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FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1169
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 05 MOSCOW 003616 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958: N/A 
TAGS: PREL PGOV ECON EAGR MARR PARM KNNP OREP RS
SUBJECT: Scenesetter for Senator Lugar's Visit to Russia 
 
Welcome to Russia 
----------------- 
 
¶1.  (SBU)  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.  However, both 
Medvedev and Putin have left the door open to closer cooperation 
with the new U.S. administration, with Medvedev using his December 
12 meeting with Dr. Kissinger to express "optimism" about prospects 
for relations with the Obama administration.  Nevertheless, you can 
expect to hear that 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 and will ask for your estimate of the new President. 
 
The Political Tandem 
-------------------- 
 
¶2.  (SBU)  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 Putin at 70 percent and Medvedev at 54 percent 
approval; 59 percent of Russians express "trust" in Putin and 44 
percent in Medvedev. 
 
¶3.  (SBU)  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-making authority of 
leaders.  "Opposition" political parties are loyal to the Kremlin, 
and the "real" opposition is both scarce and consumed by 
in-fighting.  Television is state-owned or controlled 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.  (Yuliya 
Latynina, a journalist at Ekho Moskvy Radio -- where you will be 
interviewed -- received the Defender of Freedom Award by the 
Secretary for bucking self-censorship on the tough issues of 
leadership corruption and Georgia.)  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 
------------------- 
 
¶4.  (SBU)  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 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.  Since the invasion, Russia has focused its diplomatic 
 
MOSCOW 00003616  002 OF 005 
 
 
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 Georgia conflict. 
 
¶5.  (SBU)  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 prevented from entering either territory. 
 
The Foreign Policy Consensus 
---------------------------- 
 
¶6.  (SBU)  We see no difference in approach on foreign policy 
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.  As you know well from your 
previous visits, Russians across the political spectrum nurture a 
grievance over their perceived humiliation during Russia's period of 
acute weakness in the 1990's and argue 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 Russians insist that the U.S. is 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. 
 
¶7.  (SBU)  At the Carnegie conference and Spaso celebration marking 
the 15th Anniversary of the Trilateral Agreement, you will have an 
opportunity to engage the cardinals of Russia's arms control 
community on next steps in our stewardship of nuclear weapons, as 
well as to draw your interlocutors out on Medvedev's objectives in 
advancing a new European Security Treaty.  You will hear the 
following arguments: 
 
-- Post-START:  There is almost unanimity within the Russian 
strategic affairs community that arms control must resume its 
central place in U.S.-Russian relations.  The GOR maintains that 
negotiating and ratifying a post-START Treaty is feasible by the end 
of 2009 assuming cardinal changes in U.S. positions; Lavrov recently 
reaffirmed that Russia does not want to rely on a five-year 
extension of the existing START Treaty.  In addition to seeking a 
legally binding treaty, Russia wants all warheads and delivery 
vehicles (including those being modified for conventional weapons) 
to be counted, and insists that all strategic weapons be located 
only on national territories.  While Russia has called for further 
cuts in nuclear inventories, as essential to maintain international 
support for NPT leading up to the 2010 review conference, Lavrov has 
maintained a healthy public skepticism of the Global Zero 
initiative. 
 
-- 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 conclude on December 15, 
with no breakthrough expected.  Moscow continues to insist that 
their experts be permanently stationed at the sites; something the 
two host countries do not 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 
 
MOSCOW 00003616  003 OF 005 
 
 
brightest redline, with Russian officials positing that NATO 
membership and NATO bases in Ukraine (sic) 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, 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 archetypal 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 Georgian territory.  Even prior to the 
Georgia conflict, Russia rejected linkage of the Adapted Treaty to 
political commitments to remove its forces from Georgia and Moldova, 
and is playing on European concern over the absence of a viable CFE 
to push for western compromise. 
 
-- European Security Treaty:  Medvedev has trumpeted the failure of 
existing European security architecture to prevent the conflict in 
Georgia as proof of the need for a new European Security Treaty, but 
has yet to elaborate his concept.  While officials argue that they 
are not seeking to undermine NATO, the security gambit is clearly 
aimed at foreclosing any further expansion of NATO towards Russia's 
borders.  Key elements of the initiative include "equal security 
guarantees" for the states of the Euro-Atlantic area; development of 
a "uniform interpretation of the principles of security" for states 
and relations between them, including inadmissibility of the use of 
force; the abandonment of claims by individual states or their 
groups to exclusive rights to the maintenance of peace and security 
in the Euro-Atlantic area; the determination of basic principles for 
development of arms control regimes and military build-up; new 
cooperation in countering the spread of WMD, terrorism, drug 
trafficking and other kinds of transnational organized crime; and, 
elaborating uniform approaches to the principles, procedures and 
mechanisms of conflict prevention and settlement.  How Russia's 
invasion of Georgia squares with the inadmissibility of the use of 
force has not been clarified by the Russian leadership. 
 
The Economic Crisis 
------------------- 
 
¶8.  (SBU)  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 percent 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 country's 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 
banks virtually froze lending activity, sending the stock market 
into meltdown. 
 
¶9.  (SBU)  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 Agricultural Dimension 
-------------------------- 
 
¶10.  (SBU)  While Russia produced a record grain harvest of more 
than 102 million metric tons in 2008, the financial crisis is having 
a significant impact.  Forty percent of investments in agriculture 
are dependent on credit, and several banks have stopped financing 
 
MOSCOW 00003616  004 OF 005 
 
 
new agricultural projects.  Short-term credit for working capital is 
scarce, and as a result some experts believe that by the spring of 
2009 up to twenty percent of Russian agricultural enterprises might 
go bankrupt, primarily small producers of crops and dairy products. 
In addition to credit woes, domestic grain producers are suffering 
from low prices due to Russia's record harvest and limited export 
markets.  Deputy Prime Minister Victor Zubkov has approved emergency 
government measures including export subsidies, but the proposed 
measures have not been finalized yet. 
 
¶11.  (SBU)  Russian politicians recognize that the disruption in the 
supply of agricultural or food products might have dramatic effects 
on the economic and social stability of the country.  In efforts to 
restore confidence, Agriculture Minister Gordeyev took charge of a 
working group consisting of the six largest banks financing the 
agriculture sector.  There is an agreement that banks will reduce 
their loans to the agricultural sector, but priority projects and 
funds to support production will continue.  Furthermore, hoping to 
reduce the impacts of the crisis, the Ministry of Agriculture has 
spent 75 percent more (an additional $2.2 billion) than the original 
2008 agriculture budget to subsidize credit, feed, fertilizer and 
fuel. 
 
¶12.  (SBU)  The current financial crisis may help the Russian 
Ministry of Agriculture to push forward its efforts to secure more 
control over the agricultural markets under the guise of food 
security.  While gross agricultural output in 2007 was estimated at 
approximately RUR 2.02 trillion ($72 billion), a 3.3 percent 
increase over 2006, Russia is lagging far behind its production 
targets for meat, poultry and dairy products.  The government 
intends to undertake urgent measures to improve the situation for 
these commodities.  Some of the recent actions de-listing U.S. 
poultry and pork facilities and the efforts to amend the meat TRQs 
are consistent with Minister Gordeyev's desire to bolster domestic 
production by managing import competition. 
 
The Politics of Energy Dependence 
--------------------------------- 
 
¶13.  (SBU)  The energy sector remains central, given Russia's 
failure to significantly diversify the economy.  Putin succeeded in 
reasserting state control over the energy sector, arguing that 
private and western interests had "taken advantage" 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 percent 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 onerous tax regime. 
Russia is also by far the largest natural gas producer and has the 
world's largest gas reserves.  State-controlled Gazprom dominates 
the sector, controlling 85 percent of production, all exports and 
the gas transportation network.  Gas production is stagnating as 
Gazprom has failed to adequately invest in new production areas. 
 
¶14.  (SBU)  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 Gazprom's 
revenues.  Approximately 80 percent 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 Perennial Irritants: WTO and Jackson-Vanik 
--------------------------------------------- - 
 
¶15.  (SBU)  Russia is the last major world economy that is not yet a 
WTO member.  Russia's years-long accession process neared the end 
game earlier this year, but has been derailed by the Georgian 
conflict.  Russia has completed bilateral market access talks with 
all interested WTO members, except for Georgia.  In Russia's 
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 able to complete its entry process during 2008, 
senior GOR officials announced that Russia would reopen certain WTO 
commitments that it had agreed to implement in advance of accession. 
 Russia already has reopened the U.S.-Russia Bilateral Agreement on 
Meat (poultry and pork), with negative consequences for U.S. 
 
MOSCOW 00003616  005 OF 005 
 
 
exporters, and has indicated that it may reopen agreements on 
harvesters as well. 
 
¶16.  (SBU)  While both President Medvedev and PM Putin have recently 
affirmed Russian interest in WTO, the Russian government's 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 Russia's 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 implemented visa-free 
travel this year adds insult to injury.) 
 
The CTR Pillar: Still Standing Strong 
------------------------------------- 
 
¶17.  (SBU)  Despite strains in bilateral relations, our longstanding 
cooperation on nuclear nonproliferation remains strong.  We have 
made significant progress in our joint efforts to secure nuclear 
materials, recover radiological sources, and minimize the use of 
highly enriched uranium.  In your meetings with General Verkhovtsev 
and Rosatom Director Kiriyenko, you can note that we have completed 
upgrades at more than 90 percent of the Russian nuclear warhead 
sites of concern, including all 39 Russian Navy nuclear sites and 
all 25 Russian Strategic Rocket Forces sites, with work underway at 
nine 12th Main Directorate sites to be completed by the end of 2008. 
 In addition, we have secured 181 buildings containing hundreds of 
metric tons of weapons-useable Russian nuclear material at 11 
Russian Navy reactor fuel sites, seven Rosatom Weapons Complex 
sites, six civilian (non-Rosatom) sites, and 12 Rosatom civilian 
sites. This year, two Seversk weapons-grade plutonium reactors were 
shutdown in April and June, six months ahead of schedule.  We are 
also actively pursuing the closure of the Zheleznogorsk reactor 
ahead of the projected 2010 schedule, thereby eliminating a combined 
total of 1.2 MT of plutonium annually and permanently shutting down 
the last remaining plutonium production reactors in Russia.  In 
partnership with Russia, we have returned almost 765 kilograms 
(enough for over 30 nuclear weapons) of Soviet-origin highly 
enriched uranium from vulnerable sites around the world. 
 
The Unfinished Business: 123 
---------------------------- 
 
¶18.  (SBU)  Rosatom Director Kiriyenko understands that by pulling 
the 123 Agreement from Congress, the Administration saved it from 
congressional repudiation.  Nevertheless, Kiriyenko was dismayed 
that the decision was characterized in the White House statement and 
press as punishment over Georgia.  While we have reiterated that 
cooperation on nuclear security and nonproliferation remains a top 
priority, Kiriyenko will want to hear whether and when the U.S. will 
be prepared to move forward with a 123 that can facilitate the 
global nuclear partnership that we have explored undertaking. 
 
The Bilateral Relationship 
-------------------------- 
 
¶19.  (SBU)  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.  The expiration of the START Treaty 
in December 2009 for better or worse will place arms control 
squarely back on the U.S.-Russia agenda.  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.  The Russian leadership 
appreciates the initiative and vision that you have brought to 
U.S.-Russian relations, and we expect your visit to be a productive 
one. 
 
Beyrle