CODEL NELSON/LOTT: SCENESETTER

UNCLAS SECTION 01 OF 04 MOSCOW 002472

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL PGOV ECON PARM ENRG RS
SUBJECT: CODEL NELSON/LOTT: SCENESETTER

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1. (SBU) Your visit comes at a vital juncture in
Russian-American relations. As Russia moves closer to
succession in March 2008, the more complicated this
relationship will be to manage. There is a lot at stake:
deepening cooperation in reversing North Korea's nuclear
status and preventing the emergence of Iran as a nuclear
power; building US-Russian leadership in the promotion of
civilian nuclear energy and non-proliferation and energy
security for producer and consumers alike; fighting
terrorists and the ideology that motivates them; reinforcing
promising trends like the growth of a middle class; and
encouraging the development of civil society and democratic
institutions, despite worrisome trends. While differences
over missile defense, Kosovo and Russia's treatment of its
neighbors are real, high-level engagement is essential to
advance our interests in areas of strategic importance.


2. (SBU) Your visit follows on the recent consultations by
Secretary Gates and Secretary Rice and will be followed by a

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meeting of Presidents Bush and Putin on the margins of the
June 6 G8 summit in Potsdam. Contacts between
parliamentarians constitute an important channel of bilateral
communication. Congressman Lantos was here in February and
is scheduled to hold a bilateral session with counterparts
from the Duma in Washington in June. Senator Lugar and
former Senator Nunn are expected to travel to Russia in late
August to commemorate the 15th anniversary of the Nunn-Lugar
program. Your interparliamentary dialogue with the
Federation Council and your meetings with Russian leaders
will serve to underline that commitment to engagement.

Russia is Back
--------------


3. (SBU) Buoyed by high energy prices and eight years of
economic growth, the Russian elite sees a self-assured and
economically dynamic Russia reassuming its place on the world
stage. The Russians view the world as full of possibilities
-- the U.S. is focused on Iraq and Afghanistan; Europe is
consumed with leadership transitions; and the Middle East
offers opportunities to renew old ties while building new
ties to countries like Saudi Arabia. From the Kremlin's
perspective, Russia's own neighborhood looks a lot better
than it did a year ago, with NATO expansion less imminent and
Ukraine's orange revolution fading. Georgia's interest in
NATO and insistence on restoring sovereignty over Abkhazia
and South Ossetia, however, remain an issue for the Russians.

Political Landscape
--------------


4. (SBU) Despite Russia's resurgence, the elite here
maintains its peculiar mix of insecurity and cockiness. Duma
elections in December and the presidential succession are
less than one year away. While Putin's popularity hovers
near 80%, authorities have hindered demonstrations by the
opposition organization "Other Russia" in cities throughout
Russia. A series of election-related legislation has
eliminated independent candidates and raised the bar to Duma
representation from five to seven percent of the popular
vote. Still, it appears that at least four, and possibly
five, parties will be represented in the next Duma. A
recently-created party, "For A Just Russia," although
initially a brainchild of the Kremlin, shows signs of
becoming a genuine political force.


5. (SBU) Looming larger than the Duma election contest is
the 2008 presidential succession. First Deputy Prime
Ministers Sergey Ivanov and Dmitriy Medvedev are the front
runners, but Putin has yet to indicate a preference and, in
the interest of avoiding lame duck status, may not do so
until after the December Duma elections.


Economic Prospects
--------------


6. (U) The Russian economy has been growing steadily since
the 1998 financial crisis, with annual GDP growth averaging
7%. Russia has an impressive fiscal surplus that reached
7.4% of GDP in 2006, bolstered by high global prices for its
oil, natural gas, and metals exports. To help protect
against a sharp drop in energy prices, Russia has accumulated
a $113 billion Stabilization Fund. Russia's foreign debt is
5.1% of GDP, down from 75.7% of GDP in 1999. Reserves have
topped $380 billion.

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7. (SBU) The EU represents Russia's largest trading partner,
driven largely by Europe's dependence on Russian oil and
natural gas, but also by Russia's booming demand for European
machinery and consumer goods. Russia also maintains
significant trade with China. Although still a relatively
small percentage of Russia's total, trade with the U.S. grew
by 20 percent last year, and investment was up more than 50
percent. Some notable recent successes include Amway, whose
sales reached $250 million after only two years here; Alcoa,
with over $300 million invested in two aluminum fabricating
facilities; International Paper, which is investing an
additional $400 million here in a 50/50 joint venture with
Ilim Pulp; and Ford, with over $500 million already in its
St. Petersburg auto plant. U.S. finance and service
companies are also investing here, including Citibank, the
largest foreign bank in Russia, with 38 branches servicing
over 400,000 clients.


8. (SBU) World Trade Organization. There are few events
more likely to help our exporters than getting Russia into
the WTO on terms we can live with. The Russian Government is
pushing hard to complete its decade-long WTO accession
process, but significant issues remain. Russia must complete
multilateral negotiations, and fulfill its bilateral
obligations to the U.S., spelled out in our November, 2006,
market access agreement, including better IPR protection and
market access for U.S. agricultural products. You will meet
with Economic Development and Trade Minister Gref, a strong
proponent of free trade, who shares Putin's resolve to decide
the issue during his tenure. Gref will likely raise the
constraints of the Jackson-Vanik Amendment.


9. (SBU) Trade and Investment Challenges. Investors in
Russia have long requested clear guidelines on the sectors in
which they can invest. A draft Law on Foreign Investment in
Strategic Sectors is now moving through the legislative
process, and should help improve the situation. The same is
true for long-awaited amendments to Russia's Subsoil Law,
which will clarify which energy deposits foreigners may own.
The subsoil restrictions would align legislation with the
current 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.


10. (SBU) Promising Sectors. Despite increased Russian
Government control over the energy sector, Chevron and
Gazprom Neft have formed a joint venture to work in West
Siberia; Lukoil and ConocoPhillips continue to expand their
partnership; and energy service companies are doing very
well. Gazprom CEO Alexey Miller, whom you will meet, is a
longtime confidante of President Putin, having worked for him
in St. Petersburg. In the aircraft manufacturing and sales
sector, Russia is working to revive its own manufacturing
capabilities, but is also looking to update its aging fleets.
Boeing has been working hard over the past two years to win
a share of that market.

Emerging Middle Class
--------------


11. (SBU) The emerging middle class is becoming one of the
most important trends in Russia today. Real incomes have
gone up 70 percent in seven years. The average Russian earns
an annual salary of an estimated $4570, with Moscow's 15
million inhabitants earning roughly twice that figure. And
at least another third of wages are "grey" - unreported and
untaxed. Most experts place the upper class at one percent
of the population, the middle class - 20 percent, the
lower-middle class - 65-70 percent, and 10-15 percent live in
poverty. The emerging middle class eventually will likely
want a voice and vote in how their country is governed and
how their tax dollars are spent.

Energy Security
--------------


12. (SBU) Russia faces two broad challenges: getting its
hydrocarbons out of the ground, and delivering them to the
market. For this, the Russian energy sector will need
billions of dollars in investment. Russia has capital and
know-how, but will need additional foreign capital and
specialized know-how. The ability of Russia to attract and
hold investors will depend greatly on the GOR's steps toward
rule of law, transparency and good corporate governance.


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13. (SBU) We are involved in discussions with Russia on
energy security issues both bilaterally through an energy
dialogue and through the G-8. Our messages are that Russia,
the world's largest producer of hydrocarbons, has an
obligation to provide reasonable leadership on key components
of global energy security, including predictable, pro-market
regulatory and tax regimes and diversification of sources and
transit routes. Key energy security issues such as these
were agreed by Russia and other G-8 leaders in last year's
St. Petersburg Plan of Action.

Nuclear Cooperation
--------------


14. (SBU) You will have a meeting with Rosatom Director
Sergey Kiriyenko. Much progress has been made on
U.S.-Russian nuclear energy cooperation over the past year.
The U.S. and Russia have formed a Civil Nuclear Energy
Working Group to help align our respective nuclear energy
proposals. Negotiations on a 123 Agreement are ongoing and,
to date, have been fruitful and the U.S. Russia Global
Initiative to Combat Nuclear Terrorism, launched at the G8 in
2006, has grown to 30 countries.


15. (SBU) U.S.-Russian cooperation on nuclear
nonproliferation remains robust, with work proceeding well to
meet the aggressive schedules for completing nuclear security
work outlined in the Bratislava Presidential initiative. The
Nunn-Lugar program will celebrate its 15th anniversary this
year. Under the Elimination of Weapons Grade Plutonium
Production program, DOE and Rosatom are moving closer to the
goal of shutting down two plutonium production reactors in

2008. With respect to the Plutonium Disposition program,
Russia has recently expressed a plan that it feels is
financially and technically credible and discussions with
Washington are ongoing. On the heels of the 2006 signing of
the protocol on liability and the reaffirmation of commitment
to the program by Director Kiriyenko, there is reason for
cautious optimism for a mutually acceptable program.

Security and Nonproliferation Issues
--------------


16. (SBU) Missile Defense. Russia's opposition to the
planned deployment of U.S. missile defense assets in the
Czech Republic and Poland has been intense - and highly
public. The Russians reject our analysis of the future
Iranian threat, believing the placement of interceptors and
radars in Poland and the Czech Republic is provocative, and
distrust our long-term intentions. Secretary Gates has
proposed cooperation, there will be an experts meeting in
June, and Secretaries Gates and Rice will meet their
counterparts in the fall to continue high level discussions.


17. (SBU) Conventional Forces in Europe (CFE) Treaty. In his
April 26 State of the Federation address, Putin declared that
a "moratorium" on Russian compliance with CFE would be
necessary until NATO countries ratify the adapted treaty.
Russia rejects NATO members' insistence that Russia first
complete its Istanbul Commitments of removing remaining
troops from Georgian and Moldovan territory before NATO
members ratify the Adapted CFE Treaty. Foreign Minister
Lavrov, terming the status quo "absurd," called on May 23 for
an extraordinary CFE Conference.


18. (SBU) NATO. Russia's neuralgia about the prospect of
Ukrainian entry into NATO has eased somewhat as Ukraine
struggles with its internal political situation. Russia
strongly opposed the establishment of Intensified Dialogue
for Georgia. Your visit coincides with the Federation
Council's passage of the NATO/PFP-Russia Status of Forces
Agreement (SOFA) on May 24, following the Duma approval on
May 23. Passage sends a positive message on the 5th
Anniversary of the NATO-Russia Council. A SOFA will remove
the stumbling block to joint exercises that precipitated the
fall 2006 cancellation of the bilateral Torgau military
exercise.


19. (SBU) Sanctions. The U.S., in July 2006 and again in
December, imposed INPA (Iran Nonproliferation Act, now known
as the Iran, North Korea, and Syria Nonproliferation Act)
sanctions against Rosoboronexport, the Russian
government-supported arms agency that oversees all arms
exports. The GOR regards the sanctions as an attempt to
undercut the Russian arms industry and deprive it of what
Russian leaders see as legitimate markets. Your

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interlocutors will argue that this is an extraterritorial
application of U.S. law and their sales do not violate
international law or UN sanctions.
BURNS