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Cablegate: D/Ustr John Veroneau in Moscow

VZCZCXYZ0000
PP RUEHWEB

DE RUEHMO #5310/01 3111427
ZNR UUUUU ZZH
P 071427Z NOV 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5107
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS MOSCOW 005310

SIPDIS

SENSITIVE
SIPDIS

EUR/RUS, EB/IFD/OIA
NSC DPRICE, WARLICK
STATE PASS TO USTR FOR VERONEAU AND HAFNER

E.O. 12958: N/A
TAGS: EINV ETRD ECON WTO RS
SUBJECT: D/USTR JOHN VERONEAU IN MOSCOW

REF: MOSCOW 5210

This cable is sensitive but unclassified, not for internet
distribution.

1. (U) Summary: While in Moscow to attend the U.S.-Russia
Business Council Annual Meeting, D/USTR John Veroneau met
with industry leaders, engaged with experts at the Carnegie
Center and had discussion with counterparts at the Ministry
of Economic Development and Trade (MEDT) and the Finance
Ministry (MinFin) on topics ranging from WTO to a Bilateral
Investment Treaty. End Summary.

2. (U) Deputy U.S. Trade Representative Ambassador John K.
Veroneau visited Moscow October 22-24 to participate in the
15th Annual Meeting of the U.S.-Russia Business Council
(USRBC) and deliver the keynote closing address. Betsy
Hafner, director of the office for Europe and Eurasia at
USTR, accompanied him. In his speech to the Council on
October 24, D/USTR Veroneau addressed the importance of
economic openness, rule of law, and transparency in fostering
long-term economic growth. He also underlined U.S. support
for Russia's WTO accession and the importance of the
U.S.-Russia trade and investment agenda. Toward that end,
D/USTR Veroneau suggested that the United States and Russia
consider negotiating a Bilateral Investment Treaty (BIT).

-----------------------
Taking Industry's Pulse
-----------------------

3. (SBU) During pull asides at the two day USRBC meeting
and at official representational events, D/USTR Veroneau
heard from industry leaders about the rewards and challenges
of doing business in Russia and discussed specific concerns
companies face. Separately, the American Chamber of Commerce
hosted a roundtable breakfast that provided an opportunity
for a wide-ranging discussion on the business climate in
Russia. Executives from the software, pharmaceutical and
insurance sectors briefed the D/USTR on company plans and
shared their viewpoints on how to achieve success here. They
supported WTO accession, citing the benefits of membership in
a rules-based organization for international firms trading
and investing in Russia. They candidly described the
problems the face dealing with corruption and excessive
bureaucracy.

---------------------------------
Whither Russia - Think Tank Views
---------------------------------

4. (SBU) The Carnegie Moscow Center (Carnegie Endowment for
International Peace) also hosted an in-house roundtable
discussion organized and moderated by Senior Associate Dmitri
Tenin. Discussion ranged across the broad expanse of Russian
history, language, culture economic, social, and political
issues. In line with business viewpoints, participants
identified corruption and related bureaucratic red-tape as
the most serious problems. On the political front, they
agreed that President Putin is determined not to be a lame
duck and delights in keeping people guessing what his next
move may be. Overall, they expressed optimism about Russia's
future, pointing to a gradually emerging middle class with
its ability to travel outside the country and the power of
global communication to keep information flowing.

---------------------------
Bilateral Investment Treaty
---------------------------

5. (U) Speaking at the USRBC on October 23, Trade Minister
Elvira Nabiullina told U.S. and Russian companies that she
supported negotiating a BIT, noting that the United States
was one of the few major economies with which Russia does not
have such an agreement and expressing hope that one would be
completed soon.

6. (SBU) In meetings with Deputy Finance Minister Sergey
Shatalov and Deputy Trade Minister Kirill Androsov, D/USTR
Veroneau raised the U.S. interest in negotiating a BIT with
Russia (RefTel). (Note: a previous BIT was signed in 1993,
but never ratified by the Duma.) Shatalov and Androsov
indicated that a BIT would be attractive to investors from
both countries. Shatalov said that the old model BITS were
no longer applicable since they did not reflect changes in
the Russian economy over the past decade. MEDT, not MinFin
would be the lead negotiator on a BIT, he said, but MinFin
would also participate. Shatalov predicted that other
ministries would support BIT negotiations, but also
underscored that concluding the WTO accession was the top
priority.

----------------------------------------
CIFUS and Russia's Strategic Sectors Law
----------------------------------------

7. (SBU) Meeting with MEDT Deputy Minister Androsov, D/USTR
Veroneau described the Committee on Foreign Investments in
the United States (CFIUS) as legislation intended to protect
national security interests while ensuring that the United
States remained open to foreign investors. He stressed that
it was not a protectionist economic measure and explained the
law was designed to make the process more formal and
transparent. He added that only a small percentage of
foreign investment were ever reviewed on national security
grounds and few were actually rejected.

8. (SBU) Androsov responded that the draft Strategic
Sectors Law is intended to fulfill the same function. It
would clarify for foreign investors those areas where GOR
permission would be required to establish majority control of
a Russian company. He stressed that Russia would remain open
to foreign investors needed to help the country diversity its
economy. He noted that 60 percent of the GOR's budget was
the result of taxes on the oil and gas sectors and said that
reducing this dependency would be the new government's number
one economic objective.

--------------------------------------------- --------
Concerns about Russia's Accounting and Control System
--------------------------------------------- --------

9. (SBU) D/USTR Veroneau raised in the meeting with Deputy
Finance Minister Shatalov U.S. business concerns at the
possible expansion of Russia's accounting and control system
(EGAIS/UFAIS) -- covering import, export and distribution of
products -- to other products in addition to alcoholic
beverages. According to Shatalov, the introduction of
customs stamps on alcohol was flawed: measures were not
completely considered and implementation was mismanaged, as
evidenced by the inadequate supply of stamps. He said that
domestic producers were particularly affected by the changes
and that production fell dramatically and still remains below
late 2005 levels. He assured Veroneau that should the system
be extended to other products, implementation would be much
smoother and non-discriminatory.

10. (SBU) Following up on this issue, Director Hafner held
separate meetings with GOR officials and raised concerns
about the discriminatory application of the EGAIS/UFAIS
system to imported spirits as well as its expansion to new
products. She also raised concerns about the GOR's continued
unwillingness to share draft orders implementing our
bilateral agreement on the importation of products with
encryption technology. MEDT advisor Yuriy Lyubimov expressed
his optimism about WTO accession and described on-going
discussions with the drafters of Part IV of the Russian Civil
Code. Vladimir Loginov, MEDT's head of the Department of
Non-Tariff Regulations, said the GOR would resolve remaining
issues related to encryption and alcohol. Hafner also met
with local representatives of the spirits, cosmetics and
technology industries who raised their specific, detailed
concerns with her.

11. (U) D/USTR Ambassador John K. Veroneau has cleared this
cable.
BURNS

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