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