Austria-Russia Economic Ties Deepening

UNCLAS SECTION 01 OF 04 VIENNA 001733 SIPDIS SENSITIVE TREASURY FOR OASIA/ICB/VIMAL ATUKORALA USDOC FOR 4212/MAC/EUR/OWE/PDACHER USDOC PASS TO OITA E.O. 12958: N/A TAGS: ETRD EINV ECON ENRG PREL RS AU SUBJECT: Austria-Russia Economic Ties Deepening REF: 07 VIENNA 2853 ¶1. (U) SUMMARY: Austria's commercial ties with Russia, which date to the Soviet era, have grown significantly since 2000. Despite a brief dip in 2007, imports from Russia (dominated by energy) are rising again. In recent years, Austrian firms (especially banks) have expanded aggressively into the Russian market. High- profile investments by Russian oligarchs and fear of political manipulation (as with sovereign wealth funds) have sparked talk in Austria of shielding strategically important companies. Russia has no official debts with Austria. END SUMMARY. Bilateral Trade -------------- ¶2. (U) Austrian statistics show total trade between Austria and Russia of EUR 4.4 billion in 2007 ($6.3 billion at the current rate of exchange of USD 1/EUR 0.70, a 5% drop from 2006 (in part due to Euro strength),but up 11% from 2005. In March 2008, reacting to weak bilateral trade in 2007, Austrian Economics Minister Martin Bartenstein and Russian Science and Education Minister Andrei Fursenko agreed to promote cooperation in investment, innovation and technology through a bilateral "Business Council" that convenes every six months. A weak 2007 masked strong expansion since 2000, when bilateral trade was less than half its current size (EUR 1.9 billion / $2.7 billion) and was tilted in favor of Russia (Austrian exports of EUR 655 million / $936 million versus imports of EUR 1.2 billion / $1.7 billion). Since 2000, Austrian exports to Russia have grown much faster (295%) than imports from Russia (48%) or Austrian exports worldwide (65%). In the first half of 2008, bilateral trade was up 23% (EUR 2.6 billion / $3.7 billion) over the same period in 2007. ¶3. (U) Imports from Russia fell 24% to EUR 1.8 billion ($2.6) in 2007 from 2006, constituting 1.6% of Austrian imports (2006: 2.3%) and making Russia number 14 among Austrian suppliers worldwide. The decline was solely due to lower oil and gas imports. Due to the price hike, the value of oil and gas imports rose almost 40% in the first half of 2008 and was the main reason for the 27% increase in imports from Russia compared to H1/2007. ¶4. (U) Austrian exports to Russia in 2007 were up 15% (following a 31% increase in 2006) and reached EUR 2.6 billion ($3.9 billion),or 2.3% of Austrian exports worldwide. Russia was Austria's number eleven export market, comprising 40% machinery, 25% chemical products, 15% metal / finished products. In the first half of 2008, Austrian exports to Russia rose 20% over H1/2007. Energy: Gazprom's Oldest Western Customer -------------- ¶5. (U) Austria is highly dependent on Russian natural gas -- much less so oil -- covering 62% of Austrian gas consumption. In fall 2006, Austrian oil and gas leader OMV extended until 2027 its contracts with Gazprom for gas deliveries of 7 billion bcm/annum. Gazprom also received the right to market its gas products by itself in three Austrian states (Carinthia, Styria, and Salzburg). Gazprom founded a Vienna-based trading company, Centrex, to market gas in Austria and neighboring countries. ¶6. (U) OMV Gas (a wholly-owned subsidiary) currently operates the Central European Gas Hub (CEGH),a web- based trading platform in operation since 2005 offering commercial, logistical, and auctioneering services to gas traders. A February 2008 agreement gave Gazprom the option of a 50% stake in the CEGH (reftel) and allows for joint gas storage as well. As agreed in November 2008, from 2009 OMV will hold only 30% of the CEGH. It will sell 20% to the Vienna Stock Exchange, while Gazprom's stake will be divided between Gazprom Germania (30%) and Centrex (20%). This new structure is intended to promote the CEGH as a "Central European VIENNA 00001733 002 OF 004 Gas Stock Exchange" according to OMV (septel). ¶7. (SBU) OMV remains schizophrenic about Gazprom's interests in Austria: OMV has profited enormously from imports since 1968 but is wary of Russian intentions vis-a-vis the Nabucco gas pipeline and the prospect of direct competition on the Austrian and Central European markets. Despite OMV leadership in Nabucco, the GoA and OMV are willing to cooperate with Russia on the major "rival" pipeline -- South Stream -- in an effort to bring more gas to OMV's physical hub in Baumgarten. Only the direct aftermath of the Georgia crisis prevented the GoA from negotiating an agreement with Russia on South Stream in September. Financial Ties to Russia -------------- ¶8. (U) The two leading Austrian banks in Russia are Raiffeisen International/RI (a fully consolidated subsidiary of the Raiffeisen Zentralbank/RZB with responsibility for emerging Europe) and Bank Austria- Creditanstalt/BA-CA, a member of the Italian UniCredit group with responsibility for eastern/southeastern Europe. In 2007, RI created Russia's largest foreign bank by merging the JSC Impexbank into its Russian subsidiary ZAO Raiffeisenbank, founded in 1996. BA holds 100% of ZAO UniCredit Bank (the former International Moscow Bank) and the Russian investment bank UniCredit Aton. RI is the seventh largest bank in Russia and the number one foreign bank, while BA is the tenth largest Russian and third largest foreign bank. In 2007, total assets of foreign banks in Russia reached EUR 563 billion, of which RI held about 2.2% (EUR 12.2 billion) and BA 1.8% (EUR 10.3 billion). Austrian banks have the third-highest claims on Russia after German and French banks. On November 11, RI subsidiary ZAO Raiffeisenbank announced a special agreement with the Central Bank of Russia, whereby the Central Bank will underwrite inter- bank loans issued by Raiffeisenbank by providing partial compensation for any losses incurred by the bank on Russia's inter-bank loan market. BA subsidiary ZAO UniCredit, which is also eligible for this guarantee, reportedly is still considering the offer. ¶9. (U) Other Austrian banks with large holdings in Russia include Erste Bank and the regional Raiffeisen Landesbank Upper Austria which hold respective stakes of 10% and 3.6% in the southern Russian bank Center Invest. Austrian bank activities in Russia are supplemented by leasing companies, brokers, etc. The Vienna Insurance Group, Austria's largest insurance company, owns 25% of Moscow-based Russian insurer MSK-Life. ¶10. (U) The Russian VTB Bank Austria, formerly Donau- Bank, was established in Vienna in 1974 and is a specialist in financing trade with Russia and other countries from the former Soviet Union (CIS),portfolio management, and structuring and syndicating loans for Russian and CIS clients. In 2007, VTB parent JSC VTB Bank (the former Vneshtorgbank),in which the Russian government holds a majority, reorganized VTB Bank Austria as its regional headquarters for Western Europe corporate and trade financing (the former Western European headquarters, VTB London, became responsible for investment banking). With a EUR 340 million ($486 million) capital injection from its mother, VTB Austria bought a 97.7% share in VTB Bank Germany and 87% in VTB Bank France. In 2007, VTB Austria's balance sheet totaled EUR 2 billion, the consolidated balance sheet of the VTB Subgroup (Austria, Germany and France) EUR 4.1 billion. The Austrian Kontrollbank -- Austria's export credit agency and Ex-Im Bank equivalent -- has had a cooperation agreement with VTB since 2007. Kontrollbank provides 100% guarantee cover without restrictions for business with Russia. ¶11. (U) Russia has no debts with Austria. In August 2006, Russia made an early payment of EUR 1.25 billion to complete the redemption of the former Soviet Union's debts with Austria (under a Paris Club agreement). Foreign Direct Investment -------------- VIENNA 00001733 003 OF 004 ¶12. (U) Latest available figures show strongly rising Austrian FDI in Russia; Russian FDI in Austria is also growing rapidly. At the end of 2005, Austrian investment in Russia was about EUR 0.8 billion ($1.2 billion) or 1.3% of Austria's total FDI stock abroad. In 2006, it rose to EUR 1.8 billion ($2.6 billion) or 2.2% of total Austrian FDI abroad. Preliminary figures show an EUR 2.6 billion ($3.7 billion) increase in 2007 and of EUR 740 million ($1.1 billion) in the first half of 2008, so that Austrian FDI in Russia is likely to exceed EUR 5 billion ($7.1 billion) by the end of 2008. Reasons for the increase include Austrian takeover of Russian banks (para 8) and investments by companies such as the Vienna Insurance Group, Egger (particle board),Kaindl (particle board),Neusiedler (paper) and Mayr-Melnhof (paperboard). Around 350 Austrian firms have subsidiaries in Russia. ¶13. (U) Russian FDI in Austria reached EUR 461 million ($659 million) at the end of 2006, less than 1% of total foreign FDI in Austria. The only prominent Russian investment at that time was in VTB Bank (para 10),which has operated in Austria for more than 30 years. With several recent investments, including Gazprom's investment in trading platform CEGH, preliminary figures for Russian FDI in Austria show an increase by about EUR 262 million ($374 million) in 2007 and another EUR 111 million ($159 million) in H1/2008, so that total Russian FDI in Austria is likely to top EUR 1 billion this year. ¶14. (U) Russian oligarchs are significant portfolio investors in Austria. In mid-2007, Oleg Deripaska purchased via Rasperia Trading a 25% share in Austro- German STRABAG, Europe's sixth largest construction conglomerate, for EUR 1.1 billion ($1.5 billion). At the same time, Deripaska entered a deal via Russian Machines (a subsidiary of Basic Element Holding) to borrow EUR 1 billion ($1.7 billion) to obtain a 20% share in the Canadian automotive supplies company Magna International and with it, Austrian subsidiary Magna Steyr Fahrzeugtechnik (MSF). NOTE: Austria's largest automotive company, MSF assembled 200,000 BMW, Chrysler, Mercedes and Saab vehicles in 2007, with total sales of EUR 2.7 billion ($4.1 billion) and 7,000 employees - END NOTE. In October 2008, the global financial crisis apparently compelled Deripaska to back out of the loan-financed Magna deal. He will remain in STRABAG after Raiffeisen-parent RZB loaned him EUR 460 million to refinance his participation in that deal. Tourism -------------- ¶15. (U) Russian tourism to Austria is on the upswing. Increasing numbers of Russians spend their vacations in Austria. In 2007, Austria recorded 88.4 million overnight stays by foreign tourists. Though Russian citizens accounted for only 786,600 (or 0.9%),this was a 25% increase from 2006 and 49% over 2005, in a two- year period when the total number of overnight stays of foreign tourist rose less than one percent. Russian Residents in Austria -------------- ¶16. (U) An increasing number of Russians are reportedly taking residence in Austria (some 19,000 Russian Federation citizens live here according to Statistics Austria). Preferred locations include the Lake Woerthersee area in southern Austria, the alpine resort Kitzbuehel, and Klosterneuburg (a Vienna suburb). Roman Abramovich is an avid visitor who reportedly owns an estate in the Salzkammergut (Upper Austria) and has become a player on the Austrian real estate market. COMMENT: Austrian Schizophrenia on Russian Money -------------- --- ¶17. (SBU) While Austrian-Russian business relations have been smooth and are bolstered by Austria's neutralist foreign policy, many remain skeptical of the VIENNA 00001733 004 OF 004 potential baggage that Russian ties may bring. The January 2006 Gazprom standoff with Ukraine and the invasion of Georgia hurt Russia's public standing here, and many are aware of Austria's gas dependence. Some observers painted the latest CEGH deal in a negative light, and say that Gazprom pressured OMV. ¶18. (U) High-profile investments by Russian oligarchs have become part of the debate over sovereign wealth funds (SWFs). Despite a long positive track record with the Abu Dhabi International Petroleum Investment Company/IPIC (17.6% owner of OMV since 1994),a few Austrians are voicing concerns about investments from Russia and other countries lacking adequate rule-of- law. In November 2007 (echoing the German debate) then-Economics Minister Martin Bartenstein proposed shielding strategically important companies by law from non-EU state ownership. Bartenstein suggested an EU- wide regulation for the energy sector and national regulations for other industries. The GOA could not agree before collapsing in mid-2008, and it remains to be seen whether the incoming GoA will revisit the topic. GIRARD-DICARLO