U/S JEFFERY'S MEETING WITH MINISTER OF INDUSTRY

UNCLAS SECTION 01 OF 02 MOSCOW 000371 SIPDIS SENSITIVE SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: N/A TAGS: EPET ENRG ECON PREL RS SUBJECT: U/S JEFFERY'S MEETING WITH MINISTER OF INDUSTRY AND ENERGY KHRISTENKO SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION. -------------- SUMMARY -------------- ¶1. (SBU) Minister of Industry and Energy Viktor Khristenko told U/S Jeffery and Ambassador Burns on January 29th that the GOR expects rising domestic gas prices and a liberalized electricity market to raise energy efficiency in Russia as industries and consumers adopt energy saving technologies and practices. He said Russia hopes to learn from U.S. experience and expected Deputy Minister Materov's visit to the U.S. next week to begin a continuing "partnership" on energy efficiency. Khristenko was very interested in the U.S. and Russia sharing their respective "national energy strategies," an idea U/S Jeffery welcomed. Khristenko said the pending Strategic Sectors Law (reftel) has "priority status" in the new Duma, and that he is working with the Ministry of Natural Resources to integrate language on oil and gas fields. He said the law would provide investors needed clarity and certainty. End summary. -------------- ENERGY EFFICIENCY A TOP PRIORITY -------------- ¶2. (SBU) In a January 29th meeting with U/S Jeffery, Minister of Industry and Energy Viktor Khristenko said that improving the Russian economy's energy efficiency is one of the most important aspects of the GOR's energy sector strategy. He explained that while energy efficiency technologies and practices have been widely used in the U.S. for decades, the concept is new to Russians who have historically expected abundant and cheap energy. He said changing the mentality of consumers will take time, but that economic incentives are encouraging efficiency. He described the potential energy savings to be squeezed out of the Russian economy as "colossal." ¶3. (SBU) Khristenko highlighted liberalized domestic gas prices as a major driver for future efficiency gains. Gas prices are set to reach "market" levels (European prices minus transportation costs and export taxes) by 2011 for industrial consumers. He described this process as politically difficult, but necessary. He added that electricity sector reforms will also play an important role as new investments ($20 billion in 2007 and an expected $20 billion in the first half of 2008) replace and upgrade existing facilities with the latest technologies. According to the GOR's plan, "100%" of commercial consumers will be able to buy their electricity in an open market by 2011. In addition, the GOR plans to provide consumers with better information to make more efficient choices. ¶4. (SBU) Khristenko said Russia "relies on drawing from U.S. experience" with regard to energy efficiency technologies, standards, and regulations. He was very upbeat about the upcoming visit to the U.S. of his Deputy Minister, Ivan Materov, to learn from DOE counterparts and others about U.S. energy efficiency policies and programs. He expected the trip to be the beginning of a productive partnership on this issue. ¶5. (SBU) Khristenko repeated his previously proposed suggestion that the USG and GOR share respective "national energy strategies." He said such an exchange would be in the interest of global energy security. This would not be an exercise "merely to grade each other's policies," but an on-going process of information sharing, he explained, adding he is "very excited" about the idea. U/S Jeffery welcomed the idea, but did not commit to the proposal. -------------- STRATEGIC SECTORS LAW WILL PROVIDE CLARITY -------------- ¶6. (SBU) Responding to U/S Jeffery's inquiry about the pending Strategic Sectors Law (reftel),Khristenko said it is a "priority," but he did not predict a timeframe for passage. MOSCOW 00000371 002 OF 002 He said there are continuing discussions with the Natural Resources Ministry to integrate definitions related to strategic oil and gas fields. He said the proposed bill drew from U.S. law, but claimed it was "better" because it is specific on the sectors that would be deemed "strategic," and thus restricted with regard to foreign investment. "It will provide a lot of certainty and give investors confidence." He stressed that the bill received much input from the private sector and has been extensively discussed with international investors. -------------- ECONOMIC DIVERSIFICATION -------------- ¶7. (SBU) Khristenko also described the GOR's "ambitious" efforts to diversify the Russian economy. As Minister of both Industry and Energy he said he often has to balance competing interests. He said high taxes in the energy sector have actually helped steer capital to a host of other sectors including pharmaceuticals, machine tools, and chemicals. He said the GOR is investing heavily in science and education to help fuel expanding industries. He said Russia's rapidly growing economy has drawn investments in nearly all fields, highlighting the booming car market. According to Khristenko, just 3 years ago Russia had the world's 12th largest car market; it has now grown to be the "5th or 6th" largest. This growth has attracted investments in domestic production capacity and is just one example of Russia's economic diversification, which he said is evident in the growth of most major industrial and commercial sectors. ¶8. (U) This message has been cleared by U/S Jeffery. BURNS