VZCZCXRO6992
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHRO #2257/01 2221500
ZNR UUUUU ZZH
P 101500Z AUG 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC PRIORITY 5592
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHKB/AMEMBASSY BAKU PRIORITY 0083
RUEHMO/AMEMBASSY MOSCOW PRIORITY 4282
RUEHFL/AMCONSUL FLORENCE PRIORITY 1632
RUEHMIL/AMCONSUL MILAN PRIORITY 7501
RUEHNP/AMCONSUL NAPLES PRIORITY 1736
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ROME 002257 
 
SIPDIS 
 
SIPDIS 
 
EUR FOR DAS BRYZA 
 
E.O. 12958: N/A 
TAGS: ENRG ECON ETRD RU IT
SUBJECT: ITALY'S TRADE AND INVESTMENT RELATIONS WITH RUSSIA 
 
ROME 00002257  001.2 OF 002 
 
 
¶1.  (U) Summary.  Italy and Russia are major trading 
partners, with the bulk of trade comprised of natural gas 
exports from Russia to Italy.  While the GOI has expressed 
concern over Italy's dependence on Russian natural gas, Italy 
has not yet aggressively pursued alternative sources of 
energy.  Italy and Russia are now finalizing an agreement on 
energy investment to open up energy markets to each other's 
investors.  Despite the risks associated with investments in 
Russia, and Italy's reliance on Russia for natural gas, Italy 
seems comfortable with the relationship.  End Summary. 
 
Italy-Russia Trade Figures 
-------------------------- 
 
¶2.  (U) The volume of trade between Italy and Russia has 
consistently increased over the past five years, except for a 
slight dip in 2002.  Italy's exports to Russia, dominated by 
machinery, were valued at 6.1 billion euros in 2005.  In 
2004, according to the Russian Institute of Statistics, Italy 
was the EU's second-largest exporter to Russia after Germany. 
 Italy's principal imports from Russia are petroleum and 
natural gas, in such volume that Italy's trade deficit with 
Russia reached 5.7 billion euros in 2005. 
 
Italy,s Foreign Trade with Russia (euro billion) 
(Source: Bank of Italy Annual Report) 
 
      Exports     Imports     Balance 
2001   3.5          8.5         -5.0 
2002   3.8          7.9         -4.1 
2003   3.8          8.2         -4.4 
2004   4.9          9.7         -4.8 
2005   6.1         11.8         -5.7 
 
¶3.  (U) Italy's total trade with Russia has increased from 12 
billion euros in 2003 to 17.9 billion euros in 2005, a gain 
of 48 percent.  In 2005, 9.3 billion euros (fully half of the 
total trade between the two countries) was comprised of 
Italian imports of Russian oil and gas.  Italy imports 30 
percent of its natural gas supply from Russia.  The 
importance of dependable access to Russian energy sources was 
underscored earlier this year, when the flow of natural gas 
from Russia via Ukraine was interrupted.  This drop in supply 
forced the GOI to dip into domestic - and then emergency - 
natural gas reserves, and raised the possibility that Italy 
might halt electricity exports to other EU countries to avoid 
blackouts within Italy.  Prime Minister Prodi said publicly 
in July that he was already worried about the reliability of 
gas supplies for the 2006-2007 winter. 
 
Italian Investment in Russia 
---------------------------- 
 
¶4.  (U) Italy is a net investor in Russia.  As of December 
31, 2004, the stock of Italian foreign direct investment in 
Russia was 251.6 million euros (Istat).  According to the 
Finance Ministry, official statistics probably significantly 
understate Italian foreign direct investment in Russia 
because many Italian companies invest in Russia through 
holding companies and joint ventures registered in third 
countries.  Investments made through foreign holding 
companies are not included in the official calculation of 
Italian foreign direct investment because such investments 
originate abroad. 
 
¶5.  (U) In recent months, the Italian and Russian governments 
have strengthened their economic and trade relations. 
 
-- During a June 20 visit to Moscow, Italian PM Prodi agreed 
to a "reciprocally satisfying" bilateral accord regarding 
energy markets with President Putin.  Subsequently, Italian 
oil and gas parastatal ENI and Russian parastatal Gazprom 
began finalizing an agreement in which ENI will acquire a 
stake in Gazprom's Barents Sea oil fields in exchange for 
selling Gazprom a stake in ENI's natural gas distribution 
system in Italy.  The agreement will create a collaborative 
relationship between Gazprom and ENI encompassing all aspects 
of the natural gas business, from extraction to distribution. 
 
 
-- The GOI has indicated it may agree to Russian investments 
in Italian electricity companies.  Enel, Italy's electricity 
parastatal, has finalized the purchase of a 49.5 percent 
stake (worth $105 million) in Russia's Rusenergosbyt 
 
ROME 00002257  002.2 OF 002 
 
 
electricity trading company, and has signed a cooperation 
deal with the Russian utility company UES. 
 
-- PM Prodi is enthusiastically promoting collaboration 
between Italian and Russian companies.  One such partnership 
is the agreement between Alenia Aeronautica, a subsidiary of 
Italian defense and aerospace group Finmeccanica, and Russian 
holding company Sukhoi; the two are in the initial phases of 
developing the Russian Regional Jet (RRJ) project, the most 
important civil aviation project in Russia at present. 
 
¶6.  (U) The GOI has acknowledged the risks of Italy's 
dependence on Russia for energy, and has stated that Italy is 
trying to diversify its sources of energy, statements 
seemingly at odds with ENI and ENEL investments in Russia. 
Finance Ministry officials explain this apparent discrepancy 
by noting that diversification is a long-term objective and 
is difficult, even with the fiscal and tax incentives being 
implemented to promote diversification.  Similarly, 
Giandomenico Magliano, MFA Director General for Multilateral 
Economic Affairs, has noted that increased Italian investment 
in the Russian energy sector enhances Italian energy security 
by increasing the quantity of natural gas Russia can export. 
 
Financial Exposure 
------------------ 
 
¶7.  (U) Russia is scheduled to pay off its Paris Club debt 
August 21.  Italy is Russia's second largest Paris Club 
creditor. 
 
¶8.  (U) Italian banks are beginning to enter the Russian 
market.  UniCredit, Italy's largest bank, has been authorized 
to take a 26 percent stake in the International Moscow Bank. 
 
¶9.  (U) SACE, Italy's official export credit insurance 
agency, has outstanding insurance exposure for trade with 
Russia of 2.9 billion euros.  This is SACE's second-largest 
exposure to a single country, exceeded only by that to Iran. 
SACE's coverage in Russia is without restrictions, meaning 
that SACE views investments in Russia as being only 
moderately risky.  SACE has partnered with Ingosstrakh, its 
Russian equivalent, in a cooperation agreement to allow 
increased information-sharing between the two.  SACE has also 
established an office in Moscow.  Lorenza Chiampo, a Manager 
of Economic Research and International Relations at SACE, 
acknowledged that risks are higher than SACE would like, but 
added that SACE is compelled to do business in Russia because 
of the many Italian firms interested in investing there. 
 
Comment 
------- 
 
¶10.  (U) Despite Italy's vulnerability to the trade imbalance 
and Italy's reliance on Russia for economically crucial 
energy supplies, Italy has nonetheless fully embraced its 
economic relationship with Russia.  Part of this active 
relationship is due to the commercial pressure of Italian 
traders and businesses, who see a lucrative market in Russia. 
 Another reason is that the GOI is so dependent upon Russian 
gas: the GOI has not aggressively pursued alternative sources 
of energy, and talk of diversifying Italy's energy sources 
have not translated into GOI action.  Instead, the GOI has 
actively promoted Italian investments in Russian upstream 
energy operations, while opening the door to Russia in 
Italy's downstream market.  End comment. 
SPOGLI