UNDER SECRETARY HORMATS MEETINGS WITH RUSSIAN

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003053

SIPDIS

WHITE HOUSE FOR USTR

E.O. 12958: DECL: 12/01/2019
TAGS: EAGR ECON EFIN RS
SUBJECT: UNDER SECRETARY HORMATS MEETINGS WITH RUSSIAN
GOVERNMENT OFFICIALS ON MULTILATERAL ISSUES

Classified By: AMBASSADOR JOHN BEYRLE, REASON 1.4 (B) AND (D)


--------------
SUMMARY
--------------


1. (SBU) Under Secretary of State for Economic, Energy and
Agricultural Affairs Robert Hormats visited Moscow from 1-3
December, conducting meetings with a wide variety of
audiences, including the Russian Presidential Administration,
Russian Foreign Ministry and Economic Development Ministry
officials, Gazprom executives, and representatives of the
American and Russian business communities. He also spoke at
the Economic Faculty of Moscow State University, taking
questions from undergraduate students in economics. This
cable reports on Under Secretary Hormats' meetings with
Russian government officials. Energy issues and bilateral
topics are reported septels. End summary.


2. (SBU) During his recent visit to Moscow, Under Secretary
Hormats participated in a two-hour session at the Russian
Foreign Ministry, with a team lead by Deputy Foreign Minister
Denisov. The session was followed by a working lunch, where
Yelana Danilova of the Ministry for Economic Development and
Andre Bougrov, currently with the Russian company Interros,
joined the group. Hormats also met with Arkadiy Dvorkovich,
Russian Presidential Advisor on Economic Issues. During these
wide-ranging meetings, Hormats addressed U.S.-Russian
cooperation on macroeconomic issues, Russia's WTO accession
process, China, Cambodia and sovereign wealth funds. Both
sides agreed on the importance of maintaining a dialogue
between foreign ministries on economic topics, in order to
support the key role economic diplomacy can play in the
bilateral relationship.

Macroeconomic Overview--Doing Better But Still
Have A Long Way To Go
-------------- -


3. (C) Under Secretary Hormats opened the substantive
discussion with a review of the current economic situation in
the U.S. In his presentation, he emphasized that, although
the financial crisis affected the U.S. and Russia in
different ways, both countries felt the blow. Hormats
stressed that, unlike in previous economic crises, this time
the reaction of the world was to draw together, using such
groupings as the G20 and the IMF. The Under Secretary
stressed the important, positive role of U.S.-Russia
bilateral cooperation on financial issues, led by Treasury
Secretary Geitner and Russian Finance Minister Kudrin. He
noted that Russia has been a good partner at the G20, IMF and
World Bank, and emphasized that we would like this type of
U.S.-Russia cooperation to continue into the post-crisis
period.


4. (C) Denisov began by noting that Russian Foreign Minister
Kudrin is a controversial person. Some find him "irritating"
and accuse him of treason, while others believe he is the
best finance minister Russia has had. According to Denisov,
Kudrin has a power to resist against the influence of other
players in policymaking, and as managed to survive yet
another financial crisis. Denisov noted that the statistics
on the Russian economy are still discouraging--GDP will
decline by more than 8% in 2009. Industrial production has
dropped by nearly 15%. The Russian government prioritized
social programs in its spending package, to protect living
standards. The increased social spending, combined with a
lower inflation rate, mean that overall living standards have
not declined as much as they could have. Denisov attributes
this to Kudrin's prior actions on reserves, which provided
the funding for these initiatives.


5. (C) Regarding the global economy, Denisov noted that we
are beginning to see signs of recovery. We still have strong
government intervention, with governments providing direct
support to the real economy. In his view, there is reduced
uncertainty and systemic risk in the global financial sector,
but growth in Russia will remain slow (IMF predicts
approximately 3% GDP growth in 2010). The future is
optimistic, but the Russian government remains cautious, as
the real sector is still weak. Unemployment remains a
concern. While the emerging economies, including China, will
begin to grow, Denisov still views the U.S. economy as the
"anchor" for the global economy, providing the safety net for
the rest of the world.


6. (C) In Denisov's opinion, Russia's overall participation

MOSCOW 00003053 002 OF 003


in the global economy is small, but Russia plays a key role
in certain areas, such as the European energy market.
Denisov supports a consensus approach and favors groups such
as the G20 for finding agreed outcomes with practical
results. He sees future work on IFI reforms, increased
regulatory effectiveness, increased transparency and a
decrease in tax havens. Denisov agreed with Under Secretary
Hormats' view of the importance of U.S.-Russia cooperation in
international fora, and noted that Russia is prepared to go
along with restructuring of the World Bank and IMF voting
shares, even though Russia will lose. He points to this as
an example that Russia is ready to work in a constructive
positive way on issues of mutual interest.


7. (C) Presidential Advisor Dvorkovich, in a separate
meeting, added the Russians believe that the G-20 should be
the primary forum for deliberations on financial
accountability and economic development. Hormats recognized
Russia's close and productive cooperation with the U.S. in
both the G-8 and G-20 context. He reiterated the point made
elsewhere that the U.S. also would like to see Russia be a
productive member of the WTO and OECD if Russia can meet the
necessary preconditions.

Future Dialogue
--------------


8. (C) Both Under Secretary Hormats and Denisov agreed on
the need to fix a framework for future exchanges, emphasizing
that economic diplomacy is more important than ever. The
dialogue should be broad-based, and provide a forum to
coordinate and facilitate more specialized discussions
occurring in the various working groups of the Bilateral
Presidential Commission. Denisov also noted that there are
several areas where Russia has a pragmatic interest in having
U.S. assistance, including in setting up a judicial
enforcement system for economic oversight. Noting that
cooperation between U.S. and Russian financial agencies is
helpful for both, he is supportive of a continued banking
dialogue which will implement practical outcomes.

China
--------------


9. (C) The lunch discussion began with a brief exchange on
the increasing role of China in the global economy. Andre
Bougrov stated that China is using some of its dollar
reserves to buy influence around the world, including with
some of Russia's neighbors. At this point, however, Bougrov
says that he doesn't know what the Chinese intend to do with
this influence. Hormats raised the concern that Chinese
lending without conditionality to some of the same countries
who are seeking Paris Club debt relief is undermining the
efforts of Paris Club members, such as Russia and the U.S.
Bougrov noted the importance of being proactive--perhaps even
of forming a "Beijing Club" to bring the Chinese in. If not,
in his view, the World Bank will fill the vacuum if the debt
is not rescheduled or forgiven.

WTO
---


10. (C) Denisov began the discussion with an overview of the
history of the Customs Union, noting that it was the first
post-Soviet supranational agreement on trade. He
acknowledged that the announcement of the Customs Union was a
surprise to Russia's partners in the WTO negotiations, and
that Russia is in a difficult position as it tries to meet
the needs of the Customs Union while moving forward with WTO
accession as well. He argued that the Customs Union is vital
to Russia's economic survival as it creates a broad market
area.


11. (C) Presidential Advisor Arkadiy Dvorkovich expressed
similar views on the WTO issue. Dvorkovich admitted that the
GOR Russia needed to explain to its trade partners how the
Customs Union will work, as the common tariff regime will
take effect on January 1. He said that Russia intended to
complete WTO negotiations on the basis of its own tariffs,
not those of the Customs Union. Belarus and Kazakhstan would
eventually adjust their tariffs to Russia's WTO tariffs.
Outstanding bilateral issues (SPS, meat and poultry quotas,
etc.) would not be difficult to resolve, in Dvorkovich's
view. Hormats emphasized the need for the GOR to have one
person in charge of the WTO negotiating process, so as to
pull all the interested agencies and constituencies together.
Dvorkovich said President Medvedev personally instructed
Deputy Prime Minister Shuvalov and MED Nabiullina to

MOSCOW 00003053 003 OF 003


accelerate the WTO negotiating process in the next few
months.


12. (C) Yelana Danilova from the Ministry of Economic
Development, however, presented the position that Russia will
insist on simultaneous entry into the WTO by all three
Customs Union partners on identical terms. She also claimed
that they will keep to bilateral and other previously
negotiated protocols, with only the "minimal changes"
necessitated by the formation of the Customs Union.


13. (C) Throughout these conversations, Hormats conveyed
U.S. administration's support for Russian accession to the
WTO. While there were no major political barriers on the
U.S. side, he said, Russia had to resolve a number of
technical issues, but these were doable, if Russia is willing
to adhere to its earlier agreements. The implementation of
the Customs Union posed new complications, however.


14. (C) On other trade issues, Dvorkovich said that Medvdev
had urged lowering of tariff and trade barriers in a recent
meeting with government officials. The specific sectors
involved are: automobiles, agricultural machinery,
agricultural products, and steel products (pipes).
Dvorkovich explained it was unlikely that the GOR would begin
by lowering tariffs on agricultural products, but the other
three sectors were fair game. Hormats noted that it would be
helpful to reduce trade barriers on agricultural machinery
and that John Deere could produce many Russian jobs.
Dvorkovich agreed that raising tariffs on agricultural
machinery as well as used/imported cars was a mistake and
inefficient. He pointed out, however, that Russian
agricultural producers, including chicken farmers, were
becoming more competitive globally and may one day export to
U.S. markets, necessitating a "symmetrical approach" to the
two countries' agricultural trade policies.

Cambodian Debt
--------------


15. (C) Denisov informed the Under Secretary that Russia
held consultations with Cambodia in October and November, but
were disappointed with the outcomes. The positions of the
two countries are very far apart. Russia is looking for
payment terms of 3-4% interest over 30 years, while the
Cambodians proposed 1% interest for 40 years. Denisov said
that they will continue trying to reach agreement.

Sovereign Wealth Funds
--------------


16. (C) At the end of the conversation, Denisov noted that
the Russians would also like to discuss sovereign wealth
funds and other "emerging issues" at future meetings,
although he did not provide any more details.

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


17. (C) The meetings were both extremely cordially. In the
meeting with MFA, Denisov and Malyan both spoke with a fair
degree of frankness, including on issues such as varying
views of Finance Minister Kudrin within the Russian
hierarchy. Denisov was clearly well-prepared and spoke in
detail on complex issues, only occasionally referring to his
notes. MED's Danilova, who joined for the lunch discussion,
was much more circumspect with her comments, hewing closely
to the Putin party line on issues such as the Customs Union
and WTO membership. Dvorkovich, for his part, also displayed
an openness to working with the Under Secretary on issues of
mutual interest.


18. (U) This cable has been cleared with U/S Hormats'
delegation.
Beyrle