CRISIS-RESPONSE MEASURES FOR THE RUSSIAN CAR

UNCLAS SECTION 01 OF 04 MOSCOW 000334

SENSITIVE
SIPDIS

STATE FOR EUR/RUS AND EEB/TPP/MTAA (NAFZIGER)
STATE PLS PASS USTR (MALMROSE, HAFNER, KLEIN)
COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON)

E.O. 12958: N/A
TAGS: ECON EFIN ETRD WTO RS
SUBJECT: CRISIS-RESPONSE MEASURES FOR THE RUSSIAN CAR
INDUSTRY

REF: A. STATE 4753

B. MOSCOW 180

C. 08 MOSCOW 3745

D. 08 MOSCOW 3669

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET OR DISTRIBUTION
OUTSIDE USG CHANNELS.

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SUMMARY
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1. (SBU) Russia's car companies are heavily indebted and
steadily losing market share to foreign competitors. The GOR
continues to employ a range of state support measures to help
Russia's major vehicle manufacturers cope with the global
financial crisis, including direct financial support,
subsidized lending and debt restructurings. A weakening
ruble and increased duties on imported automobiles (Ref C)
have provided some modicum of protection to domestic
producers by making foreign cars more expensive. However,
sales of Russian automobiles, what one critic called "scrap
on wheels," remain low and with stockpiles increasing, some
factories are beginning to cut production. As the financial
crisis continues, the GOR's overarching concern will be
avoiding the social unrest that might stem from massive
layoffs at Russia's major car assembly facilities and at the
upstream steel and metallurgical coal plants that supply them
basic materials (Ref B). END SUMMARY.


2. (SBU) Per Ref A request, we summarize below the general
actions that the GOR has taken to help Russia's car companies
cope with the financial crisis, including increased duties on
imported vehicles, and investment incentives for global car
parts and components manufacturers who agree to set up
production in Russia, a move that will indirectly benefit
Russian car makers. We also summarize the situation at each
major Russian car company, and the individual GOR support
measures that have already been adopted or are being
contemplated for each company. Finally, we assess the likely
effect of these measures on sales and production.

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Investment Incentives for Car Parts/Components
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3. (SBU) Russian car makers will benefit indirectly from
investment incentives that the GOR is now offering to global
automobile parts and components manufacturers. As disclosed
during Russia's WTO accession negotiations, because of
quality problems and shortages of domestically produced car
parts, Russia is now offering favorable investment terms to
multinational companies that apply to the Ministry of
Economic Development (MED) to establish parts assembly and
production within Russia. MED is currently considering 28
proposals, but has acknowledged that some of the deals may be
abandoned or put on hold because of the financial crisis.
For instance, in early February, Sumitomo and Czech firm
Cadence canceled a $60-million joint venture production
facility in St. Petersburg that was supposed to produce
plastic car parts for Suzuki vehicles.


4. (SBU) Russian officials insist that these investment
programs, and similar investment incentives previously
offered to global car manufacturers, do not provide for
mandatory local content requirements or run afoul of other
international trading norms, though they do provide for
preferential duty treatment as the percentage of local
content in domestic assembly and production increases over
time.

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Increased Duties and Ruble Depreciation
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5. (SBU) Russia's domestic car manufacturers have derived
some benefit (see below) from recent duty increases on
imported vehicles and the rapid depreciation of the ruble
against the dollar and Euro, which have made foreign cars
more expensive (Ref C). However, many observers believe that
most Russian consumers will simply choose to save longer in
order to buy a foreign car, rather than purchase Russian
models that are widely viewed as unreliable and of inferior
quality. As one Bank of Moscow analyst recently stated to

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the media, the Lada Classic (produced by Avtovaz, Russia's
leading car maker) is a piece of uncompetitive "scrap metal"
that few Russian consumers want to buy.

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Subsidized Loans and Government Procurement
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6. (U) On February 10, the GOR announced two further support
measures for domestic car makers. The first measure provides
2 billion rubles ($56 million) in 2009 for subsidized loans
to consumers who purchase domestically produced cars with a
purchase price less than 350,000 rubles ($9,722). The second
measure provides for 12.51 billion rubles ($347 million) in
GOR procurements of domestically produced vehicles through
several ministries, including the Ministries of Defense,
Internal Affairs (e.g., police cars),and Emergency
Situations.

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Avtovaz: State-Owned Vehicle Losing Market Share
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7. (SBU) Avtovaz, Russia's largest car manufacturer, produces
the iconic Soviet-era Russian brand "Lada" and engages in
joint production ventures with Renault and GM. While the
company's ownership structure is not fully transparent,
Renault acquired 25% of the stock in 2008 and a small
percentage of the stock is publicly traded. We believe that
the largest block of shares is owned by Rostekhnologii and
its affiliated companies, and Sergey Chemezov, the President
of Rostekhnologii, is also Chairman of the Board of Avtovaz.
Rostekhnologii is a state-owned conglomerate that also owns
aviation assets, titanium production, and much of Russia's
military-industrial complex.


8. (U) Avtovaz employs 104,000 workers at its production
facilities in Tolyatti (population 705,000). The company's
vehicle sales declined 6% in 2008 compared to 2007.
(According to estimates from the Association of European
Businesses, foreign car sales increased 26% in 2008 compared
to 2007, while domestic car sales dropped 9%.) Avtovaz
produced nearly 740,000 cars in 2008, but as it lost market
share to foreign car producers, it entered 2009 with an
inventory overhang of over 110,000 vehicles (equivalent to
more than two months' production). Avtovaz plans to produce
only 600,000 vehicles in 2009. Avtovaz has laid off 400 of
1,200 workers producing the GM Niva (a sport utility vehicle)
and has temporarily reduced its other productions lines to
two shifts of six hours each. In early February, Avtovaz
temporarily idled all of its production lines because of
payment disputes with its suppliers (since January 1, it had
been paying 30% cash and 70% in promissory notes on the
accounts payable to its suppliers). However, the payments
problems with suppliers were reportedly resolved, and the
company resumed production on February 9.


9. (SBU) Rostekhnologii is one of only seven state-owned
corporations that receive money directly from the federal
budget, is only required to report financial results to the
GOR once per year, and does not operate in a fully
transparent manner. As such, it is entirely possible that
Avtovaz could receive GOR money transfers via Rostekhnologii
without any public disclosure of the support. In late 2008,
Rostekhnologii received more than $5 billion in state support
to weather the financial crisis, though, according to press
reports, the GOR intended that much of the funds would be
used to prop up the company's defense and aviation holdings,
rather than Avtovaz.


10. (SBU) Rostekhnologii President Sergey Chemezov is
reportedly now seeking an additional $7.22 billion in state
support in the form of GOR capital contributions and state
guarantees. If the GOR grants Chemezov's request, it is not
yet clear how much of that funding will ultimately flow to
Avtovaz. Avtovaz also announced that in March it would begin
providing subsidized loans to consumers wishing to purchase
the Lada and other Avtovaz models by using its own financial
resources and those of two leading Russian banks, Sberbank
and VTB. The company is also reportedly seeking buyers for
its car dealership subsidiary, which accounts for roughly 25%
of total sales, in order to raise about $150 million in cash.

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GAZ: Badly in Need of a Bailout
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11. (U) GAZ employs 115,000 personnel at its production
facility in Nizhniy Novgorod (population 1.3 million). The
company makes the Gazelle (an all-purpose delivery truck),
has just launched the Volga Siber (a sedan that is similar to
the discontinued Chrysler Sebring and is produced using old
technology purchased from Chrysler),and also produces a few
other light truck models. The company is owned by
billionaire oligarch Oleg Deripaska, who has already received
about $4.5 billion in GOR bailouts to aid his struggling
metals businesses and to pay off his foreign creditors.
Despite the overall strong demand for cars in Russia in 2008,
GAZ's sales fell 25% in 2008 compared to 2007. GAZ is viewed
as the most heavily indebted of Russia's auto makers, with at
least $1.3 billion in debts, much of it reportedly in the
form of short-term external borrowings that are due in
mid-2009. Some press reports in January indicated that GAZ
would have to lay off at least 25,000 workers if it were
unable to secure GOR assistance. The company has temporarily
gone to shorter work weeks and idled some production lines.


12. (U) On February 4, the GOR Anti-Crisis Committee chaired
by First Deputy PM Shuvalov met to discuss how to assist GAZ
through the crisis. The committee reportedly considered
several options, including a restructuring of GAZ's debt, a
GOR guarantee of the company's bank loans, bonds and
commercial paper, or a GOR takeover of the company through a
quasi-bankruptcy reorganization (while Russian bankruptcy law
technically only allows for liquidations, the committee
reportedly discussed a procedure that would be akin to a U.S.
Chapter 11 bankruptcy reorganization). Some committee
participants told the press that GAZ would receive the lion's
share of government procurements of Russian cars in 2009.
The committee charged the Ministry of Economic Development
with preparing a package of GOR support measures for GAZ by
the beginning of March.

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Sollers/UAZ: Least Vulnerable
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13. (U) Sollers/UAZ employs 16,500 workers in Ulyanovsk
(Lenin's home town, population 604,000) and 2,175 workers in
Naberzhnye Chelniy (Republic of Tatarstan, population
506,000). The company is privately held by Vadim Shevtsov, a
business associate of billionaire oligarch and Severstal
owner Aleksey Mordashov. The company has fared better than
Avtovaz and Gaz, because it has largely become an assembler
of foreign economy class brands, including Fiat, Ssangyong
and Isuzu, while still producing some Russian car and truck
brands. In December 2008, Sollers reportedly received a 4
billion ruble ($111 million) credit facility from the
state-owned bank VTB to help it through the crisis, and is
reportedly seeking up to 6.1 billion rubles ($169 million)
more to refinance debt and increase the company's working
capital.

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Kamaz: Captive Clients for Heavy Duty Trucks
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14. (U) Kamaz is a heavy duty truck and bus manufacturer that
has few consumer sales. Kamaz's main production facility is
in Naberzhnye Chelniy, where it employs 72,000 workers. The
company is owned by the state and a consortium of Russian
banks, and its largest client is the Russian military.
Despite the fact that the company does not operate in the
consumer market and is to some degree insulated from direct
competition with foreign truck producers because of state
procurement contracts, in December 2008, it received a 7
billion ruble ($194 million) credit facility from state-owned
bank VTB to tide it through the crisis.

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COMMENT: STABILITY IS PARAMOUNT
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15. (SBU) State support for the domestic car industry is more
about ensuring stability in Russia's regions than about
rescuing individual companies. The GOR is driven by a desire
not only to save jobs in the car industry itself, but also to
avoid layoffs at upstream steel and metallurgical coal

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facilities that supply basic materials to the industry. Many
of Russia's car makers and their upstream suppliers are the
single-largest employers in the medium-sized cities where
they are located, and a shuttering of their plants would have
a devastating impact on local and regional unemployment
figures. As Russia's domestic car makers continue to cope
with eroding market share and weak consumer demand, we expect
that the GOR will employ all means necessary to avoid massive
layoffs and the social unrest that might ensue (Ref B).
BEYRLE