MEDVEDEV-SARGSIAN: NAGORNO-KARABAKH, ECONOMICS

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 001164

SIPDIS

E.O. 12958: DECL: 05/06/2019
TAGS: PREL PGOV ECON RS AM AZ
SUBJECT: MEDVEDEV-SARGSIAN: NAGORNO-KARABAKH, ECONOMICS

Classified By: Pol M/C Alice G. Wells for reasons 1.4(b) and (d)


1. (C) Summary: In a press conference after his April 23
meeting with Armenian President Sargsian, President Medvedev
stressed the November 2 Moscow Declaration he personally had
brokered as the basis for progress on Nagorno-Karabakh, while
the MFA stated its hope the Turkey-Armenia rapprochement
would benefit the negotiations. The MFA noted that Russian
companies operating in Armenia saw the opening of the border
to Turkey as a new export opportunity, and clarified that the
approved USD 500 million loan to Armenia still required Duma
passage of the budget, with additional assistance possible
through the EurAsEC anti-crisis fund. Analysts see Russia's
role declining in the South Caucasus, including over
Nagorno-Karabakh, as a result of Turkey's diplomatic
initiative. However, Armenia's decision to cancel its
participation in the May 6 PfP exercises with Georgia is one
indication that Moscow will not cede its "privileged
interests" easily. End Summary.

--------------
Nagorno-Karabakh
--------------


2. (U) In a press conference after his April 23 meeting with
Armenia President Sargsian, President Medvedev stressed the
November 2, 2008 Moscow Declaration signed by Sargsian and
Aliyev as a common approach "based on the fundamental
principles of international law" to resolving
Nagorno-Karabakh, and the basis for Sargsian's and Aliyev's
willingness to "move in a positive direction." Sargsian
agreed, stressing that the core issue in the Nagorno-Karabakh
conflict was the status question. In reference to Turkey,
Sargsian welcomed the "appearance of another country that
thinks of Russia as its strategic partner," which he said
"increased Russia's role" in resolving the conflict. MFA
spokesman Nesterenko on April 29 echoed FM Lavrov's April 16
remarks in Yerevan that the Turkey-Armenia rapprochement was
a "bilateral affair," adding that Russia hoped it would "help
ease tensions in the region" and "benefit the atmosphere of
negotiations" on Nagorno-Karabakh.


3. (C) Calling Nagorno-Karabakh a "permanent" item on the
Russia-Armenia agenda, MFA Armenia desk officer Petr
Volokovykh told us April 29 that the Presidents discussed the
upcoming May 7 Sargsian-Aliyev meeting in Prague. In order
to counteract the "image of enmity" the conflict sides bore
toward each other, Medvedev and Sargsian agreed to pursue
"people's diplomacy" by staging a cultural event in the
summer designed to increase the mutual understanding of the
Azerbaijan and Armenia peoples.


4. (C) Volokovykh termed the Turkey-Armenia rapprochement a
"bilateral issue" that Russia welcomed, but posited that the
Nagorno-Karabakh resolution process should not suffer because
of it. He disagreed with the notion that Russia would lose
its influence in Armenia if Turkey and Armenia normalized
relations. While it was true that Russia was Armenia's
greatest partner both in political and economic terms,
Volokovykh noted that the Armenian market was very "narrow,"
and that the Russian companies operating in Armenia saw the
opening of the border to Turkey as a new export opportunity.

--------------
Economics
--------------


5. (U) In the press conference, Medvedev highlighted
existing energy and infrastructure projects as means by which
Russia was helping Armenia weather the economic crisis and
protect the USD 1 billion Russian-Armenia trade relations and
USD 2.5 billion Russian investment in Armenia. He singled
out as examples the joint construction of a civilian nuclear
plant and development of uranium mines. Calling Armenia one
of Russia's "closest partners," Medvedev indicated that
Russia sought additional ways to assist Armenia during the
crisis, including "special economic mechanisms" and
"guarantees."


6. (C) Volokovykh said that the GOR had decided to provide
USD 500 million in credit to Armenia, but the allocation of
funds was only possible once the Duma passed the new budget.
Volokovykh said it was possible to discuss the terms of the
loan, but it was "well understood by all" that Armenia had a
history of not repaying loans, and this would be no exception.


MOSCOW 00001164 002 OF 002



7. (C) Volokovykh clarified that Medvedev's remarks about
using "special economic mechanisms" to assist Armenia
referred to the anti-crisis fund of the Eurasian Economic
Community (EurAsEC). EurAsEC members had decided to let
Armenia participate in the fund, even though it was only an
observer in the organization. While Russia was the biggest
contributor to the fund, providing USD 7 billion of the
fund's USD 10 billion total volume, EurAsEC members would
have to jointly decide on the terms of aid to Armenia at
their next summit in the summer. The planned USD 500 million
loan would not come from the EurAsEC anti-crisis fund,
Volokovykh said, despite Medvedev's April 2 remarks that the
bulk of Russian aid to its neighbors would be disbursed via
that fund.


8. (C) Volokovykh said that apart from the civilian nuclear
cooperation, Gazprom's participation in constructing an
Iran-Armenia pipeline and the modernization of the Armenian
railway system with the help of the Russian Railway were the
main economic issues Medvedev and Sargsian discussed. He did
not have anything to add to the earlier allegations of
Russian arms sales to Armenia that Russia had dismissed as
forged, but stated that "military-technical" cooperation
regarding the upkeep of Armenia's Soviet-era military
equipment continued.

--------------
Analysts
--------------


9. (SBU) Analysts are more critical of the effects of
Turkish-Armenian normalization on Russia's influence in the
Caucasus. In a thoughtful piece in Vermya Novostei, Ivan
Sukhov allowed that a solution for Nagorno-Karabakh might be
found more easily if Armenia could break out of isolation.
However, Turkey's offer to open its border to Armenia in
return for Karabakh settlement was a carrot Russia could not
match, forcing Russia out of its position as the main
mediator in the Karabkah conflict. Russia's use of the
conflict to hold Armenia and Azerbaijan in its sway was
trumped by Turkey's willingness to actually resolve the
issue, Sukhov posited. He attributed Russia's weak hand to
its mishandling of the August 2008 Georgia conflict, which
had alienated Armenia, Azerbaijan, and Turkey. Noting that
this would cause Russia's "main ally in the South Caucasus"
to turn toward Turkey, Sukhov judged that Russian links to
Yerevan would be reduced to an "auxiliary role."


10. (SBU) Mikhail Zirgar and Vladimir Solovyev argued in a
Kommersant article that as a result of the normalization with
Turkey, Armenia would no longer rely solely on Russia as the
basis of its foreign policy, in particular as increased trade
with Turkey crowded out Russian economic ties. Boris
Makarenko of the Political Technology Institute agreed that
Russia must realize it "no longer held the monopoly on what
used to be the Soviet Union," while Alexey Vlasov from Moscow
State University described the new situation in the Caucasus
as "multi-vectoral." However, Zirgar and Solovyev reasoned
Moscow's USD 500 million loan (down from the requested USD 2
billion) would ensure Armenia went along with Russia's
Nagorno-Karabakh initiatives, while quoting an MFA contact
describing the Turkey-Armenia roadmap as "a PR ploy."

--------------
Comment
--------------


11. (C) While Russia may be losing ground as the monopolist
in the South Caucasus, Armenia's decision to withdraw from
the NATO-Georgia PfP exercises shows that Moscow still has
clout in the region, and will not lightly surrender control
of its "region of privileged interests."


RUBIN