YOUR VISIT TO MOSCOW

C O N F I D E N T I A L MOSCOW 001377 SIPDIS SIPDIS FOR SECRETARY GUTIERREZ FROM AMBASSADOR BURNS USDOC FOR 1000/SEC/SECRETARY GUTIERREZ E.O. 12958: DECL: 03/27/2015 TAGS: ECON ETRD EINV OVIP SUBJECT: YOUR VISIT TO MOSCOW REF: MOSCOW 434 (NOTAL) Classified By: Charge d'Affaires Daniel A. Russell for reasons 1.5 (b/d ). ¶1. (C) On behalf of the Ambassador, we look forward to your arrival, and offer the following overview of our commercial relationship with Russia. You may want to read also the Ambassador's scenesetter for Foreign Minister Lavrov's last visit to Washington (referenced above),which provides insight into the overall bilateral relationship, Putin and the political scene, and the challenges before us. Now in its ninth year, Russia's economic boom continues to impress, as evidenced by the record number of American businesses entering the Russian market, driving our trade and investment relationship strongly forward. Against this backdrop, we find the Russian Government in the midst of an effort to finish the work of President Putin's economic agenda in the twelve months remaining in his administration. At the top of the list is Russia's entry into the WTO, which Putin has personally advanced at critical moments over the past year. A close second, in the context of our bilateral relationship, has been Putin's desire to push ahead with U.S.-Russian civilian nuclear cooperation. No less pressing for the Kremlin has been the desire to see Russian firms establish themselves as international players. ¶2. (C) These three themes will play again and again in your meetings here. On WTO, your interlocutors are looking for signs of USG support for the accession process, even as we push for IPR protection and a more predictable basis for trade in agricultural and other products. On civilian nuclear cooperation, efforts to complete the uranium suspension agreement will be seen as important progress towards a headline Presidential goal. Our message of openess to investment (including Russian investment) pairs nicely with an equally blunt message that it is time for Russia to put its own house in order, be it the completion of the legal framework for investment, restraint in the administration of tax and environmental regulation, or the need to slow corruption's steady advance here. Despite the often difficult discussions surrounding trade and investment, bilateral commercial relations remain one of the strongest forces for positive change in Russia as well as ballast in 
our challenging political relationship. 2007 is the year we should push our bilateral trade well past the $25 billion mark, and your visit gets us off to a good start. ¶3. (C) The Numbers and the Firms Behind Them. U.S. trade and investment is expanding rapidly across Russia, boosting prosperity and disseminating American business values. Bilateral trade grew by 20 percent last year, and investment was up more than 50 percent. In an important shift, energy no longer dominates our trade and investment story to the exclusion of all else. Among the more notable recent U.S. successes in Russia are Amway, whose sales reached $250 million after only two years here; Alcoa, with over $300 million invested in two aluminum fabricating facilities; P&G, which employs over 20,000 Russians; AmGen, who recently marked the entrance of U.S. biotech pharmaceuticals to Russia; International Paper, which is investing an additional $400 million here in a 50/50 joint venture with Ilim Pulp; Ford, with over $500 million already in its St. Petersburg auto plant; and even Ralph Lauren, the first U.S. fashion house to launch its brand in Russia. ¶4. (C) WTO. The push is on inside the Russian Government to bring Russia's decade-long bid for the WTO to a close in the next twelve months, and there are few events more likely to help our exporters than getting Russia into this organization on terms we can live with. The Russians have an enormous amount of work left, including a potentially indigestible level of political concessions they will need to face soon. We have tough WTO-related issues that must be raised, but you may also wish to take this opportunity to signal our support for their aspirations and our intention to keep pace with them this year. Your primary interlocutor, Minister Gref, is fully engaged in the negotiations and shares Putin's resolve that the issue be decided during his tenure. Other interests, particularly in the agriculture sector, are however clearly working to avoid accession altogether. ¶5. (C) Challenges to Our Trade and Investment Relationship. Investors have long been awaiting a clearer understanding of where they can and cannot invest in Russia. Your visit comes just as the draft Law on Foreign Investment in the Strategic Sectors finally shows signs of moving ahead. There is much in the draft we can live with, the bigger point being that some rules would be better than the free-for-all firms face now. Same goes for long awaited amendments to the Subsoil Law, which will make clear which deposits foreigners may own. The subsoil restrictions would align that legislation with the current non-legislated practice of prohibiting foreign firms from holding majority stakes in projects with fields over 510 million barrels of oil or 50 billion cubic meters of gas. The two efforts appear to be on a parallel and linked passage track, and could use a nudge from our quarter. ¶6. (C) Energy as a Special Case. Despite increased Russian Government control over the sector, it is worth noting that U.S. majors are involved in several high-profile deals and that below-the-radar deals are becoming more common. We suspect that behind all this activity is a renewed awareness here of Russia's need for western expertise -- most urgently on the gas side -- as it moves to exploit the offshore and the eastern half of the country, as well as the enormous Barents Sea gas field, Shtokman. Nothing is easy, of course -- Caspian Pipeline (CPC) expansion has been elusive and the Sakhalin-2 firesale worried many. Nevertheless, our companies tell us that they can work as minority stakeholders, and there are promising signs marking the way forward: domestic gas prices are set to rise to European levels by 2011 (a move we have long advocated); Chevron and Gazprom Neft have formed a joint venture to work in West Siberia; Lukoil and ConocoPhillips continue to expand their partnership; smaller oil companies have increasing room to grow; and energy service companies are doing very/very well. ¶7. (C) Aircraft Manufacturing and Sales as Another Special Case. We are already into our sixteenth month of Boeing advocacy, and hard as it may be to believe, this game just got more interesting. The government is knee deep in an effort to revive Russia's once-proud aviation sector, but knows companies like Aeroflot can't wait forever to renew their aging fleets. Last week's quasi "purchase" by Aeroflot of 22 A350s, rather than closing the door on Boeing, is being characterized to us by senior officials as a new opportunity to make the 787 sale. That sale alone is worth nearly the entire volume of U.S. exports to Russia in 2006. Your visit to the Boeing design center and advocacy signals our understanding of this odd, but not necessarily bad, situation, and will help pave the way for the Russians to allow Aeroflot to buy Boeing, too. ¶8. (C) Nuclear Cooperation. Beyond the immediate issues of Iran and North Korea, there continues to be real potential for broader U.S-Russia nuclear cooperation. The President's Global Nuclear Energy Partnership tracks conceptually with Putin,s own proposal for an international network of fuel enrichment centers; both envisage expanding nuclear energy while minimizing proliferation risks. Negotiations continue on a civilian nuclear cooperation framework agreement (commonly known as a "123" agreement) that Rosatom Director Kiriyenko optimistically hopes to initial during his May visit to Washington. Negotiations are also ongoing to amend the existing "suspension" agreement in order to work out new terms for Russian access to the U.S. uranium market. David Spooner will try to close on the latter during your visit. ¶9. (C) Your Interlocutors. You need no introduction to your primary interlocutors - Ministers Gref, Khristenko, Kudrin, and Rosatom's Kiriyenko are by now all familiar faces for you. Natural Resources Minister Trutnev is central to our energy relations, given the role his environmental watchdog agency played in the Sakhalin II situation, and the pending environmental inspection of ExxonMobil's Sakhalin I operations. Just below the layer of top leadership we have asked for you to see are the two most "almost declared" candidates for Presidency here, Sergey Ivanov and Dmitriy Medvedev. The latter is fresh from his international coming out party at Davos, but has yet to project the aura of authority that would garner the support of some of the shadowy hard-liners close to Putin. Sergey Ivanov has just had his palate considerably widened to include most industrial policy, and while he is forceful, he isn't exactly a man of the people. Your meetings are an important opportunity to try and continue to vest each of them with a stake in our broader bilateral relations. RUSSELL