Identifier
Created
Classification
Origin
09MOSCOW756
2009-03-26 15:51:00
CONFIDENTIAL
Embassy Moscow
Cable title:
ROSTECHNOLOGII DIRECTOR CHEMEZOV SEEKS MORE STATE
how-toVZCZCXRO0952 PP RUEHDBU DE RUEHMO #0756/01 0851551 ZNY CCCCC ZZH P 261551Z MAR 09 FM AMEMBASSY MOSCOW TO RUEHC/SECSTATE WASHDC PRIORITY 2571 INFO RUCNCIS/CIS COLLECTIVE PRIORITY RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000756
SIPDIS
STATE FOR EUR/RUS; NSC FOR ELLISON
E.O. 12958: DECL: 03/24/2119
TAGS: EAIR ECON EINV PARM RS
SUBJECT: ROSTECHNOLOGII DIRECTOR CHEMEZOV SEEKS MORE STATE
SUPPORT; SUPPORTS GM AND BOEING INVESTMENTS
Classified By: AMBASSADOR JOHN BEYRLE, REASONS 1.4 (B,D)
------
SUMMARY
-------
C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000756
SIPDIS
STATE FOR EUR/RUS; NSC FOR ELLISON
E.O. 12958: DECL: 03/24/2119
TAGS: EAIR ECON EINV PARM RS
SUBJECT: ROSTECHNOLOGII DIRECTOR CHEMEZOV SEEKS MORE STATE
SUPPORT; SUPPORTS GM AND BOEING INVESTMENTS
Classified By: AMBASSADOR JOHN BEYRLE, REASONS 1.4 (B,D)
--------------
SUMMARY
--------------
1. (C) In a March 20 meeting with the Ambassador, Director
General of Rostechnologii, Sergei Chemezov, stated that many
of the conglomerate's constituent corporations would likely
close owing to the economic crisis. Thirty percent of
Rostechnologii's defense plants were on the verge of
bankruptcy, and half of them would eventually shut down. On
the other hand, Rostechnologii would receive sufficient
government support (mostly in state guarantees and interest
rate compensation on bank loans) to sustain its major
enterprises, such as the car manufacturer, Avtovaz. Chemezov
said Rostechnologii's joint venture with Boeing is scheduled
to open in June or July, and in that regard noted that
Rostechnologii's aviation arm, Rosavia, was planning to put
out a tender for the purchase of up to 100 Boeing or Airbus
aircraft. Finally, he noted that production at GM's joint
venture with Avtovaz would be halved this year owing to the
decline in Russian auto sales. End Summary.
--------------
Economic Crisis: Winners and Losers
--------------
2. (C) Chemezov said that when the military-industrial
conglomerate Rostechnologii was formed in 2007, it not only
absorbed the assets of the state arms exporter,
Rosobnoronexport, but acquired 450 additional entities,
including 180 state corporations, mostly in the defense,
machine building, aviation, auto manufacturing and metallurgy
sectors. (Note: Rostechnologii owns stakes in VSMPO Avisma,
a supplier of titanium to Boeing, and Avotvaz, Russia's
biggest car manufacturer, which has a joint venture with GM
in Togliatti. It is also the majority shareholder in Rosavia,
a collection of several bankrupt regional carriers. End
Note.)
3. (C) Chemezov said Rostechnologii needed to conduct an
auditing of the acquired assets in order to establish their
real value and prepare many of them for public auction; a
process that could take up to two years. In order to speed
up the auditing process, Chemezov was seeking legislation
from the Duma allowing Rostechnologii to assume immediate
management of the 100 percent owned state corporations
(unitarniye predpriyaiya) that had been handed over to it.
The state corporations were presently under the control of
the government State Property Agency.
4. (C) Chemezov said that many of Rostechnologii's
constituent enterprises would have to be closed,"causing
pain" for many workers. Driving this process was not just
the downturn, but $800 million in debt Rostechnologii had
inherited when it assumed control of these enterprises, and
which was continuing to mount as many of these firms lost
value. Enterprises in the single company towns, i.e.,
Avtovaz, would continue to operate and receive state funding.
However, smaller enterprises that did not contribute
significantly to Rostechnologii's major product lines would
have to close.
5. (C) Chemezov hoped that the crisis would bottom-out by
the end of the year, but predicted that economic recovery,
particularly in the manufacturing sector, would take at least
three or four years. This would put enormous pressure on the
compnay's weaker components.
--------------
Defense Industries
--------------
6. (C) Among those weaker components were defense related
firms, according to Chemezov. Rostechnologii included 19
holding companies in defense related industries, including
radio-electronics, aviation equipment; and manufacturing of
motors, ammunition and conventional weapons. Thirty percent
of the defense plants were on the verge of bankruptcy, he
said, and about half of those plants would eventually be
closed.
--------------
State Financing
--------------
MOSCOW 00000756 002 OF 003
7. (C) Chemezov said he was confident that Rostechnologii
would obtain a large part of the state funding it had
requested. He said that he had been working directly with
Deputy Prime Minister Shuvalov, who would make the final
decision on how much and where the cuts to Rostechnologii's
budget would be made. (Note: Rostechnologii is one of only
seven state-owned corporations that receive money directly
from the federal budget. Rostechnologii received $5 billion
last fall and is now reportedly seeking another $7.22 billion
in GOR capital contributions and state guarantees. End note.)
8. (C) Chemezov said the bulk of government support would be
in the form of guarantees for bank credits and interest rate
compensation. He complained about the high interest rates
for commercial bank credits, which he said the Finance
Minister had attributed to inflation. "Compensating us for
high interest rates is also inflationary," he grumbled. "It's
as if the money is going from one pocket into another."
--------------
Cooperation with Boeing
--------------
9. (C) Chemezov said that the Boeing-VSMPO JV "Ural Boeing
Manufacturing Plant" (which will produce parts for the Boeing
787/Dreamliner) was scheduled to open in June or July. Local
production would not only lower transport and packing costs
for Boeing, but produce jobs for Russians and profits for
Rostechnologii, he noted. He commented that commercial
successes such as the Boeing-VSMPO partnership could do much
to offset the occasional political fluctuations in the
bilateral relationship.
10. (C) Chemezov said he would be meeting with Boeing
executives Scott Carson and Sergey Kravchenko in early April
to discuss the timing of the JV opening (which he suggested
could be coordinated with possible POTUS visit). He invited
the Ambassador to attend a meeting he was organizing for the
Boeing execs with Deputy Prime Minster Shuvalov.
11. (C) Chemezov added that Rostechnologii's aviation arm,
Rosavia, was interested in purchasing a large volume of
foreign aircraft (either Boeing or Airbus) to modernize its
fleet and make it fuel efficient. Rosavia was preparing a
tender for the purchase of about 100 aircraft which would be
presented to both Boeing and Airbus. Chemezov said that
Rosavia was about to send a delegation to the U.S to discuss
possible purchase of Boeing aircraft. A selling point for
Boeing was the fact that spare parts could be produced in
Russia. Chemezov added, however,that the Airbus 320 had a
more modern design than the Boeing 737. On the other hand,
the larger Boeing 767 was more suitable for long-haul
passenger flights, and would be ideal for Rosavia's cross
country flights to Vladivostok and Khabarovsk. (Chemezov's
staff later told us that Rosavia might consider a purchasing
a combination of Boeing 737 and 767 jets if Boeing wins the
tender).
12. (C) In the future, Chemezov said Rosavia would most
likely procure locally produced aircraft, but the Russian
manufacturer United Aircraft was not yet geared up for
production. In the meantime, Rosavia would be exempt from
customs duties on imported aircraft. Eventually, he said air
passenger traffic would be divided between Rosavia (taking
over all of the domestic routes) and Aeroflot (holding on to
the international flights). Chemezov said the government was
prepared to subsidize air travel between western Russia and
the Russian far east.
--------------
Avtovaz and GM
--------------
13. (C) Chemezov said production of the Lada and GM Niva
models at GM's joint venture with Avtovaz would be cut by one
half this year. To cover losses (owing to the fall in
Russian car sales from 2.8 million to 1.8 million in the
course of a year),the firm would sell some of its finished
product abroad for foreign exchange. He explained that
Russian consumers no longer wanted to spend on expensive
consumer goods and were "saving for a rainy day". For that
reason, he said, Avtovaz was designing an inexpensive "car
for the people" which would be sold at a price "accessible to
all". Avtovaz was also investing a new conveyer belt to
manufacture a "slightly higher class Lada".
MOSCOW 00000756 003 OF 003
--------------
Comment
--------------
14. (C) Although closely identified with one of the Kremlin's
shadowy siloviki clans, Chemezov was candid about
Rostechnologii's financial plight, production problems and
potential cuts, particularly in the defense industry. He
also seemed genuinely supportive of Rostechnologii's business
ties with GM, Boeing and another Western firms, and
acknowledged the need for foreign investment to modernize
those elements of the conglomerate that will survive the
crisis. End Comment.
BEYRLE
SIPDIS
STATE FOR EUR/RUS; NSC FOR ELLISON
E.O. 12958: DECL: 03/24/2119
TAGS: EAIR ECON EINV PARM RS
SUBJECT: ROSTECHNOLOGII DIRECTOR CHEMEZOV SEEKS MORE STATE
SUPPORT; SUPPORTS GM AND BOEING INVESTMENTS
Classified By: AMBASSADOR JOHN BEYRLE, REASONS 1.4 (B,D)
--------------
SUMMARY
--------------
1. (C) In a March 20 meeting with the Ambassador, Director
General of Rostechnologii, Sergei Chemezov, stated that many
of the conglomerate's constituent corporations would likely
close owing to the economic crisis. Thirty percent of
Rostechnologii's defense plants were on the verge of
bankruptcy, and half of them would eventually shut down. On
the other hand, Rostechnologii would receive sufficient
government support (mostly in state guarantees and interest
rate compensation on bank loans) to sustain its major
enterprises, such as the car manufacturer, Avtovaz. Chemezov
said Rostechnologii's joint venture with Boeing is scheduled
to open in June or July, and in that regard noted that
Rostechnologii's aviation arm, Rosavia, was planning to put
out a tender for the purchase of up to 100 Boeing or Airbus
aircraft. Finally, he noted that production at GM's joint
venture with Avtovaz would be halved this year owing to the
decline in Russian auto sales. End Summary.
--------------
Economic Crisis: Winners and Losers
--------------
2. (C) Chemezov said that when the military-industrial
conglomerate Rostechnologii was formed in 2007, it not only
absorbed the assets of the state arms exporter,
Rosobnoronexport, but acquired 450 additional entities,
including 180 state corporations, mostly in the defense,
machine building, aviation, auto manufacturing and metallurgy
sectors. (Note: Rostechnologii owns stakes in VSMPO Avisma,
a supplier of titanium to Boeing, and Avotvaz, Russia's
biggest car manufacturer, which has a joint venture with GM
in Togliatti. It is also the majority shareholder in Rosavia,
a collection of several bankrupt regional carriers. End
Note.)
3. (C) Chemezov said Rostechnologii needed to conduct an
auditing of the acquired assets in order to establish their
real value and prepare many of them for public auction; a
process that could take up to two years. In order to speed
up the auditing process, Chemezov was seeking legislation
from the Duma allowing Rostechnologii to assume immediate
management of the 100 percent owned state corporations
(unitarniye predpriyaiya) that had been handed over to it.
The state corporations were presently under the control of
the government State Property Agency.
4. (C) Chemezov said that many of Rostechnologii's
constituent enterprises would have to be closed,"causing
pain" for many workers. Driving this process was not just
the downturn, but $800 million in debt Rostechnologii had
inherited when it assumed control of these enterprises, and
which was continuing to mount as many of these firms lost
value. Enterprises in the single company towns, i.e.,
Avtovaz, would continue to operate and receive state funding.
However, smaller enterprises that did not contribute
significantly to Rostechnologii's major product lines would
have to close.
5. (C) Chemezov hoped that the crisis would bottom-out by
the end of the year, but predicted that economic recovery,
particularly in the manufacturing sector, would take at least
three or four years. This would put enormous pressure on the
compnay's weaker components.
--------------
Defense Industries
--------------
6. (C) Among those weaker components were defense related
firms, according to Chemezov. Rostechnologii included 19
holding companies in defense related industries, including
radio-electronics, aviation equipment; and manufacturing of
motors, ammunition and conventional weapons. Thirty percent
of the defense plants were on the verge of bankruptcy, he
said, and about half of those plants would eventually be
closed.
--------------
State Financing
--------------
MOSCOW 00000756 002 OF 003
7. (C) Chemezov said he was confident that Rostechnologii
would obtain a large part of the state funding it had
requested. He said that he had been working directly with
Deputy Prime Minister Shuvalov, who would make the final
decision on how much and where the cuts to Rostechnologii's
budget would be made. (Note: Rostechnologii is one of only
seven state-owned corporations that receive money directly
from the federal budget. Rostechnologii received $5 billion
last fall and is now reportedly seeking another $7.22 billion
in GOR capital contributions and state guarantees. End note.)
8. (C) Chemezov said the bulk of government support would be
in the form of guarantees for bank credits and interest rate
compensation. He complained about the high interest rates
for commercial bank credits, which he said the Finance
Minister had attributed to inflation. "Compensating us for
high interest rates is also inflationary," he grumbled. "It's
as if the money is going from one pocket into another."
--------------
Cooperation with Boeing
--------------
9. (C) Chemezov said that the Boeing-VSMPO JV "Ural Boeing
Manufacturing Plant" (which will produce parts for the Boeing
787/Dreamliner) was scheduled to open in June or July. Local
production would not only lower transport and packing costs
for Boeing, but produce jobs for Russians and profits for
Rostechnologii, he noted. He commented that commercial
successes such as the Boeing-VSMPO partnership could do much
to offset the occasional political fluctuations in the
bilateral relationship.
10. (C) Chemezov said he would be meeting with Boeing
executives Scott Carson and Sergey Kravchenko in early April
to discuss the timing of the JV opening (which he suggested
could be coordinated with possible POTUS visit). He invited
the Ambassador to attend a meeting he was organizing for the
Boeing execs with Deputy Prime Minster Shuvalov.
11. (C) Chemezov added that Rostechnologii's aviation arm,
Rosavia, was interested in purchasing a large volume of
foreign aircraft (either Boeing or Airbus) to modernize its
fleet and make it fuel efficient. Rosavia was preparing a
tender for the purchase of about 100 aircraft which would be
presented to both Boeing and Airbus. Chemezov said that
Rosavia was about to send a delegation to the U.S to discuss
possible purchase of Boeing aircraft. A selling point for
Boeing was the fact that spare parts could be produced in
Russia. Chemezov added, however,that the Airbus 320 had a
more modern design than the Boeing 737. On the other hand,
the larger Boeing 767 was more suitable for long-haul
passenger flights, and would be ideal for Rosavia's cross
country flights to Vladivostok and Khabarovsk. (Chemezov's
staff later told us that Rosavia might consider a purchasing
a combination of Boeing 737 and 767 jets if Boeing wins the
tender).
12. (C) In the future, Chemezov said Rosavia would most
likely procure locally produced aircraft, but the Russian
manufacturer United Aircraft was not yet geared up for
production. In the meantime, Rosavia would be exempt from
customs duties on imported aircraft. Eventually, he said air
passenger traffic would be divided between Rosavia (taking
over all of the domestic routes) and Aeroflot (holding on to
the international flights). Chemezov said the government was
prepared to subsidize air travel between western Russia and
the Russian far east.
--------------
Avtovaz and GM
--------------
13. (C) Chemezov said production of the Lada and GM Niva
models at GM's joint venture with Avtovaz would be cut by one
half this year. To cover losses (owing to the fall in
Russian car sales from 2.8 million to 1.8 million in the
course of a year),the firm would sell some of its finished
product abroad for foreign exchange. He explained that
Russian consumers no longer wanted to spend on expensive
consumer goods and were "saving for a rainy day". For that
reason, he said, Avtovaz was designing an inexpensive "car
for the people" which would be sold at a price "accessible to
all". Avtovaz was also investing a new conveyer belt to
manufacture a "slightly higher class Lada".
MOSCOW 00000756 003 OF 003
--------------
Comment
--------------
14. (C) Although closely identified with one of the Kremlin's
shadowy siloviki clans, Chemezov was candid about
Rostechnologii's financial plight, production problems and
potential cuts, particularly in the defense industry. He
also seemed genuinely supportive of Rostechnologii's business
ties with GM, Boeing and another Western firms, and
acknowledged the need for foreign investment to modernize
those elements of the conglomerate that will survive the
crisis. End Comment.
BEYRLE