AEROFLOT-BOEING DEAL: STILL ALIVE - FOR NOW

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 010606

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SIPDIS

STATE FOR EB AND EUR/RUS
USDOC FOR 4321/ITA/MAC/EUR/RISA EDWARDS AND BEADLE
USDOC FOR 3004/CS/ADVOCACY/BLOOM
NSC FOR GRAHAM AND MCKIBBEN

E.O. 12958: DECL: 09/21/2016
TAGS: ECON PREL EAIR RS
SUBJECT: AEROFLOT-BOEING DEAL: STILL ALIVE - FOR NOW

REF: HOLMAN EMAIL 9/20

Classified By: Econ M/C Quanrud for reasons 1.5b and d.


1. (C) Summary: A surprising "white knight" - billionaire
Alexandr Lebedev, minority shareholder in Aeroflot - with $40
million from his own pocket has resuscitated the Boeing deal
that as of September 15th, looked near demise. Lebedev's
move might give the Kremlin a face-saving to allow the Boeing
sale. The deal also gives the Kremlin breathing space,
allowing Putin, on the eve of meeting with German Chancellor
Merkel and French President Chirac, to hold up the prospect
of large-scale Airbus purchase as possible leverage to
acquire a greater share in EADS. End Summary.

The Kremlin ) Maneuvering Behind the Curtain
--------------


2. (C) Early last week, Boeing was hopeful that after so many
false starts, the Kremlin might finally give the go-ahead to
Aeroflot's Board to approve the purchase of 22 Boeing 787s at
its planned September 14 meeting. Even the announcement of
Russian state-owned bank VTB purchasing a 5 percent share of
European Aerospace and Defense Company, EADs, did not dash
hopes here in Moscow. (Note: While Boeing CEO Carson
expressed concern that the EADs purchase portended trouble,
Boeing Russia president Sergey Kravchenko (please protect)
was less concerned. Kravchenko told us this week that EADs
move to quash Russian aspirations for a voice on the board
could have only enhanced Boeing's partnership in the eyes of
the Kremlin. End Note)


3. (SBU) A more troubling sign, however, was the rescheduling
of the Board meeting from September 14 to the evening of
September 15. No explanation was given at that time, but it
is now apparent that Aeroflot's Board was waiting for a
signal from the Kremlin. The guidance never came, and the
September 15 meeting adjourned with the decision once again
hanging in the air - and perhaps, with an even more uncertain
fate. Unlike previous delays, when it was announced just
when the board would next take up the decision, this time
Aeroflot said that the decision has been postponed
"indefinitely."


4. (C) The press has had a field day speculating the reasons
for the Board's inaction, but the overriding conventional
wisdom is that the Kremlin wanted to retaliate for the
Rosoboronexport and Sukhoy sanctions by holding hostage the
Boeing decision. An additional consideration it seems was
the Kremlin's reluctance to do anything precipitous in the
lead up to the Putin-Chirac-Merkel meeting this weekend.

Enter &White Knight8 Lebedev
--------------


5. (U) In an extraordinary move on September 19, Russian
businessman Alexandr Lebedev, whose company National Reserve
Corporation (NRK) owns 30 percent of Aeroflot, put his own
money on the table to keep the deal open. He announced he
had offered Boeing $40 million to keep the current delivery
slot (of 2010) open for Aeroflot until the end of this year,
and that Boeing had accepted his offer. Reftel notes that
NRK and Boeing signed a preliminary contract that provides
for the same conditions that were offered to Aeroflot, with
first delivery of planes starting in 2010. NRK is the holder
of the slots but would transfer them back to Aeroflot.


6. (C) The one-day postponement of the meeting set in motion
the Lebedev decision, our contacts told us. Reading the
Kremlin's signals - or lack of signals - key players met
Thursday evening to come up with a game plan in case the
Aeroflot Board failed to act. This is not the first time
Lebedev has tried to save the Boeing deal. Just two weeks
ago, he was quoted in the press saying that while he
supported Aeroflot's purchase of Boeing planes, he also urged
a similar purchase of Airbus planes in the near future -- a
solution which many believed would be palatable to the
Kremlin, allowing the 787 purchase go ahead now. Lebedev,
who also is a member of the Duma for the ruling United Russia
party, is reportedly fed up with the politics behind this
drama ) which could ultimately cost his business interests
dearly. Absent the 787 purchase, Aeroflot will have to find
alternative long-range aircraft. Leasing, he calculates,
would cost the company $800 million over the cost of the
proposed 787 purchase.


MOSCOW 00010606 002 OF 002



7. (SBU) Even after the Lebedev announcement, the Russian
press speculated that Aeroflot will split the deal between
Boeing and Airbus, with the original terms of a 22 Boeing
plane purchase remaining in place. Once the deal with Boeing
is finalized, Aeroflot would re-energize negotiations with
Airbus for an additional number of planes. Aeroflot Chief
Executive Valery Okulov told reporters at a conference in
Itkursk September 20 that the firm would purchase the same
number of Airbuses in 2012-2016. Boeing discounts these
stories, arguing that Airbus does not need more than the 22.
But as long as these stories circulate, the Kremlin
negotiates from a stronger position with the Europeans on
EADs.

Other Fallbacks Possible
--------------


8. (C) November 1st is the next critical date. Our contacts
say that Aeroflot Board will need to meet and must give its
final approval by this date to ensure the 2010 delivery dates
are retained. Not only are the 22 787s at stake. Also
linked to the sale of the 787s are six McDonnell-Douglas
MDD11 cargo planes Boeing intends to sell to Aeroflot. If
Boeing pulls its planes off the table, Aeroflot loses out on
both a modernized passenger and cargo fleet. (Comment: We
believe Boeing is serious that November 1 is the real
drop-dead date. We understand that Boeing did indeed pull
its planes off the table - i.e. withdrew its commitment to
the 2010 delivery date - at the September 15 meeting when it
became clear the Aeroflot Board would not act. The fact that
the next Board date has not yet been announced is a matter of
some concern. End Comment.)

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


9. (C) The longest Boeing sales campaign in the history of
the firm (and the prospect of the largest single U.S.
manufactured goods sale to Russia) will be with us a while
longer, it appears. Lebedev's voice of reason is a welcome
addition to the debate, but we see his bail-out offer as a
heroic attempt of a businessman to preserve the value of his
investment rather than a signal from the Kremlin. This
latest move will keep the 787 deal alive in its current
configuration for several more weeks, after which it could
die completely (if it has not yet been finalized) or will no
doubt start to significantly morph into a smaller or more
expensive, and certainly a less timely deal -- for Aeroflot.

BURNS