Paulson Says U.S. Welcomes Rubles

APMedvedev welcoming Paulson during their Monday meeting in the Kremlin.
U.S. Treasury Secretary Henry Paulson appealed for Russia to invest its oil riches in the dampened U.S. economy on Monday, during the first Kremlin visit by a senior U.S. official following the accession of President Dmitry Medvedev.

Paulson, in his first visit to Russia since being appointed by U.S. President George W. Bush two years ago, told Prime Minister Vladimir Putin during a meeting at the White House, "We very much welcome your investment."

The two-day visit, which also saw Paulson meet Finance Minister Alexei Kudrin and Medvedev, could signal Washington's desire to boost trade and investment relations with Moscow, as it lags far behind Europe in tapping Russia's newfound wealth, analysts said.

As the United States weathers what some observers have called its worse financial crisis since the Great Depression, Russia is booming on the back of sky-high oil prices, which on Monday briefly topped $143.50, a new record.

Putin quickly corrected Paulson after the treasury secretary said both Russia and the United States were working together to form best practices for investment by sovereign wealth funds.

"Since we do not have a sovereign wealth fund yet, you are confusing us with someone else," Putin said, adding that Russia had instead created "various funds."

"But we are ready to [create a sovereign wealth fund], especially if you want us to," he said, Interfax reported. "We will do this, if we do it, transparently and openly."

Russia currently maintains two funds — a $129 billion Reserve Fund that acts as an oil stabilization fund to cushion the economy in the event of a drop in oil prices, and a $33 billion National Wealth fund due to be invested in riskier ventures.

The official formerly tasked with overseeing the stabilization fund, former Deputy Finance Minister Sergei Storchak, has been imprisoned without trial since November.

Bilateral trade currently stands at $8 billion, all of it private, Putin said. "There is no doubt that trade and economic contacts are the foundation of our relations," he said.

Even as U.S. officials and analysts complain about Russia's record on democracy, free media and human rights, investment by Russian firms has not met with the same opposition as Chinese and Arab investment. Two major deals — attempts by a United Arab Emirates firm to buy U.S. ports and by a Chinese firm to buy Unocal — were ditched amid growing politicized protectionist sentiment in the country.

Just last week, Severstal won a bidding war for U.S. steelmaker and distributor Esmark with a $1.25 billion bid, adding to already massive holdings in the country. Along with steel and mining giant Evraz, which owns two mills in the United States, Severstal is leading the push by Russia's metals sector into the U.S. economy.

That could change if Russian energy firms enter the game, said Andrew Kuchins, a senior fellow at the Center for International and Strategic Studies, a Washington-based think tank.

"If they get into investment into the energy sector" — through selling liquefied natural gas or buying downstream assets in the U.S. — "we could have a higher possibility that it could be viewed pretty controversially in Washington, and especially in the U.S. Congress," he said.

State-run Gazprom, often accused of acting as a Kremlin foreign policy tool, has recently floated the idea of helping ConocoPhillips and BP build a planned pipeline linking Alaska to the continental U.S.

"We see North America as a region of our strategic interests. The work in the region is important for long-term success of our LNG business, and we are mounting our presence on the North American continent," Gazprom CEO Alexei Miller told The Financial Times in an interview last week.

Paulson warned Monday that tough times lay ahead, as the U.S. Congress is due to debate a controversial Soviet-era law that must be lifted ahead of Russia's accession to the World Trade Organization, which Moscow hopes to achieve this year.

Washington struck a bilateral deal on Russia's WTO membership in late 2006, but the U.S. Congress must restore normal trade relations by removing the Jackson-Vanik amendment if it is not to be in breach of WTO rules.

"It will not be easy. There will be opposition in the Congress but I think it will be important to try," Paulson said in an interview on Ekho Moskvy.

The Jackson-Vanik amendment, approved in 1974, denied the Soviet Union normal trade relations over human rights concerns.

Russia remains the only major economy outside the WTO and hopes to wrap up negotiations on its entry, over a decade in the making, this year. It must still conclude bilateral agreements with Georgia and Saudi Arabia.

"We are making progress on the last details of negotiations. I think it is important to finish this up," Paulson said.

Rose Gottemoeller, head of the Moscow Carnegie Centre, said Paulson's visit was designed to show the Bush administration's support for Russia's bid.

"Paulson's arrival in Moscow is a signal that this is one of the accomplishments that the Bush administration would like to point to in its Russia policy before it leaves office," she said.

Yet a widespread view that Russia has slid on human rights and democratic practice under Putin, who still holds sway in his new post as prime minister, "has infected the Congress with a very negative attitude toward Russia," she said. "Mr. Paulson was right to say any attempt to graduate Russia from Jackson-Vanik will be a difficult political job on Capitol Hill."

Paulson's meeting with Medvedev, part of which was televised on the evening news, appeared to take second place to his meeting with Putin.

Kudrin, the finance minister, said Paulson's talks with Medvedev focused on the global credit crunch and global economic institutions, while he broached the subject of money laundering and nonproliferation of weapons of mass destruction during his meeting with Putin, Interfax reported.

Paulson also said Monday during his interview with Ekho Moskvy that he supported a strong dollar, a position long called for by Russian officials.

"I would agree that a strong dollar is a good thing, and I believe it is in our nation's interest," Paulson said. Kudrin welcomed the remarks, Interfax reported.

Paulson also warned that soaring oil prices were weighing down the global economy, and no short-term fixes were in sight.

"The price of oil right now is creating a big burden on the world economy," he told Ekho Moskvy on Monday, as top oil executives met at the World Petroleum Congress in Madrid to discuss capacity concerns.

He left Moscow for Berlin on Monday evening.