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Viewing cable 06MOSCOW6334, GROWTH AND CORRUPTION IN RUSSIA'S REGIONAL

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Reference ID Created Released Classification Origin
06MOSCOW6334 2006-06-14 10:08 2011-08-24 01:00 UNCLASSIFIED Embassy Moscow
VZCZCXRO8521
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHMO #6334/01 1651008
ZNR UUUUU ZZH
R 141008Z JUN 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 7572
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEHLN/AMCONSUL ST PETERSBURG 3100
RUEHVK/AMCONSUL VLADIVOSTOK 1459
RUEHYG/AMCONSUL YEKATERINBURG 1712
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
UNCLAS SECTION 01 OF 05 MOSCOW 006334 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR GRAHAM/MCKIBBEN 
USDOC FOR 4231/ITA/MACK/RISD/JBROUGHER/MEDWARDS 
STATE FOR EUR/RUS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ELAB SOCI POL RS
SUBJECT: GROWTH AND CORRUPTION IN RUSSIA'S REGIONAL 
ECONOMIES 
 
REF: A. MOSCOW 2449 
     B. 05 MOSCOW 14851 
 
MOSCOW 00006334  001.2 OF 005 
 
 
1. SUMMARY: While none would dispute that Moscow leads Russia 
in economic development, it is increasingly clear that many 
cities beyond Moscow are experiencing healthy growth.  Small 
and medium-sized enterprise (SME) owners in large provincial 
cities report expanded opportunities and gradually improving 
business climates.  Corruption, not surprisingly, is 
commonplace and grudgingly accepted as a cost of doing 
business.  Nonetheless, there are signs that businesses are 
becoming more assertive in protecting their rights against 
predatory bureaucrats.  Finding and keeping qualified workers 
is another headache, as the best and the brightest still move 
to Moscow or abroad.  Despite the obvious problems, regional 
diversification is clearly now part of the story of Russian 
economic growth.  END SUMMARY. 
. 
SPREADING THE WEALTH 
==================== 
 
2. (U) During recent trips to five regional capitals -- 
Astrakhan (on the Caspian), Syktyvkar (near the Urals at the 
Arctic Circle), Smolensk (bordering Belorussia), Novosibirsk 
and Tomsk (western Siberia) -- we heard again and again how 
much the face of those cities had changed for the better over 
the last five years.  One small businessman in Astrakhan who 
had moved there in 2001 told us we wouldn't recognize the 
place, the difference was so great; coffee shops and 
restaurants had sprung up catering to a growing middle class, 
and shopping malls had been replacing traditional outdoor 
markets.  In Novosibirsk, while stuck in traffic unthinkable 
only a few years before, we heard that more (and increasingly 
foreign) cars were on the roads, that apartment prices had 
jumped 100% last year in response to surging demand for 
better housing, and how the buying power of the growing 
consumer class had led several U.S. investors to the 
continued expansion of their restaurant and coffeehouse 
chains.  In Tomsk, 24-hour 1950's-style diners, cafes, and 
trendy European clothing stores lined the streets. 
Construction cranes were visible from every corner of 
Syktyvkar.  Even in Smolensk, where regional growth rates lag 
behind the national average, contacts spoke of the 
significant growth in retail establishments that was 
expanding consumer choice. 
 
3. (U) In these provincial capitals, contacts pointed to 
different drivers of growth.  Shipbuilding in Astrakhan, 
paper in Komi, diamond cutting in Smolensk, oil in Tomsk, and 
metallurgy in Novosibirsk all play prominent roles in those 
regional economies.  But it was at the small and medium-sized 
business level (SMEs) that the greatest optimism about 
prevailing trends was evident.  Significant real income 
growth has meant greater purchasing power among the consumer 
base in most large cities, giving rise to numerous retail 
shops catering to that growing demand.  Easier (though still 
not easy) access to financing had opened more opportunities 
to SMEs.  Perhaps more important, according to many contacts, 
was that business owners were simply starting to get over the 
hump on the learning curve and getting better at what they 
do.  As Olga Romanenko, head of OPORA business association in 
Astrakhan, put it, "You have to remember - private business 
in Russia is very young.  We've lacked experience and 
business traditions.  But we're learning." 
. 
BUREAUCRATIC ATTITUDE ADJUSTMENT 
================================ 
 
4. (SBU) SMEs may also be benefiting from a general shift in 
attitudes among bureaucrats regarding the importance of small 
business.  Now that President Putin has, on several 
occasions, publicly proclaimed government's need to support 
SMEs, "civil servants have gotten the message that small and 
medium-sized businesses are a driving force in the economy," 
the head of the Astrakhan Chamber of Commerce told us.  "Good 
ideas are coming from Moscow," Smolensk's head of OPORA said, 
"and of course local bureaucrats do everything looking back 
at Moscow," she added.  As a result, regional and municipal 
governments are reaching out to find ways to support small 
business.  "Local leaders want to look good to Putin -- they 
 
MOSCOW 00006334  002.2 OF 005 
 
 
want to demonstrate that they can generate growth," and so 
are working to assist SMEs, the head of Novosibirsk Oblast's 
Chamber of Commerce told us. 
 
5. (SBU) In many cities, we heard, it helps that more public 
officials are coming into office with business experience. 
In Astrakhan, for example, the new Governor, a former 
businessman, appointed people with business backgrounds to 
seven of 14 top positions in the oblast.  "They know the 
problems from the inside, and are able to give us real 
support," Romanenko told us.  One former entrepreneur, 
recruited by Astrakhan's Governor, shared with us his 
initiative for educating and empowering SMEs (with inspection 
log books and access to a harassment hotline) to resist 
shake-down attempts by overzealous inspectors acting beyond 
the law (a tactic we have also admired at work in Rostov on 
Don).  The new mayor of Syktyvkar, an entrepreneur in his 
early 30s, gained office by promising a better business 
climate.  "He's part of a new generation that understands the 
potential business has to make a  better life for people 
here," the Director of the Komi Chamber of Commerce explained. 
. 
BUSINESS STANDS UP FOR ITSELF 
============================= 
 
6. (SBU) Moreover, business owners are learning to assert 
themselves in this new environment.  "After so many years of 
communist mentality, people are becoming more active, and are 
seeing that they can influence affairs," Romanenko said.  As 
an example, she noted that she and her fellow 
tourist-business owners had effectively lobbied the Governor 
to replace an incompetent head of the regional tourism 
agency.  A group of Smolensk small business owners told us 
that increasingly, small business owners knew their rights, 
e.g., about what inspections were allowed and how often. 
"Step by step, we see attitudes changing as businessmen 
become educated and bureaucrats realize there are limits on 
what they can get away with," we heard.  Vladimir Shargayev 
of the Smolensk Anti-Corruption Commission agreed: 
"Bureaucrats used to prey upon the ignorance of business 
people.  But now, there is lots of legal assistance, and 
people know they no longer need to pay -- they can take them 
to court." 
 
7. (SBU) Representatives of the Siberian Civic Initiatives 
Support Center told us that though such business activism was 
not growing rapidly, it was growing.  Collective action is 
still rare, but they estimated that five percent of 
businesses in Novosibirsk now belonged to some sort of 
professional association.  As the head of Astrakhan's Chamber 
of Commerce put it, "We're not going out into the streets 
with posters, or holding public meetings, but we are quietly 
influencing policy," as with a year-long cooperative effort 
between the Chamber and the regional and local governments to 
identify and reduce administrative barriers.  According to 
the Director of the Novosibirsk Small Business Development 
Center, as more businesses regularize their activities and 
abide by the laws, they are developing a different 
relationship with government: "Now that they legally pay 
taxes and payroll, there is less fear, and they can make 
demands like, 'Why are there potholes?  I pay my taxes!'" 
 
8. (U) Thus, gradually and persistently, SMEs in many regions 
are taking increasing advantage of and even expanding the 
economic free space in which they can operate.  Their 
on-the-job training -- about business best practices, about 
their own rights as owners, and about how to cope in what 
remains a challenging environment -- is having a cumulative 
beneficial effect.  Their gains may not be evident to 
first-time visitors off a plane from Moscow, we were 
cautioned, but such evolutionary progress was clear to anyone 
familiar with where things stood only a few short years ago, 
we heard. 
. 
SO MUCH FOR THE GOOD NEWS 
========================= 
 
9. (SBU) For all their optimism about the general trends, 
small business owners were still clear-eyed about the 
considerable obstacles in their way.  For example, though 
 
MOSCOW 00006334  003.2 OF 005 
 
 
credit had become more available and affordable, long-term 
credit was still hard to come by.  Real estate markets remain 
opaque and unnavigable, and are becoming increasingly 
unaffordable.  For some (e.g., in Syktyvkar) security was an 
issue, with competitors sometimes opting for arson or 
intimidation rather than fair market competition.  The 
objectivity of the courts in many regions remains suspect. 
And of course, there is always the red tape.  Two of the most 
often-cited problems mentioned, though, had to do with 
maintaining a qualified workforce and coping with corruption. 
. 
HARD TO FIND GOOD HELP THESE DAYS 
================================= 
 
10. (SBU) Any time we met with owners who required a skilled, 
non-professional workforce, they identified a shortage of 
qualified employees as a huge challenge.  "The system of 
vocational education that we had in Soviet times has been 
destroyed," a member of the Smolensk Coalition for SME 
Support explained, "and for 15 years people's skills have 
deteriorated."  The head of the Novosibirsk City Chamber of 
Commerce complained that educational institutions churned out 
plenty of lawyers, accountants and secretaries, but that 
skilled laborers were in huge deficit.  Starved for cash and 
unreformed, the old vocational education system does little 
now to meet modern labor market needs, we repeatedly heard. 
(See also Ref A.) 
 
11. (SBU) When qualified applicants are available, both 
professional and non-professional, too often they don't stick 
around.  "I don't like the job applicants that I do get, and 
those who I would like to have stay all move to Moscow," 
Lyudmila Pushkareva, the owner of a Smolensk apparel company, 
told us.  Aleksey Kantemerov, President of the Astrakhan 
Chamber of Commerce, was resigned to the unfortunate reality 
of migration patterns: "Just as a fish looks for deeper 
water, a man looks for a better place."  The head of a 
Novosibirsk branch office for an IT firm told us that the 
entire first generation from her office, save herself, was 
now in Moscow.  This internal brain drain constituted a real 
constraint on regional growth, we heard.  Regional capitals 
do tend to attract young workers from the surrounding 
(depressed) rural areas, and migrants (both legal and 
illegal) from the CIS continue to come, but in most cases, 
not enough to offset the losses.  Absent dramatic increases 
in immigration, the deficit will likely grow, as Russia's 
demographic crunch begins to reduce the country's total 
working age population in 2007 (Ref B). 
. 
THE STENCH OF CORRUPTION... 
=========================== 
 
12. (SBU) Most of our contacts were rather fatalistic about 
the presence of corruption in their regional economies. 
"People accept corruption like they accept the sun," Lada 
Yurchenko, the Deputy Director of the Siberian Civic 
Initiatives Support Center, told us.  According to the 
Novosibirsk Oblast Chamber of Commerce, "If business can only 
operate without corruption, then it won't operate."  OPORA in 
Astrakhan told us that, despite the changed attitudes of many 
civil servants, law enforcement structures remain as 
predatory as ever and negatively affect tourism and trade. 
OPORA in Smolensk told us that without personal connections, 
business found it difficult to get bank credit, to secure 
property, or generally to gain the necessary permissions to 
operate a business.  When we asked the head of the 
Novosibirsk City Chamber of Commerce whether there were any 
serious anti-corruption steps being taken locally, he 
replied: "It's easy for two people to say they want to lift a 
tractor, but that doesn't mean they can do it."  Only Moscow, 
he explained, could provide the necessary muscle to tackle 
the task. 
. 
...ISN'T SO BAD, ONCE YOU GET USED TO IT 
======================================== 
 
13. (SBU) Still, like sewer workers who have decided not to 
let the smell interfere with their work, most small business 
owners have decided to plug their noses and press ahead.  To 
an extent, we heard, corruption-related costs were largely 
 
MOSCOW 00006334  004.2 OF 005 
 
 
just another expense -- certainly something to grumble about 
(like taxes) but also something they would simply need to, 
and usually could, cope with.  As one Novosibirsk business 
owner sardonically quipped, "Corruption isn't a problem, if 
you pay."  According to contacts in several cities, the 
landscape seems to have morphed some as well, with fewer 
cash-filled envelopes exchanging hands.  "It's more about 
connections and string-pulling than bribery and corruption," 
a Novosibirsk restaurateur told us.  "I've surrounded myself 
with partners who have the right connections.  You've got to 
be willing to include people.  If you're not willing to 
share, someone will stick a spoke in your wheels," he 
explained. 
 
14. (SBU) Gifts and charitable contributions have also 
emerged as primary methods for building and maintaining 
necessary connections.  Most of the business people we asked 
said that, of course, they sent birthday, New Year's and 
Women's Day presents (but nothing too extravagant) to key 
bureaucrats and officials.  "For us, this isn't corruption. 
It's just smart business," we were told.  Many contacts also 
reported regularly receiving official letters on government 
stationery requesting donations -- sometimes for charitable 
causes championed by the Governor's wife, other times for 
computer equipment, reflective vests, or similar, mundane 
operational needs of the local government.  "It's normal, and 
an opportunity to give back to the community" we heard. 
Several business people noted that good old fashioned bribes 
more often came into play when initiated by a businessman who 
wants to get around the law, or to accelerate an otherwise 
lengthy process.  For those willing to play by the rules and 
fortunate enough to work in a field without heavy government 
regulation, the occasional hand-over of some cash to the fire 
inspector or a few others may still be necessary, but regular 
gifts or contributions to "grease the wheels" were the main 
methods for keeping their businesses on track. 
 
SHRINKING OPPORTUNITIES FOR EXTORTION 
===================================== 
 
15. (SBU) More businesses appear to be "playing by the 
rules," which over the long-term should reduce their 
susceptibility to extortion.  Sergey Semka, a deputy in the 
Novosibirsk Regional Administration, told us that ten years 
ago, new businesses were popping up everywhere, but a 
minority were legally registered.  As of five years ago, 70% 
were registered, and now 99% were.  With the documents to 
prove their right to operate, small businesses had become 
harder targets for attempted shake-downs.  Several owners 
told us that they had gradually transitioned to completely 
above-board payroll systems to lower their vulnerabilities. 
(Note: A general, gradual trend out of the shadow or "gray" 
economy that was occurring was also driven by growing 
interest in accessing credit, whether for business, cars, 
homes, or other investments that require transparent 
accounting, we heard.) 
 
16. (SBU) Regional officials have worked as well (with 
varying degrees of enthusiasm) to minimize the points of 
leverage that government has over business.  The Governor of 
Novosibirsk, we learned from several NGOs, had installed a 
new transparent electronic tendering procedure for government 
contracts to replace the old back-corridor deals that had 
been the norm.  A member of the Astrakhan City Duma claimed 
that they "work constantly to reduce direct contact between 
businessmen and civil servants, including restricting the 
number of inspections that are allowed."  In Novosibirsk and 
Astrakhan, business associations reported that the 
implementation of a new "one-window" process had greatly 
simplified business registration and dramatically reduced the 
points of contact between SME owners and officials.  However, 
the perceived success of this federally mandated program 
varied considerably from region to region.  In Smolensk it 
got poor marks from business contacts, suggesting it was for 
show, and had not really simplified registration.  In 
Syktyvkar we heard, "Sure there's one window, but you've 
still got to go to it five times.") 
 
17. (SBU) In a few exceptional cases, SMEs have even overcome 
their fatalism and gotten into the anti-corruption fight.  In 
 
MOSCOW 00006334  005.2 OF 005 
 
 
Tomsk, business associations have partnered with NGOs and the 
media for a USAID-funded initiative to ferret out corruption 
loopholes in all proposed legislation, and have published 
corruption "grade tables" for every regional Duma deputy 
(that have reportedly cost some their seats in subsequent 
elections).  The coalition's legal aid service has provided 
over 2000 free consultations to companies bold enough to 
resist extortion, and a professionally produced public 
information campaign has further raised awareness. 
Corruption may still permeate most government-business 
interaction, but business owners are better educated about 
their rights in most, and in rare cases like Tomsk, business 
is actively fighting back. 
. 
COMMENT 
======= 
 
18. There is no question that Russia's impressive economic 
growth over the past seven years has not spread to all 
corners of the country.  Most of rural Russia, many of the 
former military-industrial cities, and nearly all of its 
towns dedicated to a single factory or industry have largely 
been left behind.  Still, many regional capitals are plugged 
in and are benefiting from and contributing to Russian 
growth.   The fact that they may fall far short of the flashy 
wealth of Moscow matters little.  What matters is how far 
they have come.  The visible signs of growth -- more shops 
and restaurants, cars, construction, and the palpable 
optimism of many SME owners -- are good indicators that part 
of the story of Russia's growth is one of nascent regional 
diversification and revival. 
BURNS