07MOSCOW3099, TREASURY DEPUTY SECRETARY KIMMITT’S JUNE 21

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Reference ID Created Released Classification Origin
07MOSCOW3099 2007-06-26 10:43 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Moscow

VZCZCXYZ0002
PP RUEHWEB

DE RUEHMO #3099/01 1771043
ZNY CCCCC ZZH
P 261043Z JUN 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1594
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 003099 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EUR/RUS, EB/IFD 
TREASURY FOR KIMMITT, DALY, HAUSER, MEYER, CETINA 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR KLECHESKI, MCKIBBEN 
 
E.O. 12958: DECL: 06/25/2017 
TAGS: EFIN ECON EINV RS
SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT'S JUNE 21 
MEETING WITH CENTRAL BANK CHAIRMAN IGNATIEV 
 
 
Classified By: Ambassador William J. Burns, Reasons 1.4 (b/d). 
 
1. (C) Summary.  In a June 21 meeting with Deputy Treasury 
Secretary Robert M. Kimmitt, Russian Central Bank (CBR) 
 
SIPDIS 
Chairman Sergey Ignatiev provided a generally positive 
overview of the Russian economy.  On the subject of investing 
Russia's oil and gas tax revenue, Ignatiev observed that the 
CBR would play a consultative role regarding the Finance 
Ministry's plans to invest the resources of the Stabilization 
Fund, which will be reorganized into the Reserve Fund and the 
National Welfare Fund in early 2008.  He emphasized that the 
CBR's role was one of establishing macroeconomic conditions 
needed to sustain an attractive investment climate.  He said 
that the CBR had helped facilitate improvements in such 
indicators such as reduced unemployment, rising wages, 
declining inflation, and a strengthening ruble.  He also 
observed, however, that although Russia's banking sector was 
one of the fastest growing and, in terms of foreign 
investment and ownership, was one of the least restricted 
segments of the economy, it suffered from a perception of 
vulnerability and instability.  Ignatiev explained that the 
prevalence of such views has been the principal obstacle 
regarding the issue of foreign bank branching in Russia. 
Kimmitt thanked Ignatiev for the CBR's participation in the 
transfer of funds to the North Korean Foreign Trade Bank's 
account with the Far Eastern Commercial Bank in Khabarovsk. 
End Summary. 
 
2.  (C) GOR Investments.  Treasury Deputy Secretary Kimmitt 
met with Central Bank (CBR) Chairman Ignatiev to thank the 
CBR for its role in the transfer of North Korean funds from 
Banco Delta Asia to the Far Eastern Commercial Bank in 
Khabarovsk. They also discussed the CBR's role in managing 
the GOR's windfall oil profits in the Stabilization 
Fund--which will be reorganized as a Reserve Fund and 
National Welfare Fund in early 2008--as well as its 
responsibilities in working to establish macroeconomic 
stability needed to attract foreign investment. Ignatiev 
explained that the Finance Ministry is the primary decision 
maker for investing Stabilization Fund resources but added 
that the CBR does play, and will continue to play, a 
consultative role even after the Stabilization Fund's 
reorganization. Ignatiev echoed other officials' views that 
neither the GOR in general nor the Finance Ministry in 
particular had plans to use the Stabilization Fund for direct 
investment purposes or to establish a controlling stake in 
any foreign corporation, state-owned or private. 
 
3.  (C) Investment Climate.  Chairman Ignatiev said that the 
CBR would have very little involvement in the content and 
direction of the Strategic Sectors Law.  He outlined that the 
CBR was charged with facilitating macroeconomic conditions 
that would produce an attractive investment climate. Focused 
on lowering inflation, the CBR has helped bring down 
unemployment to its lowest level since 1992, just 7 percent 
by International Labor Organization measures.  Full ruble 
convertibility and capital account liberalization in July 
2006 pushed net private capital inflows to nearly USD 
42 billion by the end of the year, and net private capital 
inflows for 5m07 have already reached USD 60 billion. 
Maintaining relatively low interest rates has fueled growth 
in manufacturing and industrial production.  Ignatiev 
observed that, although the economy was growing at "a good 
rate" and that the country was "on track" to meet its 
inflation target for the year, the banking sector was showing 
some signs of overextension. 
 
4.  (C) Banking Sector.  Ignatiev described the banking 
sector as one of the most profitable and least restricted 
segments of the Russian economy.  Profit ratios exceed 20 
percent for most of the sector, and the law does not impose a 
limit on foreign ownership.  He nevertheless expressed 
concern that the growing volume of non-performing loans might 
shake depositors' confidence in the sector as a whole. 
Banking assets grew nearly 40 percent during 2006, with 
consumer lending taking the lion's share.  In an effort to 
address questionable lending practices and to educate 
borrowers, the CBR would soon begin requiring that lenders 
fully disclose their effective interest rates to borrowers, 
inclusive of fees, commissions and other expenses.  Ignatiev 
hastened to add, however, that the CBR currently sees no 
signs the banking sector is overheating. 
 
5.  (C) Foreign Branching.  In response to a question about 
 
foreign branching in Russia, Ignatiev explained that although 
the Russian banking sector was open to foreign investment, it 
had not yet become competitive against foreign branching.  He 
summarized the Russian banking community's fear that 
branching by foreign banks would lead to the collapse of &#
x000A;Russian banks.  Ignatiev recounted that the deposit insurance 
program was still in its infancy and had its first test 
immediately following implementation.  In 2004, a money 
laundering allegation against a bank provoked a run on the 
bank, which Russian bankers do not want to see repeated.  He 
expressed confidence that with time, as deposits continue to 
rise in line with positive sentiment about the deposit 
insurance program, the banking sector will be able to support 
foreign branching. 
 
6.  (U) Deputy Secretary Kimmitt has cleared this message. 
BURNS

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