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PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHMO #3611/01 3471444
ZNR UUUUU ZZH
P 121444Z DEC 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1157
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 04 MOSCOW 003611 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958: N/A 
TAGS: PREL PGOV MARR PARM KNNP OREP RS
SUBJECT:  SCENESETTER FOR CODEL TAUSCHER 
 
Welcome to Russia 
 
Your visit to Moscow comes at a time of real disconnect in the 
U.S.-Russian relationship.  Disagreements over European security, 
Russia's role in its neighborhood, and the Kremlin's creeping 
authoritarianism were followed by the rupture over Russia's 
decision to send forces into Georgia and to recognize the breakaway 
 
regions of South Ossetia and Abkhazia.  Having tapped into 
substantial public disapproval of U.S. policies on Iraq, Kosovo, 
NATO enlargement, missile defense, and Georgia, President Medvedev 
and Prime Minister Putin enjoy broad popular support for Russia's 
more assertive foreign policy.  In his November 5 address to the 
nation, 
Medvedev sent an ill-tempered message to President-elect 
Obama, reprising a litany of complaints against the U.S. and 
threatening to deploy short-range nuclear missiles to Kaliningrad 
if the U.S. proceeds with missile defense plans.  While both 
Medvedev and Putin have left the door open to closer cooperation 
with the new U.S. administration, Russians believe the onus is on 
the U.S. to set a new tone and to "return to realism."   Never easy 
 
interlocutors, your Russian counterparts will push for a new U.S. 
approach to outstanding disputes. 
 
The Political Tandem 
 
More than six months after Medvedev's inauguration, questions remain 
 
about Russia's political succession.  As Prime Minister, Putin 
continues to play a dominant role, bestowing legitimacy on Medvedev 
 
and heading the ruling party, which enjoys a constitutional majority 
 
in the Duma.  Putin used a December 4 national press conference to 
dismiss rumors of early elections, but declined to speculate about 
his possible return to the Kremlin in 2012.  While Medvedev has 
focused on foreign policy, Putin has taken full responsibility for 
guiding Russia through the economic crisis.  It is an open question 
 
whether the political passivity that marked Russia's last eight 
years 
of constantly expanding wealth and economic growth will erode as 
Russians confront the reality of rock-bottom energy prices, 
plummeting 
foreign direct investment, and increasing unemployment.  At present, 
 
both leaders enjoy high popularity, with 59% of Russians expressing 
trust 
in Putin and 44% in Medvedev. 
 
While Medvedev campaigned on an agenda of economic and political 
modernization, Russia's democratic development remains stalled, 
with no institutional check on a powerful elite concentrated in 
the White House and Kremlin.  Civil society and human rights 
activists are under pressure to scale back their interaction with 
foreign donors and to restrict or curtail activity that 
questions the legitimacy or the decision-makingauthority of 
leaders.  "Opposition" political parties are loyal to the Kremlin, 
and the "real" opposition is both scarce and consumed by 
in-fighting. 
National television is state-owned and provides a diet of 
pro-government 
reports.  While small-circulation newspapers and magazines 
provide critical coverage and the Internet remains unfettered, 
journalists throughout the country have been threatened, beaten and 
 
sometimes killed for exposing corruption.  The Russian Orthodox 
Church, which is in the process of naming a new leader following 
the death of Patriarch Aleksey II, remains the dominant religious 
entity in the country, enjoying close ties and support from the 
government.  The revival of religious association since the 
collapse of the Soviet Union has been striking, with 71 percent 
of Russians identifying themselves as Orthodox. 
 
The Georgia Rupture 
 
While concerns over the economy have pushed Georgia into the 
background for the average Russian, the August conflict 
left an indelible imprint.  Russians rallied behind the 
government's decision to go to war against Georgia, 
outraged by the killing of Russian peacekeepers and 
South Ossetian civilians, as well as by the absence of 
international condemnation of Georgian actions. 
Saakashvili remains vilified as a war criminal, and few 
are persuaded that the U.S. did not provide a "green light." 
In provoking Georgia's attack, Russia secured its strategic 
objective of thwarting Georgia's near-term NATO membership 
and laid down an unsettling marker that it was prepared 
to use military means to assert its "privileged" interests 
 
MOSCOW 00003611  002 OF 004 
 
 
in its neighborhood.  The failure of any neighboring country 
to endorse Russia's recognition of South Ossetia and Abkhazia 
reflects the regional unease over a revanchist Russia. 
Russia has focused its diplomatic efforts on "Old Europe" 
and encouraged French President Sarkozy's diplomacy, 
calculating that Europe's significant economic ties and 
energy interdependence will erode a policy of "no business 
as usual" in response to the invasion. 
 
While Russia argues that Saakashvili "destroyed" Georgian 
territorial integrity, our goal is to keep the parties engaged 
in confidence building measures to improve security and provide 
for the return of refugees that, over the long-term, will 
allow Georgia to create the economic and political conditions 
to attract the breakaway regions back into its fold. 
While Russia has participated in the Geneva talks, with the 
next session scheduled December 17-18, it has threatened to 
cut short the process and has done little to rein in its 
clients on the ground, where security remains poor in the areas 
adjoining both South Ossetia and Abkhazia, with EU monitors 
prevent from entering either territory. 
 
The Foreign Policy Consensus 
 
Your record of critically questioning missile defense 
will be seized upon here, where there is a consensus 
across the political spectrum that Russia was "humiliated" 
during its period of acute weakness in the 1990's and that 
important gestures by Putin, including acceding to the U.S. 
abrogation of the ABM treaty and post-9/11 assistance in 
staging the war in Afghanistan, went unreciprocated. 
Many of your interlocutors will tell you that they see 
the U.S. as fundamentally intent on weakening Russia, 
including by "encircling" Russia in waves of NATO 
enlargement and by establishing U.S. basing and 
missile defense sites that over time could erode 
Russia's national security. 
 
We see no difference in approach between Putin and Medvedev, 
especially over the basket of European security issues, 
including missile defense, NATO enlargement, CFE, and Kosovo. 
Medvedev's "European Security Treaty," which received a chilly 
reception at the OSCE December Summit, is less a substantive 
initiative than a shot across the Euro-Atlantic bow that Russia 
is dissatisfied with the status quo.  Specifically, you will 
hear the following arguments: 
 
-- Missile Defense:  Russia expects the new U.S. 
administration to revisit missile defense plans in Europe, and 
will argue that its offer of cooperation at the Qabala radar 
facility in Azerbaijan was a missed opportunity to present a 
common front against Iran.  Russia's offer of cooperation was 
premised on the U.S. halting the development of radar and 
interceptor 
sites in the Czech Republic and Poland.  Russia rejects the physics 
 
driving the geographic selection of the two sites, and the U.S. 
decision to provide Poland with Patriot batteries has been pocketed 
 
as evidence of the "anti-Russian" nature of the program. 
Since October 2007, we have proposed a number of transparency and 
confidence-building measures to reassure Russia, providing 
extensive technical briefings on the threat from Iran as well 
as on the characteristics of the system, showing that it could 
not be effective against Russia's nuclear arsenal.  The latest 
round of talks will take place during your December 15 consultations 
 
in Moscow, with no breakthrough expected.  Moscow continues to 
insist that their experts be permanently stationed at the sites; 
something the two host countries cannot accept.  Additionally, 
Moscow 
has balked at the idea of reciprocal access to Russian sites for the 
U.S., 
Poles and Czechs. 
 
-- NATO:  Russia welcomed NATO's decision to resume 
engagement in the NATO-Russia Council post-Georgia as a 
"return to realism," continuing its policy of demanding 
greater cooperation even as it decries the security 
organization as an existential threat to Russian security. 
While NATO reaffirmed the Bucharest Declaration's pledge 
that Ukraine and Georgia will become NATO members, your 
Russian interlocutors will argue strongly that further 
enlargement risks direct military confrontation. 
Ukraine remains Russia's brightest redline, with 
Russian officials positing that NATO membership and 
NATO bases in Ukraine means that Russia could lose a 
conventional war.  Seventeen years after the collapse 
of the Soviet Union, we have yet to persuade the Russian 
body politic and populace that NATO is not a threat, 
 
MOSCOW 00003611  003 OF 004 
 
 
with Baltic and Polish rhetoric reinforcing the impression 
here that NATO is still an alliance directed against Russia. 
 
-- Conventional Forces in Europe Treaty:  Russians point 
to the CFE as the archtypal outdated security structure, 
premised on the Cold War division of Russia versus the 
rest of Europe.  Russia continues to maintain its December 2007 
suspension of its Treaty obligations and to press for 
ratification of the Adapted Treaty by the NATO signatories, 
while insisting on changes to the Adapted Treaty, such as 
elimination of the flank regime for Russia.  The U.S. continues 
to pursue a "parallel actions plan" that would culminate in 
ratification of the Adapted Treaty; however, Russia's 
recognition of Abkhazia and South Ossetia repudiate our 
operating premise that all Russian forces must leave all 
eorgian territory.  Even prior to the Georgia conflict, 
Russia rejected linkage of the Adapted Treaty 
to political commitments to remove its forces 
from Georgia and Transnistria, and is playing on European 
concern over the absence of a viable CFE to push for western 
compromise. 
 
-- European Security Treaty:  The Russian argument is 
that the failure of existing European security architecture 
to prevent the conflict in Georgia confirmed the 
need for a new European Security Treaty. 
 
The Economic Crisis 
 
The international financial crisis has replaced the 
war with Georgia as the defining issue for Russia's political 
class and public, with the "real economy" now taking a hit. 
The precipitous drop in oil, gas and other commodity prices, 
as well as the withdrawal of massive amounts of foreign investment, 
 
exposed the weaknesses in the Russian economy.  Prior to August 
2008, 
the Russian economy had been growing fast, with real economic growth 
 
of over 8% in 2007, a strong ruble, and record levels of foreign 
direct investment--$41 billion in 2007 alone.  Years of budget 
surpluses and rising oil prices had lifted the countryQs foreign 
currency reserves to almost $600 billion, third highest 
in the world.  August marked a clear turning point, when 
the stock market began to drop sharply, in response to 
hostilities with Georgia, slipping oil prices, and GOR 
statements intimating state interference in the economy. 
Money began to flow out of the country as investors sold 
their shares and Russians sold their rubles for dollars. 
By mid-September, the default by a pair of high-profile 
bank virtually froze lending activity, sending the stock 
market into meltdown. 
 
The most optimistic expectations for 2009 are that the 
economy will grow by 3 percent, although some experts 
are predicting no growth or even negative growth should 
oil prices remain low.  All told, the GOR has committed 
more than $200 billion in short-term and long-term funds 
to supply liquidity, recapitalize banks, and support 
domestic securities markets.  Nevertheless, tight 
credit markets at home and falling demand globally 
have forced a growing number of firms to cut production 
and staff.  While Medvedev pledged with his G20 partners 
to eschew protectionist measures in response to the crisis, 
Putin clarified that Russia would take whatever steps 
necessary to protect its national interests. 
Putin and Medvedev regularly attribute the Russian economic 
crisis to U.S. irresponsibility, and anti-Americanism 
could become a more prominent theme as the downturn 
intensifies in Russia. 
 
The Politics of Energy Dependence 
 
The energy sector remains central to the Russian economy, 
with the GOR failing to significantly diversify the Russian 
economy.  Putin succeeded in reasserting state control 
over the energy sector, arguing that private and western 
interests had Qtaken advantageQ of Russia in the 1990s. 
Today, the Russian government directly or indirectly controls 
the majority of production assets and directly controls the 
transportation networks.  The move toward greater government 
control over the sector included the high-profile bankruptcy 
and liquidation of Yukos oil company and the forced 
sale to Gazprom of 51% of the Sakhalin 2 consortium. 
A newly passed strategic sectors law includes amendments 
that place many large oil and gas deposits largely off-limits 
to foreign investors.  Currently, Russia produces just under 
10 million barrels per day, second only to Saudi Arabia. 
Since 2005, however, production has tapered off and will 
decline in 2008 due to inefficient state control and an 
 
MOSCOW 00003611  004 OF 004 
 
 
onerous tax regime. Russia is also by far the largest 
natural gas producer and has the worldQs largest gas reserves. 
State-controlled Gazprom dominates the sector, controlling 
85% of production, all exports and the gas transportation network. 
 
Gas production is stagnating as Gazprom has failed to 
adequately invest in new production areas. 
 
As an "energy superpower," Russia banks on European energy 
dependence to provide ballast to its relations with Europe, 
otherwise buffeted by criticism over Georgia and human rights. 
Russia supplies approximately one-half of European gas 
imports with some European countries completely dependent 
on Russia for their gas.  Russia, for its part, is dependent 
on Europe for virtually all of its gas exports, which 
provide some three-quarters of GazpromQs revenues.  Approximately 
80% 
of Russian gas exports to Europe travel through Ukraine, 
which itself has a tense energy (and political) relationship with 
Russia. 
The Russian-European interdependence in the gas area is a key factor 
 
in their broader relationship as Europe seeks to diversify its 
gas supplies and Russia seeks to diversify its export routes and 
markets. 
 
The Irritants: WTO and Jackson-Vanik 
 
Russia is the last major world economy that is not yet 
a WTO member.  RussiaQs years-long accession process 
neared the end game earlier this year but following the 
Georgian conflict once more looks to be delayed.  Russia 
has completed bilateral market access talks 
with all interested WTO members, except for Georgia. 
In RussiaQs multilateral accession document, only a few 
key issues, such as agricultural supports, remain unresolved. 
Following the outbreak of hostilities with Georgia in 
August and with the realization that Russia would not be 
ble to complete its entry process during 2008, senior GOR 
officials announced that Russia would reopen certain WTO 
commitments that it had agree to implement in advance of accession. 
 
Russia has reopened the U.S.-Russia Bilateral Agreement 
 on Meat (poultry and pork), with negative consequences 
for U.S. exporters.  U.S. and Russian trade and agriculture experts 
 are now consulting on the issue. 
 
While both President Medvedev and PM Putin have recently 
affirmed that Russia is still interested in WTO, the Russian 
governmentQs actions in reopening previous agreements is a 
step in the wrong direction and is making early accession 
less likely.  Anger over the protracted accession negotiations 
is matched by frustration over U.S. inaction in repealing 
Jackson-Vanik.  While repeal of Jackson-Vanik would be essential 
for U.S. exporters to gain the full benefits of RussiaQs WTO 
accession when it occurs, Russians view the continuation 
of the Soviet-era amendment as a sign of U.S. lack of respect. 
(The fact that Russia and Israel have implemented visa-free 
travel adds insult to injury.) 
 
The Bilateral Relationship 
 
You will have an opportunity to ask your Russian interlocutors 
for their vision of U.S.-Russian relations under a new U.S. 
administration, and how best to manage a relationship that 
will be defined as much by cooperation as by competition. 
We share an important agenda, with on-going cooperation in 
safeguarding and reducing nuclear weapons stockpiles, 
preventing the emergence of a nuclear Iran, countering terrorism, 
advancing peace in the Middle East, pushing North Korea to wind 
down its nuclear program, and working collaboratively in space 
on projects that advance health and understanding of climate change. 
 
Conclusion of a "123" agreement, set aside after the Georgia 
conflict, 
could open significant new cooperation and trade in civilian nuclear 
 
energy and build on our Global Nuclear Energy Partnership. 
We do not lack for a positive agenda, but will need to rebuild an 
architecture to our bilateral relationship that allows wide-ranging 
 
and candid engagement on all issues of concern. 
RUBIN