CHELYABINSK OBLAST: SOUTHERN URALS REGION COPES WITH

UNCLAS YEKATERINBURG 000037


DEPT FOR EUR/RUS

E.O. 12958: N/A
TAGS: ECON EIND EINV PGOV RS SCUL
SUBJECT: CHELYABINSK OBLAST: SOUTHERN URALS REGION COPES WITH
ECONOMIC HARD TIMES

Sensitive but Unclassified. Not for internet distribution.


1. (SBU) Begin Summary: Consul General, Public Affairs
Officer, Department TDYer and LES Pol/Econ assistant traveled to
Chelyabinsk and Magnitogorsk May 26-28. In Chelyabinsk, we met
with the leader of the of the Pravoe Delo (Right Force)
political party, toured an American investment and met with the
American chief of the Emerson Electric corporation. In
Magnitogorsk, the CG met the mayor while opening a photographic
exhibit at the city art gallery. End Summary

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Chelyabinsk political scene quiet


2. (SBU) In Chelyabinsk, we had lunch with city duma deputy
Aleksey Sevastyanov, USG exchange program alum and current
leader of the Pravoe Delo political party in Chelyabinsk.
According to Sevastyanov, Pravoe Delo claims about 1500 members
in Chelyabinsk oblast, with branches in Miass, Magnitogorsk and
other cities. Entrepreneurs and small and medium business
owners make up the bulk of the party's membership. The economic
crisis has hit small and medium businesses the hardest,
according to Sevastyanov, due to the lack of availability of
credit. Some are being bought out by larger firms. Meanwhile,
the government has been focusing its attention on assisting
industrial giants such as Mechel and the Magnitogorsk
Metallurgical Combinat (MMC) in weathering the crisis.
Sevastyanov said that his group, which is pro-Kremlin in
orientation, does not advocate any revolutionary ideas, but
stands for the development of the rule of law, an end of
corruption and opportunities for small businessmen.

3. (SBU) The current political scene is relatively quiet, with
major elections just having occurred in March. Sevastyanov said
that the region's young people are not politically minded and
that pensioners, the segment of society most likely to protest,
were recently mollified by the government's promise of a raise
in benefits by 2010. He said that NGOs are not under any
particular pressure in the region, but reiterated his complaint
that Chelyabinsk Governor Sumin steadfastly refuses to appoint a
human rights ombudsman.

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American investors cope with economic downturn, other problems


4. (SBU) We traveled to the outskirts of Chelyabinsk to visit
the Carbo Ceramics plant which manufactures ceramic propant used
in the oil and gas industry. The Texas-based company invested
over US$ 42 million in the plant, which opened in 2007 and
employs about 100 workers. The economic crisis has reduced
demand in Russia, forcing the company to export more of its
product to Europe and the U.S. But the high quality of Carbo's
product still finds buyers among western firms doing business
here such as Hallibruton, Schlumberger and TNK-BP. The company
has switched from using low-quality Urals bauxite to higher
quality ore from other parts of Russia to maintain its standards
of quality.


5. (SBU) Dinner with Dwight Bohm, American director of the
Emerson Electric portion of the Emerson-Metran U.S.-Russian
joint venture revealed both the potential and the pitfalls that
face American investors in Russia. The global economic crisis
has ended a four-year period of steady growth for Emerson's
business in Russia. Mr. Bohm expected that his company's
revenues would reach only 2007 levels in 2009. He hoped that
the company could maintain this level through next year, by
which time he believed the economic crisis would be over.
Emerson had not engaged in significant layoffs; to do so would
be very risky in the context of Russian labor law. He allowed
that the metallurgy industry in Chelyabinsk olbast was suffering
and that cuts in employment would continue.


6. (SBU) Mr. Bohm revealed that Emerson was negotiating a
buyout of its Russian partner. The main reason for this seemed
to be the failure of the Russian side to fully comprehend the
need for transparency and adherence to the high standards of
business ethics maintained by the St. Louis- based Emerson
corporation. A series of accounting irregularities, conflicts
of interest in the supply chain and a criminal investigation of
the principal Russian partner had taken their toll on the
business relationship. Mr. Bohm lamented that the business
culture and practices in Russia were simply not up to western
standards. He allowed that the criminal investigation - about
which he declined to elaborate - was the last straw and led to
Emerson's takeover effort.


7. (SBU) In general, Mr. Bohm praised the attitude of the
regional authorities to American investors, but noted that
dealing with federal authorities was much more difficult and
that lines of jurisdiction were often unclear. For example,
Emerson's operation occupies space in a plant that once made
equipment for the Russian Ministry of Defense, which remained
its landlord. When confronted with a sudden massive rent
increase year, the company was virtually without recourse.
Though regional officials wanted to be helpful, they were unable
to assist. Negotiations were unsuccessful in reducing the
increase to a more reasonable amount. Carbo Ceramics managers
echoed this theme, stating their plant is located on two parcels
of land, one of which is controlled by regional and the other by
federal authorities. They noted that regional authorities had
been very accommodating in meeting the company's needs for
infrastructure connections, but that federal authorities had
been far less forthcoming.

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Magnitogorsk welcomes photo exhibit


8. (U) In Magnitogorsk, we met mayor Yevgeniy Venianovich
Karpov who joined in opening the PAS-produced photographic
exhibition "My Discovery of America," which combines the work of
a Yekaterinburg photographer and the poetry of Vladimir
Mayakovskiy and drew large crowds and rave reviews in
Yekaterinburg. Mayor Karpov, who rose through the ranks of MMC
before his election as mayor in 2005, spoke proudly of his
city's history and contribution to the Russian economy, but
emphasized its lively cultural life and it's crown jewel - the
European champion Metallurg professional hockey team. Karpov
was open and friendly and raved about a recent trip he took to
the United States as a tourist, visiting Las Vegas, Los Angeles
and Hawaii. Karpov is one half of an unusual political power
couple in Russia: his wife is a city duma deputy. Press
coverage of the event was very positive.


9. (SBU) Comment: The bustling streets of Chelyabinsk gave
the impression of a city that is coping reasonably well with
economic stresses. Magnitorgorsk looked a bit down on its luck,
but a newly built cathedral gleamed on a hilltop overlooking the
city's sprawling industrial complex. A superficial tour of MMC
itself revealed an orderly operation. Our guide alluded to
layoffs in the company, but would not give details. He
commented that cutbacks in working hours that had been imposed
earlier in the year had been rescinded and shifts were once
again working five days per week. The important question facing
MMC is whether it can produce steel of high enough quality to be
competitive on the world market.


10. (SBU) Comment continued: The road connecting Chelyabinsk
and Magnitogorsk was one of the best that we have travelled on
in the region. It was in decent repair and had more stretches
of four-lane divided highway than we have seen elsewhere. We
left the beaten track for Arkaim, located in the remote steppe
of the southern Urals about 160 km from Magnitogorsk, where we
visited the 18th century B.C. archaeological site of a former
proto-civilization. Arkaim is one of several ancient city states
in the region that are being investigated by archeologists.
Though the actual excavations on the site are minimal, the
location, which is sometimes touted as "the Russian Stonehenge,"
has become a popular destination for those seeking sources of
cosmic energy and mystical healing powers. Our guide, a
historian, while acknowledging that the site may have been
constructed to allow observations of astronomical phenomena,
downplayed the modern cult associations with the site. She
emphatically stated that, despite the large crowds that gather
there for the summer solstice, paganism has no place in modern
Russia. End Comment


SANDUSKY