UNCLAS ST PETERSBURG 000116


E.O. 12958: N/A
TAGS: RS PGOV ECON EIND
SUBJECT: PIKALYOVO'S DILEMMA UNRESOLVED: COMPANIES KICK THE CAN
FURTHER DOWN THE ROAD

REF: ST PETERSBURG 68, ST PETERSBURG 89



1. (U) Summary. Companies involved in the controversy
surrounding the industrial complex in the town of Pikalyovo,
Leningrad oblast, have agreed to extend until the end of 2009
the agreements PM Putin forcefully persuaded them to sign in
June during a visit there. The extension will allow the
industrial complex to continue working over the next four
months, keeping a lid on social tensions there for the time
being. However, the stop-gap solution fails to resolve the
underlying challenge of how to restructure the town's industry
in order to make it competitive and self-sustaining in the
absence of state intervention . End Summary


2. (U) According to the press service of the federal Ministry of
Industry and Trade, the companies involved in the controversy
surrounding the industrial complex in Pikalyovo in Leningrad
Oblast (reftels) decided to prolong until the end of the current
year the agreements PM Putin forcefullly persuaded them to sign
in June during his visit to the town. That decision was
adopted on August 28 at a meeting of the federal "Pikalyovo Task
Force" led by Deputy Minister of Industry and Trade Denis
Manturov. Based on the Federal Antimonopoly Service's (FAS)
recommendations, prices for raw materials used in Pikalyovo's
industrial production have been slightly revised under the
extended agreement.


3. (U) According to the FAS, the slight revision in raw
materials prices will allow the production complex in Pikalyovo
to operate through the end of the year without incurring losses.
However, the local press has reported that outside experts
claim that the agreement saddles Apatit, the Murmansk
Oblast-based supplier of raw materials for Pikalyovo's
BazelTsement industrial firm, with the bulk of the burden of the
agreement, since it will have to continue selling materials to
BazelTsement at cut-rate prices. (Note: Despite the public
hammering oligarch Oleg Deripaska - a Putin confidant and owner
of one of the factories in the Pikalyovo complex - took from
Putin during the PM's visit there in June, the price revisions
give Deripaska's company a continued artificial edge over the
competition, which does not enjoy the same pricing advantages.
End note.)


4. (U) Murmansk-based Apatit has not yet signed onto the new
agreement, claiming that the new price of 850 rubles per ton of
output is still far below its production cost. It has agreed to
accept the 850 ruble price only for the next two months, and has
proposed adding a penalty cost of another 350 rubles per ton if
BazelTsement fails to consume the agreed-upon volumes of the
product. Press reports that although both Evrotsement and
Metahim, the other two plants in Pikalyovo, have signed the new
agreement, they have also submitted letters of protest to
BazelTsement and to the Ministry of Industry and Trade stating
their disagreement with some of the contracts' conditions.


5. (U) Comment: In the meantime, the companies concerned are
required by the new agreement to continue negotiations aimed at
producing a new organizational structure and sustainable
long-term pricing system for Pikalyovo's industrial complex. A
new round of talks on that subject has been scheduled for the
end of September. In the absence of such a solution, we are
likely to see continued stop-gap measures meant to prevent a
production stoppage which could threaten social stability in
Pikalyovo, an outcome the government seems determined to prevent
at any cost. End comment.

GWALTNEY