VZCZCXRO0967
RR RUEHCN RUEHDBU RUEHGH RUEHIK RUEHLN RUEHPOD RUEHSK RUEHSL RUEHVC
RUEHYG
DE RUEHVK #0098/01 2650300
ZNR UUUUU ZZH
R 220300Z SEP 09
FM AMCONSUL VLADIVOSTOK
TO RUEHC/SECSTATE WASHDC 1208
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUEHVK/AMCONSUL VLADIVOSTOK 1313

UNCLAS SECTION 01 OF 03 VLADIVOSTOK 000098 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL MARR ECON ENRG EPET ETRD EIND ECIN
EINV, RS, CH, JA 
SUBJECT: SCENESETTER FOR VISIT OF EUR/RUS DIRECTOR KYLE SCOTT TO 
VLADIVOSTOK 
 
VLADIVOSTO 00000098  001.2 OF 003 
 
 
¶1. (SBU) Summary:  Consulate General Vladivostok warmly welcomes 
you to the Russian Far East (RFE).  You are coming to a region 
rich in investment opportunities for U.S. firms, especially as 
Vladivostok builds new infrastructure in the run-up to APEC 
¶2012.  Such investment from U.S. firms would be welcome in this 
part of Russia, where anti-Americanism is less prevalent.  Our 
military-to-military relations are recovering from the August 
2008 conflict in Georgia, with a regular schedule of US Navy and 
Coast Guard port visits.  While in the RFE, you will get an 
opportunity to discuss oil production on Sakhalin.  You will 
also get a chance to examine Sino-Russian and Russo-Japanese 
relations away from the politics of the capitals, and see how 
individuals in the border regions interact.  End summary. 
 
--------------------------------------------- ----- 
Economic and Business Opportunities for U.S. Firms 
--------------------------------------------- ----- 
 
¶2. (SBU) The vast potential for cooperation between the United 
States and Russia in the Russian Far East remains largely 
untapped.  There are success stories and promising joint 
projects.  Big name American companies like Boeing, John Deere, 
Freightliner, Exxon and Caterpillar are involved in the 
aviation, agriculture, transportation and energy sectors but 
there is still much to be done.  Russia's fishing, timber, 
shipping, tourism and logistics industries would all benefit 
from partnerships with the United States.  I am convinced 
American firms can benefit and do well here. 
 
¶3. (SBU) The fact that Russia and the U.S. are neighbors in this 
part of the world is not fully exploited.  That could change, 
however.  Russia has decided to use APEC 2012 as a means of jump 
starting development in the region, and we hope there will be a 
expanded role for the U.S. in the energy and infrastructure 
projects that the government has in mind.  From new bridges to 
atomic energy plants to wastewater treatment plants and a 
refurbished airport, the plans are ambitious and could have 
regional implications.  China, Japan and Korea are keenly aware 
of the potential contracts and are aggressive in their 
investment strategies.  U.S. firms remain more risk-averse, 
having had more invested in the region when Russia defaulted in 
¶1998. 
 
¶4. (SBU) Many American companies successfully operating in 
European Russia, however, are now looking to "Pacific Russia." 
Our message is that there are good partners here and that there 
are models for success.  Corruption remains a problem.  Russian 
officials who crusade against it find themselves up against 
powerful interests.  So far, the powerful interests are winning 
that battle, but grassroots groups, including the indigenous 
group "TIGER" are winning converts and making an impact on the 
political landscape. 
 
--------------------- 
Less Anti-Americanism 
--------------------- 
 
¶5. (SBU) The Consulate in Vladivostok now has a 17 year history 
of engagement, and the rich public diplomacy efforts have paid 
off.  Youth orchestras, jazz bands, Broadway shows, joint 
baseball games, and student engagements have all produced a 
wellspring of goodwill for America that is useful when relations 
suffer. 
 
¶6. (SBU) Anti-Americanism, even during low points in our 
relationship, is never as severe as in Moscow or St. Petersburg. 
 American tourists are welcome and local people even in remote 
provinces still remember fondly Peace Corps volunteers who made 
a difference.  The Lend-Lease program from World War II is not 
as well known, but we have capitalized on that legacy as well, 
placing a plaque on a locomotive that came from the U.S. to aid 
the Russian war effort, reminding Russians of our shared 
sacrifice and victory. 
 
-------------------------------- 
Military to Military Cooperation 
-------------------------------- 
 
¶7. (SBU) Military to military cooperation has always been robust 
at RFE ports.  Thus far, in 2009 there were visits by two U.S. 
Navy ships and one Coast Guard ship, the U.S.S. SYCAMORE, which 
paid a port call on September 16-18.  Celebrating Victory Day on 
May 9 has become a tradition for the U.S. and Russian navies. 
Seeing American sailors on the streets here, marching shoulder 
to shoulder with Russian sailors, is a powerful reminder of how 
successful we can be when we cooperate.  The sailors engage in 
community relations events, from visiting orphanages to planting 
 
VLADIVOSTO 00000098  002.2 OF 003 
 
 
trees at the Veterans Home.  More importantly, officers from 
both the U.S. and Russian navies have an opportunity to meet and 
discuss tactics and procedures for joint operations such as the 
fight against piracy.  Additionally, U.S. Coast Guard cooperated 
with their Russian Border Guard colleagues to halt illegal drift 
net fishing that was seriously damaging Northern Pacific fish 
stocks. 
 
--------------------------- 
Sakhalin and Oil Production 
--------------------------- 
 
¶8. (SBU) Sakhalin is the site of the biggest U.S. investment in 
the Russia.  Exxon is big enough to largely take care of its own 
interests, but the U.S. still plays a role and we are very 
pleased to have a Consular Agent on the island to monitor energy 
projects and provide American citizen services. 
 
Sakhalin I 
---------- 
 
¶9. (SBU) ExxonMobil's main investment in Russia is in the 
Sakhalin I project, of which EM owns 30 percent and is the 
operator.  Sakh I is the last major majority-foreign-owned 
project in Russia and one of only three Production Sharing 
Agreements (PSA, the others being Total's Kharyaga, which is 
relatively minor, and Sakhalin II, described below).  Sakh I 
produces significant oil (peaked at 250,000 barrels per day, now 
down to about 160,000), and is a technological and economic 
success.  However, it has been unable to realize its gas 
production potential due to an impasse with Gazprom.  The likely 
best customer for Sakh I gas would be China.  Gazprom maintains, 
however, that Sakh I cannot sell gas directly to China, as 
Gazprom is the sole authorized exporter of Russian gas (despite 
a specific exemption for PSAs in the law granting an export 
monopoly to Gazprom).  The Sakh I consortium, whose partners 
include Sodeco (Japanese, 30 percent), ONGC (Indian, 20 
percent), and Rosneft (20 percent), continues to negotiate this 
issue with Gazprom, while selling small volumes of gas in the 
region. 
 
Sakhalin II 
----------- 
 
¶10. (SBU) The other major PSA in Russia, Sakhalin II (Sakhalin 
Energy Investment Company, SEIC), is primarily an LNG project, 
which was developed and built by a consortium led by Shell.  In 
2007, the consortium sold a majority stake in SEIC to Gazprom, 
after the project ran into trouble with environmental 
authorities.  Shell now owns 27.5 percent of the project, 
Japan's Mitsui (12.5 percent) and Mitsubishi (10 percent).  Sakh 
II shipped Russia's first cargo of LNG in March, 2009, and is 
touted as an example for future Russian participation in the LNG 
market.  Gazprom's takeover of Sakh II was widely seen as an 
attack on foreign investment in Russia in the oil and gas 
sector.  In March 2008, SEIC pulled its application for EX-IM 
financing when the request ran into delays.  The project has 
been the subject of various inter-agency discussions in 
Washington. 
 
---------------------- 
Sino-Russian Relations 
---------------------- 
 
¶11. (SBU) Despite competition for geopolitical influence and 
access to Central Asian energy resources, Russia and China have 
built a pragmatic and cooperative bilateral relationship since 
resolving their border issues in 2004.  A USD 25 billion 
loans-for-oil deal concluded earlier this year opens the way for 
an oil pipeline from Eastern Siberia to China that could be 
completed as early as 2010.  A second leg of the Eastern 
Siberia-Pacific Ocean pipeline (ESPO) terminating at Nakhodka on 
the Pacific Coast would make Russian oil available to Japan, 
South Korea, and the world market.  A proposed railway project 
linking Khabarovsk and Vladivostok would also involve Chinese 
investment and expertise.  While China is one of Russia's 
largest bilateral trading partners, the structure of trade 
(primarily Russian raw materials for Chinese manufactured and 
consumer goods) highlights concerns of many Russian observers 
that Russia is merely a source of commodities for a more dynamic 
and technologically innovative Chinese economy. 
 
¶12. (SBU) China has procured military and nuclear equipment from 
Russia in recent years, but purchases have declined as China 
develops its own military and nuclear industries and seeks 
better technology elsewhere.  Russia and China share views on 
Iran, Afghanistan, and North Korea and have conducted joint 
 
VLADIVOSTO 00000098  003.2 OF 003 
 
 
military exercises as the two leading members of the Shanghai 
Cooperation Organization (SCO), and are both keen to restart the 
Six-Party negotiations and avoid any increase in tensions or 
military conflict on the Korean Peninsula. 
 
¶13. (SBU) Fears of a Chinese demographic threat to the Russian 
Far East have subsided in recent years.  Rather, there is a 
growing recognition in Siberia and the Russian Far East that 
Chinese labor, in addition to Chinese trade and investment, is 
vital to the region's economic development.  China and other 
Asian countries, however, complained to Russia of unfair 
treatment when a large Asian market in Moscow was shut down 
recently and vendors' property seized. 
 
------------------------ 
Russo-Japanese Relations 
------------------------ 
 
¶14. (SBU) Japan's new government under Yukio Hatoyama is 
expected to make resolving the disputed sovereignty of the four 
Kuril Islands (Northern Territories) a top foreign policy 
priority, and Medvedev has signaled his willingness to discuss 
the issue.  The dispute over the Kurils has not prevented Japan 
and Russia from working as cooperative partners in the Six-party 
talks. 
 
¶15. (SBU) With 90 percent of its oil imports from the Middle 
East, Japan sees economic and investment ties to Russia as a way 
to diversify its sources of fossil fuels.  Japan is a major 
investor in the Sakhalin energy projects and LNG shipments to 
Japan from Sakhalin have just recently begun.  While Japanese 
firms have been cautious about further investments, especially 
following Gazprom's maneuvers in 2007 to become majority 
shareholder in the Sakhalin-2 project, Japanese officials do not 
see such "business disputes" holding back further investment. 
Japanese companies are eyeing projects to develop Eastern 
Siberian oil fields whose production would flow to the Pacific 
via ESPO.  Japanese firms, however, have shown less enthusiasm 
for participation in the investments proposed by Russia during 
PM Putin's May 2009 visit to Japan.  During Putin's visit the 
two countries also announced completion of a civil nuclear 
agreement that paves the way for Russian uranium exports to 
Japan, where nuclear power generates a third of all electricity. 
 The agreement also opens the door for Japanese firms to provide 
cutting edge nuclear power technology to new Russian civilian 
reactors. 
 
------- 
Comment 
------- 
 
¶16. (SBU) Your visit will highlight the potential for increased 
environmental cooperation and showcase how well public diplomacy 
investments pay off.  There is an air of expectation about 
Barack Obama's presidency and what it means for U.S.-Russian 
relations.  Your give and take with political leaders, 
businessmen, and our staff is much anticipated and will help 
shape our message and I hope yours.  I remain optimistic about 
U.S.-Russian relations and have already seen some great 
developments here, from direct flights to Alaska to direct cargo 
sailings to the port of Tacoma.  The Consulate co-hosted the 
"Security in North East Asia Symposium" with the US Pacific 
Fleet, creating a network for dialogue on regional security 
issues.  For tourists this is the start (or end) of the Trans 
Siberian railroad and it is a land that still has wild tigers 
and leopards.  We have many challenges in our relationship, but 
progress continues and I am confident your visit will highlight 
the possibilities and attract more Americans to this fascinating 
part of the world. 
ARMBRUSTER