TREASURY DEPUTY SECRETARY KIMMITT'S JUNE 20

C O N F I D E N T I A L MOSCOW 003344 SIPDIS SIPDIS STATE FOR EUR/FO, EUR/RUS, EB/IFD TREASURY FOR KIMMITT, DALY, HAUSER, MEYER, CETINA NSC FOR KLECHESKI E.O. 12958: DECL: 06/25/2017 TAGS: EINV EFIN ECON RS SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT'S JUNE 20 MEETING WITH FINANCE MINISTER KUDRIN Classified By: Ambassador William J. Burns, Reasons 1.4 (b/d). ¶1. (C) Summary. In a June 20 dinner meeting with Treasury Deputy Secretary Kimmitt and Ambassador Burns, Finance Minister Kudrin raised the issue of Iraqi debt forgiveness. Kimmitt expressed appreciation for Russia's assistance with the transfer of funds from Banco Delta Asia to the Far Eastern Commercial Bank. He outlined the U.S. commitment to an open investment policy and discussed the Committee for Investment in the U.S. (CFIUS) process and pending CFIUS legislation and Russia's new investment law. Kudrin explained changes to the Stabilization Fund into the Reserve Fund and National Welfare Fund (aka Fund for Future Generations),noting that the investment policy for the Reserve Fund would remain conservative and that the National Welfare Fund may adopt a riskier investment strategy. End Summary. ¶2. (C) Iraq Debt. Kudrin raised the issue of Iraqi debt forgiveness. Deputy Secretary Kimmitt noted that the GOR was the only Paris Club member that had not forgiven Iraqi or Afghanistan debt. He also noted that Iraqi President Jalal Talabani was traveling to China to meet with President Hu Jintao to sign an agreement on Iraq debt, and also noted that the oil minister Al-Shahristani would also be in attendance. ¶3. (C) North Korea Funds/Iran. Deputy Secretary Kimmitt relayed the USG's appreciation for Russian assistance in facilitating the transfer of funds from Banco Delta Asia in Macau to a North Korean account with the Far Eastern Commercial Bank in Khabarovsk, Russia and noted that North Korea would be obliged to comply with the February 13 Framework Agreement. He also observed that the financial measures imposed on the Iranian regime are having an impact and that the U.S. hopes for continued Russian support within the UN to pressure Iran to meet its obligation to suspend sensitive nuclear activities. ¶4. (C) Open Investment. Deputy Secretary Kimmitt reaffirmed the commitment of the United States to its longstanding open investment policy. He noted that while much attention has been focused on trade flows, investment flows are considerably larger and, as detailed in the G8's Heiligendamm communique on investment, will only grow in importance. Kimmitt stressed that the United States welcomed investment from abroad, including from Russia. However, he recognized that fallout from the failed bids for U.S. assets by the China National Overseas Oil Corporation (CNOOC) and Dubai Ports World had generated a misperception that the United States was becoming less open to foreign investment, particularly from state enterprises. He noted that for this and other reasons, the President released an open investment policy statement on May 10. Kimmitt explained that his trip to China and Russia, and future trips to the Middle-East and other regions would serve to reinforce the President's message. ¶5. (C) CFIUS. Deputy Secretary Kimmitt described in general terms the narrow scope of CFIUS reviews and summarized how pending legislation on the matter would preserve a narrow "national security" based review. He observed that only a small percentage of cross-border investments, less than 8 percent of total mergers and acquisitions in 2006, were reviewed by CFIUS and suggested that the pending legislation was likely to pass this summer. Kudrin expressed a keen interest in CFIUS current operations as well as implementation of the pending CFIUS bill. Kudrin asked many detailed questions focused on the potential U.S. approach toward transactions that could have national security implications, including those dealing with critical infrastructure. ¶6. (C) Strategic Sectors Law. Kudrin discussed Russia's draft law on strategic sectors that is currently before the Duma. He explained that the law centered on 39 sectors and came about as a result of a memo that President Putin had drawn up in 2005. According to Kudrin, Putin asked for new investment legislation to clarify Russia's investment review process. Kimmitt conveyed support for the GOR's approach in considering outside parties' comments on the draft law, encouraged a transparent process, and urged a balance between national security considerations and maintaining open investment policies. He expressed hope that neither the United States nor Russia would adopt laws or policies that could be viewed as protectionist in the eyes of the rest of the world. ¶7. (C) Changes to the Oil Stabilization Fund (OSF). Kudrin provided an overview of the upcoming changes in the organization and investment guidelines affecting the Stabilization Fund. In early 2008, the Stabilization Fund will be transformed into a Reserve Fund and a National Welfare Fund (aka Future Generations Fund, National Prosperity Fund, National Well-Being Fund). In approximately three years, the Reserve Fund will serve as the GOR's collection point for all of Russia's oil and gas tax revenues. The target size for the Reserve Fund is 10 percent of GDP, and its resources will be used to cover budget expenses in the event of an economic downturn. Once the Reserve Fund equals 10 percent of GDP, the National Welfare Fund will be the destination for all subsequent oil and gas revenues. The Reserve Fund will likely maintain the Stabilization Fund's conservative investment approach, that is, high-quality government securities. The National Welfare Fund is likely to invest in a broader set of assets that could include foreign blue chip stocks. Kudrin indicated that the the GOR might eventually consider using the National Welfare Fund's assets for direct investments abroad in non-sensitive sectors. ¶8. (U) Deputy Secretary Kimmitt has cleared this message. BURNS