UNCLAS SECTION 01 OF 03 VLADIVOSTOK 000098

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL MARR ECON ENRG EPET ETRD EIND ECIN
EINV, RS, CH, JA
SUBJECT: SCENESETTER FOR VISIT OF EUR/RUS DIRECTOR KYLE SCOTT TO
VLADIVOSTOK

VLADIVOSTO 00000098 001.2 OF 003



1. (SBU) Summary: Consulate General Vladivostok warmly welcomes
you to the Russian Far East (RFE). You are coming to a region
rich in investment opportunities for U.S. firms, especially as
Vladivostok builds new infrastructure in the run-up to APEC

2012. Such investment from U.S. firms would be welcome in this
part of Russia, where anti-Americanism is less prevalent. Our
military-to-military relations are recovering from the August
2008 conflict in Georgia, with a regular schedule of US Navy and
Coast Guard port visits. While in the RFE, you will get an
opportunity to discuss oil production on Sakhalin. You will
also get a chance to examine Sino-Russian and Russo-Japanese
relations away from the politics of the capitals, and see how
individuals in the border regions interact. End summary.

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Economic and Business Opportunities for U.S. Firms
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2. (SBU) The vast potential for cooperation between the United
States and Russia in the Russian Far East remains largely
untapped. There are success stories and promising joint
projects. Big name American companies like Boeing, John Deere,
Freightliner, Exxon and Caterpillar are involved in the
aviation, agriculture, transportation and energy sectors but
there is still much to be done. Russia's fishing, timber,
shipping, tourism and logistics industries would all benefit
from partnerships with the United States. I am convinced
American firms can benefit and do well here.


3. (SBU) The fact that Russia and the U.S. are neighbors in this
part of the world is no

t fully exploited. That could change,
however. Russia has decided to use APEC 2012 as a means of jump
starting development in the region, and we hope there will be a
expanded role for the U.S. in the energy and infrastructure
projects that the government has in mind. From new bridges to
atomic energy plants to wastewater treatment plants and a
refurbished airport, the plans are ambitious and could have
regional implications. China, Japan and Korea are keenly aware
of the potential contracts and are aggressive in their
investment strategies. U.S. firms remain more risk-averse,
having had more invested in the region when Russia defaulted in

1998.


4. (SBU) Many American companies successfully operating in
European Russia, however, are now looking to "Pacific Russia."
Our message is that there are good partners here and that there
are models for success. Corruption remains a problem. Russian
officials who crusade against it find themselves up against
powerful interests. So far, the powerful interests are winning
that battle, but grassroots groups, including the indigenous
group "TIGER" are winning converts and making an impact on the
political landscape.

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Less Anti-Americanism
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5. (SBU) The Consulate in Vladivostok now has a 17 year history
of engagement, and the rich public diplomacy efforts have paid
off. Youth orchestras, jazz bands, Broadway shows, joint
baseball games, and student engagements have all produced a
wellspring of goodwill for America that is useful when relations
suffer.


6. (SBU) Anti-Americanism, even during low points in our
relationship, is never as severe as in Moscow or St. Petersburg.
American tourists are welcome and local people even in remote
provinces still remember fondly Peace Corps volunteers who made
a difference. The Lend-Lease program from World War II is not
as well known, but we have capitalized on that legacy as well,
placing a plaque on a locomotive that came from the U.S. to aid
the Russian war effort, reminding Russians of our shared
sacrifice and victory.

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Military to Military Cooperation
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7. (SBU) Military to military cooperation has always been robust
at RFE ports. Thus far, in 2009 there were visits by two U.S.
Navy ships and one Coast Guard ship, the U.S.S. SYCAMORE, which
paid a port call on September 16-18. Celebrating Victory Day on
May 9 has become a tradition for the U.S. and Russian navies.
Seeing American sailors on the streets here, marching shoulder
to shoulder with Russian sailors, is a powerful reminder of how
successful we can be when we cooperate. The sailors engage in
community relations events, from visiting orphanages to planting

VLADIVOSTO 00000098 002.2 OF 003


trees at the Veterans Home. More importantly, officers from
both the U.S. and Russian navies have an opportunity to meet and
discuss tactics and procedures for joint operations such as the
fight against piracy. Additionally, U.S. Coast Guard cooperated
with their Russian Border Guard colleagues to halt illegal drift
net fishing that was seriously damaging Northern Pacific fish
stocks.

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Sakhalin and Oil Production
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8. (SBU) Sakhalin is the site of the biggest U.S. investment in
the Russia. Exxon is big enough to largely take care of its own
interests, but the U.S. still plays a role and we are very
pleased to have a Consular Agent on the island to monitor energy
projects and provide American citizen services.

Sakhalin I
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9. (SBU) ExxonMobil's main investment in Russia is in the
Sakhalin I project, of which EM owns 30 percent and is the
operator. Sakh I is the last major majority-foreign-owned
project in Russia and one of only three Production Sharing
Agreements (PSA, the others being Total's Kharyaga, which is
relatively minor, and Sakhalin II, described below). Sakh I
produces significant oil (peaked at 250,000 barrels per day, now
down to about 160,000), and is a technological and economic
success. However, it has been unable to realize its gas
production potential due to an impasse with Gazprom. The likely
best customer for Sakh I gas would be China. Gazprom maintains,
however, that Sakh I cannot sell gas directly to China, as
Gazprom is the sole authorized exporter of Russian gas (despite
a specific exemption for PSAs in the law granting an export
monopoly to Gazprom). The Sakh I consortium, whose partners
include Sodeco (Japanese, 30 percent), ONGC (Indian, 20
percent), and Rosneft (20 percent), continues to negotiate this
issue with Gazprom, while selling small volumes of gas in the
region.

Sakhalin II
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10. (SBU) The other major PSA in Russia, Sakhalin II (Sakhalin
Energy Investment Company, SEIC), is primarily an LNG project,
which was developed and built by a consortium led by Shell. In
2007, the consortium sold a majority stake in SEIC to Gazprom,
after the project ran into trouble with environmental
authorities. Shell now owns 27.5 percent of the project,
Japan's Mitsui (12.5 percent) and Mitsubishi (10 percent). Sakh
II shipped Russia's first cargo of LNG in March, 2009, and is
touted as an example for future Russian participation in the LNG
market. Gazprom's takeover of Sakh II was widely seen as an
attack on foreign investment in Russia in the oil and gas
sector. In March 2008, SEIC pulled its application for EX-IM
financing when the request ran into delays. The project has
been the subject of various inter-agency discussions in
Washington.

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Sino-Russian Relations
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11. (SBU) Despite competition for geopolitical influence and
access to Central Asian energy resources, Russia and China have
built a pragmatic and cooperative bilateral relationship since
resolving their border issues in 2004. A USD 25 billion
loans-for-oil deal concluded earlier this year opens the way for
an oil pipeline from Eastern Siberia to China that could be
completed as early as 2010. A second leg of the Eastern
Siberia-Pacific Ocean pipeline (ESPO) terminating at Nakhodka on
the Pacific Coast would make Russian oil available to Japan,
South Korea, and the world market. A proposed railway project
linking Khabarovsk and Vladivostok would also involve Chinese
investment and expertise. While China is one of Russia's
largest bilateral trading partners, the structure of trade
(primarily Russian raw materials for Chinese manufactured and
consumer goods) highlights concerns of many Russian observers
that Russia is merely a source of commodities for a more dynamic
and technologically innovative Chinese economy.


12. (SBU) China has procured military and nuclear equipment from
Russia in recent years, but purchases have declined as China
develops its own military and nuclear industries and seeks
better technology elsewhere. Russia and China share views on
Iran, Afghanistan, and North Korea and have conducted joint

VLADIVOSTO 00000098 003.2 OF 003


military exercises as the two leading members of the Shanghai
Cooperation Organization (SCO), and are both keen to restart the
Six-Party negotiations and avoid any increase in tensions or
military conflict on the Korean Peninsula.


13. (SBU) Fears of a Chinese demographic threat to the Russian
Far East have subsided in recent years. Rather, there is a
growing recognition in Siberia and the Russian Far East that
Chinese labor, in addition to Chinese trade and investment, is
vital to the region's economic development. China and other
Asian countries, however, complained to Russia of unfair
treatment when a large Asian market in Moscow was shut down
recently and vendors' property seized.

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Russo-Japanese Relations
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14. (SBU) Japan's new government under Yukio Hatoyama is
expected to make resolving the disputed sovereignty of the four
Kuril Islands (Northern Territories) a top foreign policy
priority, and Medvedev has signaled his willingness to discuss
the issue. The dispute over the Kurils has not prevented Japan
and Russia from working as cooperative partners in the Six-party
talks.


15. (SBU) With 90 percent of its oil imports from the Middle
East, Japan sees economic and investment ties to Russia as a way
to diversify its sources of fossil fuels. Japan is a major
investor in the Sakhalin energy projects and LNG shipments to
Japan from Sakhalin have just recently begun. While Japanese
firms have been cautious about further investments, especially
following Gazprom's maneuvers in 2007 to become majority
shareholder in the Sakhalin-2 project, Japanese officials do not
see such "business disputes" holding back further investment.
Japanese companies are eyeing projects to develop Eastern
Siberian oil fields whose production would flow to the Pacific
via ESPO. Japanese firms, however, have shown less enthusiasm
for participation in the investments proposed by Russia during
PM Putin's May 2009 visit to Japan. During Putin's visit the
two countries also announced completion of a civil nuclear
agreement that paves the way for Russian uranium exports to
Japan, where nuclear power generates a third of all electricity.
The agreement also opens the door for Japanese firms to provide
cutting edge nuclear power technology to new Russian civilian
reactors.

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Comment
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16. (SBU) Your visit will highlight the potential for increased
environmental cooperation and showcase how well public diplomacy
investments pay off. There is an air of expectation about
Barack Obama's presidency and what it means for U.S.-Russian
relations. Your give and take with political leaders,
businessmen, and our staff is much anticipated and will help
shape our message and I hope yours. I remain optimistic about
U.S.-Russian relations and have already seen some great
developments here, from direct flights to Alaska to direct cargo
sailings to the port of Tacoma. The Consulate co-hosted the
"Security in North East Asia Symposium" with the US Pacific
Fleet, creating a network for dialogue on regional security
issues. For tourists this is the start (or end) of the Trans
Siberian railroad and it is a land that still has wild tigers
and leopards. We have many challenges in our relationship, but
progress continues and I am confident your visit will highlight
the possibilities and attract more Americans to this fascinating
part of the world.
ARMBRUSTER