RUSSIA'S WTO ACCESSION: ONE STEP FORWARD, TWO

C O N F I D E N T I A L MOSCOW 001538 WHITE HOUSE FOR USTR (KIRK,RODHE,KLEIN,HAFNER) STATE FOR EUR/RUS COMMERCE FOR MAC (BROUGHER, EDWARDS, THOMPSON) NSC FOR H. SOLOMON, L. HAYDEN, J. ELLISON, M. MCFAUL E.O. 12958: DECL: 06/10/2019 TAGS: ETRD EINV ECON WTO RS SUBJECT: RUSSIA'S WTO ACCESSION: ONE STEP FORWARD, TWO STEPS BACK Classified By: Amb. John R. Beyrle, Reason 1.4 (b) and (d). ¶1. (C) SUMMARY. Although U.S. Trade Representative Ambassador Kirk's June 4-6 visit to St. Petersburg seemed to make progress on Russia's WTO accession in bilateral meetings with senior Russian economic officials, including First DPM Shuvalov, this progress proved illusory: PM Putin announced June 9 that Russia intends to pursue a customs unions with Belarus and Kazakhstan and to enter the WTO together with those countries. In a meeting with Ambassador Beyrle on June 10, First DPM Shuvalov explained that, despite the positive talks with Ambassador Kirk in St. Petersburg, there had been an "unexpected breakthrough" in customs union talks during the week of June 8. Kazakhstan offered, and Russia accepted, a compromise that would bring the customs union into effect on January 1, 2010, but only if the three countries combined their WTO bids into one. Shuvalov confirmed that Russia would end its attempt to enter the WTO on its own, and would now instead seek to accede as part of the "troika." The decision to prefer the customs union over WTO accession makes little economic sense and is likely motivated by protectionist forces within the GOR and by political concerns about strengthening Russia's position and influence in the post-Soviet space. It is a victory for autarkic, statist forces over those in business and the government who see Russia's interests best served by closer international integration. Our own interests are best served by maintaining support for the "integrators" who have lost a battle, but not the war. END SUMMARY. -------------- USTR Kirk's Visit: Illusion of Progress -------------- ¶2. (C) U.S. Trade Representative Ambassador Ronald Kirk held what seemed like productive bilateral meetings with Russian First DPM Shuvalov, DPM and Finance Minister Kudrin and Economic Development Minister Nabiullina on Russia,s WTO accession on the margins of the St. Petersburg International Economic Forum June 4-6. Ambassador Kirk and senior Russian economic officials agreed that a few key outstanding issues should be elevated to a political level for resolution and that with a concerted effort on the part of Russia and WTO members, all remaining issues could be resolved and the accession process completed by the end of 2009. ¶3. (C) In a meeting with Ambassador Kirk on June 4, First DPM Shuvalov noted that, following President Medvedev's meeting with President Obama in London at the April G20 Summit, Medvedev had instructed Shuvalov to find mutual compromises and reach agreement by the end of the year on Russia's WTO accession. However, Shuvalov cautioned that if the negotiations did not conclude this year, Russia would likely go forward with a customs union with Belarus and Kazakhstan, which would greatly complicate future WTO negotiations. ¶4. (C) Shuvalov said he was prepared to come to Washington within the next few weeks with a draft decree in hand that would bring Russia's SPS rules in line with international standards, and to start an intense period of diplomacy in the run-up to the July Summit. He noted that he needed the action-forcing pressure of the July Summit to get all of the GOR ministries and agencies to work together, including those opposed to Russia's accession, who would continue to use any excuse -- today the H1N1 virus, tomorrow something else -- to delay the accession. ¶5. (C) Ambassador Kirk responded that Russia,s WTO accession was in the U.S. interest, and, with political will on both sides and movement by Russia on key outstanding issues, the end of 2009 was an appropriate and achievable deadline to complete accession. ¶6. (C) Economic Development Minister Elvira Nabiullina, who participated in the Shuvalov meeting, told Kirk that she and EU Trade Commissioner Lady Ashton had agreed on June 3 that talks should be completed by the end of the year and to that end had scheduled an EU-Russia Ministerial Meeting for the November/December timeframe. Nabiullina said Russia was prepared to make concessions in key remaining areas, such as State-Owned Enterprises (SOEs) and Sanitary and Phyto-Sanitary Standards (SPS). ¶7. (C) She and Ambassador Kirk later agreed at a working dinner to prepare a single harmonized list that would identify issues to be completed by WTO negotiators at a technical level, as well as four remaining issues that should be elevated to a political level for resolution: SOEs, SPS, agriculture subsidies, and transparency in the Russian regulatory and legislative process. -------------- EU Also Saw Good Progress In St. Petersburg -------------- ¶8. (C) Barbara Stracher (protect),an economic and trade first secretary in the EC Moscow mission, advised us that the overall tone of meetings held between EC officials and GOR representatives in St. Petersburg had also been positive, with the Russians agreeing to look at an EC-prepared text on the exact mechanism and formula for Russian timber export tariffs (the most sensitive issue remaining in Russia's WTO negotiations with the EU),and to make substantial progress on SPS issues prior to a proposed high-level Russia/EU meeting in the November/December timeframe. -------------- Confusion After Putin's Surprise Announcement -------------- ¶9. (C) This apparent progress on Russia's WTO accession suddenly got the rug pulled out from under it on June 9. During a high-level session of the Eurasian Economic Cooperation Organization in Moscow, PM Putin announced that Russia would join the WTO as part of a customs union with Belarus and Kazakhstan, with the three countries negotiating a joint entry into the trade organization. He also stated that the GOR would send a letter to the WTO Secretariat informing them of this change in negotiating position. ¶10. (C) Just days after the positive progress in St. Petersburg, the announcement caught WTO supporters in the GOR off guard, to say the least. According to Vadim Grishin (protect),a high-level finance ministry official close to Kudrin, Kudrin (who had told Putin that he was very pleased after the meetings in St. Petersburg) unsuccessfully tried on three separate occasions to talk Putin out of announcing the Customs Union joint WTO bid. Chief WTO Negotiator Medvedkov was also reportedly blindsided by Putin's announcements and "embarrassed and apologetic" in subsequent conversations with Brussels-based EU trade officials, according to EU diplomats. ¶11. (C) Stracher told us that EU representatives were stunned and confused by the announcement, especially given that the EC had agreed to an accelerated timetable for WTO negotiations at the talks in St. Petersburg. Stracher said that if the GOR does, in fact, inform the WTO of a changed status of negotiations, the EU will likely react negatively, virtually eliminating the potential for Russia's WTO accession negotiations to conclude this year. ¶12. (C) Separately, German diplomats told us that Presidential Economic Adviser Dvorkovich sought to play down Putin's announcement in a meeting with German business leaders on June 10. Dvorkovich asserted that Russia was still considering joining the WTO this year and was not trying to make the accession process more difficult through the customs union announcement. German diplomats and business representatives were highly skeptical of Dvorkovich's claim during the meeting, with one business leader saying, "What the hell are you thinking?" -------------- Shuvalov Confirms Putin's Decision -------------- ¶13. (C) Ambassador Beyrle met with First DPM Shuvalov on June 10, at Shuvalov's request, for an explanation of Putin's June 9 announcement. Shuvalov told the Ambassador that the customs union was a GOR priority and had been under discussion for a long time. He said there had been an unexpected breakthrough during the week of June 8. Kazakhstan had offered a compromise on auto and truck tariffs that would bring the customs union into effect on January 1, 2010, but only if the three countries combined their WTO bids into one entry. ¶14. (C) Shuvalov said Russia had accepted Kazakhstan's proposal. In response to a question from the Ambassador whether this meant that Russia had ended its attempt to enter the WTO on its own, Shuvalov confirmed that, "Yes, the decision was final," and Russia would now be seeking to join the WTO as part of a "troika." Shuvalov said he understood that Belarus in particular could pose problems for the U.S. and many other WTO members, but Russia was committed to pulling Belarus along in the accession process. ¶15. (C) Shuvalov was at pains to explain that the GOR had been sincere in its WTO approaches in St. Petersburg and that his job as head of the accession process was to "accelerate, not delay" the accession. He said that his task following Putin's announcement would be to find a way to build on Russia's 15-plus years of negotiations and accelerate the WTO aspirations of all three countries. He noted he was working on pulling together a unified GOR position on how to accomplish this. All of the understandings reached on pharmaceuticals, IPR, etc., would remain as negotiated. ¶16. (C) Shuvalov also said the GOR was committed to making the July Summit a success and obtaining President Obama's support for Russia's revised WTO bid. He stated that the GOR would still continue to work to narrow differences with the U.S. over meat and other issues, as agreed with U.S. Trade Representative Kirk in St. Petersburg. However, he also reaffirmed that Russia's position remained that its WTO-related commitments would not go into force until Russia formally joined the WTO. ¶17. (C) Ambassador Beyrle responded that we regretted the decision regarding the customs union and the WTO. The U.S. saw accession as in Russia's and the U.S. interest in building a strong, prosperous and modern Russian economy. That goal would now be more complicated and difficult to achieve. In addition, Putin's announcement was particularly regrettable given the renewed interest in Russia's accession from the new U.S. Administration, and given how close to completion Russia had been in its WTO talks and in the talks with USTR Ambassador Kirk in St. Petersburg. -------------- Comment -------------- ¶18. (C) The idea of a Russia/Belarus/Kazakhstan customs union has been around for several years, with the original agreemen4FK#}QiQ0m2Q_Qn the other hand, represents 52% of Russian trade, and other WTO members such as the U.S. and China account for 3.7% and 7.6%, respectively. As one Moscow-based newspaper stated, "The economic benefits of Russia entering the WTO as a part of a three-party union are doubtful: Russia's trade turnover with foreign countries is several times higher than its trade turnover with former Soviet states." ¶19. (C) The real motivation was almost certainly political. Putin has reportedly been disenchanted with the lengthy and complicated WTO process for some time. In that context, it is unsurprising, if still disappointing, that rather than make one last push, he sided with the strong protectionist elements within the GOR and statist voices of First DPM Zubkov and DPM Sechin. At a time when liberalizing forces, including Shuvalov, Kudrin, Nabiullina and Dvorkovich, were gaining momentum on WTO accession, with both the EC and the U.S. making positive announcements at St. Petersburg, the protectionists appear to have successfully fought back, allegedly pointing to, among other things, the lack of firm proposals from the U.S. on SOEs as evidence that it was all "just talk." Perhaps more importantly, Putin's move also reflects Russia's interest in asserting its "privileged" sphere of influence in the CIS and in binding its neighbors within the post-Soviet space ever closer to itself. We need to continue to take our cues from the reformers on how we can best support their back-and-forth battle to modernize the Russian economy. BEYRLE NNNN