VZCZCXRO7155
PP RUEHDBU RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHMO #2472/01 1451719
ZNR UUUUU ZZH
P 251719Z MAY 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0642
INFO RUEHIT/AMCONSUL ISTANBUL PRIORITY 0681
RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEHLN/AMCONSUL ST PETERSBURG 4140
RUEHVK/AMCONSUL VLADIVOSTOK 2141
RUEHYG/AMCONSUL YEKATERINBURG 2456

UNCLAS SECTION 01 OF 04 MOSCOW 002472 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL PGOV ECON PARM ENRG RS
SUBJECT: CODEL NELSON/LOTT: SCENESETTER 
 
MOSCOW 00002472  001.2 OF 004 
 
 
¶1.  (SBU) Your visit comes at a vital juncture in 
Russian-American relations.  As Russia moves closer to 
succession in March 2008, the more complicated this 
relationship will be to manage.  There is a lot at stake: 
deepening cooperation in reversing North Korea's nuclear 
status and preventing the emergence of Iran as a nuclear 
power; building US-Russian leadership in the promotion of 
civilian nuclear energy and non-proliferation and energy 
security for producer and consumers alike; fighting 
terrorists and the ideology that motivates them; reinforcing 
promising trends like the growth of a middle class; and 
encouraging the development of civil society and democratic 
institutions, despite worrisome trends.  While differences 
over missile defense, Kosovo and Russia's treatment of its 
neighbors are real, high-level engagement is essential to 
advance our interests in areas of strategic importance. 
 
¶2. (SBU) Your visit follows on the recent consultations by 
Secretary Gates and Secretary Rice and will be followed by a 
 
SIPDIS 
meeting of Presidents Bush and Putin on the margins of the 
June 6 G8 summit in Potsdam.  Contacts between 
parliamentarians constitute an important channel of bilateral 
communication.  Congressman Lantos was here in February and 
is scheduled to hold a bilateral session with counterparts 
from the Duma in Washington in June.  Senator Lugar and 
former Senator Nunn are expected to travel to Russia in late 
August to commemorate the 15th anniversary of the Nunn-Lugar 
program.  Your interparliamentary dialogue with the 
Federation Council and your meetings with Russian leaders 
will serve to underline that commitment to engagement. 
 
Russia is Back 
-------------- 
 
¶3.  (SBU)  Buoyed by high energy prices and eight years of 
economic growth, the Russian elite sees a self-assured and 
economically dynamic Russia reassuming its place on the world 
stage.  The Russians view the world as full of possibilities 
-- the U.S. is focused on Iraq and Afghanistan; Europe is 
consumed with leadership transitions; and the Middle East 
offers opportunities to renew old ties while building new 
ties to countries like Saudi Arabia.  From the Kremlin's 
perspective, Russia's own neighborhood looks a lot better 
than it did a year ago, with NATO expansion less imminent and 
Ukraine's orange revolution fading.  Georgia's interest in 
NATO and insistence on restoring sovereignty over Abkhazia 
and South Ossetia, however, remain an issue for the Russians. 
 
Political Landscape 
------------------- 
 
¶4.  (SBU) Despite Russia's resurgence, the elite here 
maintains its peculiar mix of insecurity and cockiness.  Duma 
elections in December and the presidential succession are 
less than one year away.  While Putin's popularity hovers 
near 80%, authorities have hindered demonstrations by the 
opposition organization "Other Russia" in cities throughout 
Russia.  A series of election-related legislation has 
eliminated independent candidates and raised the bar to Duma 
representation from five to seven percent of the popular 
vote.  Still, it appears that at least four, and possibly 
five, parties will be represented in the next Duma.  A 
recently-created party, "For A Just Russia," although 
initially a brainchild of the Kremlin, shows signs of 
becoming a genuine political force. 
 
¶5.  (SBU) Looming larger than the Duma election contest is 
the 2008 presidential succession.  First Deputy Prime 
Ministers Sergey Ivanov and Dmitriy Medvedev are the front 
runners, but Putin has yet to indicate a preference and, in 
the interest of avoiding lame duck status, may not do so 
until after the December Duma elections. 
 
 
Economic Prospects 
------------------ 
 
¶6.  (U) The Russian economy has been growing steadily since 
the 1998 financial crisis, with annual GDP growth averaging 
7%.  Russia has an impressive fiscal surplus that reached 
7.4% of GDP in 2006, bolstered by high global prices for its 
oil, natural gas, and metals exports.  To help protect 
against a sharp drop in energy prices, Russia has accumulated 
a $113 billion Stabilization Fund.  Russia's foreign debt is 
5.1% of GDP, down from 75.7% of GDP in 1999.  Reserves have 
topped $380 billion. 
 
MOSCOW 00002472  002.2 OF 004 
 
 
 
¶7.  (SBU) The EU represents Russia's largest trading partner, 
driven largely by Europe's dependence on Russian oil and 
natural gas, but also by Russia's booming demand for European 
machinery and consumer goods.  Russia also maintains 
significant trade with China.  Although still a relatively 
small percentage of Russia's total, trade with the U.S. grew 
by 20 percent last year, and investment was up more than 50 
percent.  Some notable recent successes include Amway, whose 
sales reached $250 million after only two years here; Alcoa, 
with over $300 million invested in two aluminum fabricating 
facilities; International Paper, which is investing an 
additional $400 million here in a 50/50 joint venture with 
Ilim Pulp; and Ford, with over $500 million already in its 
St. Petersburg auto plant.  U.S. finance and service 
companies are also investing here, including Citibank, the 
largest foreign bank in Russia, with 38 branches servicing 
over 400,000 clients. 
 
¶8.  (SBU) World Trade Organization.   There are few events 
more likely to help our exporters than getting Russia into 
the WTO on terms we can live with.  The Russian Government is 
pushing hard to complete its decade-long WTO accession 
process, but significant issues remain.  Russia must complete 
multilateral negotiations, and fulfill its bilateral 
obligations to the U.S., spelled out in our November, 2006, 
market access agreement, including better IPR protection and 
market access for U.S. agricultural products.  You will meet 
with Economic Development and Trade Minister Gref, a strong 
proponent of free trade, who shares Putin's resolve to decide 
the issue during his tenure.  Gref will likely raise the 
constraints of the Jackson-Vanik Amendment. 
 
¶9.  (SBU) Trade and Investment Challenges.  Investors in 
Russia have long requested clear guidelines on the sectors in 
which they can invest.  A draft Law on Foreign Investment in 
Strategic Sectors is now moving through the legislative 
process, and should help improve the situation.   The same is 
true for long-awaited amendments to Russia's Subsoil Law, 
which will clarify which energy deposits foreigners may own. 
The subsoil restrictions would align legislation with the 
current 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. 
 
¶10.  (SBU) Promising Sectors.  Despite increased Russian 
Government control over the energy sector, Chevron and 
Gazprom Neft have formed a joint venture to work in West 
Siberia; Lukoil and ConocoPhillips continue to expand their 
partnership; and energy service companies are doing very 
well.  Gazprom CEO Alexey Miller, whom you will meet, is a 
longtime confidante of President Putin, having worked for him 
in St. Petersburg.  In the aircraft manufacturing and sales 
sector, Russia is working to revive its own manufacturing 
capabilities, but is also looking to update its aging fleets. 
 Boeing has been working hard over the past two years to win 
a share of that market. 
 
Emerging Middle Class 
--------------------- 
 
¶11.  (SBU) The emerging middle class is becoming one of the 
most important trends in Russia today.  Real incomes have 
gone up 70 percent in seven years.  The average Russian earns 
an annual salary of an estimated $4570, with Moscow's 15 
million inhabitants earning roughly twice that figure.  And 
at least another third of wages are "grey" - unreported and 
untaxed.  Most experts place the upper class at one percent 
of the population, the middle class - 20 percent, the 
lower-middle class - 65-70 percent, and 10-15 percent live in 
poverty.  The emerging middle class eventually will likely 
want a voice and vote in how their country is governed and 
how their tax dollars are spent. 
 
Energy Security 
--------------- 
 
¶12.  (SBU) Russia faces two broad challenges: getting its 
hydrocarbons out of the ground, and delivering them to the 
market.  For this, the Russian energy sector will need 
billions of dollars in investment.  Russia has capital and 
know-how, but will need additional foreign capital and 
specialized know-how.  The ability of Russia to attract and 
hold investors will depend greatly on the GOR's steps toward 
rule of law, transparency and good corporate governance. 
 
 
MOSCOW 00002472  003.2 OF 004 
 
 
¶13.  (SBU) We are involved in discussions with Russia on 
energy security issues both bilaterally through an energy 
dialogue and through the G-8.  Our messages are that Russia, 
the world's largest producer of hydrocarbons, has an 
obligation to provide reasonable leadership on key components 
of global energy security, including predictable, pro-market 
regulatory and tax regimes and diversification of sources and 
transit routes.  Key energy security issues such as these 
were agreed by Russia and other G-8 leaders in last year's 
St. Petersburg Plan of Action. 
 
Nuclear Cooperation 
------------------- 
 
¶14. (SBU) You will have a meeting with Rosatom Director 
Sergey Kiriyenko.  Much progress has been made on 
U.S.-Russian nuclear energy cooperation over the past year. 
The U.S. and Russia have formed a Civil Nuclear Energy 
Working Group to help align our respective nuclear energy 
proposals.  Negotiations on a 123 Agreement are ongoing and, 
to date, have been fruitful and the U.S. Russia Global 
Initiative to Combat Nuclear Terrorism, launched at the G8 in 
2006, has grown to 30 countries. 
 
¶15.  (SBU) U.S.-Russian cooperation on nuclear 
nonproliferation remains robust, with work proceeding well to 
meet the aggressive schedules for completing nuclear security 
work outlined in the Bratislava Presidential initiative.  The 
Nunn-Lugar program will celebrate its 15th anniversary this 
year.  Under the Elimination of Weapons Grade Plutonium 
Production program, DOE and Rosatom are moving closer to the 
goal of shutting down two plutonium production reactors in 
¶2008.  With respect to the Plutonium Disposition program, 
Russia has recently expressed a plan that it feels is 
financially and technically credible and discussions with 
Washington are ongoing.  On the heels of the 2006 signing of 
the protocol on liability and the reaffirmation of commitment 
to the program by Director Kiriyenko, there is reason for 
cautious optimism for a mutually acceptable program. 
 
Security and Nonproliferation Issues 
------------------------------------ 
 
¶16.  (SBU) Missile Defense.  Russia's opposition to the 
planned deployment of U.S. missile defense assets in the 
Czech Republic and Poland has been intense - and highly 
public.  The Russians reject our analysis of the future 
Iranian threat, believing the placement of interceptors and 
radars in Poland and the Czech Republic is provocative, and 
distrust our long-term intentions.  Secretary Gates has 
proposed cooperation, there will be an experts meeting in 
June, and Secretaries Gates and Rice will meet their 
counterparts in the fall to continue high level discussions. 
 
¶17. (SBU) Conventional Forces in Europe (CFE) Treaty.  In his 
April 26 State of the Federation address, Putin declared that 
a "moratorium" on Russian compliance with CFE would be 
necessary until NATO countries ratify the adapted treaty. 
Russia rejects NATO members' insistence that Russia first 
complete its Istanbul Commitments of removing remaining 
troops from Georgian and Moldovan territory before NATO 
members ratify the Adapted CFE Treaty.  Foreign Minister 
Lavrov, terming the status quo "absurd," called on May 23 for 
an extraordinary CFE Conference. 
 
¶18.  (SBU) NATO.  Russia's neuralgia about the prospect of 
Ukrainian entry into NATO has eased somewhat as Ukraine 
struggles with its internal political situation.  Russia 
strongly opposed the establishment of Intensified Dialogue 
for Georgia.  Your visit coincides with the Federation 
Council's passage of the NATO/PFP-Russia Status of Forces 
Agreement (SOFA) on May 24, following the Duma approval on 
May 23.  Passage sends a positive message on the 5th 
Anniversary of the NATO-Russia Council.  A SOFA will remove 
the stumbling block to joint exercises that precipitated the 
fall 2006 cancellation of the bilateral Torgau military 
exercise. 
 
¶19.  (SBU) Sanctions.  The U.S., in July 2006 and again in 
December, imposed INPA (Iran Nonproliferation Act, now known 
as the Iran, North Korea, and Syria Nonproliferation Act) 
sanctions against Rosoboronexport, the Russian 
government-supported arms agency that oversees all arms 
exports.  The GOR regards the sanctions as an attempt to 
undercut the Russian arms industry and deprive it of what 
Russian leaders see as legitimate markets.  Your 
 
MOSCOW 00002472  004.2 OF 004 
 
 
interlocutors will argue that this is an extraterritorial 
application of U.S. law and their sales do not violate 
international law or UN sanctions. 
BURNS