JEFFERY-DENISOV MEETING YIELDS AGREEMENT ON

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000316 SIPDIS SIPDIS DEPT FOR EEB, EUR/RUS; NSC FOR WARLICK; DOE FOR HARBERT, HEGBORG, EKIMOFF: DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 02/01/2018 TAGS: ECON ENRG EINV ETRD RS SUBJECT: JEFFERY-DENISOV MEETING YIELDS AGREEMENT ON ECONOMIC DIALOGUE Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d) -------------- Summary -------------- ¶1. (C) In a January 31 meeting, Under Secretary Jeffery and Deputy Foreign Minister Denisov agreed to establish a regular USG-GOR economic dialogue under their chairmanship. Both sides agreed that the dialogue should remain relatively informal, include the private sector and not supplant on-going negotiations such as those over Russia's WTO accession. Jeffery and Denisov agreed that the first meeting would be in Washington in the spring and approved a short joint public statement to that effect. While the agenda for the meeting will be decided over the next several months, discussion centered on two core areas: energy, and trade and investment. Denisov noted that while it might not be a focal point of the dialogue, WTO accession this year was the GOR's highest economic priority. End Summary. -------------- Agreement on a Regular Dialogue -------------- ¶2. (C) Jeffrey told Denisov that his visit last summer had convinced him of the need for a regular USG-GOR economic dialogue. Two of the world's largest economies should be meeting regularly to discuss ways to facilitate business and increase their growing economic and commercial relationship. That said, Jeffery noted that past dialogues had become bogged down in bureaucracy and he hoped that this time we could meet in a "formal/informal" fashion. To that end, he suggested that he and Denisov chair the dialogue initially and that it start small with an initial meeting this spring in Washington. The focus would be on issues where we could make a difference and we could expand the participation to include expertise from other parts of the USG and GOR and the private sector as the agenda warranted. ¶3. (C) Jeffery said the agenda should be flexible and could range from broad topics such as international economic development to more concrete issues such as our respective foreign investment regimes, including the need for a bilateral investment treaty (BIT) and for education/outreach on new and proposed regulations that would screen foreign investment on national security grounds. Ambassador Burns said a key virtue of the dialogue would be to revive the habit of talking to one another systematically. He added, however, that the proposed dialogue should not supplant existing lines of communication, such as the on-going negotiations between USTR and the Russian Trade Ministry (MEDT) over Russia's WTO accession, but rather help facilitate them. ¶4. (C) Denisov agreed that a regular structured dialogue was a good idea and that the State Department and the Foreign Ministry should chair such discussions, with other ministries and the private sector involved as appropriate. He accepted the invitation to come to Washington in the spring. (N.B. A joint statement was issued to that effect at the conclusion of the meeting). Denisov noted that economics was becoming ever more important to Russia's foreign relations, including especially with the U.S. Russia wanted a relationship with the U.S. similar to China's, where commercial ties provided a foundation for our relations and a safety net in the event of, inevitable, political disputes. ¶5. (C) Denisov said that for the U.S., the USD 25 billion trade relationship might be small. However, for Russia it was important, not just in dollar terms, but symbolically as well. Moreover, it was in both countries' interest, and in the interest of their business communities, that commercial relations expand. Denisov noted that for the first time direct Russian investment into the U.S. exceeded U.S. investment into Russia. Both were roughly USD 8 billion, but Russia's share was growing and included many of Russia's largest firms. In that regard, he added that a BIT was in the interests of both countries and that we would eventually "strike a deal" likely on the basis of the U.S. model but that this would have to come after WTO accession. -------------- -- MOSCOW 00000316 002 OF 003 Agenda Core Items: Energy, Trade and Investment -------------- -- ¶6. (C) Denisov said Russia would want to discuss investment and trade issues. FDI was critical to Russia if it was to sustain growth. Although the investment climate was rapidly improving, there was still much work to be done and the dialogue could help identify problems and solutions. For instance, on IPR issues Russia understood that its legal framework was acceptable but that enforcement needed to improve. And with respect to the proposed Strategic Sectors Law, which Russia would use to screen foreign investment, the regime would need to be credible but also clear and transparent. The MFA's role was to assist the lead ministries to follow international standards, and the dialogue could assist it in that regard. ¶7. (C) Jeffrey responded that on investment regimes there was confusion and concern on both sides. We could bring in U.S. experts to brief on the new CFIUS law and Russia could do the same with respect to its Strategic Sector law. With a clearer understanding, it would be easier to negotiate disagreements. ¶8. (C) Denisov identified energy issues as another potential agenda item. The West accused Russia of using energy as a political weapon while Russian perceptions were that the West was preoccupied with alternative transit routes that by-passed Russia. Russia was partly to blame for this situation and needed to do more to allay concerns. In fact, while Europe depended on Russia for 25 percent of its gas, Russia depended on Europe for 80 percent of its gas income. The dialogue would offer a forum to explain this mutual dependence and to reiterate Russia's commitment to the G-8 St. Petersburg principles. ¶9. (C) Jeffery acknowledged that energy was a sensitive subject and agreed that it would be an appropriate agenda item. The U.S. was not anti-anyone when it came to transit routes, we were in favor of diversification, itself one of the St. Petersburg principles. In our view, competition was good for consumers. In addition, multiple routes provided redundancy in the event of supply disruptions. As with investment regimes, an exchange of views on energy policies could help educate one another. ¶10. (C) Ambassador Burns noted that energy relations were not "zero sum." The recent agreement on the Burgas-Alexandropolos pipeline (BAP) was a potential "win-win" since it was a logical precursor to expansion of the CPC pipeline in which American firms were heavily invested. He added that we could consider bringing in an outside expert, someone like Daniel Yergin, who could provide a broader framework for the discussion. -------------- WTO Optimism -------------- ¶11. (C) Denisov noted that although it might not be a focal point of the dialogue, the most important agenda item in our bilateral economic relationship was Russia's WTO accession. The meeting between Ambassador Schwab and Deputy Prime Minister Kudrin the week before in Davos had stoked Russian optimism that accession could happen this year. Russia still had to conclude bilateral deals with the UAE, Saudi Arabia, and Georgia and the last two offered particular challenges. It also had work to do on the multilateral agreement and in the trilateral negotiations with the U.S. and the EU, but the remaining obstacles, such as State-owned enterprises (SOEs) seemed amenable to compromise. ¶12. (C) Denisov noted, however, that WTO was controversial in Russia. Unlike China, there was not a large export sector agitating in favor of WTO membership. Energy and raw materials were its main exports and these were less affected by WTO rules. For its part, the GOR understood that it needed to be in the WTO and part of the decision-making process. Russia's economy was largely ready for the WTO and for now the government had the political will to complete accession, though Putin's time as president was growing short. Denisov noted that WTO accession was linked to Jackson-Vanik and asked what effect it would have on Russia's MOSCOW 00000316 003 OF 003 prospects for graduation. ¶13. (C) Jeffery responded that the Administration remains committed to permanently lifting Jackson-Vanik for Russia but that this is a congressional decision. WTO membership could provide the momentum needed to make this happen. American firms would be unable to take advantage of the WTO agreement if Jackson-Vanik remained in place and that would put pressure on Congress. In that regard, Jeffery said the U.S. had also been encouraged by the Schwab-Kudrin meeting and strssed the importance of Russian implementation of its WTO undertakings prior to accession. High-level involvement on all sides would be critical to reaching an agreement but Russia's accession had never been closer than it was now and it was a priority for the U.S. as well. ¶14. (U) This message has been cleared by U/S Jeffery. BURNS