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Cablegate: U.S. And Russia Launch Economic Dialogue

VZCZCXRO2328
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

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