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 SIPDIS DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN, S/EEE MORNINGSTAR DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER NSC FOR MMCFAUL 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