Monthly Archives: September 2006

06MOSCOW11029, RUSSIAN REACTS TO ARRESTS OF SOLDIERS IN GEORGIA

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Reference ID Created Released Classification Origin
06MOSCOW11029 2006-09-29 15:38 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO5032
OO RUEHDBU
DE RUEHMO #1029/01 2721538
ZNY CCCCC ZZH
O 291538Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3275
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 011029 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/29/2016 
TAGS: PREL MARR NATO GG RS
SUBJECT: RUSSIAN REACTS TO ARRESTS OF SOLDIERS IN GEORGIA 
 
REF: MOSCOW 10986 
 
Classified By: Deputy Chief of Mission Daniel A. Russell.  Reasons:  1. 
4(B/D). 
 
1.  (C)  Summary:  The Ambassador strongly encouraged 
restraint in a September 29 telephone conversation with 
Deputy Foreign Minister Karasin.  Karasin responded that he 
appreciated U.S. responsiveness and welcomed Tbilisi's 
decision to permit joint patrolling of the Kodori Gorge.  The 
MFA confirmed that it has begun taking diplomatic and 
political steps to obtain the release of the Russian officers 
arrested in Georgia.  The MFA told us September 29 that the 
Russian Ambassador to Georgia had been recalled, the Embassy 
in Tbilisi was being drawn down, diplomatic and military 
employees in Georgia were being evacuated and visa issuance 
to Georgians was suspended.  Moscow will also increase the 
tempo of its diplomatic efforts in capitals and possibly in 
New York.  Public opinion remains angry over the Georgian 
move, but most public figures are calling for a political 
rather than a military resolution. Russian analysts we spoke 
to were unanimous in viewing the arrests as an escalatory 
step by Saakashvili that would likely backfire.  End Summary. 
 
. 
DFM KARASIN WELCOMES U.S. EFFORTS 
--------------------------------- 
 
2.  (C)  The Ambassador, participating in an economic 
conference in Sochi, telephoned DFM Karasin September 29 to 
reiterate U.S. calls for restraint, underscore that the U.S. 
had taken serious note of the GOR non-paper, and detail U.S. 
efforts to de-escalate the situation in Tbilisi.  Karasin 
appreciated the U.S. follow-up on the incident and the 
opportunity in Washington for an exchange between Russian 
Ambassador Ushakov and U/S Burns.  He welcomed Tbilisi's 
decision to allow joint CIS-UNOMIG patrolling of the Kodori 
Gorge as a means to reduce tensions. 
. 
MFA:  DIPLOMATIC STEPS . . . FOR NOW 
------------------------------------ 
 
3.  (C)  MFA Fourth CIS (Caucasus) Deputy Director Dmitriy 
Tarabrin reviewed the diplomatic steps that Russia had or was 
about to take today in response to the arrests.  They are: 
 
--  recall of Russian Ambassador to Georgia Kovalenko for 
consultations in Moscow. 
--  drawdown of staff and dependents from the Russian Embassy 
in Tbilisi and Russian military facilities in Tbilisi, Batumi 
and Akhalkalaki. 
--  dispatch of two EMERCOM planes on Friday to Tbilisi to 
evacuate employees and dependents.  Ambassador Kovalenko is 
likely to join the first group of evacuees. 
 
4.  (C)  In addition to these steps, the MFA has issued a 
travel warning to Russian citizens recommending against 
travel to Georgia because of the threat of violence.  Visa 
issuance to Georgians (whether in Tbilisi or elsewhere) has 
been suspended with exceptions to be made only in emergency 
cases.  Russia will be making demarches in major capitals to 
argue that the officers must be freed and allowed to return 
to Russia.  He said Russia would weigh bringing the issue of 
the detentions to the notice of the UN Security Council. 
 
5.  (C)  Tarabrin said that these measures would be 
sufficient for now, but Moscow was actively considering other 
diplomatic, political and financial measures that might be 
taken against the Georgians.  He emphasized several times 
that Russia was not contemplating military measures.  He 
would not be drawn out on when such further measures might be 
put in place, but said that if the situation was not resolved 
in the next few days, Russia would weigh taking additional 
steps.  He pointed to the large sum of funds transferred 
annually to Tbilisi in the form of remittances (he put the 
unofficial figure at USD 2 billion) but shared no details on 
what practical steps Russia could take to stop such transfers. 
. 
PUBLIC STATEMENTS MODERATING? 
----------------------------- 
 
6.  (C)  Compared to statements on September 28, when news 
broke of the arrests, public officials were more restrained. 
Russian television channels ran (edited) clips of the 
Georgian tapes supposedly showing acts of espionage, but 
newscasters were dismissive about what the tapes proved. 
While the arrests continue to draw across-the-board 
condemnation, few public figures were recommending a military 
response.  The Public Chamber called for the release of the 
officers, pointing to the damage it was doing to the 
bilateral relationship, while Duma Foreign Affairs Committee 
Chairman Konstantin Kosachev ruled out the use of force to 
 
MOSCOW 00011029  002 OF 002 
 
 
resolve the situation and noted that the U.S. was playing a 
role in calming tensions.  Carnegie Center analyst Aleksey 
Malashenko dismissed the possibility of war, but thought the 
relationship would remain "in crisis."  A staffer on the Duma 
Defense Committee told us that he did not expect any serious 
consequences to the arrests, which would likely be resolved 
through diplomatic means.  Such views were not universal -- 
for example, Duma CIS Affairs Committee Chairman Andrey
 
Kokoshin called Georgia a "failing state" and warned that 
Russia would "stop at nothing" if its security interests were 
threatened. 
. 
THINK TANKERS SEE GEORGIAN MISCALCULATION 
----------------------------------------- 
 
7.  (C)  Embassy contacts at political-military think tanks 
were unanimous in blaming Saakashvilli for the incident, 
seeing his goal as an escalation of Tbilisi's confrontation 
with Moscow that would draw in the U.S. and other Western 
partners.  Boris Makarenko of the Center for Political 
Studies said Saakashvilli felt emboldened by Georgia,s new 
ID status with NATO.  Alexander Belkin, of the Council of 
Foreign and Defense Policy, told us Saakashvilli was raising 
the stakes and that Georgia hoped Russia would make a mistake 
and overreact.  Pointing out that "real" espionage incidents 
were resolved quietly, Ivan Safranchuk of the World Security 
Institute said that the arrest might be a good tactical move 
to escalate the conflict, but Saakashvilli was engaged in a 
high stakes gamble. 
. 
WESTERN PARTNERS 
---------------- 
 
8.  (C)  Among our Quad partners, only the Germans approached 
the MFA on this issue and received much the same readout as 
we did.  Because of what they characterized as the positive 
tone of discussions in Berlin during the September 28 Friends 
of Georgia meeting, the Germans have concluded that no 
demarche is needed and that the Russians were responding 
along political and diplomatic lines.  The UK Embassy is 
advocating a coordinated response both in Moscow and in 
Tbilisi to encourage restraint and the expulsion of the 
detained Russians.  The British were more alarmist about the 
prospect for unanticipated escalation into a military 
confrontation. 
. 
NEXT STEPS 
---------- 
 
9.  (C)  Russia has now taken measured steps to respond to 
the arrests and has -- for the most part -- dialed down the 
rhetoric.  However, if this matter begins to drag into next 
week, there is an increasing chance that harsher measures 
will be implemented because of growing political pressure to 
be seen as doing something.  Russia's preexisting sanctions 
against Georgia (embargoes on trade and transit restrictions) 
cut down on the options available to Moscow.  A decision to 
expel the officers quickly in order to resolve this matter 
would remove Russia's temptation to pursue more heavy-handed 
measures. 
BURNS

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06MOSCOW11024, INITIAL REACTION TO 2006 IRF REPORT

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Reference ID Created Released Classification Origin
06MOSCOW11024 2006-09-29 14:00 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

VZCZCXRO4873
PP RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHMO #1024 2721400
ZNR UUUUU ZZH
P 291400Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3268
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE

UNCLAS MOSCOW 011024 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PHUM PREL KDEM RS
SUBJECT: INITIAL REACTION TO 2006 IRF REPORT 
 
 
1. (U) Ministry of Foreign Affairs Spokesman Mikhail Kaminin 
told reporters that the 2006 International Religious Freedom 
Report amounted to a repetition of groundless claims that 
there are restrictions on religious freedom in Russia.  He 
said that U.S. officials had repeatedly ignored GOR 
explanations to the point that the GOR considered further 
explanations superfluous.  Kaminin alleged that the report 
was politically motivated. 
 
2. (U) Noting some improvements in this year's edition, the 
Moscow Patriarchate remarked that the report still lacked 
objectivity.  In an Interfax interview on September 25, 
Deputy Head of the Department of External Church Relations of 
the Moscow Patriarchate Vsevolod Chaplin remarked that "in 
comparison to previous years, the report of the State 
Department was more accurate in terms of facts and 
assessments."  He also noted that it was a pleasant surprise 
that the report finally mentioned some anti-Orthodox acts of 
vandalism, but that the number of those incidents was 
insignificant in comparison to the description of acts 
directed against religions that have large and influential 
constituencies in the U.S., such as Catholic, Jewish, 
Protestant, and "new religious movements."  He added that 
while the report addressed the property restitution problems 
of the Russian Orthodox Church, they were disproportionate to 
the restitution problems of other religious communities.  He 
even admitted that the report was correct in noting the need 
for improvements in conditions for Muslims' prayer activities 
and access to religious advisors in the army. 
 
3. (U) Chaplin argued that Russia is only asserting what is 
the norm in Europe: "a society's selective attitude towards 
religious communities."  He said that in most European 
countries both state and society have always understood that 
some religious organizations have grounds for special 
support, while others "could be considered destructive and 
dangerous, based on their activities and ideology."  Chaplin 
also maintained that local populations have the right to 
decide which religious buildings could be built in their 
districts and to whom local authorities can grant community 
space for religious meetings, as well as the right of 
citizens to a religious education and the right to protest 
against the activities of certain religious groups they 
considered sects. 
 
4. (SBU) COMMENT. The tone of the MFA's response to the 2006 
report does not differ markedly from its response last year. 
We are still waiting for the translation of the report into 
Russian to be finished.  We will then review it with 
additional interlocutors in the GOR and human rights and 
religious communities. 
BURNS

Wikileaks

06MOSCOW11002, RUSSIA: CENTER-REGIONAL RELATIONS UNDER STRESS

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Reference ID Created Released Classification Origin
06MOSCOW11002 2006-09-29 11:41 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

VZCZCXRO4684
PP RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHMO #1002/01 2721141
ZNR UUUUU ZZH
P 291141Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3243
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 MOSCOW 011002 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PINR PREL RS
SUBJECT: RUSSIA: CENTER-REGIONAL RELATIONS UNDER STRESS 
 
REF: 2002 MOSCOW 120552 
 
 1. (SBU) SUMMARY. Federal-local relations in Russia are 
under increasing stress due to the implementation of the 
Local Self-Government Law of 2003. This law cuts the flow of 
tax dollars to regional and local government in order to spur 
the localities to become entrepreneurial in developing their 
own tax base.  The local governments, especially cities, 
complain that while they are the engines of growth that 
create the tax revenue "hoarded" by Moscow, they are being 
left with unfunded mandates by the federal government. A 
report to be delivered to the Public Chamber on September 30 
describes in detail the deficiencies of the federal law. 
Moscow appears to be using the new law to reinforce its 
central power and keep the cities politically subdued. END 
SUMMARY. 
 
2. (U) Local, national, and private-sector representatives 
held a press conference on September 21 in Moscow to describe 
the growing conflict in federal-local relations in Russia. 
The participants included the mayors of Rostov-on-Don and 
Nizhny Novgorod, a member of the State Duma Budget and Tax 
Committee, and Vyacheslav Glazychev, an academic and member 
of the Public Chamber. 
 
--------------------------------------------- ----- 
FEDERAL LAW 131: REFORMING MUNICIPAL RELATIONSHIPS 
--------------------------------------------- ----- 
 
3. (SBU) Federal Law 131 of 2003 (FL-131), which took effect 
in January 2006, restructured local self-government and 
municipal structures throughout Russia.  In a detailed report 
that will be presented to the Social Chamber on September 30, 
Professor Vyacheslav Glazychev describes the history of the 
law, its implementation, and its intended and unintended 
consequences.  Glazychev claims that to properly implement 
the 167-page law, the federal government should provide 300 
billion rubles, but has only budgeted 15 million.  This 
leaves cash-starved cities on the front lines of receiving 
complaints from their citizens.  Glazychev writes that this 
is an "anti-urban" law that leaves cities subordinate to less 
populated municipal districts in a vertical hierarchy.  For 
example, the city of Murom (pop. 132,000) has been subjugated 
to the Murom municipal district (additional pop. 16,000). 
 
--------------------------------------------- ------------- 
MAYORS: MOSCOW MAKES US CHOOSE BETWEEN ROADS AND HOSPITALS 
--------------------------------------------- ------------- 
 
4. (SBU) The Mayors complained that Moscow had cut the flow 
of tax revenue to local levels, rendering them unable to 
provide basic services, but nevertheless leaving them with 
the responsibility (and the blame).  Mayor Bulavinov of 
Nizhny Novgorod said that this year he was forced to choose 
between funding road repairs and funding hospitals. Mayor 
Chernyshov of Rostov-on-Don said that his choices were 
between street lighting and kindergartens.  The common 
refrain was that while cities were the generators of wealth, 
they were treated like beggars when they sought access to tax 
revenues. 
 
5. (SBU) Anecdotal evidence compiled by Glazychev shows that 
many cities must now transfer 80% of their property tax 
revenue up to the regional authorities, who take a cut before 
passing it on to Moscow.  Other examples included towns that 
were forced to shut their medical clinics, budgets being 
slashed by 50 to 80 percent, streetlights left dark, and 
cities forced to sell land and public buildings to raise 
funds.  This makes life even harder for those city-dwellers 
hurt by last year's monetization of benefits.  The mayors at 
the forum and those quoted in Glazychev's reports speak of 
both the social costs of these cuts and the growing 
discontent among their citizens. 
 
--------------------------------------- 
MOSCOW TO REGIONS: WE'LL GIVE YOU MONEY 
IF YOU CAN SHOW THAT YOU DON'T NEED IT 
--------------------------------------- 
 
6. (U) Dmitry Kozak, the plenipotentiary presidential 
representative (PolPred) in the Southern Federal District 
(which includes Rostov-on-Don), said in an interview earlier 
this year that the federal government was trying to help the 
cities and regions become more "responsible" and 
self-sufficient.  "If local authorities work 
effectively...they should be granted greater freedom and 
independence.  However, if they mostly rely on subsidies 
(i.e., tax revenue from the federal government)...they should 
have less independence and freedom and should be more 
controlled by the state."  He then added that those 
territories with high economic growth rates and who do not 
 
MOSCOW 00011002  002 OF 002 
 
 
rely on federal tax revenue should be given a bonus by the 
state as a reward.  This economic incentive will spur the 
other regions to become more efficient. 
 
7. (U) Kozak, who was the architect of FL-131 (reftel) and is 
now overseeing its implementation in the Southern Federal 
District, refused to respond to the authors of the report, 
according to Glazyche
v. Glazychev accused Kozak of being 
disdainful of local authorities and to those who complained 
about the law's effects.  In his interview, Kozak argued that 
one should not expect immediate results or for everyone to 
like the changes (all reforms hurt), but that the law was 
necessary and ultimately good for the cities and the country. 
He defended the drastic budget cuts by saying that without 
serious motivation, the local authorities would become lazy, 
develop a "parasitic attitude," and discredit the role of 
government in general among citizens.  This, he said, would 
in turn generate "social apathy or political extremism." 
 
8. (SBU) COMMENT: The distribution of resources and power 
between the center and the periphery is a struggle over 
governance and control in this vast country.  Through the 
implementation of FL-131, Moscow is strengthening its 
position at the top of a "vertical of power."  The effects of 
the 2003 law are now beginning to be seen, and as the cities 
feel the pinch of the budget cuts, we expect the tension to 
worsen and the complaints of the cities to grow louder. END 
COMMENT. 
BURNS

Wikileaks

06MOSCOW10990, NATO SOFA RATIFICATION: VERDICT STILL OUT

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Reference ID Created Released Classification Origin
06MOSCOW10990 2006-09-29 07:22 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO4335
PP RUEHDBU
DE RUEHMO #0990/01 2720722
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FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3217
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHDC
RHMFISS/CDR USEUCOM VAIHINGEN GE

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 010990 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/29/2016 
TAGS: MARR MOPS PGOV RS
SUBJECT: NATO SOFA RATIFICATION:  VERDICT STILL OUT 
 
REF: A. MOSCOW 10230 
     B. MOSCOW 9821 
 
Classified By: DCM Daniel A. Russell. Reasons 1.4 (B/D). 
 
1.  (C) SUMMARY:  According to the Foreign Ministry, the 
Russian Government is completing its review of the NATO 
Status of Forces Agreement (SOFA) -- which was signed last 
year -- and expects to send it to the Duma "within weeks." 
The MFA assured us that all GOR entities, including the 
Ministry of Defense, supported the agreement, albeit with 
some reservations.  Non-official contacts do not share the 
MFA's rosy assessment and attributed the long review process 
to concerns about closer military cooperation with Western 
nations.  Duma representatives told us that the legislature 
would consider the agreement "in due course," suggesting that 
the measure might not be taken up during the Duma's current 
session, which ends in December.  Election dynamics will 
complicate prospects for SOFA ratification, with little 
obvious political gain in advocating closer military 
relations with NATO and the U.S.  END SUMMARY. 
. 
------------------------------------ 
REVIEW OF NATO SOFA ALMOST COMPLETED 
------------------------------------ 
 
2.  (C) Grigoriy Sumkin, Counselor in the NATO Section of 
MFA's European Cooperation Department, told us September 26 
that the GOR was nearing completion of its second review of 
the NATO SOFA signed by Foreign Minister Sergey Lavrov in 
April 2005.  He anticipated that the government would submit 
the agreement to the Duma for ratification "within a few 
weeks."  Sumkin emphasized that there was no political reason 
for the long official review, explaining that it was not 
unusual for international agreements to undergo more than one 
round of scrutiny to ensure that all provisions conformed 
with Russian law.  He said Lavrov had stressed the same 
points in a September 19 meeting in New York with NATO 
Secretary General de Hoop Scheffer.  In the case of the NATO 
 
SIPDIS 
SOFA, Sumkin continued, several provisions had not initially 
complied with domestic law.  He declined to specify the exact 
differences but suggested that they pertained to customs 
duties and liability for property damages.  These issues were 
being resolved.  He asserted that the entire government, 
including MOD, supported the SOFA and looked forward to 
closer military cooperation with the U.S. and other Western 
nations. 
 
3.  (C) Nonetheless, Sumkin said the government might send 
the agreement to the Duma accompanied by several 
clarifications; their nature and wording were still being 
negotiated.  Characterizing the SOFA as a framework agreement 
that could be tailored to individual circumstances, Sumkin 
argued that some NATO partner nations had issued similar 
clarifications upon ratification without significant effects 
upon their military cooperation.  Sumkin did not think the 
GOR's clarifications would impose artificial barriers or 
otherwise undermine the agreement's implementation.  The GOR 
understood the reciprocal nature of the SOFA and would not 
deliberately risk disadvantaging its military personnel 
abroad. 
. 
-------------------------------- 
DEFENSE ANALYSTS LESS OPTIMISTIC 
-------------------------------- 
 
4.  (C) Several of our non-official contacts did not share 
the MFA's optimism concerning ratification.  Aleksandr Golts, 
a respected defense analyst with the Weekly Journal, 
Aleksandr Belkin of the Council on Foreign and Defense 
Policy, and independent analyst Pavel Felgengauer all told us 
separately that a decision to ratify the agreement would be 
based mainly on political considerations.  All echoed the 
sentiment that neither Duma consideration nor a final 
decision on ratification was imminent. 
 
5.  (C) Belkin emphasized that there was not a strong lobby 
for closer ties to the U.S. or NATO.  The MOD mindset was 
still mired in Soviet-era thinking that did not permit the 
military or civilian leadership to recognize the merits of 
active cooperation with more advanced armed forces.  Belkin 
noted that there were only a handful of people in the Duma -- 
deputies or staffers -- who understood defense issues and 
would be able to analyze objectively the implications of the 
NATO SOFA.  If the government did send the agreement to the 
legislature soon, he thought the most likely time to consider 
it would be in the latter part of the current session or the 
early part of the spring session (in other words, after this 
autumn's regional and local elections but before next 
 
MOSCOW 00010990  002 OF 002 
 
 
autumn's parliamentary campaign).  He said the Kremlin was 
sensitive about the timing of any decision regarding 
ratification.  Isabelle Francois, Head of the local NATO 
Information Office, also told us that Duma consideration of 
the SOFA was unlikely until the spring legislative session. 
. 
-------------------------------------------- 
DUMA UNLIKELY TO PUT AGREEMENT ON FAST TRACK 
-------------------------------------
------- 
 
6.  (C) Contacts in the Duma confirmed that the legislature 
had not yet received the agreement nor is it now on the 
docket for consideration during the current session.  Valeriy 
Ignatyev, a knowledgeable staffer on the Defense Committee, 
told us this week that the agreement was still with the MFA, 
which had not finished clearing the SOFA with other 
ministries.  Ignatyev mentioned that the agreement would be 
considered "in due course" but would likely require several 
amendments to existing Russian law before it could be 
implemented.  His own sources had informally told him that 
the SOFA was not expected at the Duma before the end of the 
year. 
. 
------- 
COMMENT 
------- 
 
7.  (C) We are encouraged that the MFA is moving ahead on 
interagency consideration of the draft NATO SOFA.  That said, 
ratification will depend on political considerations with an 
eye toward the forthcoming electoral campaigns.  The Russian 
reaction to the landing of NATO forces in Ukraine and to 
NATO's decision to offer Intensified Dialogue to Georgia 
shows that cooperation with NATO remains a political 
hotbutton here.  Nonetheless, Russia's decision to 
participate in NATO's Active Endeavor Mediterranean 
interdiction operation shows that there are Russian 
decision-makers who recognize the value of increased 
practical cooperation with NATO.  De Hoop Scheffer's October 
26 visit to Moscow is the next opportunity to raise the SOFA 
with Russia's leadership.  We will continue to press the MFA 
and others to accelerate consideration of the agreement. 
BURNS

Wikileaks

06MOSCOW10986, NOT WAR, BUT CLOSE:” RUSSIAN REACTION TO GEORGIA

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Reference ID Created Released Classification Origin
06MOSCOW10986 2006-09-28 15:11 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO3467
OO RUEHDBU
DE RUEHMO #0986/01 2711511
ZNY CCCCC ZZH
O 281511Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3209
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 010986 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/28/2016 
TAGS: PREL MARR NATO GG RS
SUBJECT: "NOT WAR, BUT CLOSE:"  RUSSIAN REACTION TO GEORGIA 
ARRESTS OF RUSSIAN SOLDIERS 
 
Classified By: Ambassador William J. Burns.  Reason 1.4 (b, d) 
 
1. (C) Summary:  DFM Karasin told Ambassador September 28 the 
arrest of Russian officers in Georgia "could have been a 
casus belli."  Russian reaction "will be more reasonable." 
Russia "has the impression that it cannot rely on its 
American partners."  Karasin asked for U.S. help in freeing 
the officers.  He made clear that expulsion to Russia would 
be acceptable.  He passed a non-paper on the Russian 
position.  Karasin was tough -- but the opinion of Russia's 
political classes is tougher still.  End Summary. 
 
2. (C) Ambassador met Karasin September 28 to discuss the 
September 27 arrest of Russian military intelligence officers 
in Georgia.  Karasin handed Ambassador a non-paper 
(translation, para. 11).  He said a chain of events showed 
Georgia has an "orientation to force."  The situation is "not 
war, but close to war."  The arrest of Russian officers was a 
"qualitatively new escalation."  It called forth a "whole 
bouquet of tough and unpleasant thoughts."  The officers were 
there to help withdraw Russia's military bases -- in 
fulfillment of Russia's commitments. 
 
3.  (C) The arrest, Karasin said, was part of a chain of 
events:  the September 21 decision on Intensified Dialogue 
(ID) for Georgia; the Kodori Gorge operation with its 
aftermath of "political circus;" and intensified attacks on 
Russian peacekeepers in Abkhazia and South Ossetia.  Later he 
added the GUAM initiative on frozen conflicts as one of 
Georgia's "provocative actions." 
 
4. (C) Karasin regretted that Georgia had received 
encouragement:  the push for ID, the applause for Pres. 
Saakashvili's UNGA speech, and the generally anti-Russian 
tone of Georgian policy.  This encouragement has created the 
impression in Russia that it cannot rely on its partners, and 
in particular on the U.S.  The explosion of tensions in South 
Ossetia was unnecessary.  It is a zone of Russia's vital 
interests; America must understand the dangers. 
 
5. (C) Karasin said Russia insists on immediate freedom for 
its soldiers and for an end to the blockade around the Group 
of Russian Forces in the Trans-Caucasus (GRVZ).  Tomorrow, 
Russia will evacuate the families of embassy employees.  It 
will recall its ambassador.  Washington, he concluded, must 
understand the gravity of the situation. 
 
6. (C) Ambassador promised to convey Karasin's seriousness to 
Washington.  Neither the U.S., nor Russia, nor Georgia needed 
an increase in tensions.  We appreciate Russia's fulfillment 
of its obligations to withdraw its bases.  Despite Russian 
perceptions, the U.S. message to Georgia has been consistent: 
 we are prepared to move down the road toward Georgian NATO 
membership, but Georgia must show restraint on Abkhazia and 
South Ossetia.  Ambassador asked what outcome would work for 
everyone in the present crisis. 
 
7. (C) Karasin responded that Russia is still considering its 
course of action.  Karasin did not want to close any option. 
Its priority is the release of its people.  This "could have 
been a casus belli," he said, "but our response will be more 
reasonable."  However, he stressed, "Our reserve of patience 
is near an end."  It was important to return the situation to 
"a more reasonable basis."  When a situation evolves on its 
own, he said, there can be a dangerous chain reaction.  There 
were a million Georgians in Russia.  This gave the problem 
great magnitude.  Russia would have to think about how to 
proceed.  "We hope our partners will help," he said, "by 
being tough and precise with Georgia."  He said Ambassador 
Ushakov would be seeking a senior appointment to make these 
points in Washington, and hoped he would be received.  He 
added that if Saakashvili "returns to normal negotiations on 
Abkhazia," ending the "political circus" in Kodori, which 
"smells of adventurism," Russia will try to convince the 
Abkhaz "there is a chance." 
 
8. (C) Ambassador reiterated he would convey Karasin's sense 
of seriousness.  He asked whether the Russian Embassy had 
access to the detainees.  Karasin said yes; they were in 
satisfactory conditions.  At a later date -- after their 
release -- Russia would be prepared to discuss the claims 
against them.  He reiterated that it was important that these 
people be freed.  "They can stay or leave the country," as 
long as they get out of jail. 
 
9. (C) Karasin's comments, tough as they were, are restrained 
in comparison to the public statements of political figures 
and the analyses of our institutional contacts.  Foreign 
Minister Lavrov stated that Russia would seek an emergency 
session of the UN Security Council to discuss the detention. 
All commentators note the proximity to the NATO decision on 
 
MOSCOW 00010986  002 OF 003 
 
 
ID, and call the arrests a deliberate provocation, not a 
serious counter-
espionage operation.  A number stated that 
the U.S. must have approved, or at least did not veto the 
arrests, and some point to the arrests as part of 
Saakashvili's "narrow agenda to undermine Russia" -- 
presumably as a catspaw for American ambitions.  Federation 
Council Chair Mironov bluntly said the arrests "could lead to 
war."  Fyodor Lukyanov, Chief Editor of Russia in Global 
Politics, told us that the detentions would unite radical 
elements in Russian politics.  He said the only positive 
element he could see so far was that Russian elites were 
calling for sanctions rather than military action.   Lukyanov 
thought that the incident would demonstrate to NATO what 
Georgia's membership would entail NATO disputes with Russia. 
 
COMMENT 
------- 
 
10. (C)   The Russian non-paper below is a cry of anger and 
outrage -- but without concrete decisions on the Russian 
reaction, because Russia has no good options in this case. 
We strongly recommend pressing Georgia to expel the Russian 
officers and make public its evidence for the accusations. 
The sooner that is done, the sooner the crisis can be 
defused, and it would also help dampen some of the more 
inflammatory rhetoric.   Some of that rhetoric is genuine 
outrage; some an attempt to recoup after the decision on ID. 
Russia's message to NATO members is clear:  giving Article V 
guarantees to Georgia allows Georgia to embroil NATO in a war 
with Russia. 
 
Text of Russian Non-Paper 
------------------------- 
 
11. (C) Begin text of informal Embassy translation: 
 
On the blatant provocation by the Georgian side 
 
The Russian side expresses the most serious concern in 
connection with the arbitrary action (proizvol) committed by 
Georgian security forces yesterday evening and early morning 
against Russian military personnel who were on territory of 
Georgia, in the staff of the Group of Russian Forces in the 
Trans-Caucasus (GRVZ)  completely legally and in accordance 
with treaties. 
 
The series of arrests undertaken by Georgian authorities on 
27 September against Russian officers of the GRVZ was the 
latest blatant attack confirming the anti-Russian course of 
the leadership of Georgia.  The actions of the Georgian side 
contradict the conditions of the Agreement between the 
Russian Federation and Georgia on the timetable and regime of 
temporary functioning and withdrawal of Russian military 
bases and other military sites of Russian Forces in 
Trans-Caucasus deployed on the territory of Georgia; in 
particular, of Article 4, which mandates "the provision of 
normal living conditions and temporary functioning" of 
Russian military bases.  Despite the treaties, the Georgian 
authorities continue to put outrageous obstacles in the path 
of the normal work and living conditions of Russian military 
personnel, who are responsible for the fulfillment of their 
obligations, inter alia in the interests of and in accordance 
with the wishes of Georgia itself.  Last week the last 
echelon of Russian military equipment was sent from Georgian 
territory in accordance with the timetable planned for 2006 
for the withdrawal of equipment and materiel by bilateral 
Agreement.  The logic of steps by the Georgian side clearly 
directed at disruption of the process, worked out with such 
effort, of withdrawing the Russian military bases is 
completely incomprehensible to us. 
 
The provocative actions of the Georgian side against Russian 
military personnel in Georgia when taken together with the 
incessant chain of defiant actions of Tbilisi, together with 
the use of force against Abkhazia and South Ossetia, 
exacerbate tensions throughout the region and constitute a 
direct threat to stability and security in the 
Trans-Caucasus.  The consequences of such actions are 
unpredictable and fraught with the most negative effects both 
on bilateral Russian-Georgian relations and the region-wide 
situation.  Given the existence of unregulated conflicts in 
the Trans-Caucasus, the irresponsibility of the Georgian side 
cannot remain unnoticed by the international community. 
 
We consider the unceremonious and impudent character of the 
actions by the Georgian "siloviki" with regard to Russian 
citizens, and other actions by the Georgian side directed at 
undermining existing agreements, demolishing the negotiating 
and peacekeeping formats and mechanisms in the region, worthy 
of unqualified condemnation by all leading international 
organizations, in the first instance the UN and OSCE, 
 
MOSCOW 00010986  003 OF 003 
 
 
directly involved in the issue of world security and conflict 
resolution.  We expect the Georgian provocations will be 
given an appropriate and unbiased evaluation by the 
international community.  It must be recognized in Tbilisi 
that the period of indulgence and permissiveness, including 
by a number of Western states, has ended and that the time 
has come to answer for one's actions. 
 
Concrete conclusions will be drawn in Russia from the 
Georgian leadership's line.  We have no intention of leaving 
our citizens in trouble -- whether ordinary tourists or 
military personnel fulfilling their service obligations 
abroad in accordance with international treaties.  The 
reaction of the Russian side will be appropriate calculated 
as a warning against the repetition of such unfriendly acts. 
 
End text. 
BURNS

Wikileaks

06MOSCOW10985, AMBASSADOR’S SEPTEMBER 27 MEETING WITH RUSSIAN

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Reference ID Created Released Classification Origin
06MOSCOW10985 2006-09-28 14:45 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO3410
PP RUEHAG
DE RUEHMO #0985/01 2711445
ZNY CCCCC ZZH
P 281445Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3206
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0140
RUEHBUL/AMEMBASSY KABUL PRIORITY 0420
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 010985 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR P, E 
STATE EB/IFD/OMA 
STATE FOR EUR/RUS, NEA/FO, NEA/I, SA/FO, SA/A 
STATE PASS USTR FOR DWOSKIN, MOLNAR, KLEIN 
TREASURY FOR D/S KIMMITT, A/S LOWERY, COX/ALIKONIS/BAKER 
USDOC FOR 431/ITA/MAC/EUR/RISA EDWARDS AND BEADLE 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 09/27/2016 
TAGS: ECON EFIN ETRD PREL PGOV RS
SUBJECT: AMBASSADOR'S SEPTEMBER 27 MEETING WITH RUSSIAN 
FINACE MINISTER KUDRIN 
 
REF: MOSCOW 5629 
 
Classified By: Amb. William J. Burns, Reasons 1.4 (b/d). 
 
Summary 
------- 
 
1.  (C) In a September 27 meeting with the Ambassador, 
Russian Finance Minister Aleksey Kudrin gave few details on 
debt relief for Afghanistan, but noted he hoped to conclude a 
bilateral agreement by February 2007.  On Iraq, Kudrin said 
resolving the Qurna-2 license issue was important but not a 
pre-condition for debt relief.  He reiterated the GOR's 
commitment to continuing banking sector reforms that slain 
Central Bank (CBR) First Deputy Chairman Andrey Kozlov had 
championed.  He said proposed 2007 budget spending increases 
would support GOR priorities during the last 18 months of 
Putin's term.  Kudrin strongly emphasized his personal hope 
that a bilateral agreement on Russia's WTO accession will be 
concluded this fall.  End Summary. 
 
2.  (U) In addition to Kudrin, Deputy Finance Minister Andrey 
Storchak and Tax Affairs Department Director Mikhail Motorin 
attended the September 27 meeting with Ambassador. 
 
Afghan, Iraqi Debt 
------------------ 
 
3.  (C) Kudrin said that bilateral negotiations with Afghan 
authorities were underway and that he expected to conclude an 
agreement by February 2007.  On Iraq, he noted that a 
bilateral agreement has already been negotiated; signing of 
the accord is all that remains. (Note: This differs from 
media accounts of Kudrin's statements on the margins of G7/G8 
meetings in Singapore that "technical work was underway" on 
Iraqi debt forgiveness.  End Note.)  He said that Russia's 
position on debt relief was connected, "but not directly 
connected," to the restoration of Lukoil's license to operate 
the Qurna-2 oilfield. 
 
4.  (C) Kudrin recounted that Lukoil had hired a U.S. legal 
consultant to review the legitimacy of the firm's claim to 
Qurna-2 and lamented that the Iraqi government had not made a 
decision on the issue since it was raised 18 months ago.  He 
commented that the GOR was obliged to fly the flag so that 
Russian firms would know that the government was promoting 
their interests in Iraq.  Both Kudrin and Deputy Minister 
Storchak maintained that the license issue had not delayed 
assistance to Iraq and would not lead to any negative 
financial consequences for Iraq. 
 
5.  (C) Kudrin added that there have been many positive 
developments in Russia's relationship with Iraq.  He 
highlighted that the Iraqi government was prepared to sign an 
MOU on oil-related technical assistance and that Lukoil has 
pledged USD 4.5 million to redevelop neglected oilfields. 
 
Expressions of Concern, Hope for WTO 
------------------------------------ 
 
6.  (C) Kudrin expressed concern that during the recent G7/G8 
meetings in Singapore, Treasury Secretary Paulson had 
"hinted" a review of the financial services section of our 
bilateral WTO accession agreement might be forthcoming. 
Although he did not specify what issues Secretary Paulson 
mentioned, Kudrin told the Ambassador that a more appropriate 
time for discussion of Russia's financial sector market 
access commitments - further to what had already been agreed 
in our bilateral WTO accession negotiations - would be during 
Russia's negotiations on OECD accession.  The Ambassador 
expressed hope that both countries' negotiators would be able 
to resolve pending issues in our bilateral WTO negotiations 
before Presidents Bush and Putin meet at the November APEC 
Summit. 
 
Banking Sector Reforms 
---------------------- 
 
 
MOSCOW 00010985  002 OF 003 
 
 
7.  (C) Regarding the murder of Central Bank (CBR) First 
Deputy Chairman Andrey Kozlov, Kudrin said that Kozlov was a 
man of conviction who, regrettably, irritated many "shadow 
economy groups."  He noted that Gennady Melikyan's 
appointment as head of the CBR's Banking Supervision 
Committee was temporary and that officials were looking for 
"a stronger candidate" to succeed Kozlov.  He stated 
matter-of-factly that banking reforms will continue and that 
"norms will be tougher." 
 
8.  (U) Kudrin explained that the Central Bank recently began 
the process of implementing Basel II capital adequacy 
standards to consolidate the banking sector, and speculated 
that banks unable to comply might be attractive acquisitions. 
 He said that CBR controls in place following the mini-crisis 
of 2004 included close cooperat
ion with the Interior 
Ministry, which has improved the pace of some investigations. 
 Regulatory tools have helped bring some banks into 
compliance and have facilitated shutting down others.  (Note: 
The CBR has revoked 110 licenses since 2004.  End Note.) 
 
2007 Budget Overview 
-------------------- 
 
9.  (U) Kudrin defended the spending increases envisioned in 
the 2007 budget as nominal and in support of President 
Putin's goals.  He maintained that the budget served the 
GOR's goals of reining in inflation, promoting economic 
growth, and adding to the Stabilization Fund, which will 
continue to grow as long as the per-barrel price of Ural oil 
is USD 27 or more.  Kudrin clarified that the budget is 
balanced when oil is USD 37 per barrel.  The GOR is also 
developing a proposed legislative amendment that will allow 
the government to submit a 3-year budget.  He expected work 
on the first 3-year budget would begin by June of next year. 
 
10.  (U) Kudrin also described the GOR's tentative plans to 
institute a so-called Future Generations Fund that would 
begin accumulating revenue when the Stabilization fund 
reached 7 percent of GDP.  (Note: The Stabilization Fund is 
currently around 6.5 percent of GDP.  End Note.)  He 
pronounced the proposal as more political than economic or 
financial in nature, adding that Norway had developed such a 
fund, which now exceeds 100 percent of GDP, to pay for 
pension programs.  Kudrin said that revenue from the natural 
resource sector would finance the Future Generations Fund, 
which would invest in as-yet unspecified instruments.  The 
proceeds from these investments would eventually supplement 
the budget.  He noted the GOR would elaborate on program 
details and goals again in November. 
 
Specific Tax Issues 
------------------- 
 
11.  (C) The Ambassador sought Kudrin's assistance in 
reviewing two tax issues that concern U.S. business 
interests.  Tax authorities have assessed the Caspian 
Pipeline Consortium (CPC) USD 170 million in back taxes for 
purportedly wrongfully claiming certain 2002 interest 
payments as deductible expenses.  The case has gone to trial 
and the September 15 decision was in favor of the tax 
authorities.  Senior CPC managers are anxious that 
authorities could levy assessments of back taxes of 
reportedly up to USD 800 million.  They are also troubled by 
the prospect of facing criminal charges.  In another case, 
Pricewaterhouse Coopers (PwC) was alleged to have 
fraudulently deducted salary expenses for expatriate 
employees.  Although the Finance Ministry has issued a letter 
explaining that PwC's deductions were consistent with 
standard Russian business practices, tax authorities are 
continuing with the case and have introduced what PWC 
considers immaterial evidence about its work with YUKOS, a 
former client. 
 
12.  (C) Tax Affairs Department Director Mikhail Motorin 
responded that regarding CPC there was nothing to suggest 
that criminal charges would be brought or would even be 
appropriate.  However, he said that the tax rate in question 
 
MOSCOW 00010985  003 OF 003 
 
 
was not onerous (Note: implying that the deductions for 
interest payments were unnecessary.  End Note.) and 
maintained that tax inspectors had made a proper assessment. 
As for PwC, Motorin stated that the ministry's letter 
regarding PwC would be the determining factor.  He expressed 
confidence that the case,s outcome would correspond with the 
message contained in the ministry's letter. 
 
Comment 
------- 
 
13.  (C) Kudrin's attempt to play down the connection between 
Russia's bilateral agreement on Iraqi debt and Lukoil's claim 
to Qurna-2 was unconvincing, but he was eager to emphasize 
positive engagement with Iraq on the assistance and 
commercial fronts.  We will continue to press the GOR on debt 
agreements with both Iraq and Afghanistan.  We will also 
continue to urge the GOR to handle the CPC and PwC tax 
disputes in compliance with GOR law and prior understandings 
with both entities. 
BURNS

Wikileaks

06MOSCOW10984, RUSSIAN ENERGY: PSAS — THE VIEW FROM SAKHALIN AND

WikiLeaks Link

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Reference ID Created Released Classification Origin
06MOSCOW10984 2006-09-28 14:34 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO3390
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0984/01 2711434
ZNY CCCCC ZZH
O 281434Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3202
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 010984 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 09/28/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: PSAS -- THE VIEW FROM SAKHALIN AND 
MOSCOW 
 
 
Classified By: Amb. William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) Summary.  From discussions in Moscow and Sakhalin this 
week, Production Sharing Agreements (PSAs) may be out of 
favor, but they are far from being driven out of business. 
Shell (Sakhalin-2) appears to have dodged the bullet of 
having its environmental license revoked, but still faces 
tough negotiations with Gazprom and the GOR on asset swaps 
and cost overruns, respectively.  ExxonMobil (Sakhalin-1) is 
getting splashed by the mudslinging surrounding Shell, but to 
almost no effect; the first tanker loading from the De-Kastri 
port is expected to go forward October 5.  Putin and many of 
Russia's elite seem to resent the PSAs as unwelcome reminders 
of a weak moment in Russia's past, but the emerging line for 
both supporters and opponents of PSAs is one of strict 
adherence, for all sides.  In practice, that means the GOR 
will not try to annul existing PSAs, but PSA holders are 
being clearly warned to strictly abide by the terms of their 
agreements and Russian regulatory processes.  The alternative 
is unhappy since any move to annul one of the three existing 
PSAs would certainly end up in Stockholm arbitration.  End 
Summary. 
 
2. (C) This note reflects on a number of meetings the week of 
September 25, including the Ambassador's September 27 meeting 
with the head of the ExxonMobil's (EM) Moscow office, Ben 
Haynes, and additional meetings between Econ M/C and 
officials and company representatives on Sakhalin Island. 
. 
Sentiment Towards PSAs Souring 
But Revocation Not An Option 
------------------------------ 
. 
3. (C) The upbeat mood in the Sakhalin Governor's office this 
week was in stark contrast to the harsh rhetoric swirling 
around the issue of PSAs in Russia's capital.  The sour mood 
in Moscow reflects an emerging, but deeply held view by Putin 
and the key officials around him: the three PSAs signed in 
the mid-1990s were good for Russia then, but are 
"sub-optimal" by today's boomtown standards.  Yet, while some 
may dream of extracting better conditions from their PSA 
partners by whatever means they can, it seems clear from our 
conversations this week that there is no appetite in Sakhalin 
to see existing PSAs overturned. 
 
4. (C) In a September 25 meeting, Sakhalin Governor Ivan 
Malakhov was explicit on this point, at times implying he was 
not sure what his colleagues in Moscow thought they were 
doing.  He categorically opposes canceling existing PSAs, but 
he also expects rights holders to comply fully with their 
obligations under Russian law and the terms of their 
contracts.  Malakhov's position makes sense: his oblast has 
begun to see a significant revenue stream since first oil at 
Sakhalin-1 a year ago ($50 million so far), and there is more 
to come once tanker loadings begin from the De-Kastri 
terminal next week and export volumes rise to 250,000 barrels 
per day (b/d).  The biggest threats to future money flows 
from this project to the oblast are regulatory setbacks, and 
thus his expectation that the PSAs on the island are run 
well, and regulatory issues be dealt with promptly. 
. 
Sakhalin 1 and 2 Perceived Differently 
-------------------------------------- 
. 
5. (C) Malakhov sees significant differences between the 
management of the Sakhalin 1 and 2 projects.  He praised EM 
(the operator of Sakhalin 1) as "flexible" and "responsive," 
dealing with issues expeditiously, and maintaining a solid 
dialogue with local authorities.  About the management of 
Sakhalin 2, Malakhov was less complimentary, criticizing 
Shell for letting issues "pile up" and complaining that the 
firms' local representation seems two-headed, by which he 
meant both uncoordinated and lacking HQ-connected leadership. 
 Malakhov refused to be drawn out on whether he thought 
Minister of Natural Resources Trutnev and other federal 
authorities were acting "aggressively" with respect to PSAs 
or Sakhalin 1 in particular, but he didn't leave the topic 
without restating his conviction that while existing PSAs 
should not be cancelled, neither should poor management 
practices be tolerated. 
. 
The View Of/From Shell 
 
MOSCOW 00010984  002 OF 004 
 
 
---------------------- 
. 
6. (C) From discussions this week in Sakhalin, it appears 
that Sakhalin 2 has had its share of problems, including 
reportedly 18 job-related deaths, which one insider said was 
a sure sign that there were other problems beneath the 
surface: safety is usually the top priority in multinational 
projects.  It may be that Sakhalin 2 management, because of 
the magnitu
de and tight timetable of the project has had a 
hard time keeping on top of its numerous sub-contractors 
(there are some 17,000 employees right now).  It was a 
subcontractor (now fired) that was responsible for the August 
RosPrirodNadzor (RPN) negative inspection finding that 
appears to have "triggered" the near-revocation of Sakhalin 
2's 2003 State Environmental Expert Review (SEER) 
certification.  Sakhalin Energy (the Shell subsidiary running 
the project) may also not be aware that its relationship with 
local authorities is slipping -- "local government is very 
supportive" top management told us confidently, only days 
after the local government (who otherwise has nothing bad to 
say about PSAs) had been upset enough about Sakhalin Energy 
to complain openly to a foreigner about the firm's behavior. 
 
7. (C) That said, it is unlikely that Sakhalin Energy has so 
badly botched the job as to deserve the kind of reputational 
pressure they have been put under this month.  Project 
Director, David Greer, told us September 27 that Sakhalin 2 
has been subject to over 5,000 inspections over the past 
year.  The current problems with RPN, he believes, stem from 
a summer trip to Sakhalin 2's nearly-completed LNG terminal 
by DPM Dmitry Medvedev.  According to Greer, after having 
seen how close Sakhalin 2 was to starting LNG exports 
(expected in 2008) Medvedev pushed to get the Gazprom-Shell 
asset swap that has been on hold for a year moving again. 
Like many analysts in Moscow, Greer believes the actions of 
RPN are just noise intended to soften up Sakhalin 2 
shareholders, driving down the perceived value of Sakhalin 2 
in advance of their September 29 meeting with Gazprom. 
 
8. (C) According to the British Embassy, Dutch PM Balkenende 
reached out to Putin by phone this week to protest rumors 
that Sakhalin 2's 2003 SEER had been revoked.  Putin is 
reported to have called the PSAs "colonial era agreements" 
while agreeing to pull back the threat to the SEER.  Putin 
made a point, according to our British colleague, of urging 
PSA management companies to be diligent in their adherence to 
their obligations under Russian law. 
. 
And The View From ExxonMobil 
---------------------------- 
. 
9. (C) Exxon Neftegaz (EM's Russian arm) Executive VP Jim 
Taylor related to us this week that a grudging sense of 
unfairness seems to be what motivates watchdog agencies like 
RosTekNadzor (RTN -- which some compare to OSHA) and RPN (an 
agency within the Ministry of Natural Resources (MNR) 
responsible for environmental issues in the energy sector) to 
plow through piles of documents and examine endless miles of 
pipe and facilities in search of fault.  EM was investigated 
some 60 times this year alone.  Taylor said that Exxon 
Neftegaz has been quick to address concerns raised in the 
inspection process, preferring to keep Sakhalin 1 moving 
forward rather than argue with the regulators. 
 
10. (C) As an example, Taylor cited environmental issues 
raised by RPN about the De-Kastri port, where tanker loadings 
are expected to start on time October 5.  The inspection 
resulted, among other things, in the firm's extraordinary 
paving over of a sewage basin -- a requirement not found in 
Russian law, but raised by the inspectors.  The announcement 
last week of a relatively minor set of environmental issues 
surrounding De-Kastri (including the already resolved issue 
of the paved sewer basin) surprised Taylor somewhat.  He 
speculated that the inspector may have come under pressure to 
say something publicly about Sakhalin 1 on the day Shell's 
SEER appeared pulled -- even though the two events were not 
comparable.  Likewise, Haynes told the Ambassador that the 
press had greatly exaggerated the concerns over the De-Kastri 
oil terminal.  He said RTN had, in fact, given the project 
"rave reviews" for its environmental compliance.  Haynes did 
note with concern, though, that RTN head Pulikovskiy made 
"sharp" public comments about both Sakhalin projects 
 
MOSCOW 00010984  003 OF 004 
 
 
subsequent to this. 
. 
With Time, GOR likely to Expand 
Scope of Chayvo Field 
------------------------------- 
. 
11. (C) Exxon Neftegaz President Stephen Terni expressed 
confidence in a meeting September 27, that the Chayvo field 
problem, whereby a portion of the oil field was inadvertently 
left outside the original PSA are, will eventually be solved. 
 Terni and Taylor maintain that granting Sakhalin 1 rights to 
the parcel is just good field management practice for any 
government, and that such a contingency was foreseen and 
covered in their 1996 PSA.  Rosneft VP Peter O'Brien (Rosneft 
is one of Exxon's partners in the project) agrees, and both 
sides confirm that Rosneft and EM have formed a united front 
against the Ministry of Natural Resources.  The heat behind 
this issue -- which in many places around the world would be 
considered routine -- appears tied (again) to general pique 
surrounding PSAs.  One of Malakhov's assistants told us after 
the meeting with the Governor that this is a clear case of 
the government not wanting to give the firm another chunk of 
reserves at "1996 PSA price...no more cheap deals for 
foreigners." 
 
12. (C) Taylor believes that with time, the obvious mistakes 
made by MNR in this case will fade in the collective memory, 
allowing the project to move forward quietly.  Taylor noted 
that MNR had already ruled once in the firm's favor on this, 
and thought they would do so again.  Rosneft's O'Brien shares 
Taylor's confidence that the situation is already on its way 
to resolution, and while he would not go so far as to exclude 
the possibility of the parcel coming (back) into the 
consortium via auction, he doubted that outcome very much. 
 
13. (C) Haynes was, perhaps, a little less sanguine on Chayvo 
during his meeting with the Ambassador.  Despite rebuffing a 
suggestion at a recent meeting with MNR that re-opening the 
PSA would help "resolve" the Chayvo issue, Haynes said that 
he felt the Ministry was willing to work constructively with 
EM.  Nevertheless, Haynes said that some in EM are "very 
close" to employing a dispute resolution mechanism included 
in the PSA that would require taking the case to Stockholm. 
He recognized, however, that such a move would be quickly 
picked up by the press and may be unhelpful for some of their 
other equities in Russia. 
. 
Cost Overruns? 
Sakhalin 1 - A Little 
Sakhalin 2 - Yes 
--------------------- 
. 
14. (C) Last week, a story surfaced in the press that EM 
faces significant cost overruns at Sakhalin 1.  Haynes said 
that these reports were generally inaccurate, maintaining 
that the 2001 development plan foresaw spending of $12.1 
billion in constant 2002 dollars.  Factoring in foreign 
exchange fluctuations since then, he said the consortium is 
within ten percent of their per-barrel spending estimates. 
Haynes mainta
ined that this was an "extraordinary" result for 
a project of such magnitude.  According to Taylor on 
Sakhalin, the discussion in any event is purely theoretical 
at this point, as EM gas only spent $6 billion, and it will 
take until 2012 (when the bulk of the project should be up 
and running) to determine if the cost estimate was correct. 
It was not clear to Taylor why this old bit of news was 
surfacing now. 
 
15. (C) The situation with Sakhalin 2 is different.  Sakhalin 
2 is near the end of phase II of a two-phase project, and the 
cost overruns they cited a year ago in August were based on 
actual, not projected, overruns.  Sakhalin Energy agreed with 
the GOR on a $9.6 billion price tag for the project in May 
2003.  In the meantime, explains Greer, approvals took 
longer, steel prices rose, and contractor costs ballooned -- 
all of which put huge pressure on the budget.  By early 2004, 
it was already clear that costs would exceed $13 billion, and 
that estimate rose by early 2005 to almost $20 billion.  The 
public announcement of the cost overruns in August 2005 
(right after the Gazprom-Shell asset swap MOU was announced) 
was driven by public disclosure requirements associated with 
Shell acquisitions elsewhere in the world.  Since Sakhalin 2 
 
MOSCOW 00010984  004 OF 004 
 
 
is a full-cost recovery PSA (unlike Sakhalin 1 which is on an 
85 percent cost recovery basis and therefore is paying out 
some to the GOR) the overruns will delay the GOR's expected 
pay out date. 
. 
Comment 
------- 
. 
16. (C) It appears that EM's Sakhalin 1 project is much less 
exposed to GOR pressure tactics than is Shell's Sakhalin 2 
venture.  Moreover, the latest interest in the PSAs 
(including Total's Kharyaga project) is likely driven by a 
host of factors: the perceived unfairness by the Russians of 
the PSAs' terms, Gazprom's drive to get into these projects, 
intra-governmental rivalries, and the fact that foreign 
companies have majority control of significant energy 
projects at a time when this sort of deal structure is out of 
favor with the GOR.  Despite all of this, according to the 
people we have spoken to, this renewed attention will most 
likely stop well short of PSA revocation.  We are 
consistently hearing from EM and Shell, and for now we agree, 
that the best short-term course of action is to ride out the 
current tempest calmly, with little public comment, while 
continuing privately to let the GOR know we are watching.  A 
more aggressive strategy would be warranted if things take a 
turn for the worse in coming weeks, such as over EM's 
"dispute resolution" situation or over Shell's upcoming SEER 
court cases that will unfold in coming weeks that could throw 
Sakhalin 2 into crisis and embolden the Russian authorities. 
BURNS

Wikileaks

06MOSCOW10982, RUSSIA SUPPORTS ONE YEAR EXTENSION OF SUDAN PANEL

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Reference ID Created Released Classification Origin
06MOSCOW10982 2006-09-28 14:11 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0000
OO RUEHWEB

DE RUEHMO #0982 2711411
ZNY CCCCC ZZH
O 281411Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3200
INFO RUEHGG/UN SECURITY COUNCIL COLLECTIVE IMMEDIATE

C O N F I D E N T I A L MOSCOW 010982 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/28/2016 
TAGS: PREL PGOV UNSC SU RS
SUBJECT: RUSSIA SUPPORTS ONE YEAR EXTENSION OF SUDAN PANEL 
OF EXPERTS 
 
REF: STATE 162339 
 
Classified By: D/POL Colin Cleary.  Reasons: 1.4(B/D). 
 
(C)  In response to reftel demarche, Vladimir Safronkov, 
Chief of the UN Political Affairs Section in the MFA's IO 
Department, told us September 28 that the Russian delegation 
had already been instructed to support a one year extension 
of the Sudan Panel of Experts.  He said that Russia had no 
position on the addition of a fifth member to the Panel. 
BURNS

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06MOSCOW10861, RUSSIA’S “DEMOCRATS” IN DISARRAY

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If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #06MOSCOW10861.
Reference ID Created Released Classification Origin
06MOSCOW10861 2006-09-27 11:16 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO1735
PP RUEHDBU
DE RUEHMO #0861/01 2701116
ZNY CCCCC ZZH
P 271116Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3055
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 010861 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/18/2016 
TAGS: PGOV PINR RS
SUBJECT: RUSSIA'S "DEMOCRATS" IN DISARRAY 
 
REF: MOSCOW 10620 
 
Classified By: Ambassador William J. Burns: 1.4 (b, d). 
 
1.  (C)  Summary:  Russia's "democrats" remain in 
near-terminal disarray.  Personality disputes, disagreements 
over accommodating with the Kremlin, differences over the 
viability of political activity, and difficulties in 
political party registration undercut efforts aimed at 
uniting in advance of the 2007 Duma elections.  While some 
believe the Kremlin wants a unified democratic (or 
"rightist") opposition, if only for appearances sake, the 
democrats remain stymied by Yabloko chairman Yavlinskiy's 
insistence on a paramount leadership role.  In meetings with 
the Central Election Commission and other senior government 
officials, the Ambassador will continue to underscore concern 
over the failure of the Russian Republican Party under 
Vladimir Ryzhkov to be registered to date; separately, the 
democrats will need to make tough decisions about their 
political future.  End Summary 
 
2.  (C)  In recent introductory calls on Yabloko's Grigori 
Yavlinskiy and Republican Party's Vladimir Ryzhkov, a picture 
of disorganization, backbiting, and alleged pandering to the 
Kremlin emerged, further complicating the prospects of a 
unified democratic opposition capable of crossing the seven 
percent threshold to the Duma. 
 
------------------- 
"Democrats" divided 
------------------- 
 
3.  (C)  The real issue, according to Ryzhkov, is that there 
are three camps within the democratic opposition: those who 
despise Putin and "argue for war crimes tribunals" (Committee 
2008's Kasparov, former Prime Minister Kasyanov), who have 
scant public traction; those who are prepared to seek some 
degree of accommodation with the Kremlin (SPS' Belykh and 
Yabloko's Yavlinskiy) and in return allegedly receive party 
registration, under the table support, some access to the 
media, and occasional meetings with Presidential 
Administration Deputy Head Vladislav Surkov; and those, like 
Ryzhkov, who oppose Putin, but continue to play within a 
"managed" system and are denied party registration, as well 
as access to the media and Kremlin leadership.  While Belykh 
doubted whether a union of rightist parties would cross the 
seven percent Duma threshold, Ryzhkov optimistically argued 
that they could garner between 10-15 percent of a general 
vote.  However, Ryzhkov stressed that personality and 
attitude towards the Kremlin are significant hurdles to the 
otherwise rational calculus to unite. 
 
4.  (C)  First and foremost, Ryzhkov, Belykh and SPS Chubays 
all agreed, Yavlinskiy is a pill, and his leadership of a 
combined democratic opposition would be a bitter one for many 
to swallow, given his insistence that all other parties 
subordinate themselves to Yabloko and admit to the policy 
errors of their past.  Yavlinskiy himself told us that the 
other democratic opposition "will all come to me, they have 
no other option," given the amendments to the electoral law 
that encourage the consolidation of political parties.  In 
his meeting with us, Ryzhkov accused Yavlinskiy of promising 
to "deliver" a united rightist opposition to Surkov, thereby 
rounding out the political spectrum.  Yavlinskiy dismissed 
Ryzhkov as "a nothing," while insisting that if he had access 
to the media, Yabloko alone would draw 15 percent.  Political 
consultant Dmitri Oreshkin told us that it's "psychological" 
-- Yavlinskiy does not want to come into the Duma as part of 
a rightist union, but as the undisputed leader of the 
"democratic" forces.  When Duma member and Party of 
Entrepreneurs representative Oksana Alekseyeva was asked what 
was the main obstacle to a coalition of Russia's 
traditionally democratic parties, she said without 
hesitation: "Yavlinskiy." 
 
5.  (C)  Second, tactics among democratic parties diverge. 
The Other Russia conference organized in advance of the G8 
summit clarified the divisions: Yabloko and SPS rejected the 
conference outright -- Yavlinskiy declined to be one of a 
crowd, and Belykh said that he didn't like the company that 
the conference organizers were prepared to keep in order to 
show that opposition to Putin's Russia was alive and well. 
Outside observers, including Oreshkin, Indem President 
Georgiy Satarov and Ekho Moskvy chief editor Aleksey 
Vennediktov, endorsed the line that both parties chose to 
continue their tacit understanding with the authorities, 
according to which the Kremlin tolerates their fundraising 
and views them as politicians with whom they are prepared to 
do business.  As evidence of this tacit accord some point to 
Surkov's invitation of both Belykh and Yavlinskiy to a public 
roundtable debate on his conception of "sovereign democracy." 
 (In the case of SPS, Oreshkin argued that an additional 
 
MOSCOW 00010861  002 OF 002 
 
 
factor dictating compromise with the Kremlin was Chubays' 
focus on securing Administration support for the reform of 
RAO UES.)  While Ryzhkov endorsed the Other Russia 
conference, he subsequently repudiated Kasyanov's efforts to 
transform the conference into a party that would further 
Kasyanov's presidential bid.  The Republican Pa
rty will no 
longer attend Other Russia functions. 
 
6.  (C)  Finally, there are disagreements over the political 
landscape and room for maneuver in the presidential 
elections.  Yavlinskiy was dismissive of electoral politics 
-- predicting that Putin's inner circle would prevail upon 
him to remain in power for a third term; indifferent to the 
unification of leftist parties -- characterizing it a Kremlin 
project doomed to fail; and fatalistic about his role -- 
arguing that he was waiting "for the fall" of Russia and 
devoting his time to preparing the next generation of 
intellectual elite.  In contrast, Ryzhkov reiterated that he 
was prepared to play in the system and was actively working 
to establish credible party chapters, despite continuing 
difficulties with the election commission authorities, 
including the party's removal from the electoral list in 
Chechnya.  Ryzhkov believed that there was still political 
room for maneuver, and heralded the unification of leftist 
parties as a "positive development" since it weakened the 
hold of United Russia. 
 
----------------------- 
Ryzhkov's Moral Dilemma 
----------------------- 
 
7.  (C)  Ryzhkov acknowledged that unless he compromised with 
the Kremlin along the lines of Yabloko and SPS, there was 
little prospect of success for his party, which remains 
unregistered, and his political future.  While he accepted 
this intellectually, he noted that morally it continued to 
cause him pause.  Ryzhkov reiterated his rejection of the 
political stance of Kasyanov and Kasparov, stating that it 
was important to recognize Russia's political realities, and 
gave us the impression that he was leaning toward compromise 
with Yabloko and SPS.  Ryzhkov requested US assistance in 
underscoring concern over the difficulties faced by the 
Russian Republican Party in securing its registration.  While 
the CEC has until the end of the year to complete its review 
of the Republican Party, Ryzhkov predicted that the party's 
application would be rejected, following a series of 
"technicalities" that have plagued his party's efforts to 
organize over the last year. 
 
------- 
Comment 
------- 
 
8.  (C)  As the rightist parties continue negotiations, many 
observers believe that the Kremlin also seeks a union of 
democratic parties, if only to round out the political 
spectrum and provide legitimacy to the electoral process. 
Efforts by Republican Party and Yabloko regional leaders in 
Astrakhan (septel) to unite are indicative of pressures 
within both party structures to create viable political 
alliances, and last year's agreement between SPS and Yabloko 
to join forces secured the democrats a presence in the Moscow 
Duma.  The Ambassador will continue to raise the status of 
the Russian Republican Party in meetings with the Central 
Election Commission and senior government officials. 
BURNS

Wikileaks

06MOSCOW10855, RUSSIAN STOCK MARKET REPORT 2006

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Reference ID Created Released Classification Origin
06MOSCOW10855 2006-09-27 08:34 2011-08-30 01:44 UNCLASSIFIED Embassy Moscow

VZCZCXRO1497
RR RUEHLN RUEHVK RUEHYG
DE RUEHMO #0855 2700834
ZNR UUUUU ZZH
R 270834Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 3048
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHLN/AMCONSUL ST PETERSBURG 3409
RUEHVK/AMCONSUL VLADIVOSTOK 1676
RUEHYG/AMCONSUL YEKATERINBURG 1918
RHEHNSC/NSC WASHDC

UNCLAS MOSCOW 010855 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY COX/ALIKONIS/BAKER 
NSC FOR BROOKS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV RS
SUBJECT: RUSSIAN STOCK MARKET REPORT 2006 
 
REF: A. SUPPLEMENT TO 9/22/06 ECONOMIC WEEKLY 
 
     B. MOSCOW 6926 
 
1.  Since its consolidation in 1996, the Russian stock market 
has experienced growth that has led emerging markets and 
rivaled developed markets.  Capitalization was close to USD 1 
trillion by the end of August, compared to USD 346 billion at 
the end of August 2005, and USD 177 billion at the end of 
2003.  The Russian Trading System's (RTS) index of 40 common 
and 10 preferred shares climbed from its 1998 low of 40 to an 
all-time high of 1,765 in May. 
 
2.  Natural resource firms have fueled the vast majority of 
this growth, thanks to a favorable ruble exchange rate 
following the 1998 crisis and global increases in commodities 
prices.  The participation of foreign and domestic 
institutional investors is rising, as are market trading 
volumes and liquidity.  Perhaps the most unsung factor 
accompanying Russia's swelling market valuations has been the 
trend among established and emerging firms in Russia to raise 
primary market equity capital at home. 
 
3.  It is true that Federal Financial Market Service Chief 
Oleg Vyugin lamented that Russia's capital was "escaping" 
abroad when as much as 60 percent of trading in Russian 
stocks occurred on foreign exchanges in the 2003-2004 period. 
 It is also true that, in an effort to regain this capital, 
the FFMS instituted new rules in February to limit the 
percentage of new stock issuances that Russian firms can list 
abroad.  Nevertheless, the apparent preference among Russian 
firms for raising equity domestically had already 
materialized.  The decrease in net capital outflows during 
2005 suggests that a portion of the increasing volume of 
capital remaining in Russia is funding Russian companies 
(Reftel B).  Russian-sourced issuances in 2005 roughly 
doubled those of 2004.  More recently, Vyugin observed during 
the 10th Annual Renaissance Capital Conference in June that a 
bullish outlook on the market was justified.  He said the 
reason for optimism centered on results from 2005: growing 
capitalizations; an increase in household demand for 
ruble-denominated assets; and an increase in the number of 
non-resource firms that had completed equity issuances. 
 
4.  And now the rest of the story.  First, market 
capitalization remains highly concentrated in the energy 
sector.  Gazprom alone claims around 25 percent of total 
capitalization.  The next four largest firms account for 
another 40 percent.  The stock market's fortunes, 
consequently, have risen and fallen on traders' valuations of 
these firms.  Second, the GOR has approved a Financial Market 
Development Strategy to address systemic deficiencies that 
impede Russia's market competitiveness.  A top priority in 
this regard is the establishment of a central depository that 
would improve efficiency in settlement activity.  Since 
settlements can take months in some cases, many foreign 
investors opt to hold depository receipts.  Finally, the 
GOR's control over the shares of listed firms is 
considerable, although estimates vary on just how much market 
capitalization that is. 
 
5.  The Russian stock market, unlike the NYSE or the LSE, is 
not driven by the "small, individual investor" whose presence 
and diversified nature create "sticky stock prices" and more 
capably copes with financial fluctuations.  Although the 
Director of the Moscow Interbank Currency Exchange (MICEX) 
Aleksey Rybnikov has reported an increase in Russian 
investors trading in Russian equities, particularly after the 
liberalization in trading Gazprom shares last year, recent 
studies indicate that less than five percent of Russians own 
stocks or other financial investments.  Consequently, the 
Russian stock market is not yet "creating wealth" among small 
investors, as has happened in western markets.  This will be 
the next step on its path to becoming a major player in the 
global trading market. 
BURNS

Wikileaks