RUSSIA: CEMENTING OUR ECONOMIC RELATIONS

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 012702

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E.O. 12958: DECL: 12/10/2014
TAGS: ECON EAGR ENRG ETRD PREL RS EINV
SUBJECT: RUSSIA: CEMENTING OUR ECONOMIC RELATIONS

REF: MOSCOW 11239

Classified By: Ambassador William J. Burns for reasons 1.4 (b/d).


1. (C) Summary: After thirteen years of tough negotiations,
we finally have in hand a bilateral agreement on Russia's
accession to the WTO. Understanding that we are not yet out
of the woods, with hard work ahead in the multilateral forum,
we should take full advantage of the improved atmosphere
generated by our landmark deal to strengthen economic ties
and bolster GOR reformers who, having delivered the bilat,
remain critical to Russia's economic modernization and our
bilateral economic relations over the upcoming electoral
cycle.


2. (C) Certainly one way to build positive momentum is to
increase the tempo and level of visits - in both directions.
This could include a trade mission led by Secretary
Gutierrez, visits by USTR Schwab and Secretary Johanns, and
meetings in Moscow or Washington of other senior executive
and legislative branch officials and their Russian
counterparts. End summary.
A Trade Mission:
The Timing is Right
--------------


3. (C) A DOC-led trade mission in the spring of 2007 would
focus on the commercial opportunities created by Russia's
economic growth of the past eight years, would reciprocate
the 2005 Russian trade mission led by Industry and Energy
Minister Khristenko, and would likely enjoy the same entree
here Khristenko enjoyed in Washington. While we cannot be
driven by others' agendas, our European counterparts have led
a number of widely hailed missions to Russia over the past
year. Moreover, a mission is about much more than providing
Kremlin access to U.S. companies -- it is a clear signal of
our interest in broader and deeper commercial relations.


4. (C) U.S. firms have been among the most energetic
investors, and 2006 FDI is likely to be triple that of just
two years ago. Just this year, International Paper, Boeing,
Ford, GM, ConocoPhillips, Coca Cola, and Guardian Glass have
announced or told us of plans to put anywhere from $150
million to $1 billion in Russia over the next few years.
Large consumer goods companies like Walmart now appear ready
to jump in with significant initial investments. Others,
including Alcoa, Citigroup, John Deere, Dow, ExxonMobil,
Cargill, Procter and Gamble, United Technologies and General
Electric have been steadily increasing their presence here,
spurred on by a consumer boom and double-digit sales growth.


5. (SBU) Among the BRIC countries, Russia is the second
fastest growing economy, with the highest Gross National
Income and Gross Domestic Product per capita. FDI as a
percentage of GDP is now in line with Poland and Mexico and
is moving into China territory (i.e., over 3% of GDP).
Reflecting the ongoing consumer spending boom (spurred by
real average income growth of 66% over the past five years),
investment is diversifying away from the oil and gas sectors
into manufacturing and consumer goods and services. A new
GOR Investment Fund of over $20 billion to finance
infrastructure, six new Special Economic Zones and a $100
million World Bank credit line to finance seven technoparks
offer a wide array of opportunities to U.S. firms. Companies
such as Intel, Motorola, Boeing, and IBM are taking advantage
of Russia's affordable and well-trained human capital to
establish and expand engineering/R&D centers here.

Time to Retool our
Trade Policy Dialogue
--------------


6. (C) An early 2007 visit by USTR Schwab would not only
reinforce the GOR reformers who delivered on our bilateral
WTO deal, but could serve as a platform to launch discussion
of a new architecture for our trade policy dialogue. Over
the past few years, much of trade dialogue was of necessity
placed under the rubric of our bilateral WTO negotiations.
We need a new forum to take us into the post-accession era.
Our trading partners are already ahead of us: the European
Commission, the UK, France, Finland, Germany, and Italy have

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all established multi-tiered dialogues including annual or
semi-annual high level meetings and sector specific working
groups on issues ranging from civil aviation, to regulatory
reform, agriculture, and transportation. Successful economic
dialogue models routinely include a hefty business component,
and a new generation Russian-American Business Dialogue
appears in order, which could be another trade mission
outcome. USTR Schwab is also well-placed to help orient
Russia to the post-accession challenge of participation in
ongoing global trade liberalization talks.

Moving Ahead on Agriculture
--------------


7. (C) The proposed visit of Secretary Johanns in September
2007 would demonstrate we have moved beyond the contentious
agricultural discussions that plagued our bilateral market
access negotiations and to focus on ways in which Russia's
agricultural sector will benefit from Russia's eventual WTO
membership. To get the most out of the proposed September
visit, steps could be taken now to resuscitate the bilateral
agriculture cooperation MOU, dormant since 2003. The Russian
Agriculture Ministry has signed MOUs with other counterparts,
most recently with the EU, and will be looking for a similar
gesture on the part of the USG. Obviously, Minister Gordeyev
and his veterinary service chiefs were resistant to
concluding our bilateral market access agreement, with its
side letters and new beef and pork health certificates.
Gestures such as revitalizing the MOU and early confirmation
of a Secretarial visit to Russia could help curb their
instincts to take out frustrations in ways detrimental to our
bilateral agricultural trade.

Transportation, IPR and Energy
--------------


8. (C) Already in the works are visits on transportation, IPR
and energy. Transportation Secretary Peters recently invited
her counterpart, Minister Levitin, to Washington in the next
two months to discuss establishing a bilateral Transportation
Working Group focused on security and infrastructure
development. Deputy USTR Shaun Donnelly will lead the U.S.
delegation to Moscow late this year or early next for the
semi-annual bilateral IPR Working Group meeting focused on
legislation and enforcement. In addition, Deputy Secretary
of Energy Clay Sell plans to visit Moscow early next year for
a meeting of the bilateral Energy Working Group focused on
regulatory and investment climate issues and technical
cooperation. The same progressive Russians who helped
deliver the WTO agreement have been long-standing supporters
of information sharing in areas such as licensing, taxation,
LNG, and pipelines.

Additional Opportunities
--------------


9. (C) Executive and legislative branch contact with Russian
counterparts, either in Moscow or Washington, reinforce our
economic relations and move Russia toward stronger economic
legislation and institutions. Examples of what could be
pursued include: greater cooperation between GAO and the
Russian Audit Chamber on parallel audits and personnel
exchanges; follow-up to the Russian Central Bank proposal to
formalize information exchange with the Federal Reserve on
money laundering and terrorism financing; cooperation between
OMB and the Russian National Institute for Technical
Regulation to share U.S. experience in regulation drafting
and implementation; and a continuation of successful
cooperation between the Federal Trade Commission and the
Russian Antimonopoly Service on Russian antimonopoly
legislation and better consumer protection.

Continuing Russia's Integration
into the Global Economy
--------------


10. (C) As we strengthen our bilateral economic ties, we
should continue to encourage and support Russia's integration
into international economic institutions that require greater
adherence to global norms and behavior. There is much to be
gained from Russia's eventual membership in the OECD

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(reftel). Opening the door, and laying out clear, tough
benchmarks for Russia's OECD membership would reinforce
Putin's economic modernization instincts and, once again,
bolster the tenuous role of reformers within the Russian
bureaucracy. Within the IEA (of which Russia is not a
member) cooperation should continue between U.S. and other
members on Russia-specific issues.


11. (C) As the U.S. and Russia approach their election cycles
next year, political rhetoric will sharpen on both sides of
the Atlantic. This, added to the potential divergence of
views on how to handle inherently thorny subjects such as
Iran, North Korea, and Russia's neighborhood, argues strongly
for doing what we can now to reinforce economic and
commercial ties that can keep our relationship on a more even
keel. The bilateral WTO deal, capping years of tough
negotiations, is the best opportunity we see on the horizon
to bolster our economic dialogue and commercial ties and
ensure that Russia's economic modernization has sufficient
momentum to weather the coming elections.
BURNS