SERGEI IVANOV TALKS BUSINESS WITH THE UZBEKS

C O N F I D E N T I A L SECTION 01 OF 03 TASHKENT 001324

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/17/2017
TAGS: PREL ECON ENRG EAIR KNNP JO RS UZ
SUBJECT: SERGEI IVANOV TALKS BUSINESS WITH THE UZBEKS

REF: A. TASHKENT 438

B. TASHKENT 1302

Classified By: CDA Brad Hanson for reasons 1.4 (b) and (d).

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Summary
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1. (C) Russian First Deputy Prime Minister Sergei Ivanov's
visit to Tashkent focused primarily on resolving issues in
the Russia-Uzbekistan commercial relationship. Although
trade turnover is increasing, the growth is primarily due to
large oil and gas projects while other Russian business
continues to have difficulties, including with currency
conversion. Ivanov again pressed the Uzbeks to integrate the
Chkalov Aircraft Factory into a newly created Russian
aircraft manufacturing consortium. The two sides agreed to
task a plan to upgrade 400 km of oil and gas pipelines within
Uzbekistan, the cost of which is still being calculated, and
also discussed the possibility of Uzbekistan joining a newly
created international uranium enrichment center in Russia.
Although less frustrated with the Uzbeks than following Prime
Minister Fradkov's March visit, the Russians continue to face
many of the same business problems as the rest of the
international community and are realistic about the
probability of the situation changing in the near future.
End summary.


2. (C) Russian Ambassador Farit Mukhametshin gave the Charge
a readout of Russian First Deputy Prime Minister Sergei
Ivanov's July 3-4 working visit to Tashkent. Like Prime
Minister Mikhail's Fradkov's March visit (ref A),Ivanov's
visit focused primarily on bilateral economic issues. The
Russian Ambassador characterized Ivanov's meeting as focused
on trying to resolve specific, and lingering, issues. In
addition to the economic talks, Mukhametshin confirmed that
Russia and Uzbekistan signed three labor migration agreements
during the visit (ref B). During his two-day visit, Ivanov
met with Prime Minister Shavkat Mirziyaev, Deputy Prime
Minister Rustam Azimov, and Minister of Foreign Economic
Relations Eliyor Ganiev.


3. (C) Press reports had portrayed Ivanov's visit as a
meeting of a Russia-Uzbekistan joint economic working group.
Mukhametshin said this was not the case, but that President
Putin recently had elevated the importance of the commission
by naming Ivanov as the Russian co-chair. In addition,
Russian membership on the commission had been expanded to
include the heads of nearly all of the major Russian
companies doing business in Uzbekistan, including most
prominently Lukoil and Gazprom. Mukhametshin said that
President Karimov responded to the Russian move by naming
Prime Minister Mirziyaev as the Uzbek co-chair, Deputy Prime
Minister Azimov as his deputy, and several other ministers,
including Ganiev, to the panel. The Russian Ambassador said
that Ivanov's trip was a first meeting between the new
co-chairs; the full commission will meet next near the end of
2007 in Tashkent.

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Business Climate
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4. (C) Mukhametshin said that much of Ivanov's visit was
devoted to the bilateral commercial relationship. Trade
turnover between Russia and Uzbekistan was growing 50 percent
each year, he claimed, and had reached $3 billion in 2006.
Over 90 percent of the annual increase, however, is mostly
due to large projects in the oil and gas sectors, while small
and medium enterprises accounted for only 10 percent of the
growth. Mukhametshin said that Ivanov discussed bottlenecks
to trade, including Uzbek customs regulations which delay
goods at the border for months at a time, and "creative"
calculation of import fees on Russian goods. Mukhametshin
agreed with the Charge that these bottlenecks should not
exist since Uzbekistan joined the Eurasian Economic Community
(EURASEC),but noted that to date Uzbekistan had ratified
only about a third of the EURASEC agreements.


5. (C) Mukhametshin said that Ivanov raised again the
difficulties faced by Russian companies with currency
conversion, which he said is a problem across the board but
especially for small and medium enterprises outside of
Tashkent. He noted that the Russians have raised the issue
with the Uzbeks on multiple occasions, including during
Fradkov's visit and in meetings of a Russian-Uzbek joint

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working group on the economy co-chaired by Ivanov and
Mirziyaev. Each time it is discussed, he said, the Uzbeks
promise to fix the problem and do occasionally provide help
in individual cases. Then, just prior to Ivanov's visit the
Uzbeks provided conversion for several Russian companies
which had been waiting for several months. Mukhametshin
confirmed the Russian Embassy sent a diplomatic note raising
the problem and listing a number of major Russian companies
awaiting convertibility. (Note: The full text and picture of
which appeared on www.uzmetronome.com just after Ivanov's
visit. End note.) According to the Russian Ambassador, the
Uzbeks told Ivanov that the Russian Embassy should continue
to inform the Ministry of Foreign Affairs about specific
problems. The Russian Ambassador pointed out the Uzbek are
only hurting themselves as many Russian companies, including
the cell phone company Beeline, want to convert soum for hard
currency to buy equipment to expand their operations in
Uzbekistan.

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Aircraft Manufacturing
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6. (C) Mukhametshin said that Ivanov pressed the Uzbeks to
integrate the Chkalov Aircraft Factory (a.k.a. TAPOiCh) on
the outskirts of Tashkent into a newly created Russian
aircraft manufacturing consortium. (Note: Integration of
TAPOiCh into the wider world of Russian aircraft
manufacturing was also on Fradkov's agenda in March. End
note.) He reminded Charge that TAPOiCh remains wholly
dependent on parts from Russia. Integration into the Russian
system would result in refurbishment and updating of outdated
technology currently in use, more orders for both IL-76 and
IL-114 aircraft, and an increase in the TAPOiCh's overall
value. TAPOiCh is the only facility outside of Russia that
has been invited to join the consortium so far; however,
Mukhametshin said that although the Uzbeks would have input
into the consortium's operations, overall control would
remain in Russian hands. Mukhametshin confirmed press
reports that Jordan recently ordered two IL-76 military cargo
aircraft from TAPOiCh and said that Russian cargo companies
still buy a few planes. However, he said, these orders are
nothing compared to what the plant would get if it were part
of the Russian system.

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Energy
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7. (C) The need to upgrade oil and gas pipelines in Central
Asia was also on the Russian agenda. Mukhametshin said that
existing pipelines are 40 years old, already a decade past
their original life span and in desperate need of
refurbishment. Ivanov and Mirziyaev jointly tasked the
development of an upgrade plan for the 400 km of pipeline in
Uzbekistan, utilizing both Russian and Uzbek capital. He
said that the cost of the upgrades was being calculated.
Russia also is talking to Kazakhstan and Turkmenistan about
upgrades to portions of pipelines running through those
countries.


8. (C) Rosatom director Kiriyenko was included on Ivanov's
delegation specifically so that the possibility of Uzbekistan
joining an international uranium enrichment center in
Angarsk, Russia could be discussed. The Russian Ambassador
portrayed this center as part of joint U.S.-Russian
nonproliferation efforts. Mukhametshin said that the Uzbeks
seemed interested, and that Russia expects a positive
response soon. He said that while the details would have to
be worked out, he expected that Uzbekistan would retain
possession of uranium enriched in Russia while paying a fee
to the center. The arrangement would benefit Uzbekistan, he
said, because it would be able to command a higher sales
price for enriched uranium than it currently gets for selling
unprocessed ore. Selling raw uranium to Russia might be a
future option, he said, but it is unlikely in the near future
because of Uzbekistan's existing uranium contracts. (Note:
The existing contracts obligate Uzbekistan to sell the
majority of its uranium to U.S.-based Nukem, Inc. End note.)

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Comment
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9. (C) Mukhametshin was very frustrated with the Uzbeks
following Prime Minister Fradkov's visit in March. Some of
the frustration remains, especially when the Russian

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Ambassador talked about continuing problems with currency
conversion. Despite progress in a few key areas, the
Russians face the same problems doing business here as the
rest of us and are realistic about the probability of the
business climate improving significantly in the near future.
HANSON