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DE RUEHNO #0643/01 3001306
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O 271306Z OCT 06
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C O N F I D E N T I A L USNATO 000643 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 10/26/2016 
TAGS: ECON EPET NATO PGOV RU UP
SUBJECT: NATO ECONOMICS COMMITTEE: "HEADS" AND "SECURITY & 
DEFENSE ECONOMICS IN RUSSIA/UKRAINE/FSU" REINFORCED 
MEETINGS 10-13 OCT. 
 
 
Classified By: DCM Rick Olson for Reasons 1.4 (B) and (D). 
 
¶1.  (C) Summary: The NATO "Heads of Economic Intelligence" 
was convened by Defense & Economic Security Director Patrick 
Hardouin who reviewed the Committee's program over the past 
year. He then turned to the issue of the UK,s decision not 
to support the Committee's work in future and how to better 
support the International Military Staff (IMS) and Capitals. 
He proposed that innovations were necessary concerning 
working methods so that economic intelligence is an integral 
part of the agreed Strategic Military Requirements.  The 
"Heads" reviewed their intelligence priorities with the 
majority putting Russia and energy security at the top of 
their list followed by counter-terrorism. Support for the 
Economic Committee and its work program was nearly unanimous. 
 
 
      (C) Summary Continued: The 11-13 October meeting on 
"Russia/Ukraine/FSU Defense-economics" reflected mounting 
concern over the energy security situation of NATO members 
(read EU), Moscow's pressure on Ukraine and Georgia and 
continued worrisome trends in democracy-building in the FSU, 
and the moribund state of economic reform in most of Central 
Asia. Progress on the US defense cost-estimating model 
"NOBEL" was also reviewed. Participation was outstanding with 
about 50 representatives attending and numerous papers and 
briefings were presented. 
 
¶2.  (C) Chairman Hardouin opened the annual NATO "Heads" 
meeting with a review of the Committee's work over the past 
year including experts meetings and papers on Terrorism 
Finance, Afghanistan's Reconstruction, Developments in the 
Balkans, Economic and Security Developments in the Middle 
East (including Iraq), and the special January meeting on 
Ukrainian Energy Security.  He then turned to the matter of 
the UK's decision not to support the Committee's work in 
future and asked if the Committee's work was still relevant 
to the International Military Staff (IMS) and Capitals and if 
not what needed to be done. 
 
¶3.    (C) IMS representative Adm. Clayton (UK) explained that 
the IMS still needs the full operational package on its areas 
of current or potential military operations. It needs, for 
example, to know about economic trends in Afghanistan, Iraq 
and the Balkans, and progress on reconstruction of key 
economic infrastructure. Moreover, in preparation for future 
conflicts NATO needs to know what infrastructure should be 
targeted or spared for post-war recovery and urged that the 
Economic Committee's work be continued. 
 
¶4.    (C) Delegates from NATO countries having small 
intelligence efforts including Bulgaria, the Baltics, Poland 
and Turkey explained that the papers from reinforced meeting 
were very valuable to their governments given their own 
limited analytical resources. Other delegations also strongly 
supported the Committees work, particularly on "energy 
security", "Russian defense-economic policies",  "FSU 
criminal/organized crime", "Caspian energy" and "terrorism 
finance".  It was clear that many believed the Committee's 
work is all the more important because of the disturbing 
negative political and economic trends in Putin's Kremlin. 
Some noted that given the continued political uncertainty in 
Ukraine, events in Georgia, Moldova,s fragile economic 
situation and retrograde policies prevailing in Belarus it 
was no time for NATO to curtail its defense-economic 
analysis. There was also considerable consternation among the 
newer NATO members over Russia using its energy resources as 
a tool of its foreign policy, not only with the EU but also 
with its FSU neighbors, especially in Central Asia. 
 
¶5.    (C) The Chairman proposed that innovations were 
necessary concerning working methods in order to implement 
NATO requirements that economic intelligence and analysis 
become an integral part of the agreed NATO Strategic Military 
Requirements.  The innovations included: 1) greater and more 
timely exchanges of written products; 2) more intensive use 
of NATO's BICES computer system as a method of more rapidly 
disseminating intelligence information; and 3) increased use 
of ad hoc reinforced Economic Committee meetings on issues of 
immediate concern.  In response, the US mentioned ongoing 
"write for release" programs and efforts to obtain BICES 
terminals in analytical workspaces and encouraged the 
Committee and delegations to do the same.  The US mentioned 
attendance at ad hoc meetings might run into funding 
problems, but most other delegations strongly supported the 
idea of ad hoc meetings. 
 
¶6.    (U) The "Security and Defense Economic Developments in 
Russia, Ukraine/FSU meeting opened 10 October with two 
excellent unclassified presentations, one by Dr. Rousso, 
 
 
Chief Economist of the EBRD on "Escaping the Resource trap: 
Market Reform and Political Governance in the Resource Rich 
Countries of Eurasia" and the other by Prof. Alain Blum who 
briefed on "The Impact of Russian and Regional Demography on 
Economic and Social Stability". 
 
¶7.    (C) The classified sessions on political/economic 
trends in Russia and Ukraine were especially particularly 
dynamic, focusing on Russia's increasing willingness to use 
of its energy and trade leverage--some used the term 
"weapon"--in its relations with the newer NATO members and 
within the FSU especially in view of Russia-Georgia tensions. 
 Russia's continued move towards a more statist economic 
policy and the fallout on its neighbors--both FSU and EU also 
generated a lot of discussion. 
 
¶8.    (C) Representatives from Poland, the Baltics, Hungary, 
Slovenia, and the Czech Republic presented briefings and 
papers describing the trends in Russia's energy sector, the 
impact of the energy windfall on Moscow's economic policies 
and its use of energy leverage for political ends. They also 
discussed the many negative experiences in doing business 
with private Russian companies and the influence exercised 
over firms by the Russian government and by Russian criminal 
elements.  The US presented a briefing and paper on 
"Russia/Algeria/Iran: Seeking More Clout in the EU Gas 
Market?". Germany's paper on "Russia as a Major Energy Power" 
was quite pessimistic on the overall negative impact that 
sudden oil wealth is having on the Russian political scene 
and how government, FSB and criminal elements are merging to 
run Russia. 
 
¶9.     (C) The impact of Russia's energy windfall on the 
budgets of the MOD and other security-related forces was 
briefed by the UK which also offered two excellent papers 
analyzing actual defense and law enforcement spending in 2005 
& First Half of 2006 and the budgets/projected outlays for 
these ministries in 2006 & 2007.  These papers note that 
while the MOD's budget has increased substantially over the 
past five years, inflation has taken a big bite and in real 
terms the increases are more modest, albeit still 
significant.  There is also increasing evidence that 
inflation in the defense procurement sector is even higher 
than in the civilian economy.   The paper also notes that the 
published 2006 MOD defense budget data is becoming less 
informative than in previous years. The UK also presented 
papers on Ukrainian defense spending and on the economy of 
Belarus. 
 
¶10.   (C) The US delegation presented an update on its work 
on the joint US/UK/Denmark "National Order of Battle 
Life-cycle Cost Estimator (NOBLE) defense expenditure-costing 
model. Recent and future model improvements were covered, as 
were Ruble and Dollar defense cost estimates for 2004-2015. 
The NOBLE estimate was then compared with Russia's defense 
goals according to Russia's "Urgent Tasks" report with the 
finding that the goals could not be met unless the defense 
burden rises to 6 percent of gross domestic product.  The 
written report was posted to NATO's LOCE computer system. 
 
¶11.   (C) During the Chairman's wrap-up session many 
delegations expressed their appreciation for the meeting's 
excellent agenda focusing on the Russia/FSU-NATO big picture 
and how Moscow's economic policies are directly impacting 
NATO members.  A number of experts expressed how pleased they 
were to have the opportunity to attend this unique gathering 
of intelligence analysts where they could have such a frank 
and dynamic exchange of views and information. 
OLSON