ITALY'S TRADE AND INVESTMENT RELATIONS WITH RUSSIA

UNCLAS SECTION 01 OF 02 ROME 002257 SIPDIS SIPDIS EUR FOR DAS BRYZA E.O. 12958: N/A TAGS: ENRG ECON ETRD RU IT SUBJECT: ITALY'S TRADE AND INVESTMENT RELATIONS WITH RUSSIA ROME 00002257 001.2 OF 002 ¶1. (U) Summary. Italy and Russia are major trading partners, with the bulk of trade comprised of natural gas exports from Russia to Italy. While the GOI has expressed concern over Italy's dependence on Russian natural gas, Italy has not yet aggressively pursued alternative sources of energy. Italy and Russia are now finalizing an agreement on energy investment to open up energy markets to each other's investors. Despite the risks associated with investments in Russia, and Italy's reliance on Russia for natural gas, Italy seems comfortable with the relationship. End Summary. Italy-Russia Trade Figures -------------- ¶2. (U) The volume of trade between Italy and Russia has consistently increased over the past five years, except for a slight dip in 2002. Italy's exports to Russia, dominated by machinery, were valued at 6.1 billion euros in 2005. In 2004, according to the Russian Institute of Statistics, Italy was the EU's second-largest exporter to Russia after Germany. Italy's principal imports from Russia are petroleum and natural gas, in such volume that Italy's trade deficit with Russia reached 5.7 billion euros in 2005. Italy,s Foreign Trade with Russia (euro billion) (Source: Bank of Italy Annual Report) Exports Imports Balance 2001 3.5 8.5 -5.0 2002 3.8 7.9 -4.1 2003 3.8 8.2 -4.4 2004 4.9 9.7 -4.8 2005 6.1 11.8 -5.7 ¶3. (U) Italy's total trade with Russia has increased from 12 billion euros in 2003 to 17.9 billion euros in 2005, a gain of 48 percent. In 2005, 9.3 billion euros (fully half of the total trade between the two countries) was comprised of Italian imports of Russian oil and gas. Italy imports 30 percent of its natural gas supply from Russia. The importance of dependable access to Russian energy sources was underscored earlier this year, when the flow of natural gas from Russia via Ukraine was interrupted. This drop in supply forced the GOI to dip into domestic - and then emergency - natural gas reserves, and raised the possibility that Italy might halt electricity exports to other EU countries to avoid blackouts within Italy. Prime Minister Prodi said publicly in July that he was already worried about the reliability of gas supplies for the 2006-2007 winter. Italian Investment in Russia -------------- ¶4. (U) Italy is a net investor in Russia. As of December 31, 2004, the stock of Italian foreign direct investment in Russia was 251.6 million euros (Istat). According to the Finance Ministry, official statistics probably significantly understate Italian foreign direct investment in Russia because many Italian companies invest in Russia through holding companies and joint ventures registered in third countries. Investments made through foreign holding companies are not included in the official calculation of Italian foreign direct investment because such investments originate abroad. ¶5. (U) In recent months, the Italian and Russian governments have strengthened their economic and trade relations. -- During a June 20 visit to Moscow, Italian PM Prodi agreed to a "reciprocally satisfying" bilateral accord regarding energy markets with President Putin. Subsequently, Italian oil and gas parastatal ENI and Russian parastatal Gazprom began finalizing an agreement in which ENI will acquire a stake in Gazprom's Barents Sea oil fields in exchange for selling Gazprom a stake in ENI's natural gas distribution system in Italy. The agreement will create a collaborative relationship between Gazprom and ENI encompassing all aspects of the natural gas business, from extraction to distribution. -- The GOI has indicated it may agree to Russian investments in Italian electricity companies. Enel, Italy's electricity parastatal, has finalized the purchase of a 49.5 percent stake (worth $105 million) in Russia's Rusenergosbyt ROME 00002257 002.2 OF 002 electricity trading company, and has signed a cooperation deal with the Russian utility company UES. -- PM Prodi is enthusiastically promoting collaboration between Italian and Russian companies. One such partnership is the agreement between Alenia Aeronautica, a subsidiary of Italian defense and aerospace group Finmeccanica, and Russian holding company Sukhoi; the two are in the initial phases of developing the Russian Regional Jet (RRJ) project, the most important civil aviation project in Russia at present. ¶6. (U) The GOI has acknowledged the risks of Italy's dependence on Russia for energy, and has stated that Italy is trying to diversify its sources of energy, statements seemingly at odds with ENI and ENEL investments in Russia. Finance Ministry officials explain this apparent discrepancy by noting that diversification is a long-term objective and is difficult, even with the fiscal and tax incentives being implemented to promote diversification. Similarly, Giandomenico Magliano, MFA Director General for Multilateral Economic Affairs, has noted that increased Italian investment in the Russian energy sector enhances Italian energy security by increasing the quantity of natural gas Russia can export. Financial Exposure -------------- ¶7. (U) Russia is scheduled to pay off its Paris Club debt August 21. Italy is Russia's second largest Paris Club creditor. ¶8. (U) Italian banks are beginning to enter the Russian market. UniCredit, Italy's largest bank, has been authorized to take a 26 percent stake in the International Moscow Bank. ¶9. (U) SACE, Italy's official export credit insurance agency, has outstanding insurance exposure for trade with Russia of 2.9 billion euros. This is SACE's second-largest exposure to a single country, exceeded only by that to Iran. SACE's coverage in Russia is without restrictions, meaning that SACE views investments in Russia as being only moderately risky. SACE has partnered with Ingosstrakh, its Russian equivalent, in a cooperation agreement to allow increased information-sharing between the two. SACE has also established an office in Moscow. Lorenza Chiampo, a Manager of Economic Research and International Relations at SACE, acknowledged that risks are higher than SACE would like, but added that SACE is compelled to do business in Russia because of the many Italian firms interested in investing there. Comment -------------- ¶10. (U) Despite Italy's vulnerability to the trade imbalance and Italy's reliance on Russia for economically crucial energy supplies, Italy has nonetheless fully embraced its economic relationship with Russia. Part of this active relationship is due to the commercial pressure of Italian traders and businesses, who see a lucrative market in Russia. Another reason is that the GOI is so dependent upon Russian gas: the GOI has not aggressively pursued alternative sources of energy, and talk of diversifying Italy's energy sources have not translated into GOI action. Instead, the GOI has actively promoted Italian investments in Russian upstream energy operations, while opening the door to Russia in Italy's downstream market. End comment. SPOGLI