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 SIPDIS 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