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Reference ID Created Released Classification Origin
08MOSCOW558 2008-02-28 15:53 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Moscow


DE RUEHMO #0558/01 0591553
R 281553Z FEB 08

C O N F I D E N T I A L MOSCOW 000558 
E.O. 12958: DECL: 02/08/2018 
     B. MOSCOW 5924 
Classified By: ECMIN Eric T. Schultz for reasons 1.4 (b) and (d). 
1. (C) President Putin's choice of Dmitry Medvedev as his 
successor has been cause for optimism among much of Russia's 
business elite, who point to Medvedev's calls for more 
economic freedom.  However, Medvedev's public record provides 
little substance to support this rhetoric.  In addition to 
his problematic chairmanship of Gazprom, Medvedev's other 
high profile responsibility has been running Russia's 
National Priority Projects (NPPs) in healthcare, education, 
housing, and agriculture since 2006.  Under Medvedev, the 
NPPs have accomplished relatively little, providing grist for 
cynics who see the NPPs as window dressing and leading to 
public disillusionment. 
Medvedev as Closet Liberal 
2. (C) Echoing the prevailing business sentiment in Russia, 
Renaissance Capital's Senior Russian partner, Igor Yurgens, 
told us that President Putin had chosen the successor with 
the "higher ceiling."  He said Dmitry Medvedev was more 
likely to allow greater economic and political freedom and to 
bring Russia closer to Europe and to the West than the other 
alternatives.  This sense of optimism in Russia's business 
community has been further reinforced by Medevdev's campaign 
for the presidency and in particular his speech February 15 
at the Krasnoyarsk Economic Forum, when he called for reduced 
corruption and greater economic freedom (Ref a).  A European 
diplomatic colleague present at the speech said it received a 
strongly favorable response from the audience, which had been 
composed largely of Russian businessmen. 
3. (SBU) The international business community has also 
reacted positively to Medvedev's rhetoric.  They have 
interpreted the Krasnoyarsk and other comments by Medvedev 
and his surrogates as a signal that Medvedev's presidency 
will pursue more market-oriented economic policies.  In a 
recent internal meeting, the Director of the American Chamber 
of Commerce highlighted Medvedev's four "I"s: investment, 
innovation, institutions and infrastructure, which he said 
would mean a much improved business climate for investors, 
foreign and domestic. 
Record versus Rhetoric 
4. (C) Medvedev's liberal economic rhetoric is not matched by 
a record of accomplishments.  Critics of Medvedev, such as 
former Deputy Energy Minister Vladimir Milov, have pointed to 
his record as Chairman of Gazprom, when the company used 
Russia's energy wealth to pursue political objectives, as 
evidence that Medvedev is unlikely to back up his words with 
deeds.  Lending further fuel to critics has been Medvedev's 
other high profile responsibility of the past few years -- 
his chairmanship of Russia's National Priority Projects 
(NPPs).  The NPPs were started in 2005.  President Putin gave 
Medvedev responsibility for them the following year, 
reportedly to help develop a positive public image for his 
5. (C) From the beginning, critics of the projects contended 
that the NPP were "window dressing" intended to provide cover 
for the government's broader economic policies.  Lending fuel 
to this criticism has been the performance of the NPPs, 
including under Medvedev.  The projects were intended to 
address key social deficiencies and help nurture a Russian 
middle class.  The first three sectors identified were 
education, health and housing.  Agriculture, which still 
employs a large percentage of Russian workers, was later 
added as a fourth priority.  However, nearly three years 
after their launch, and despite Medevdev's personal 
involvement, most experts agree that the projects have been 
too small in scope and have failed to reform social systems 
in need of deep structural changes. 
Performance of the Projects 
6. (SBU) To assess whether the criticism is deserved we 
decided to take a closer look at each of the four projects. 
What we found is a mixed record.  Some of the projects have 
been more successful than others but even the more successful 
projects have been fairly modest in their scope and in none 
of them did the reality match the GOR's lofty rhetoric of 
fundamental reform. 
Education: the Most Successful Project 
7. (SBU) The modernization of the education system has been 
the most successful of the four projects.  In 2007, USD 1.85 
billion (50 billion rubles) funded 1400 new buses, internet 
connectivity in every school, teacher salary increases 
averaging 25-30 percent, and awards for innovative teachers 
and schools.  Marina Kiseleva, Deputy Head of Coordination of 
the Education National Project at the Minis
try of Education, 
told us that one of the project's main accomplishments was 
the new flexibility of schools to decide the best way to 
educate their students. 
8. (SBU) However, the project has not achieved many of its 
short-terms goals.  Kiseleva said that schools had a 
difficult time accepting the new responsibility for 
modernizing their institutions, especially determining how to 
make most efficient use of the money.  Kiseleva also admitted 
that there was a huge regional disparity in the quality of 
education and teacher qualifications and acknowledged that 
there were no concrete proposals for future programs or for 
spending this year's budget of USD 1.7 billion. 
Healthcare: Improved Technology but Costs, Access Problems 
--------------------------------------------- ------------- 
9. (SBU) Olga Kochetkova, Acting Head of the Department for 
Monitoring the National Priority Projects, told us that the 
health care NPP was improving the state of healthcare in 
Russia "little by little."  In 2007, the GOR claimed the 
healthcare NPP had been responsible for providing 42,487 new 
units of diagnostics equipment, higher-quality medication, 
and 13,244 new ambulances and that this in turn had led to 
lower mortality rates and increased birth rates and life 
10. (SBU) However, most experts in the sector, such as Ksenia 
Yudayeva, Director of Research at the Center for Strategic 
Research, argued that rising incomes, not the NPP, had led to 
such improvements.  Moreover, even Kochetkova acknowledged 
that the greatest weakness of the project was its failure to 
improve affordability of and access to quality healthcare. 
She added that future plans were unclear due to rumors of a 
reorganization of the Ministry of Health and Social 
Development, but that any new initiatives would likely be 
implemented at the regional, rather than federal level. 
Affordable Housing -- Little Progress 
11. (SBU) According to the GOR, the affordable housing 
project's 2007 budget of USD 2.3 billion led to the 
construction of 66 million square meters of new housing 
(714,000 new apartments), 30 percent more than in 2006. 
However, experts note that there is still a large imbalance 
between housing demand and supply, which has effectively 
maintained high housing prices.  The GOR estimates that only 
20 percent of Russians were able to afford a new home in 
2007, compared with 60 percent of Russians who were in need 
of new or renovated housing. 
12. (SBU) More important in the long run, is continued 
weakness in mortgage lending.  Alfa Bank told us that the 
mortgage market in Russia amounts to only 1.8 percent of GDP 
compared with 15-20 percent in Eastern European countries and 
80 percent in the U.S.  Moreover, Andrei Shirokov, Head of 
the Department of Real Estate and Urban Infrastructure 
Management at the Moscow Institute of State and Corporate 
Governance, noted that up to two-thirds of Russia's housing, 
or 3.8 billion square meters, needs repair and estimated that 
the repairs would require USD $200-400 billion. 
Agriculture NPP -- a Failure 
13. (SBU) In December 2007, Russian Minister of Agriculture 
Aleksey Gordeyev declared 
"victory" in implementation of the National Priority Project 
for Development of the Agroindustrial Complex and announced 
that it would be replaced by a five-year "Program of 
Agricultural Development and Market Regulation" (much of 
which is yet to be funded).  Gordeyev pointed to increases in 
meat and dairy production, increased loans to smallholders 
and cooperatives, and the Russian Agricultural Bank 
(Rosselkhozbank), responsible for nearly two thirds of 
agricultural loans issued under the NPP, quadrupling its 
branch network.  In addition, he claimed that the NPP had 
created 3,700 rural cooperatives. 
14. (SBU) In reality, however, the NPP has largely been a 
failure.  Ministry officials admitted publicly that roughly 
half of the new rural cooperatives exist only on paper. 
Other officials acknowledged that the reported increases in 
meat and milk production were unsupported, and increases in 
meat production were either unrelated to the project 
(poultry) or have led to financial hardship (pork).  Finally, 
the rapid expansion of credit cooperatives and 
Rosselkhozbank's branch network, coupled with the political 
imperative to push money out to rural areas in advance of the 
December 2007 Duma elections, resulted in many suspect loans 
that will likely lead to a ballooning default rate in 2008. 
A Disillusioned Public 
15. (SBU) The flawed implementation of the NPPs appears to 
have disillusioned the Russian public.  More than half (53 
percent) of respondents to a Levada Center poll said the NPPs 
had not affected them at all.  The public was also skeptical 
about continuing the NPPs, as nearly half (49 percent) of 
respondents did not believe the projects would improve the 
country's social woes.  Much of the public's cynicism appears 
to have its roots in the fact that more than half (52 
percent) of respondents thought the funding would be 
inefficiently spent.  Moreover, more respondents believed the 
money would be stolen than spent efficiently (22 and 15 
percent, respectively).  In addition, based on anecdotal 
information, between 10 and 30 percent of NPP funds was 
diverted to kickbacks in return for program award, and thus 
not spent as intended. 
16. (C) With respect to the NPPs, Medvedev has failed to 
match a record of accomplishment with his strong rhetoric in 
favor of improved social services.  Last month he announced 
that the GOR was drafting a new long-term program for social 
and economic development through 2020.  However, most of the 
experts with whom we talked predicted that this too would 
accomplish little.  Under a Medvedev presidency, the most 
likely scenario is a continuation of the current approach of 
small scale projects and that he would avoid any large 
controversial reforms.  That said, Medvedev may come under 
pressure early in his presidency to make good on his promises 
and accelerate social spending.  How he responds to that 
pressure could be an early indicator of the direction 
economic policy will take in his presidency.  End comment. 


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