Belarus' Flailing White Elephants

C O N F I D E N T I A L MINSK 000010

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/28/15
TAGS: ECON EIND ETRD ELAB PGOV BO
SUBJECT: Belarus' Flailing White Elephants


Classified by Charge Constance Phlipot for Reasons 1.4
(B,D)


1. (SBU) Summary: In recent months Ambassador and Emboffs
have visited several of Belarus' larger businesses,
including its fourth largest company, the Minsk Automobile
Factory (MAZ),its fifth largest company, the Belarus
Automobile Factory (BelAZ),and Belshina, one of the
world's largest tire factories. All are state-owned, and
all face serious problems. The most successful of the
three, MAZ, still relies on government subsidies. BelAZ
and Belshina are content with their current levels of
production, and are not seeking to expand, despite the fact
that western companies are practically begging for Belshina
tires. Success for the GOB is measured in production, not
sales. As with most Belarusian firms, much of what MAZ and
BelAZ make immediately goes into storage, rather than to a
buyer. Such economic practices, and large unreformed
companies, will increasingly act as brakes on the
Belarusian economy. End summary.


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Big Trucks at MAZ
--------------


2. (U) Ambassador and Econoff visited the Minsk Automobile
Factory (MAZ) on August 16. MAZ Director General Valentin
Gurinovich gave a tour of the plant and explained that MAZ
was founded in 1944, on the remains of a German tank repair
yard, to assemble Lend-Lease trucks. MAZ is Belarus'
largest factory, with 26,500 employees (down from 32,800 in
the late 1990s),and in 2003 accounted for 18% of all
Belarusian production. MAZ hopes for USD one billion in
sales in 2005, up 9% from 2004. The company builds 300
truck, bus and trolley variants, and produces 82 vehicles a
day. Employees earn an average USD 260 per month, just
over the national average. Gurinovich complained it is
hard to find qualified workers, and too many of his
employees do not want to work.


3. (U) Gurinovich candidly said MAZ's main assembly line
was built in 1965, with minor upgrades in the 1980s, and
the company lacks innovation and rarely changes designs.
Since its founding, MAZ has only modernized its vehicle
output six times (rather than yearly, as is common in the
west). Because the company uses old technology, Gurinovich
admitted production is more labor intensive than in the
west. [Note: Unlike at BelAZ (below),MAZ's assembly line
was in full operation during the tour. Econoff noted
workers lacked even basic hearing, eye, or hard hat
protection.]


4. (U) MAZ is 100% state-owned. Gurinovich explained he
was appointed by the President. Each year the Ministry of
Industry provides him with general guidance, as well as
production and profit targets. Within those guidelines
Gurinovich is free to operate as he would like. The
company pays 20% of its income to the budget, and is free
to keep the other 80% to cover operating costs. Being
state-owned has protected MAZ from frequent inspections,
with the State Control Committee not having inspected the
plant in over ten years.


Dependent on/Competes With Russia
--------------


5. (U) Half of MAZ's production is sold to Russia, although
this percentage is shrinking as the company seeks new
markets. Truck exports to Russia, from both MAZ and BelAZ,
fell by almost 9% over the year, largely as a result of
complications from the January 2005 switch in how VAT is
collected in bilateral trade. The next largest markets are
the CIS, especially buses to Ukraine, and European Union,
followed by Asia, South America and Africa. Only 5% of
production is sold domestically. MAZ had a USD 50 million
contract to sell garbage trucks to Baghdad, but lost this
with the war. Even so, in June an Iraqi delegation came to
investigate buying from MAZ again. MAZ hopes to boost
exports by 30% in the next few years. In 2005 MAZ sold
Euro 50 million to the EU. Gurinovich stated that sales to
the EU force the company to keep their quality up, and MAZ
hopes to soon produce to Euro-4 standards. MAZ has no
plans to export to the U.S. MAZ tried importing U.S.
engines, but found they were too expensive to sell and
service on the Russian market. Gurinovich claimed Chinese
firms have just started producing trucks, but he expects to
face serious competition from China soon.


6. (U) MAZ depends on the open border with Russia. Its
main rival is Russian company KAMAZ. Due to the Belarus-
Russia customs union, Russia cannot discriminate against
MAZ to protect KAMAZ. Gurinovich said this is vital, as
MAZ cannot afford to modernize production at the same rate
as KAMAZ has done, so competition is already difficult.
Moreover, MAZ relies on 600 Russian parts suppliers, so
needs the open border with Russia. Gurinovich hoped the
two countries would adopt a single currency to ease trade.
He did not expect any problems from Russian WTO accession,
and said Belarusian accession would make sales to the EU
easier as MAZ could avoid high EU tariffs.


Output Growing, but Still Needs Subsidies
--------------


7. (U) In December, MAZ announced that it produced 18,395
vehicles in the first eleven months of the year, up 1% from

2004. Out of this, MAZ produced 811 buses, 60% more than a
year before, and 6,714 trailers, up 40%. In dollar terms,
the company claimed production was up 12.9%. [Note:
Belarusian companies routinely announce production figures,
but rarely sales or profit figures.]


8. (U) On October 31, President Lukashenko signed a decree
giving MAZ a BYR 58.745 billion [USD 27 million] subsidy
from the state budget, and a commitment to give another BYR
10 billion [USD 4.65 million] in 2006. Ten billion rubles
of this were to be used to upgrade production at
Mogilevtransmash, a MAZ subsidiary that produces trailers.
The rest of the money was meant to pay off MAZ debts.


Weak Independent Unions
--------------


9. (C) Gurinovich joked that MAZ employees belong to three
unions, "two independent and one dependent." The vast
majority, 25,000, belong to a union MAZ created that is
affiliated with the pro-regime Federation of Trade Unions
of Belarus. The independent unions have 150 and 20 members
each.


Union Boss Claims MAZ Suffering
--------------


10. (C) On November 1, Poloffs spoke with Vladimir Volkov,
leader of the independent REP union at MAZ. Volkov was
recently transferred from his normal job at MAZ to a lesser
paying job. Management claims it is because of his hearing
loss in one ear, but he claims it is to isolate him from
speaking to other REP members.


11. (C) Volkov said that the truck-building portion of MAZ,
the company's biggest unit, is facing serious problems. It
only works when it receives orders for trucks, and orders
are becoming less frequent because of competition from
KAMAZ. Volkov heard that MAZ needs USD 200 million to
modernize to successfully compete with KAMAZ. According to
Evgeniy Burak of the local ILO office, MAZ trucks have few
buyers and the production line only works two or three days
a week. Volkov stated MAZ's sections that build buses,
trolleys and cable cars are much more successful, but
constitute a much smaller portion of the company. These
sections are all working three shifts to fulfill their
orders. The bus section is particularly successful, being
partnered with German bus company Neaplan. Volkov also
explained that the Presidential Administration takes an
active hand in managing the factory and that many workers,
deemed especially loyal to the current government, earn
salaries up to 50% higher than the MAZ norm.


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Even Bigger Trucks at BelAZ
--------------




12. (U) The Belarusian Automobile Factory (BelAZ) in
Zhodina specializes in extremely large trucks for
industrial use, especially mining. These trucks range in
size from 30 tons to a 400-ton behemoth BelAZ just
unveiled.


13. (U) Ambassador and Econoff visited BelAZ on August 18
and spoke with General Director Pavel Mariev (who is also a
Member of Parliament). Mariev explained BelAZ was founded
in 1948 to produce mining trucks. The company is 100%
state-owned, and has 9,300 employees, with the average
salary being USD 300 per month (slightly above the
Belarusian average of USD 250). This is down from over
10,000 workers during the Soviet era. BelAZ produces 1,200
trucks a year, and only in 2005 brought production back up
to that of Soviet times. The company has the capacity to
produce 3,000 trucks a year. Mariev said that BelAZ
exports 70% of its trucks to Russia, and most of the rest
to other CIS states, especially Ukraine, and smaller
amounts to China. A Chinese firm assembles 40-ton BelAZ
trucks in China. BelAZ sells very few trucks inside
Belarus, and does not export to the U.S. Mariev claimed
his main competitor is Caterpillar.


14. (U) Mariev stated that orders increased by 41% in 2005,
with strong demand from Russia (fuelled by rising oil
prices). BelAZ buys many parts, especially motors and
steel, from Russia. However, BelAZ also buys motors from
U.S. companies Cummins and the Detroit Motor Company. In
2005 the company signed an agreement with Cummins to buy
USD 50 million worth of motors a year. General Electric
has visited BelAZ several times over the past year seeking
to sell electronic transmissions. However, Mariev said
these GE transmissions are too expensive for their trucks.
Mariev explained that his company is content with their
current level of business, and are not seeking to increase
production or sales. Even so, BelAZ representatives attend
a Chicago trade show every four years, and a trade show in
Germany every other year.


Silent Assembly Line and Massive Overstocks
--------------


15. (C) Ambassador and Econoff toured BelAZ's assembly
line, which was not in use at all during the 45 minute
tour. Very few employees were present. When asked, Mariev
claimed BelAZ works two shifts, and the line was currently
between shifts. [Comment: in Econoff's experience, the
incoming and outgoing shifts would normally overlap,
causing there to be more workers present, so the assembly
line is not halted.] GE's representatives (protect) told
Econoff after visits to BelAZ in February and July that the
majority of the company's production goes into storage as
overstock as there are not enough buyers.


16. (U) Massive overstocks are endemic throughout the
Belarusian economy. In December the Ministry of Statistics
announced that 58.3% of Belarusian industrial production
was overstock. As of December 1, Belarus has BYR 2.233
trillion [USD 1.04 billion] in finished goods sitting in
storage awaiting buyers. This included 700 large MAZ and
BelAZ trucks. Truck sales appear to be improving, as truck
overstocks fell 12% in 2005, probably on the strength of
increased Russian purchases. For example, Russia's
Siberian Coal Energy Company announced in October it would
increase purchases of BelAZ trucks by 25%, to 250 million
Russian rubles in 2006. However, Russian buyers may be
switching away from Belarusian trucks. On August 11,
Secretary of the Russia-Belarus Union Pavel Borodin

SIPDIS
responded to a reporter's question by explaining that
Russian companies were buying more American and less
Belarusian trucks only because Russian buyers receive
larger kickbacks when they buy more expensive American
vehicles. This explanation is not believable, particularly
after Belarus' Minister of Agriculture recently argued that
although western tractors cost twice as much as Belarusian
ones, they do six times the work. The same qualitative
difference can be assumed to be true for trucks.


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Flagging Business at Belshina
--------------


17. (SBU) Belshina, located in the southeastern city of
Bobruisk, was the largest tire factory in the Soviet Union.
The GOB owns 99.95% of the company. Belshina is one of the
five largest tire manufacturers in the world. It is
actually a complex of three factories that produce over 200
types of tires, for all sorts of vehicles except aircraft.
Belshina makes all the tires for MAZ and BelAZ. The
company has 12,500 employees, and controls all the usual
extras expected of a Soviet company, including owning its
own collective farm. Belshina exports 60% of its
production to 44 countries, but 80% of exports go to
Russia. The company claimed an annual revenue in 2004 of
USD 479 million, although this seems inflated. GOB
statistics show that from January to October 2005 Belshina
announced it produced just BYR 426 billion [USD 198
million] worth of goods.


18. (SBU) Belshina's three factories have an official
capacity of 4.3 million tires per year. However, GOB
statistics show production is dropping, down 8.2% in 2005
to 1.932 million tires from January to August. This
includes 1.394 million tires for automobiles, down 12.2%,
343,000 for trucks, down 2.9%, and 195,000 for agricultural
machinery, up 20.3%. Despite these official statistics, in
October the company announced its overall production was up
21% for the year.


Belshina: "You Don't Want to Buy our Tires"
--------------


19. (C) On August 10, Econoff met with Vladimir Antipov,
General Director for Sales at Belshina. Antipov painted a
grim picture of Belshina. He said that of the 200 types of
tires they make, only five or six are in high demand.
Because 90% of Belshina's material is imported, and because
energy prices and labor costs are increasing, Antipov
claimed Belshina tires are not competitive in the West.
Antipov lamented that Belshina cannot compete with American
or French tires on quality, and cannot compete with Chinese
or Korean tires on cost. When Econoff asked about the
possibility of buying Belshina tires for his Jeep, Antipov
said, "You don't want to buy our tires." [Note: Belarusian
industry relies overwhelmingly on natural gas, which is
buys from Russia at well below market rates. The Ministry
of Economy estimates that energy imports account for around
ten percent of the cost of Belarusian goods. Any rise in
gas prices would make Belarusian goods that much less
competitive.]


20. (SBU) Antipov explained that Belshina is attempting to
modernize. In 2005 the company invested Euro 25 million to
upgrade its production of light truck and agricultural
equipment tires. Belshina can now produce 980 such tires a
month, compared to 300 a year before [note: this appears to
be a different category than that mentioned in para 18].
In 2006 Belshina hopes to invest Euro 45 million to
modernize the production of large tires. Antipov claimed a
U.S. company, Energo Export from Vermont, may invest USD 5
million in this project. [Note: Energo Export is believed
to be owned by a Belarusian-American businessman.]


21. (C) Antipov stated that Belshina exports 80% of its
production. About 70% of exports are to CIS states, with
the rest going around the world. Antipov said in 2005
Belshina would export USD 5 to 6 million worth of tires to
the United States, with the two biggest buyers being
Chicago's Pacetronic and GCR, a supplier to Bridgestone and
Firestone. He said that Caterpillar was interested in
buying Belshina tires, which he hoped would grow into USD 2
million in trade a month. Because of Caterpillar's
interest, Antipov estimated Belshina would export USD 12
million in tires to the U.S. in 2006. His only complaint
about U.S. companies is that they will not pay in advance,
something most Belarusian firms insist on, particularly
those that are state-owned. When asked if he or his staff
travel internationally to trade shows, Antipov explained
they are not allowed. Because Belshina receives money from
the GOB, GOB regulations prevent its employees from
traveling abroad on business.
Why Belshina Won't Sell to the West
--------------


22. (C) In October Caterpillar and another U.S. company,
Miller Large Tires, contacted Post asking for help. Both
wanted to buy large tires from Belshina, but were having
problems. Caterpillar has a contract with Belshina, but
feels Belshina is not supplying as many tires as had been
agreed to. Miller has been unable to buy any tires.
Caterpillar asked the Embassy to intercede, while Miller
asked Post not to mention their company, for fear of
ruining their negotiations.


23. (C) Post contacted Belneftikhim, the GOB entity that
controls Belshina, on October 18 asking for a meeting. On
November 10, DCM and Econoff met with Belneftikhim's vice-
president Vitaly Zhydko. Zhydko treated Emboffs with
hostility, and claimed Caterpillar was receiving all the
tires Belshina had to sell under their contract. When
asked about the possibility of supplying more tires for
2006, Zhydko grew more hostile, complaining that as of
Jafuary Belshina would be producing at full capacity, but
that there are too many orders. He explained Belshina
would give first preference to all orders from BelAZ and
MAZ, second preference to Russian firms, such as KAMAZ, and
third preference to CIS companies. If there are any tires
left, they will consider selling to foreign firms. He said
Caterpillar, Japan's Kamatsu, and "an English company" were
all trying to buy tires. When asked if Belshina could add
a second shift to increase production, or sell based on
price, not geography, Zhydko replied, "We fulfilled this
year's plan. We will fulfill next year's."


24. (C) On November 16, a Japanese diplomat told Econoff
that Kamatsu was having trouble buying from Belshina.
Kamatsu sent a representative to Belarus, but Belshina told
him Belarusian customs did not have the manpower to process
tire sales for Japan. Kamatsu offered to fund a position
at customs, but Belshina replied they did not have the
authority to decide to sell to Japan. When Kamatsu met
with Belneftikhim, they also replied they do not have the
authority to decide if Belshina can sell to a Japanese
company.


25. (C) On December 31, Poloff spoke with a Belshina sales
agent returning from Poland. This sales agent contradicted
what Antipov claimed, and said he regularly travels abroad
on behalf on his company, including recently to Chicago.
The sales agent thought Belshina was entering into a very
fruitful relationship with Caterpillar. He complained that
in the late 1990s Bridgestone entered into a partnership to
modernize Belshina. However, the GOB began to increase its
demands on Bridgestone, which quickly pulled out of the
deal.


Comment
--------------


26. (C) These are three of Belarus' largest companies, and
between them have nearly 50,000 employees. All are fully
state-owned, and all face problems, many of which stem from
being state-owned. Management at BelAZ and Belshina in
particular reflected the worst aspects of a command
economy, making little to no efforts to reach out to new
markets or seek to increase sales. Instead, success is
measured in how well these companies reach their production
targets. Selling what they make, as with most of Belarus'
large companies, is a lesser priority. Even MAZ, the more
successful of the three, still relies on state subsidies.
MAZ's success story is its production of buses, made
successful by partnership with a German company. Belshina
tried to bring in western investment and technology, but
government interference chased away the foreigners.
Belarusian production thus remains largely unmodernized,
using the techniques and technology of the 1960s. Such
companies are likely to remain a brake on Belarus' economy,
particularly as the GOB shows no inclination to reform.

PHLIPOT