REQUEST FOR GUIDANCE: POSSIBLE IAEA BUDGET DEAL

UNCLAS UNVIE VIENNA 000313 SENSITIVE SIPDIS FOR ISN, IO; DOE FOR NA-24, NA-25, NA-21; NSC FOR SCHEINMAN, CONNERY; NRC FOR DOANE, SCHWARTZMAN E.O. 12958: N/A TAGS: AORC PREL KNNP IAEA EAIO UN SUBJECT: REQUEST FOR GUIDANCE: POSSIBLE IAEA BUDGET DEAL WITH THE G-77 REF: A. STATE 48677 ¶B. UNVIE 275 ¶C. UNVIE 279 ¶1. (U) This is a request for guidance. Please see paragraphs 11-12. ¶2. (SBU) Summary: Recognizing the deadlock in IAEA budget negotiations, the Board Vice Chair will present IAEA Member States with yet another budget proposal on July 1. This will be the fourth budget proposal since Director General ElBaradei initially proposed an astonishing 23 percent increase in February. This latest, more moderate proposal is likely to fulfill U.S. objectives, with an 8-9 percent nominal increase that supports U.S. priorities in Nuclear Security and Safeguards. With some tweaks, it may also prove acceptable to the G-77. Unfortunately, the European "budget hawks" - France, Germany, UK - are poised to reject the proposal out of hand. In recognition of this obstinacy, Mission anticipates working intensely with the G-77 to hammer out a deal that makes the latest proposal acceptable to the majority of Member States and isolates the budget hawks. Mission requests guidance on supporting or proposing a formula to stabilize funding for the Technical Cooperation Fund (TCF) in exchange for G-77 support to Nuclear Security (para 11). Once a deal with the G-77 is in place, pressure will mount on the budget hawks to relinquish their hard-line zero growth approach to budget negotiations. If a solution is not achieved by the conclusion of the G-8 Summit in L'Aquila on July 10, IAEA budget negotiations will likely stall until the fall. End Summary. ¶3. (SBU) Vice Chair and head of budget negotiations Ambassador Cornel Feruta (Romania) expects to finalize a fourth iteration of the IAEA budget proposal by today, June ¶30. Feruta will then present the proposal to Member States on July 1. According to Romanian Second Secretary Dan Necalaescu, the latest budget proposal will include an increase that hovers around 8-9 percent, with an approximately 2 million Euro regular budget increase for the Nuclear Security program (on top of its current, 1.1 million Euro allocation). The Major Capital Investment Fund (MCIF) will be funded with voluntary contributions and savings out of the Regular Budget. (Note: At first blush, it appears the latest proposal conforms with Washington guidance received in ref a. It also represents a dramatic step back from the first budget proposal unveiled by DG ElBaradei in February, which entailed a jaw-dropping, 23 percent increase. End Note.) ¶4. (SBU) The European "budget hawks" (Germany, France, UK) and their allies in the budget debate (Mexico, Canada, Australia) are likely to reject Feruta's latest proposal out of hand. Reflecting earlier UK signals of accommodation, UK First Secretary Creena Lavery admitted to some flexibility in the UK position that might allow for a 5 percent increase, but doubted that France and Germany would go along with anything other than strict adherence to zero real growth (ZRG),i.e., a 2 - 3 percent price adjustment to account for inflation. ¶5. (U) More positively, G-77 representatives are finally showing some willingness to negotiate the budget beyond the hitherto blinkered focus on Technical Cooperation. In a letter received by Feruta on June 29, the G-77 laid out the Group's own take on the budget: - The Vice Chair's efforts on the budget "provide a good basis for reaching consensus." - No additional reductions to Major Programs 1, 2, 6 (nuclear energy, nuclear applications, technical cooperation) - No internal borrowing from the Technical Cooperation Fund (ref b) - A "minor increase" for Major Program 3 (nuclear safety and security) is acceptable, in exchange for a consideration of 1) "shielding," and 2) an agreement to link the Technical Cooperation Fund (TCF) to increases to the Regular Budget. ¶6. (U) The final element - on shielding and links between the TCF and RB - will prove the most challenging. Shielding refers to an instrument that allows developing countries to pay a lower share of the safeguards portion of the Regular Budget. It was introduced in the 1970s in anticipation of rapid growth in NPT safeguards implementation. The Board agreed in 2000 to phase out shielding, but delayed the phase-out as part of budget negotiations in 2003. Memories of "de-shielding" and the grueling budget negotiations of 2003 still haunt diplomats and members of the Secretariat involved at the time. As a result, the "budget hawks" have stated their refusal to even consider reopening the discussion during current budget negotiations. ¶7. (SBU) Mission has previously noted the proposal to link the Technical Cooperation Fund to Regular Budget growth (ref c). The idea is to guarantee that the TCF - a voluntary fund that nevertheless subjects Member States to a scale of assessments - receives increases that match or approximate increases in the Regular Budget. The G-77 letter proposes a formula for calculating TCF increases based on 1) the average of the real RB increase and the price adjustment, with the stipulation that 2) the result never falls below ZRG. For example, if the Regular Budget real increase is 6 percent and the price adjustment is 2 percent, TCF would receive a 4 percent increase. Conversely, were the Regular Budget to be cut in nominal or real terms, the TCF would still benefit from the prevailing price adjustment. U.S. contributions to the TCF under this 4 percent scenario would increase a little less than a million dollars, from approximately 20 million dollars to nearly 21 million in 2012 (the next year the TCF opens for negotiations). ¶8. (U) The G-77 has been informed on a number of fronts - most energetically from the Europeans - that their efforts to lock in commitments to a voluntary fund were unrealistic. They have been informed that many capitals (including Washington) would be leery of such a commitment. Per ref c, G-77 representatives were open to considering the TCF calculation on a one-time, one-year basis rather than as a standing expectation. The G-77 also needs to recognize that the hypothetically extreme circumstances leading to a cut in the IAEA's Regular Budget would necessarily force similar cuts in the TCF, rather than an upward price adjustment for TCF. With regards to the U.S., increases in the TCF are paid for out of the State Department's NADR Account (Nonproliferation, Antiterrorism, Demining and Related Programs). As NADR levels for 2012 have not yet been requested, let alone approved, any commitment to increase the TCF for 2012 would necessarily include some kind of "escape clause." ¶9. (U) In a June 29 "Future of the Agency" meeting on Technical Cooperation, a statement by the G-77 reiterated the TCF calculation but softened the proposal by describing it as an "interim measure." Many G-77 members publicly supported the calculation, referring to the "humiliating" process of appealing for support for a core IAEA function. Others went even further, such as Pakistan's rote comment that the TCF should be fully incorporated into the Regular Budget. Board Vice Chair Kirsti Kauppi (Finland) summarized the "broad agreement" on finding a new way to negotiate TCF targets. Charge stated that the U.S. had no wish to repeat last year's lengthy and polarizing TCF negotiations and was open to considering other options. The UK supported the U.S. intervention but described the TCF calculation as "overly simplistic." Egypt stepped in again to reassure Member States that the G-77 proposal was merely an opening and to welcome other suggestions for solving the lack of predictability in TCF levels. ¶10. (SBU) The Romanians are pushing hard to reach a consensus on the budget. Necalaescu has warned the budget hawks that the latest budget proposal will be the last one of the summer. He and Vice Chair Feruta plan to use the Special Board meeting July 2 to build support for the proposal. If consensus is not reached the week following the Board Meeting (July 6 - 10),then budget negotiations will stall as the Board leadership leaves town for the summer and high-level opportunities to build support (most notably, at the G-8 Summit in L'Aquila July 8 - 10) are expended. Necalaescu predicted that nothing would restart on the budget until the end of August - leaving little time to come up with a budget solution before the September Board of Governors meeting. Comment and Request for Guidance -------------- ¶11. (SBU) Reflecting an intensive and single-handed U.S. effort, the G-77 is finally being proactive on the budget, with this first statement of broad support from the Group as a whole. The G-77 has also shown, for the first time, a good faith willingness to consider other countries' priorities outside the constant call for more resources for Technical Cooperation. The nod toward Nuclear Security is particularly important. If Mission must engage in "consultations" - but no commitments - on shielding in order to get funding for Nuclear Security, then the price would seem acceptable. The G-77 proposal to link the TCF to the Regular Budget, however, is more problematic. On the one hand, this is clearly an attempt to inject some predictability into TCF funding while dispensing with the time-consuming (and, in the G-77 characterization, "humiliating") process whereby Ambassadors from different camps spend weeks haggling over TCF levels rather than program objectives. A good faith effort on our part to resolve the TCF funding instability and discuss shielding (which is already far more than the Europeans are willing to do) would earn mountains of goodwill from the G-77. Over the long run, it could clear the way for more productive interactions between Member States at Board Meetings and further advance our strategic goal of rebuilding a "spirit of Vienna" based on a shared commitment to non-proliferation principles. On the other hand, the budget hawks and others are rightly reluctant to commit to a formula for increasing a voluntary fund that has, admittedly, a spotty record of program delivery. They are also justifiably wary of creating precedence when it comes to a TCF linkage to the Regular Budget. ¶12. (SBU) Mission requests guidance on how to address the thorny issue of TCF predictability and its link to Nuclear Security during the final opportunity to reach consensus on the budget this summer (July 6 - 10). One option might be to signal U.S. openness to a "one-time, one-year" option, with the heavy caveat that U.S. funds for 2012 have not yet been appropriated. Whatever the proposal, Washington policymakers should take into account the opportunity to curry good will with the G-77 while making progress - perhaps decisive progress - toward a budget solution that fulfills U.S. priorities in Safeguards and Nuclear Security. PYATT