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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
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

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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
of constantly expanding wealth and economic growth will erode as
Russians confront the reality of rock-bottom energy prices,
foreign direct investment, and increasing unemployment. At present,

both leaders enjoy high popularity, with 59% of Russians expressing
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
National television is state-owned and provides a diet of
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

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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
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,
has balked at the idea of reciprocal access to Russian sites for the
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

-- 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
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
of Russian gas exports to Europe travel through Ukraine,
which itself has a tense energy (and political) relationship with
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

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
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.

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