CEMENT BUSINESS RECEIVES GENEROUS GOVERMENT SUBSIDIES

UNCLAS VLADIVOSTOK 000085 SIPDIS E.O. 12958: N/A TAGS: ECON PGOV SUBJECT: CEMENT BUSINESS RECEIVES GENEROUS GOVERMENT SUBSIDIES ¶1. Summary: In the SpasskCement Co. Inc., the line between public and private is blurred. Although the company is part of the privately owned VostokCement LLC, SpasskCement has regularly received financial assistance from the Primorskiy Krai government, including over 560 million rubles during the last five years. In 2009 alone, the regional government granted SpasskCement a reduced 20 percent tax on profit and a 92 million ruble subsidy. These favors are not unexplainable: Igor Pushkarev, the current mayor of Vladivostok, started his political career in Spassk-Dalniy in 2001 as the Director of VostokCement. Moreover, Igor's younger brother, Andrey, who recently succeeded Igor as the Director General, is the main shareholder of the Cyprus-based Lymex Holdings LTD, the owner of 92.14% of VostokCement. DESPITE SUPPORT, SPASSKCEMENT FLOUNDERING ¶2. Government support has not helped the company or Spassk-Dalniy, where it is located. In Soviet times, SpasskCement was an honorable place to work. The Novospasskiy Cement Plant, one of the company's two plants, was the largest manufacturer of construction materials in the Russian Far East, producing an annual output of over 3.7 million tons of cement. The plant was also the largest employer in the city, with more than 5,000 employees. ¶3. More recently, SpasskCement's two plants have faced numerous difficulties. The Novospasskiy cement plant suspended operations in the 1990's, but reopened after 2000. In late 2008, Rosprirodnadzor ordered the 100-year old Spasskiy cement plant closed because of inadequate air filtration and obsolete equipment. The plant had exposed Spassk-Dalniy's residents to dangerous amounts of cement dust. ¶4. SpasskCement has not grown during the last two decades. Although the company's annual output of cement in 2008 was 65 percent higher than in 2007, its output in 2008 was just over half of 1988 production. SpasskCement stopped operating and put all of its workers on indefinite enforced leave in late 2008. The company resumed operations in late spring of 2009. SUBSIDIES HAVE NOT BENEFITTED THE TOWN OF SPASSK-DALNIY ¶5. Spassk-Dalniy has also faced its share of hardships. In Soviet times, it was one of the most comfortable cities in Primorye, with a population of over 60,000 people. Currently, Spassk-Dalniy's population is declining and most of the residents are pensioners with limited incomes. In spite of development projects, living conditions remain poor. The Pushkarev brothers recently renovated a polyclinic and a cinema, and Igor Pushkarev donated an ultrasound unit to the municipal polyclinic. However, the city is unable to purchase SpasskCement's concrete at preferential prices to repair dilapidated roads. SPASSKCEMENT HAS NOT ECONOMICALLY USED ITS RESOURCES ¶6. Analysts argue that SpasskCement has poorly allocated both its income and its state subsidies. Although VostokCement representatives claim that their LLC uses money from preferential tax treatment to renovate and upgrade VostokCement assets, a review of SpasskCement's investments suggests otherwise. Of the company's 2007 income, SpasskCement invested 526 million rubles in the securities of other businesses and distributed 152 million rubles as shareholder dividends. In decisions that benefited neither the company nor the community, SpasskCement also granted a 58 million ruble, 7% interest, three-year loan to VostokCement and a 100 million ruble, 7%, ten-year loan to Vladimir Pushkarev, Deputy Director of VostokCement. Since SpasskCement spent only 1.3 million rubles on industrial needs, signs of renovation at the company are rare. Instead of modernizing SpasskCement's equipment, the VostokCement Board of Directors closed the old factory in 2008. Moreover, the equipment at the 33-year-old Novospasskiy plant needs to be replaced. ¶7. Comment: SpasskCement's status as the official manufacturer of cement products for the 2012 APEC Summit-related construction may assure the future for the Pushkarevs and their family empire; however, living conditions in Spassk-Dalniy are unlikely to improve. MILLER