Paulson in Russia to meet with Medvedev, Putin

By David Lawder

MOSCOW (Reuters) - U.S. Treasury Secretary Henry Paulson arrived in Moscow on Sunday for economic talks with Russia's top leaders that some observers say could help shift the focus of a sometimes frosty U.S.-Russia relationship towards the more productive areas of trade and investment.

Paulson, on his first trip to Russia since taking over as Treasury Secretary nearly two years ago, will have dinner with Russian Finance Minister Alexei Kudrin on Sunday night before closed-door meetings on Monday with new President Dmitry Medvedev and his predecessor, Prime Minister Vladimir Putin, the U.S. Treasury Department said.

He also will meet with First Deputy Prime Minister Igor Shuvalov before flying to Berlin as part of a five-day trip that also will include meetings with German Chancellor Angela Merkel, European Central Bank chief Jean-Claude Trichet, British Prime Minister Gordon Brown and Finance Minister Alistair Darling.

The Treasury has said little about the meetings so far, other than that Paulson wants to discuss the global economy, the need for countries to stay open to foreign investment and efforts to protect the global banking system from abuse by Iran.

But Paulson has an opportunity to strengthen economic ties with Russia by jump-starting talks towards a bilateral investment treaty and persuading Moscow to buy into "best practices" guidelines for sovereign wealth funds, said Anders Aslund, a senior fellow at the Peterson Institute for International Economics, a think-tank in Washington.

"I think the surprise might be something on bilateral investment," said Aslund, noting that Russia has similar investment treaties with 38 other countries.

As a result, U.S. investment in Russia has fallen far behind Europe, which he noted supplies 57 percent of Russia's imports versus 3 percent coming from the United States.

"The U.S. has lost out on this massive boom that has taken place in Russia since 2000," Aslund added. "They've discussed the wrong issues. The U.S. has discussed security issues and missile defense with Russia when they should have discussed trade and investment."

Russia's opposition to a U.S. missile shield based partly in Eastern Europe had cooled relations between Washington and Moscow by the time Putin stepped down, as had suggestions that Putin was rolling back democracy in Russia.

CONCILIATORY TONE

Paulson's meetings come just after Medvedev, Putin's hand-picked successor, struck a conciliatory tone in his debut with European Union chiefs on Friday by hailing a fresh start in their sometimes testy relations. He said a meeting to launch negotiations on a new strategic agreement governing relations between the EU and Russia had a "sincere, neighborly" mood.

As Russia's economy booms and oil revenues pour in, the government is increasingly expected to want to invest those funds abroad via its sovereign wealth fund, said Andrew Kutchins, director of the Russia and Eurasia program at the Center for Strategic and International Studies.

By cooperating with guidelines now being developed by the International Monetary Fund, Russia's wealth fund and corporations could face less resistance when making U.S. investments. A key part of the guidelines will be a pledge to invest only for financial returns and commercial purposes, not political ends.

Russian leaders also are going to want some reassurances from Paulson on the state of the U.S. economy, the housing correction and the declining U.S. dollar. With billions of dollars invested in U.S. assets, including Treasury debt and mortgage securities issued by housing finance giants Fannie Mae and Freddie Mac, Moscow is taking a direct financial hit from a falling dollar, even as it has helped push up oil prices.

"The biggest economic problem Russia faces is controlling inflation," Kutchins said. "For them, the weak dollar is a problem."

(Reporting by David Lawder; Editing by Eric Walsh)