RUSSIA: TRADE MINISTRY CONTINUES WORK TOWARD THE

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003708 SIPDIS SIPDIS STATE FOR EUR/RUS, EB/TPP/BTA NSC FOR TMCKIBBEN USDOC FOR 4231/IEP/EUR/JBROUGHER USDOC FOR 4231/IEP/EUR/MEDWARDS E.O. 12958: DECL: 07/29/2017 TAGS: PREL ECON ETRD BO RS SUBJECT: RUSSIA: TRADE MINISTRY CONTINUES WORK TOWARD THE RUSSIA-BELARUS UNION STATE REF: MOSCOW 88 Classified By: Acting Econ Counselor Kathleen Doherty, reasons 1.4 (b) and (d). 1.(C) Despite public predictions that the Russia-Belarus Union State is dead, Russian trade officials continue to meet Belarussian officials at the working level to plug away at the economic aspects of the 1999 agreement. Although trade between the two countries has increased significantly in recent years, it is still heavily skewed toward oil and gas. To help diversify exports, the Ministry of Economic Development and Trade (MEDT) has proposed the establishment of joint production projects in sectors of historical Belarussian expertise. Russian trade officials are also working to resolve a number of troublesome economic issues, including property rights and tariff differences with third countries. Moscow supports Belarussian WTO entry, and provides modest technical assistance to the GOB. The ambitious customs union envisioned among Russia, Belarus and Kazakhstan has been put on hold for the foreseeable future. Despite the efforts of trade officials to move the Union State forward, progress is hampered by politics. 2.(C) Emboffs recently met with Victor Kalmykov, Deputy Director of Department of Trade Negotiations at the Ministry of Economic Trade and Development (MEDT). Kalmykov leads GOR negotiations with Belarus on trade and economic issues, except for the issues of oil and gas. He stated that MEDT continues to conduct discussions with Belarus under the umbrella of the 1999 Union State Agreement, which already has an extensive base of 120 bilateral agreements, most in the economic sphere. 3.(C) According to MEDT statistics, Russia-Belarus turnover trade has doubled in the past four years - from $10 billion in 2002 to $20 billion in 2006. Given that first quarter 2007 trade reached $5 billion, MEDT expects year-end totals to be over $20 billion. Despite this strong growth, the GOR would like to see the structure of trade evolve away from natural resources. Currently, 54-56% of Russian exports to Belarus are oil and gas, followed by equipment at 10-11%, which Kalmykov points out are similar to export statistics to the EU. Kalmykov added, however, that trade statistics with Belarus are difficult given the nearly open border between the two countries. 4.(C) Investment statistics are less impressive. In 2006, Russian investment in Belarus was about $400 million, and Belarussian investment in Russia about $320 million. To help encourage greater trade and investment outside the natural resources sector, the Union State has a program aimed at establishing joint government production projects focused on the electronics, medical equipment and biotechnology sectors, all areas of Belarus specialization during the Soviet period. He also noted that significant inter-regional cooperation is underway, pointing to a recent visit to Minsk by Moscow Mayor Yury Luzhkov that resulted in $1 billion worth of deals, mostly in construction. 5.(C) Kalmykov reported that current Union State discussions are working to resolve problems in the areas of property rights, based on an agreement reached in January 2006, and on harmonizing differing tariff rates with third countries. However, Kommersant recently reported that the goal of creating a trilateral customs union with Russia, Kazakhstan and Belarus has been put on hold until at least Russia and Kazakhstan have acceded to the WTO. Meanwhile, customs issues remain uncertain. Although the customs border between the two countries has de jure been eliminated, de facto both Russia and Belarus conduct random checks of shipments. The free movement of people between the two countries has been criticized by Duma deputies as a potential entry point for illegal migrants or terrorists. 6.(C) Regarding Belarus' bid to join WTO, Kalmykov stated that Russia provides some technical assistance and "help on methodology" to Belarus, but is not "pushing" for its accession. He indicated, however, that he does not consider U.S. opposition to Belarusian accession to be helpful, as he believes that it would benefit Belarus to be part of the international trading system. He noted that Russia and Belarus, which have not yet negotiated a WTO bilateral market access agreement, would have to resolve several difficult issues, particularly in the agricultural sector. MOSCOW 00003708 002 OF 002 7.(C) Comment: Despite MEDT efforts to make progress on the other economic aspects of the Russia-Belarus Union State, they are often overwhelmed by political differences and oil and gas dynamics. Although tensions over subsidized gas prices and oil transit have subsided since their peak in January (reftel),there remains an uneasy truce. As long as Russia is dependent on the Druzhba pipeline to supply oil to Europe, Belarus has leverage in its economic dealings with the GOR. There is no question, however, that Russia would prefer to lessen its dependence on Belarus as a transit state and that it is moving to do so with various proposed bypasses. If Russia is successful in securing alternative routes to its lucrative markets, Belarus will lose a key bargaining chip. End Comment. RUSSELL