UNDER SECRETARY BURNS' MEETING WITH FIRST DEPUTY PRIME MINISTER SHUVALOV ON ECONOMIC ISSUES

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000147

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E.O. 12958: DECL: 01/25/2020
TAGS: ECON PGOV PREL RS
SUBJECT: UNDER SECRETARY BURNS' MEETING WITH FIRST DEPUTY PRIME MINISTER SHUVALOV ON ECONOMIC ISSUES

REF: MOSCOW 53

Classified By: EconMinCouns Matthias Mitman, Reasons 1.4 (b,d)


1. (C) Summary: First DPM Shuvalov briefed visiting U/S
Burns on Russia's post-crisis economic policy priorities,
proposed increased engagement with the U.S. to formulate a
work plan for Russia's WTO accession, and reviewed
outstanding issues related to the Customs Union with Belarus
and Kazakhstan. U/S Burns noted the importance of improving
the bilateral economic relationship as part of the "reset,"
urged resolution of regulations effectively blocking U.S.
poultry exports to Russia, and supported Boeing's bid on a
tender to supply new aircraft to RosAvia. End Summary.

Russian Economy: From Crisis to Modernization


2. (C) Under Secretary for Political Affairs Bill Burns and
NSC Senior Director for Russia Michael McFaul met with First
Deputy Prime Minister Igor Shuvalov on January 14. U/S Burns
briefly summarized USG goals to expand bilateral trade and
investment, support Russia's accession to the WTO, and
improve the overall U.S.-Russia economic relationship.
Shuvalov conceded that Russia's WTO accession probably would
be delayed at least a year, because of the recent global
financial crisis in 2008-2009. He reviewed Russia's economic
performance over the past year, emphasizing GOR fulfillment
of its anti-crisis plan and the objective of achieving
"social stability."


3. (C) In particular, Shuvalov cited GOR support for the
domestic financial sector, which provided additional
liquidity without re-igniting inflation (less than 9 percent
in 2009.) He explained that several "near-bankrupt" banks had
been rescued, thereby averting what could have been a
financial panic. Shuvalov stressed that the GOR had
prevented a large increase in unemployment during the crisis,
but that with more than two million workers officially
jobless, unemployment remains a serious issue. He admitted
that total unemployment (including those not registered) was
probably closer to nine million.


4. (C) Shuvalov noted that recent economic indicators,
including for industrial production, provided assurances that
the Russian economy had started growing again last fall. He
called the current overall economic situation "not bad," but
reiterated that GDP would not return to pre-crisis levels
until 2012. Shuvalov previewed key GOR budgetary priorities
for 2010, mentioning pension reforms, health reforms and
increased funding for higher education. He explained that
projections for the 2010 deficit had recently been revised
downward, but that external factors such as growth in the
U.S. and China, would affect world energy prices and GOR tax
revenues.


5. (C) The GOR's economic policy focus, Shuvalov continued,
has now moved beyond "anti-crisis" measures to a policy of
reforms, innovation, and modernization of the economy. He
noted that anti-crisis policies were focused on large
projects, and cited the customs union with Belarus and
Kazakhstan as an example.

Belarus-Kazakhstan Customs Union and WTO Accession


6. (C) Shuvalov candidly admitted that the customs union,
which went into effect January 1, still had several
"technical glitches" to overcome: (a) working out a system
for collecting and disbursing the customs revenues among the
three countries; (b) agreement on a harmonized tariff
schedule; and (c) addressing economic interests that will be
adversely affected by the customs union. Shuvalov noted the
controversy with Belarus over taxes on Russian crude exports
to refineries in Belarus (reftel),and noted that discussions
were continuing on access to energy transport systems such as
oil and gas pipelines. Shuvalov expected the customs union
to reduce corruption and opined that creating a unified
customs service for the three countries could eventually be
realized. He was less optimistic, however, about achieving a
"unified economic space" with Belarus and Kazakhstan in the
near future. (Note: At the end of the meeting, an aide to
Shuvalov handed him a note stating that the GOR would provide
the WTO "next week" an official memorandum addressing the
reconciliation of its accession negotiations with the customs
union.)


7. (C) Turning to Russia's WTO accession process, Shuvalov
underlined that PM Putin and President Medvedev recently
issued a resolution reaffirming that this remains a high GOR
priority. Shuvalov acknowledged that Russia still needs to
harmonize several bilateral trade issues with the U.S., but
that he thought this could be done in a relatively "short
period of time." U/S Burns noted that WTO accession would
contribute to the modernization of Russia's economy and noted
USG willingness to support the process. He added that Russia
needs to develop a game plan to address outstanding WTO
issues. NSC Senior Director for Russia McFaul recalled that
USTR Ambassador Kirk last fall had urged Shuvalov to prepare
a plan for Russia's WTO accession.


8. (C) Shuvalov responded that he "is ready" to engage but
that he does not know which senior USG and Russian officials
should start discussions on how to move forward. McFaul
responded that he would consult with senior White House
officials. Shuvalov lamented that not much progress has been
made since he returned from his visit to the U.S. last
September. Moreover, he stated some officials in the GOR are
skeptical that the USG really wants to help Russia accede to
the WTO. Shuvalov suggested that both Finance Minister
Kudrin and Minister for Economic Development Nabiullina would
be willing to go to the U.S. to engage in negotiations with
USG officials. Noting that Nabiullina is co-chair of the
Bilateral Presidential Commission's (BPC) Business
Development and Economic Relations Working Group, Shuvalov
suggested that Russia's WTO accession be included in the BPC
to "catalyze" the process.

Resolving Ban on Chlorine-treated Chicken


9. (C) U/S Burns raised serious concerns about the Russian
ban on poultry treated with a chlorine solution, stressing
that this effectively closed a major export market to U.S.
poultry producers. He explained that a USG delegation would
be coming to Moscow the week of January 18 for discussions
with GOR officials and pressed Shuvalov for assistance to
keep this trade dispute from becoming a complicated political
issue. Shuvalov agreed on the need to resolve the problem.
He stated his belief that the Russian poultry market "will be
open at the end." Shuvalov cited the bilateral agreement
with the U.S. on meat exports to Russia, and added that
destroying this market would create a larger bilateral
problem.


10. (C) Despite his predictions of resolution, Shuvalov
offered no specific actions he would take to contribute
toward resolving the chlorine ban on poultry. Instead, he
complained about the difficulty in dealing with the GOR's
lead negotiator on poultry -- Gennady Onischenko, the head of
the Federal Consumer Protection Service. He said that no one
understands Onischenko, who he called the "most harmful
bureaucrat" (samiy vredniy chinovnik) he has ever seen in the
GOR. He added, with some amusement, that Onischenko once
accused the Russian Duma of passing legislation Onischenko
called "criminal."

Boeing and the RosAvia Tender


11. (C) To demonstrate progress in the "reset" across all
areas, U/S Burns noted the need to see further successes on
bilateral trade and investment. As an example, he cited
Boeing's proposal to sell RosAvia 50 new aircraft with an
option for an additional 25. He underlined that Exim had
already expressed interest in supporting the sale. Shuvalov
responded that he had spoken to RosAvia, which "appears to
favor Boeing." He cautioned, however, that price remains an
issue -- with the possibility that Airbus could offer a lower
price than Boeing (even with Exim financing.)


12. (U) Meeting participants:

Russia

First Deputy Prime Minister Igor Shuvalov
Deputy Minister for Economic Development Andrey Slepnyov
MFA Deputy Director for North America Nikolay Smirnov

U.S.

Under Secretary for Political Affairs William Burns
NSC Senior Director for Russia Michael McFaul
Minister Counselor for Economic Affairs Matthias Mitman


13. (U) U/S Burns has cleared this cable.
Beyrle