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Reference ID Created Released Classification Origin
07MOSCOW1377 2007-03-29 11:37 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow


DE RUEHMO #1377/01 0881137
O 291137Z MAR 07

C O N F I D E N T I A L MOSCOW 001377 
E.O. 12958: DECL: 03/27/2015 
Classified By: Charge d'Affaires Daniel A. Russell for reasons 1.5 (b/d 
1. (C) On behalf of the Ambassador, we look forward to your 
arrival, and offer the following overview of our commercial 
relationship with Russia.  You may want to read also the 
Ambassador's scenesetter for Foreign Minister Lavrov's last 
visit to Washington (referenced above), which provides 
insight into the overall bilateral relationship, Putin and 
the political scene, and the challenges before us.  Now in 
its ninth year, Russia's economic boom continues to impress, 
as evidenced by the record number of American businesses 
entering the Russian market, driving our trade and investment 
relationship strongly forward.  Against this backdrop, we 
find the Russian Government in the midst of an effort to 
finish the work of President Putin's economic agenda in the 
twelve months remaining in his administration.  At the top of 
the list is Russia's entry into the WTO, which Putin has 
personally advanced at critical moments over the past year. 
A close second, in the context of our bilateral relationship, 
has been Putin's desire to push ahead with U.S.-Russian 
civilian nuclear cooperation.  No less pressing for the 
Kremlin has been the desire to see Russian firms establish 
themselves as international players. 
2. (C) These three themes will play again and again in your 
meetings here.  On WTO, your interlocutors are looking for 
signs of USG support for the accession process, even as we 
push for IPR protection and a more predictable basis for 
trade in agricultural and other products.  On civilian 
nuclear cooperation, efforts to complete the uranium 
suspension agreement will be seen as important progress 
towards a headline Presidential goal.  Our message of openess 
to investment (including Russian investment) pairs nicely 
with an equally blunt message that it is time for Russia to 
put its own house in order, be it the completion of the legal 
framework for investment, restraint in the administration of 
tax and environmental regulation, or the need to slow 
corruption's steady advance here.  Despite the often 
difficult discussions surrounding trade and investment, 
bilateral commercial relations remain one of the strongest 
forces for positive change in Russia as well as ballast in 
our challenging political relationship.  2007 is the year we 
should push our bilateral trade well past the $25 billion 
mark, and your visit gets us off to a good start. 
3. (C) The Numbers and the Firms Behind Them.  U.S. trade and 
investment is expanding rapidly across Russia, boosting 
prosperity and disseminating American business values. 
Bilateral trade grew by 20 percent last year, and investment 
was up more than 50 percent.  In an important shift, energy 
no longer dominates our trade and investment story to the 
exclusion of all else.  Among the more notable recent U.S. 
successes in Russia are Amway, whose sales reached $250 
million after only two years here; Alcoa, with over $300 
million invested in two aluminum fabricating facilities; P&G, 
which employs over 20,000 Russians; AmGen, who recently 
marked the entrance of U.S. biotech pharmaceuticals to 
Russia; International Paper, which is investing an additional 
$400 million here in a 50/50 joint venture with Ilim Pulp; 
Ford, with over $500 million already in its St. Petersburg 
auto plant; and even Ralph Lauren, the first U.S. fashion 
house to launch its brand in Russia. 
4. (C) WTO.  The push is on inside the Russian Government to 
bring Russia's decade-long bid for the WTO to a close in the 
next twelve months, and there are few events more likely to 
help our exporters than getting Russia into this organization 
on terms we can live with.  The Russians have an enormous 
amount of work left, including a potentially indigestible 
level of political concessions they will need to face soon. 
We have tough WTO-related issues that must be raised, but you 
may also wish to take this opportunity to signal our support 
for their aspirations and our intention to keep pace with 
them this year.  Your primary interlocutor, Minister Gref, is 
fully engaged in the negotiations and shares Putin's resolve 
that the issue be decided during his tenure.  Other 
interests, particularly in the agriculture sector, are 
however clearly working to avoid accession altogether. 
5. (C) Challenges to Our Trade and Investment Relationship. 
Investors have long been awaiting a clearer understanding of 
where they can and cannot invest in Russia.  Your visit comes 
just as the draft Law on Foreign Investment in the Strategic 
Sectors finally shows signs of moving ahead.  There is much 
in the draft we can live with, the bigger point being that 
some rules would be better than the free-for-all firms face 
now.  Same goes for long awaited amendments to the Subsoil 
Law, which will make clear whi
ch deposits foreigners may own. 
 The subsoil restrictions would align that legislation with 
the current non-legislated practice of prohibiting foreign 
firms from holding majority stakes in projects with fields 
over 510 million barrels of oil or 50 billion cubic meters of 
gas.  The two efforts appear to be on a parallel and linked 
passage track, and could use a nudge from our quarter. 
6. (C) Energy as a Special Case.  Despite increased Russian 
Government control over the sector, it is worth noting that 
U.S. majors are involved in several high-profile deals and 
that below-the-radar deals are becoming more common.  We 
suspect that behind all this activity is a renewed awareness 
here of Russia's need for western expertise -- most urgently 
on the gas side -- as it moves to exploit the offshore and 
the eastern half of the country, as well as the enormous 
Barents Sea gas field, Shtokman.  Nothing is easy, of course 
-- Caspian Pipeline (CPC) expansion has been elusive and the 
Sakhalin-2 firesale worried many.  Nevertheless, our 
companies tell us that they can work as minority 
stakeholders, and there are promising signs marking the way 
forward: domestic gas prices are set to rise to European 
levels by 2011 (a move we have long advocated); Chevron and 
Gazprom Neft have formed a joint venture to work in West 
Siberia; Lukoil and ConocoPhillips continue to expand their 
partnership; smaller oil companies have increasing room to 
grow; and energy service companies are doing very/very well. 
7. (C) Aircraft Manufacturing and Sales as Another Special 
Case.  We are already into our sixteenth month of Boeing 
advocacy, and hard as it may be to believe, this game just 
got more interesting.  The government is knee deep in an 
effort to revive Russia's once-proud aviation sector, but 
knows companies like Aeroflot can't wait forever to renew 
their aging fleets.  Last week's quasi "purchase" by Aeroflot 
of 22 A350s, rather than closing the door on Boeing, is being 
characterized to us by senior officials as a new opportunity 
to make the 787 sale.  That sale alone is worth nearly the 
entire volume of U.S. exports to Russia in 2006.  Your visit 
to the Boeing design center and advocacy signals our 
understanding of this odd, but not necessarily bad, 
situation, and will help pave the way for the Russians to 
allow Aeroflot to buy Boeing, too. 
8. (C) Nuclear Cooperation.  Beyond the immediate issues of 
Iran and North Korea, there continues to be real potential 
for broader U.S-Russia nuclear cooperation.  The President's 
Global Nuclear Energy Partnership tracks conceptually with 
Putin,s own proposal for an international network of fuel 
enrichment centers; both envisage expanding nuclear energy 
while minimizing proliferation risks.  Negotiations continue 
on a civilian nuclear cooperation framework agreement 
(commonly known as a "123" agreement) that Rosatom Director 
Kiriyenko optimistically hopes to initial during his May 
visit to Washington.  Negotiations are also ongoing to amend 
the existing "suspension" agreement in order to work out new 
terms for Russian access to the U.S. uranium market.  David 
Spooner will try to close on the latter during your visit. 
9. (C) Your Interlocutors.  You need no introduction to your 
primary interlocutors - Ministers Gref, Khristenko, Kudrin, 
and Rosatom's Kiriyenko are by now all familiar faces for 
you.  Natural Resources Minister Trutnev is central to our 
energy relations, given the role his environmental watchdog 
agency played in the Sakhalin II situation, and the pending 
environmental inspection of ExxonMobil's Sakhalin I 
operations.  Just below the layer of top leadership we have 
asked for you to see are the two most "almost declared" 
candidates for Presidency here, Sergey Ivanov and Dmitriy 
Medvedev.  The latter is fresh from his international coming 
out party at Davos, but has yet to project the aura of 
authority that would garner the support of some of the 
shadowy hard-liners close to Putin.  Sergey Ivanov has just 
had his palate considerably widened to include most 
industrial policy, and while he is forceful, he isn't exactly 
a man of the people.  Your meetings are an important 
opportunity to try and continue to vest each of them with a 
stake in our broader bilateral relations. 


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