Scenesetter for Senator Lugar's Visit to Russia

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SUBJECT: Scenesetter for Senator Lugar's Visit to Russia

Welcome to Russia
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1. (SBU) Your visit to Moscow comes at a time of real disconnect
in the U.S.-Russian relationship. Disagreements over European
security, Russia's role in its neighborhood, and the Kremlin's
creeping authoritarianism were followed by the rupture over Russia's
decision to send forces into Georgia and to recognize the breakaway
regions of South Ossetia and Abkhazia. Having tapped into
substantial public disapproval of U.S. policies on Iraq, Kosovo,
NATO enlargement, missile defense, and Georgia, President Medvedev
and Prime Minister Putin enjoy broad popular support for Russia's
more assertive foreign policy. In his November 5 address to the
nation, Medvedev sent an ill-tempered message to President-elect
Obama, reprising a litany of complaints against the U.S. and
threatening to deploy short-range nuclear missiles to Kaliningrad if
the U.S. proceeds with missile defense plans. However, both
Medvedev and Putin have left the door open to closer cooperation
with the new U.S. administration, with Medvedev using his December
12 meeting with Dr. Kissinger to express "optimism" about prospects
for relations with the Obama administration. Nevertheless, you can
expect to hear that the onus is on the U.S. to set a new tone and to
"return to realism." Never easy interlocutors, your Russian
counterparts will push for a new U.S. approach to outstanding
disputes and will ask for your estimate of the new President.

The Political Tandem
--------------


2. (SBU) More than six months after Medvedev's inauguration,
questions remain about Russia's political succession. As Prime
Minister, Putin continues to play a dominant role, bestowing
legitimacy on Medvedev and heading the ruling party, which enjoys a
constitutional majority in the Duma. Putin used a December 4
national press conference to dismiss rumors of early elections, but
declined to speculate about his possible return to the Kremlin in

2012. While Medvedev has focused on foreign policy, Putin has taken
full responsibility for guiding Russia through the economic crisis.
It is an open question whether the political passivity that marked
Russia's last eight years of constantly expanding wealth and
economic growth will erode as Russians confront the reality of
rock-bottom energy prices, plummeting foreign direct investment, and
increasing unemployment. At present, both leaders enjoy high
popularity, with Putin at 70 percent and Medvedev at 54 percent
approval; 59 percent of Russians express "trust" in Putin and 44
percent in Medvedev.


3. (SBU) While Medvedev campaigned on an agenda of economic and
political modernization, Russia's democratic development remains
stalled, with no institutional check on a powerful elite
concentrated in the White House and Kremlin. Civil society and
human rights activists are under pressure to scale back their
interaction with foreign donors and to restrict or curtail activity
that questions the legitimacy or the decision-making authority of
leaders. "Opposition" political parties are loyal to the Kremlin,
and the "real" opposition is both scarce and consumed by
in-fighting. Television is state-owned or controlled and provides a
diet of pro-government reports. While small-circulation newspapers
and magazines provide critical coverage and the Internet remains
unfettered, journalists throughout the country have been threatened,
beaten and sometimes killed for exposing corruption. (Yuliya
Latynina, a journalist at Ekho Moskvy Radio -- where you will be
interviewed -- received the Defender of Freedom Award by the
Secretary for bucking self-censorship on the tough issues of
leadership corruption and Georgia.) The Russian Orthodox Church,
which is in the process of naming a new leader following the death
of Patriarch Aleksey II, remains the dominant religious entity in
the country, enjoying close ties and support from the government.
The revival of religious association since the collapse of the
Soviet Union has been striking, with 71 percent of Russians
identifying themselves as Orthodox.

The Georgia Rupture
--------------


4. (SBU) While concerns over the economy have pushed Georgia into
the background for the average Russian, the August conflict left an
indelible imprint. Russians rallied behind the government's
decision to go to war against Georgia, outraged by the killing of
Russian peacekeepers and South Ossetian civilians, as well as by the
absence of international condemnation of Georgian actions.
Saakashvili remains vilified as a war criminal, and few are
persuaded that the U.S. did not provide a "green light." In
provoking Georgia's attack, Russia secured its strategic objective
of thwarting Georgia's near-term NATO membership and laid down an
unsettling marker that it was prepared to use military means to
assert its "privileged" interests in its neighborhood. The failure
of any neighboring country to endorse Russia's recognition of South
Ossetia and Abkhazia reflects the regional unease over a revanchist
Russia. Since the invasion, Russia has focused its diplomatic

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efforts on "Old Europe" and encouraged French President Sarkozy's
diplomacy, calculating that Europe's significant economic ties and
energy interdependence will erode a policy of "no business as usual"
in response to the Georgia conflict.


5. (SBU) While Russia argues that Saakashvili "destroyed" Georgian
territorial integrity, our goal is to keep the parties engaged in
confidence building measures to improve security and provide for the
return of refugees that, over the long-term, will allow Georgia to
create the economic and political conditions to attract the
breakaway regions back into its fold. While Russia has participated
in the Geneva talks, with the next session scheduled December 17-18,
it has threatened to cut short the process and has done little to
rein in its clients on the ground, where security remains poor in
the areas adjoining both South Ossetia and Abkhazia, with EU
monitors prevented from entering either territory.

The Foreign Policy Consensus
--------------


6. (SBU) We see no difference in approach on foreign policy
between Putin and Medvedev, especially over the basket of European
security issues, including missile defense, NATO enlargement, CFE,
and Kosovo. Medvedev's "European Security Treaty," which received a
chilly reception at the OSCE December Summit, is less a substantive
initiative than a shot across the Euro-Atlantic bow that Russia is
dissatisfied with the status quo. As you know well from your
previous visits, Russians across the political spectrum nurture a
grievance over their perceived humiliation during Russia's period of
acute weakness in the 1990's and argue that important gestures by
Putin, including acceding to the U.S. abrogation of the ABM treaty
and post-9/11 assistance in staging the war in Afghanistan, went
unreciprocated. Many Russians insist that the U.S. is intent on
weakening Russia, including by "encircling" Russia in waves of NATO
enlargement and by establishing U.S. basing and missile defense
sites that over time could erode Russia's national security.


7. (SBU) At the Carnegie conference and Spaso celebration marking
the 15th Anniversary of the Trilateral Agreement, you will have an
opportunity to engage the cardinals of Russia's arms control
community on next steps in our stewardship of nuclear weapons, as
well as to draw your interlocutors out on Medvedev's objectives in
advancing a new European Security Treaty. You will hear the
following arguments:

-- Post-START: There is almost unanimity within the Russian
strategic affairs community that arms control must resume its
central place in U.S.-Russian relations. The GOR maintains that
negotiating and ratifying a post-START Treaty is feasible by the end
of 2009 assuming cardinal changes in U.S. positions; Lavrov recently
reaffirmed that Russia does not want to rely on a five-year
extension of the existing START Treaty. In addition to seeking a
legally binding treaty, Russia wants all warheads and delivery
vehicles (including those being modified for conventional weapons)
to be counted, and insists that all strategic weapons be located
only on national territories. While Russia has called for further
cuts in nuclear inventories, as essential to maintain international
support for NPT leading up to the 2010 review conference, Lavrov has
maintained a healthy public skepticism of the Global Zero
initiative.

-- Missile Defense: Russia expects the new U.S. administration to
revisit missile defense plans in Europe, and will argue that its
offer of cooperation at the Qabala radar facility in Azerbaijan was
a missed opportunity to present a common front against Iran.
Russia's offer of cooperation was premised on the U.S. halting the
development of radar and interceptor sites in the Czech Republic and
Poland. Russia rejects the physics driving the geographic selection
of the two sites, and the U.S. decision to provide Poland with
Patriot batteries has been pocketed as evidence of the
"anti-Russian" nature of the program. Since October 2007, we have
proposed a number of transparency and confidence-building measures
to reassure Russia, providing extensive technical briefings on the
threat from Iran as well as on the characteristics of the system,
showing that it could not be effective against Russia's nuclear
arsenal. The latest round of talks will conclude on December 15,
with no breakthrough expected. Moscow continues to insist that
their experts be permanently stationed at the sites; something the
two host countries do not accept. Additionally, Moscow has balked
at the idea of reciprocal access to Russian sites for the U.S.,
Poles and Czechs.

-- NATO: Russia welcomed NATO's decision to resume engagement in
the NATO-Russia Council post-Georgia as a "return to realism,"
continuing its policy of demanding greater cooperation even as it
decries the security organization as an existential threat to
Russian security. While NATO reaffirmed the Bucharest Declaration's
pledge that Ukraine and Georgia will become NATO members, your
Russian interlocutors will argue strongly that further enlargement
risks direct military confrontation. Ukraine remains Russia's

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brightest redline, with Russian officials positing that NATO
membership and NATO bases in Ukraine (sic) means that Russia could
lose a conventional war. Seventeen years after the collapse of the
Soviet Union, we have yet to persuade the Russian body politic and
populace that NATO is not a threat, with Baltic and Polish rhetoric
reinforcing the impression here that NATO is still an alliance
directed against Russia.

-- Conventional Forces in Europe Treaty: Russians point to the CFE
as the archetypal outdated security structure, premised on the Cold
War division of Russia versus the rest of Europe. Russia continues
to maintain its December 2007 suspension of its Treaty obligations
and to press for ratification of the Adapted Treaty by the NATO
signatories, while insisting on changes to the Adapted Treaty, such
as elimination of the flank regime for Russia. The U.S. continues
to pursue a "parallel actions plan" that would culminate in
ratification of the Adapted Treaty; however, Russia's recognition of
Abkhazia and South Ossetia repudiate our operating premise that all
Russian forces must leave all Georgian territory. Even prior to the
Georgia conflict, Russia rejected linkage of the Adapted Treaty to
political commitments to remove its forces from Georgia and Moldova,
and is playing on European concern over the absence of a viable CFE
to push for western compromise.

-- European Security Treaty: Medvedev has trumpeted the failure of
existing European security architecture to prevent the conflict in
Georgia as proof of the need for a new European Security Treaty, but
has yet to elaborate his concept. While officials argue that they
are not seeking to undermine NATO, the security gambit is clearly
aimed at foreclosing any further expansion of NATO towards Russia's
borders. Key elements of the initiative include "equal security
guarantees" for the states of the Euro-Atlantic area; development of
a "uniform interpretation of the principles of security" for states
and relations between them, including inadmissibility of the use of
force; the abandonment of claims by individual states or their
groups to exclusive rights to the maintenance of peace and security
in the Euro-Atlantic area; the determination of basic principles for
development of arms control regimes and military build-up; new
cooperation in countering the spread of WMD, terrorism, drug
trafficking and other kinds of transnational organized crime; and,
elaborating uniform approaches to the principles, procedures and
mechanisms of conflict prevention and settlement. How Russia's
invasion of Georgia squares with the inadmissibility of the use of
force has not been clarified by the Russian leadership.

The Economic Crisis
--------------


8. (SBU) The international financial crisis has replaced the war
with Georgia as the defining issue for Russia's political class and
public, with the "real economy" now taking a hit. The precipitous
drop in oil, gas and other commodity prices, as well as the
withdrawal of massive amounts of foreign investment, exposed the
weaknesses in the Russian economy. Prior to August 2008, the
Russian economy had been growing fast, with real economic growth of
over 8 percent in 2007, a strong ruble, and record levels of foreign
direct investment--$41 billion in 2007 alone. Years of budget
surpluses and rising oil prices had lifted the country's foreign
currency reserves to almost $600 billion, third highest in the
world. August marked a clear turning point, when the stock market
began to drop sharply, in response to hostilities with Georgia,
slipping oil prices, and GOR statements intimating state
interference in the economy. Money began to flow out of the country
as investors sold their shares and Russians sold their rubles for
dollars. By mid-September, the default by a pair of high-profile
banks virtually froze lending activity, sending the stock market
into meltdown.


9. (SBU) The most optimistic expectations for 2009 are that the
economy will grow by 3 percent, although some experts are predicting
no growth or even negative growth should oil prices remain low. All
told, the GOR has committed more than $200 billion in short-term and
long-term funds to supply liquidity, recapitalize banks, and support
domestic securities markets. Nevertheless, tight credit markets at
home and falling demand globally have forced a growing number of
firms to cut production and staff. While Medvedev pledged with his
G20 partners to eschew protectionist measures in response to the
crisis, Putin clarified that Russia would take whatever steps
necessary to protect its national interests. Putin and Medvedev
regularly attribute the Russian economic crisis to U.S.
irresponsibility, and anti-Americanism could become a more prominent
theme as the downturn intensifies in Russia.

The Agricultural Dimension
--------------


10. (SBU) While Russia produced a record grain harvest of more
than 102 million metric tons in 2008, the financial crisis is having
a significant impact. Forty percent of investments in agriculture
are dependent on credit, and several banks have stopped financing

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new agricultural projects. Short-term credit for working capital is
scarce, and as a result some experts believe that by the spring of
2009 up to twenty percent of Russian agricultural enterprises might
go bankrupt, primarily small producers of crops and dairy products.
In addition to credit woes, domestic grain producers are suffering
from low prices due to Russia's record harvest and limited export
markets. Deputy Prime Minister Victor Zubkov has approved emergency
government measures including export subsidies, but the proposed
measures have not been finalized yet.


11. (SBU) Russian politicians recognize that the disruption in the
supply of agricultural or food products might have dramatic effects
on the economic and social stability of the country. In efforts to
restore confidence, Agriculture Minister Gordeyev took charge of a
working group consisting of the six largest banks financing the
agriculture sector. There is an agreement that banks will reduce
their loans to the agricultural sector, but priority projects and
funds to support production will continue. Furthermore, hoping to
reduce the impacts of the crisis, the Ministry of Agriculture has
spent 75 percent more (an additional $2.2 billion) than the original
2008 agriculture budget to subsidize credit, feed, fertilizer and
fuel.


12. (SBU) The current financial crisis may help the Russian
Ministry of Agriculture to push forward its efforts to secure more
control over the agricultural markets under the guise of food
security. While gross agricultural output in 2007 was estimated at
approximately RUR 2.02 trillion ($72 billion),a 3.3 percent
increase over 2006, Russia is lagging far behind its production
targets for meat, poultry and dairy products. The government
intends to undertake urgent measures to improve the situation for
these commodities. Some of the recent actions de-listing U.S.
poultry and pork facilities and the efforts to amend the meat TRQs
are consistent with Minister Gordeyev's desire to bolster domestic
production by managing import competition.

The Politics of Energy Dependence
--------------


13. (SBU) The energy sector remains central, given Russia's
failure to significantly diversify the economy. Putin succeeded in
reasserting state control over the energy sector, arguing that
private and western interests had "taken advantage" of Russia in the
1990s. Today, the Russian government directly or indirectly
controls the majority of production assets and directly controls the
transportation networks. The move toward greater government control
over the sector included the high-profile bankruptcy and liquidation
of Yukos oil company and the forced sale to Gazprom of 51 percent of
the Sakhalin 2 consortium. A newly passed strategic sectors law
includes amendments that place many large oil and gas deposits
largely off-limits to foreign investors. Currently, Russia produces
just under 10 million barrels per day, second only to Saudi Arabia.
Since 2005, however, production has tapered off and will decline in
2008 due to inefficient state control and an onerous tax regime.
Russia is also by far the largest natural gas producer and has the
world's largest gas reserves. State-controlled Gazprom dominates
the sector, controlling 85 percent of production, all exports and
the gas transportation network. Gas production is stagnating as
Gazprom has failed to adequately invest in new production areas.


14. (SBU) As an "energy superpower," Russia banks on European
energy dependence to provide ballast to its relations with Europe,
otherwise buffeted by criticism over Georgia and human rights.
Russia supplies approximately one-half of European gas imports with
some European countries completely dependent on Russia for their
gas. Russia, for its part, is dependent on Europe for virtually all
of its gas exports, which provide some three-quarters of Gazprom's
revenues. Approximately 80 percent of Russian gas exports to Europe
travel through Ukraine, which itself has a tense energy (and
political) relationship with Russia. The Russian-European
interdependence in the gas area is a key factor in their broader
relationship as Europe seeks to diversify its gas supplies and
Russia seeks to diversify its export routes and markets.

The Perennial Irritants: WTO and Jackson-Vanik
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15. (SBU) Russia is the last major world economy that is not yet a
WTO member. Russia's years-long accession process neared the end
game earlier this year, but has been derailed by the Georgian
conflict. Russia has completed bilateral market access talks with
all interested WTO members, except for Georgia. In Russia's
multilateral accession document, only a few key issues, such as
agricultural supports, remain unresolved. Following the outbreak of
hostilities with Georgia in August and with the realization that
Russia would not be able to complete its entry process during 2008,
senior GOR officials announced that Russia would reopen certain WTO
commitments that it had agreed to implement in advance of accession.
Russia already has reopened the U.S.-Russia Bilateral Agreement on
Meat (poultry and pork),with negative consequences for U.S.

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exporters, and has indicated that it may reopen agreements on
harvesters as well.


16. (SBU) While both President Medvedev and PM Putin have recently
affirmed Russian interest in WTO, the Russian government's actions
in reopening previous agreements is a step in the wrong direction
and is making early accession less likely. Anger over the
protracted accession negotiations is matched by frustration over
U.S. inaction in repealing Jackson-Vanik. While repeal of
Jackson-Vanik would be essential for U.S. exporters to gain the full
benefits of Russia's WTO accession when it occurs, Russians view the
continuation of the Soviet-era amendment as a sign of U.S. lack of
respect. (The fact that Russia and Israel implemented visa-free
travel this year adds insult to injury.)

The CTR Pillar: Still Standing Strong
--------------


17. (SBU) Despite strains in bilateral relations, our longstanding
cooperation on nuclear nonproliferation remains strong. We have
made significant progress in our joint efforts to secure nuclear
materials, recover radiological sources, and minimize the use of
highly enriched uranium. In your meetings with General Verkhovtsev
and Rosatom Director Kiriyenko, you can note that we have completed
upgrades at more than 90 percent of the Russian nuclear warhead
sites of concern, including all 39 Russian Navy nuclear sites and
all 25 Russian Strategic Rocket Forces sites, with work underway at
nine 12th Main Directorate sites to be completed by the end of 2008.
In addition, we have secured 181 buildings containing hundreds of
metric tons of weapons-useable Russian nuclear material at 11
Russian Navy reactor fuel sites, seven Rosatom Weapons Complex
sites, six civilian (non-Rosatom) sites, and 12 Rosatom civilian
sites. This year, two Seversk weapons-grade plutonium reactors were
shutdown in April and June, six months ahead of schedule. We are
also actively pursuing the closure of the Zheleznogorsk reactor
ahead of the projected 2010 schedule, thereby eliminating a combined
total of 1.2 MT of plutonium annually and permanently shutting down
the last remaining plutonium production reactors in Russia. In
partnership with Russia, we have returned almost 765 kilograms
(enough for over 30 nuclear weapons) of Soviet-origin highly
enriched uranium from vulnerable sites around the world.

The Unfinished Business: 123
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18. (SBU) Rosatom Director Kiriyenko understands that by pulling
the 123 Agreement from Congress, the Administration saved it from
congressional repudiation. Nevertheless, Kiriyenko was dismayed
that the decision was characterized in the White House statement and
press as punishment over Georgia. While we have reiterated that
cooperation on nuclear security and nonproliferation remains a top
priority, Kiriyenko will want to hear whether and when the U.S. will
be prepared to move forward with a 123 that can facilitate the
global nuclear partnership that we have explored undertaking.

The Bilateral Relationship
--------------


19. (SBU) You will have an opportunity to ask your Russian
interlocutors for their vision of U.S.-Russian relations under a new
U.S. administration, and how best to manage a relationship that will
be defined as much by cooperation as by competition. We share an
important agenda, with on-going cooperation in safeguarding and
reducing nuclear weapons stockpiles, preventing the emergence of a
nuclear Iran, countering terrorism, advancing peace in the Middle
East, pushing North Korea to wind down its nuclear program, and
working collaboratively in space on projects that advance health and
understanding of climate change. The expiration of the START Treaty
in December 2009 for better or worse will place arms control
squarely back on the U.S.-Russia agenda. We do not lack for a
positive agenda, but will need to rebuild an architecture to our
bilateral relationship that allows wide-ranging and candid
engagement on all issues of concern. The Russian leadership
appreciates the initiative and vision that you have brought to
U.S.-Russian relations, and we expect your visit to be a productive
one.

Beyrle