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

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