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PP RUEHLN RUEHVK RUEHYG
DE RUEHC #5587/01 1441742
ZNR UUUUU ZZH
P 231731Z MAY 08
FM SECSTATE WASHDC
TO RUEHMO/AMEMBASSY MOSCOW PRIORITY 1129
INFO RUEHLN/AMCONSUL ST PETERSBURG PRIORITY 3024
RUEHVK/AMCONSUL VLADIVOSTOK PRIORITY 1454
RUEHYG/AMCONSUL YEKATERINBURG PRIORITY 1461
RUEHGV/USMISSION GENEVA PRIORITY 2124
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS SECTION 01 OF 05 STATE 055587 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG ETRD PREL RS
SUBJECT: U.S. AND RUSSIA LAUNCH ECONOMIC DIALOGUE 
 
¶1. (SBU) Summary: In its first formal meeting, the 
U.S.-Russia Economic Dialogue reviewed areas of mutual 
interest on investment, trade and energy.  U/S Jeffery and 
First DFM Denisov fostered a warm and informative exchange of 
views on such topics as open investment, sovereign wealth 
funds, and energy efficiency, with each delegation's experts 
clarifying specific points.  The two delegations shared ideas 
for setting up a business-to-business dialogue, with the hope 
of a kick-off meeting in fall 2008.  The highlight of the day 
was a drop-by visit by the Secretary, who underscored the 
importance of the dialogue to the President's Strategic 
Framework agreed April 6 in Sochi.  Denisov expressed his 
hope that the Dialogue would serve as a bridge between 
political transitions in both countries and invited U/S 
Jeffery to Moscow in late fall for the Economic Dialogue's 
next meeting.  End Summary. 
 
¶2. (SBU) The inaugural U.S.-Russia Economic Dialogue took 
place April 28, 2008 in Washington.  Under Secretary for 
Economic, Energy and Agricultural Affairs, Reuben Jeffery 
III, and Deputy Foreign Minister Andrey Denisov co-chaired, 
with the participation of interagency delegations.  This 
dialogue was the first tangible outcome of the Strategic 
Framework Agreement, issued by Presidents Putin and Bush in 
Sochi April 6, and is the first of three dialogues to be 
launched as a part of the Framework (the others are a private 
sector business and energy dialogues).  The day-long agenda 
included a presentation on the U.S. economy (led by the 
President's Council of Economic Advisors); a discussion of 
open investment policy (led by the NSC, State and Treasury), 
and which included a review of the status of Bilateral 
Investment Treaty (BIT) exploratory talks; and third country 
investment issues.  USTR reviewed the status of Russia's WTO 
accession, and Treasury introduced the topic of sovereign 
wealth funds (SWFs).  After a brief visit by the Secretary of 
State and a break for lunch, the dialogue resumed with a 
discussion of energy efficiency and an exchange of views for 
the structure of the business-to-business dialogue. 
 
¶3. (U) USG Participants in the Dialogue were: Under Secretary 
of State for Economic, Energy and Agricultural Affairs Reuben 
Jeffery III; Principal Deputy Assistant Secretary of State 
for Economic Affairs Elizabeth Dibble; NSC Senior Director 
for Russia Mary Warlick; Deputy Assistant Secretary of State 
for Europe David Merkel; Director of the State Department 
Office of Russian Affairs Ian Kelly; Assistant Secretary of 
the Treasury for International Affairs Clay Lowery; Assistant 
U.S. Trade Representative for WTO and Multilateral Affairs 
Matt Rohde; Assistant Secretary of Commerce for Market Access 
and Compliance David Bohigian; Senior NSC Director Economic 
Affairs John Herrmann; Director of the State Department 
Office of Investment Affairs Wes Scholz; Deputy Assistant 
U.S. Trade Representative for Investment Josh Kallmer; 
Director of the Treasury Office of International Monetary 
Policy Robert Kaproth; Deputy Assistant Treasury Secretary 
for Investment Security Nova J. Daly; Deputy Assistant 
Secretary of Energy Al Hegburg; Deputy Assistant Secretary of 
State for Energy, Sanctions and Commodities, Doug Hengel; 
Administrator of the DoE Energy Information Administration 
Guy Caruso; Eurasia Energy Envoy C. Boyden Gray; Principal 
Deputy Assistant Secretary of Energy for Energy Efficiency 
and Renewable Energy John Mizroch; Science Advisor to the 
Secretary of State Nina Fedoroff. 
 
¶4. (U) Participants on the Russian side were: Andrey Denisov, 
First Deputy Minister of Foreign Affairs (MFA); Aleksandr 
Kislov, Counselor to the First Deputy Minister of Foreign 
Affairs; Nikolay Smirnov, Deputy Director MFA North American 
Department; Second Secretary, MFA Department of Economic 
Cooperation; Elena Danilova, Counselor to the Minister of 
Economic Development and Trade (MEDT); Dmitriy Sazhin, Deputy 
Director of Foreign Economic Relations Dept, MEDT; Petr 
Kazakevich, Deputy Director of International Financial 
Relations, State Debt, and State Assets, Ministry of Finance; 
Yuri Ushakov, Russian Ambassador to the United States; 
Aleksey Shishayev, Economic Counselor, Russian Embassy; 
Aleksandr Bratchikov, Economic Attache, Russian Embassy; 
Andrey Dolgorukov, Russian Trade Representative; Mr. Dmitry 
Babakhin, Deputy Trade Representative; Mr. Aydar Shakirov, 
Deputy Division Head, Office of the Trade Representative. 
 
¶5. (U) A review of the individual sessions of the Dialogue 
follows in paras 6-21. 
 
STATE 00055587  002 OF 005 
 
 
 
--------------------- 
Overview of Economies 
--------------------- 
 
¶6. (SBU) Dr. Donald Marron of the President's Council of 
Economic Advisers, reviewed the state of the U.S. economy. 
He emphasized the Administration's $150 billion stimulus 
package and averred that our fundamentals remain strong, that 
our flexible labor market and sophisticated capital markets 
are key elements to a quick recovery.  Key to the recovery 
will be export growth that can offset negatives in 
residential investment and excess inventory, particularly in 
the auto industry.  DFM Denisov said that Russia was prepared 
to expand its role in the global economy, including working 
multilaterally through Bretton Woods institutions.  He stated 
that one area of concern in Russia is inflation due to high 
fuel and food prices, but added that officials hope to 
address this without resorting to direct central government 
intervention.  In her presentation on the Russian economy, 
MEDT advisor Elena Danilova concluded that although the U.S. 
and Russian economies are not closely tied presently, the 
U.S. is a major economic partner for Russia. 
 
--------------- 
Open Investment 
--------------- 
 
¶7. (SBU) Senior NSC Director John Herrmann began by noting 
the underpinnings for U.S. investment policy stem from the 
President Bush's May 2007 Statement on Open Economies and are 
also reflected in the G8 Heiligendamm statement, with an 
important emphasis on national treatment.  The U.S. wants to 
work with Russia on a bilateral investment treaty (BIT) and 
in the G8 to achieve international acceptance of an open 
investment policy.  Herrmann noted that there is much work to 
do, as the threat of protectionism has not died.  Treasury 
A/S Clay Lowery acknowledged that the Dubai Ports World case 
generated concerns about growing protectionism in the U.S. 
In response, the USG has: reiterated its commitment to open 
investment policies (President Bush's Statement on Open 
Investment); came to consensus with Congress on amendments to 
the Committee on Foreign Investment in the United States 
(CFIUS) that will make the Executive branch more accountable 
for reviews of inward investment to the U.S. based on 
national security concerns; and sought to engage foreign 
countries, in particular on policy work on Sovereign Wealth 
Funds and by concluding BITs.  Lowery emphasized that the new 
CFIUS legislation did not establish a national screening 
mechanism, but would lead to more scrutiny of transactions 
involving state-owned enterprises. 
 
¶8. (SBU) In response, DFM Denisov said Russia on the whole 
shares these approaches, but that there are differences 
related more to the level of economic development than to 
ideology.  Improving the investment climate is a key element 
of modernizing Russia's economy, adding that our two-way 
investment flows, while good, could be much, much stronger. 
DFM Denisov lamented that U.S. investments into Russia are 
concentrated in the commodity sector and that none were 
directed to the industrial base.  This is because companies 
have different priorities than the government.  Russia needs 
to diversify its economy, he said.  The GOR is trying to 
connect Russian domestic industries to world markets, Denisov 
said.  Russia needs investment from the U.S. to develop its 
industrial sector, including technology transfers. 
 
¶9. (SBU) U/S Jeffery pointed out that there are two aspects 
to a company's investment decision: the economic and 
commercial aspects of the deal, and the political/rule of law 
issues, such as the strength of property rights, contract 
sanctity, and the integrity of the judicial system.  All of 
these issues come into play with a BIT, which gives 
assurances to both sides that these issues are addressed in a 
systematic way. 
 
¶10. (SBU) Josh Kallmer (USTR) and Wes Scholz (State's Office 
of Investment Affairs) then reviewed progress on exploratory 
BIT talks.  Kallmer described how the USG model BIT is 
designed to strengthen the investment climate by protecting 
investment (e.g. free transfer of foreign exchange, 
international law standards for expropriation), market access 
(non-discriminatory treatment provided to investors apart 
from exceptions listed in the annex to the agreement), and 
dispute resolution (providing investor-state arbitration). 
Concluding a BIT is a good opportunity to put bilateral 
investment on a solid international plane, he said.  Scholz 
 
STATE 00055587  003 OF 005 
 
 
said the U.S. was very pleased with the atmosphere at the 
initial exploratory BIT meeting in Moscow in mid-February, 
where negotiators identified non-discriminatory treatment 
(national treatment, most-favored-nation treatment) as 
potentially the most significant difference between our 
respective model BITs.  The Russian delegation undertook to 
draft a paper comparing the respective BIT models 
(subsequently received May 6), and Scholz noted U.S. 
eagerness to schedule the next meeting to continue 
discussions in Washington. 
 
¶11. (SBU) DFM Denisov and MEDT Advisor Danilova then 
described the complex structure of Russia's 
investment-related agreements, including BITs, the Energy 
Charter Treaty, Economic Partnership Agreements, Customs 
Unions with CIS states, and prospective WTO commitments. 
Danilova explained the Russian model BIT does not cover 
market access, and contains a provision capping BIT 
commitments at the level of Russia's WTO commitments.  Russia 
does not want to undermine its WTO or OECD commitments by 
entering into special arrangements, Denisov said (NOTE: 
referring to most-favored-nation commitments under the 
WTO/OECD.  END NOTE).  Scholz noted that when the U.S. opens 
its economy, it tries not to do so on a discriminatory basis. 
 Thus, if the USG provides a further opening in a BIT which 
goes beyond GATTS, it does not worry about which other 
country might benefit. 
 
--- 
WTO 
--- 
 
¶12. (SBU) U/S Jeffery underscored the importance of Russia 
joining the WTO as soon as possible, ideally by the end of 
2008, and noting that Russia's WTO accession was also a high 
priority of President Putin's administration.  A/USTR and 
lead U.S. negotiator for Russia's WTO accession Matt Rohde 
stressed the enormous amount of technical work accomplished 
on the draft Russia Working Party report over the past year. 
The remaining issues for Russia were not insurmountable, he 
said.  In response to Russian delegation questions on 
Permanent Normal Trade Relations (PNTR) with the U.S., U/S 
Jeffery said the best time to seek a PNTR vote in the U.S. 
Congress would be shortly after Russia completes all the 
accession work.  Concluding bilateral market access 
agreements with Georgia and Saudi Arabia are also necessary 
for Russia's accession. 
 
------------------------ 
Third Country Investment 
------------------------ 
 
¶13. (SBU) NSC Director Michael Smart discussed our mutual 
interest in pursuing high-standard bilateral investment 
treaties with third countries.  Smart highlighted recent 
trends in Russia's outward investment, including significant 
growth in annual flows, their increasing geographic and 
sectoral diversity, and the economic benefits of those 
investments to home and host countries.  He stressed that 
high-standard international investment agreements would help 
protect these investments.  Smart concluded that our mutual 
interest in such agreements presents an opportunity to work 
together to promote global growth, open investment regimes, 
and fair treatment of foreign investment.  The Russian 
delegation concurred with this premise. 
 
---------------------------- 
CFIUS/Sovereign Wealth Funds 
---------------------------- 
 
¶14. (SBU) Nova Daly, Treasury DAS for Investment Security, 
provided an overview of new draft regulations for the 
Committee on Foreign Investment in the United States (CFIUS) 
and the Foreign Investment in the United States Act of 2007 
(FINSA) regulations.  DAS Daly noted that since the Dubai 
Ports World case many changes have occurred in CFIUS.  He 
stated that during 2005-2007, CFIUS reviewed 325 cases, 85% 
which were cleared during the initial 30-day investigation 
period.  During that same period, only 15 cases went to 
45-day investigation.  FINSA came into effect in October 
2007, and affirms CFIUS's narrow focus on national security 
concerns and not on protection of U.S. industries.  With 
regard to foreign government-controlled transactions, DAS 
Daly stated the law creates a presumption of investigation 
for covered transactions; however, the investigation 
requirement can be waived if the Secretary of the Treasury 
and an equivalent official at the lead agency determine that 
 
STATE 00055587  004 OF 005 
 
 
the transaction would not impair national security.  On April 
21, 2008, CFIUS released the draft FINSA regulations for 
45-day public comment.  The proposed regulations define 
several of the terms in FINSA (including "covered 
transaction" and "foreign government control"), list 
information required of filing parties, and set out the 
mechanics of the filing process. 
 
¶15. (SBU) Despite being invited to do so, the Russian 
delegation did not make a presentation on Russia's Law on 
Strategic Sectors.  Instead, DFM Denisov gave the floor to 
Petr Kazakevich of the Ministry of Finance who made a 
presentation on Sovereign Wealth Funds or SWFs (slides 
e-mailed to Embassy Moscow.)  MEDT Advisor Danilova stressed 
the importance of Russian SWFs in the Russian domestic market 
and in attracting long term investment in the Russian 
economy.  Robert Kaproth, Director of Treasury's Office of 
International Monetary Policy, advanced four points on SWFs: 
utilizing "best practices" are in the best interests of both 
SWFs and recipient nations; the U.S. also has an SWF (the 
Alaska Permanent Fund); Russia has been constructive in the 
IMF process in arriving at common practices; and Russia has a 
good story to tell with regard to SWFs. 
 
------------------------------------- 
Secretary Rice Addresses the Dialogue 
------------------------------------- 
 
¶16. (SBU) The Secretary stopped by the dialogue to welcome 
the Russian delegation and deliver brief remarks.  She noted 
she was pleased that the Economic Dialogue was being 
launched, as it was the first tangible outcome of the Sochi 
Strategic Framework issued by both presidents just three 
weeks earlier.  There is nothing more important than keeping 
economies on firm footing, she said, as it is of paramount 
importance to all citizens.  Government has a role to play, 
but the private sector is the primary engine for growth and 
free capital flows.  Respect for the rule of law will ensure 
that investment flows both ways, she noted.  As to the 
U.S.-Russia trade relationship, the United States is 
committed to seeking PNTR once Russia's WTO accession work is 
completed.  Secretary Rice also said that our economic 
partnership should cover a range of activities, including 
science, technology, and innovation, noting the participation 
in the dialogue of State Department Science Advisor Nina 
Fedoroff.  The Secretary said the Economic Dialogue is an 
opportunity to mobilize the talents of people on science and 
technology, which can provide growth to the world economy. 
 
¶17. (SBU) In response, DFM Denisov said he was pleased that 
the foreign ministries were taking the lead role to support 
the Economic Dialogue, along with the cooperation of many 
other economic ministries.  This leadership will help ensure 
the Dialogue continues and this channel of communication can 
help smooth relations during the changes of administration in 
both countries.  While this group has the good fortune to 
work on non-politicized issues, Russia and the U.S. still 
have disagreements on other issues, Denisov said.  However, 
the spirit of cooperation shown in our Economic Dialogue can 
help foster collaborative work on a range of important 
economic topics, such as Sovereign Wealth Funds, investment, 
and trade. 
 
------ 
Energy 
------ 
 
¶18. (SBU) After EIA Director Guy Carruso gave an overview of 
world energy markets, Special Envoy Gray addressed the St. 
Petersburg Energy Principles.  Gray noted that 90% of the 
world's oil is controlled by governments, but that 
investments in energy won't happen unless there is a 
guaranteed rate of return and an attractive investment 
climate.  If market forces are not respected, he said, they 
will find a way to make themselves felt.  Gray touched on how 
the market is driving companies to pay attention to climate 
change, forcing them to invest in green technologies such as 
clean coal.  Gray said he believes Russia will benefit from 
the growing LNG market and resulting commoditization of 
natural gas.  He noted that Europe does not have completely 
free energy markets and called on Russia to reduce its gas 
flaring and price caps on gas. 
 
¶19. (SBU) DFM Denisov made a pitch for the return of a formal 
energy dialogue, as it could increase predictability and 
stability, both globally and bilaterally.  Topics for 
discussion could include: investment in the energy sector; 
 
STATE 00055587  005 OF 005 
 
 
support for key energy infrastructure projects; and support 
to global security by reinforcing diversification of energy 
transport routes.  He did not exclude the possibility of 
liberalizing upstream investment in Russia, which he claimed 
was happening in Russia more quickly than in Saudi Arabia. 
Denisov said some Western companies have permission to 
develop fields, but Russia wants to be careful because its 
economy depends on energy.  As a result, Russia must be very 
careful about liberalizing the Gazprom monopoly.  Russia is 
interested in alternative fuels, such as nuclear energy and 
bio fuels, all of which have potential for innovation from 
Russia's strong science base, but he noted the intense 
competition between food and fuels.  Danilova stressed the 
benefits of state-controlled solutions to problems, such as 
increased regulations and management controls, more 
regulation of financial markets in energy development and new 
financial instruments, as well as new federal institutions to 
control the energy sector. 
 
----------------------------------- 
Business-to-Business (B2B) Dialogue 
----------------------------------- 
 
¶20. (SBU) Department of Commerce A/S for Market Access and 
Compliance David Bohigian discussed U.S. ideas for a B2B 
dialogue that would include the participation of eight to ten 
CEOs from each side and two to three non-governmental 
participants from business organizations.  A/S Bohigian 
provided DFM Denisov with a white paper and draft terms of 
reference (TOR) and asked that the Russian side provide 
comments by mid-May on the proposed structure.  A quick 
response was necessary to begin a transparent CEO selection 
process this summer, Bohigian said, and to give business 
participants time to meet in early fall to develop 
recommendations for government.  The U.S. would seek a first 
meeting of B2B dialogue in October.  NSC Senior Director for 
Russian Affairs Mary Warlick and NSC Senior Director for 
Economic Affairs John Herrmann both reinforced the U.S. 
desire for early Russian feedback and stressed the 
desirability of a strong B2B process. 
 
¶21. (SBU) DFM Denisov said Moscow supported the business 
dialogue and suggested that one of the Russian NGO partners 
might be an association of top Russian investors to the U.S., 
since the Russian Chamber of Commerce or the Russian Union of 
Industrialists and Entrepreneurs might not be active and 
flexible dialogue partners.  Denisov expressed doubts that 
the Russian side would be prepared by mid-May to comment, but 
thought that Commerce Secretary Gutierrez and Minister of 
Economy Nabiullina could discuss next steps at the June St. 
Petersburg Investment Forum.  Russia had a number of 
intergovernmental commissions, Denisov observed, but now 
sought a better framework for business dialogue.  Danilova 
strongly advocated establishing an intergovernmental 
"bilateral commission" that would provide a 
presidentially-mandated structure for interagency 
coordination and be empowered to implement recommendations 
from the business community, particularly at the sub-federal 
level, she said. 
 
¶22. (SBU) Comment:  Both sides viewed the first Economic 
Dialogue in a very positive light.  The atmospherics were 
good and both sides had a frank exchange of views, making 
clear areas of agreement (such as on SWFs) and differences in 
perspective (e.g. the role of government in promoting 
investment or on BITs).  While the Russian side was 
well-prepared, at several points Russian views were not 
completely in sync.  For example, the Ministry of Finance rep 
promoted the outward investments of SWFs and said nothing 
about inward investment, while the MEDT rep stressed the 
importance of domestic investment by SWFs.  MEDT seemed quite 
seized with a governmental commission leading the B2B; 
Denisov did not seem to insist on such a structure. 
Differing comments among GOR agencies also exposed the 
internal debates between market-based solutions versus 
government-driven industrial policy, such as during the 
energy discussion.  Also curious was the lack of engagement 
by the Russians on the Law on Strategic Sectors and on CFIUS, 
even though the GOR had indicated its interest in discussing 
these issues in preparatory meetings. 
RICE