WILL PROPOSED AEROFLOT-ROSAVIA DEAL UNDERMINE

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000155

SIPDIS

DEPT FOR EUR/RUS, EEB/CIP, EEB/IFD/OIA
DOC FOR JBROUGHER
USTR FOR EHAFNER

E.O. 12958: DECL: 01/14/2010
TAGS: EAIR ECON ETRD EINV RS
SUBJECT: WILL PROPOSED AEROFLOT-ROSAVIA DEAL UNDERMINE
PURCHASE OF BOEING AIRCRAFT?

REF: 09 MOSCOW 3078

Classified By: ECONMINCOUNS Matthias Mitman for reasons 1.4(b)
and (d)


1. (SBU) On December 30, during a meeting chaired by First
Deputy Prime Minister Igor Shuvalov, Minister of Transport
Igor Levitin reportedly suggested that control over new
Russian airline RosAvia be transferred to Aeroflot. Under
the proposal, Russian state corporation Rostekhnologia, 51%
owner of RosAvia, would exchange all of its shares for a 28%
stake in Aeroflot which is currently owned by National
Reserve Corporation (NRC). Levitin expects the swap would
help Aeroflot become a leading airline not only in Russia,
but potentially in Europe as well. The possible acquisition
will be discussed by the GOR on January 30.


2. (SBU) The plan has serious implications for Boeing, which
submitted a bid in October 2009 to supply 50 narrow bodied
aircraft (with an option of 15 more) to RosAvia, a project
valued at approximately $4 billion. It is unclear how
Aeroflot,s potential acquisition of Rostekhnologia,s
aviation
assets would affect the RosAvia tender. In the meantime,
meetings between the Boeing and Rostekhnologia teams are
scheduled on January 15. End summary.

Boeing Invited to Tender
--------------


3. (SBU) On October 16, 2009, Boeing Russia submitted a bid,
at the invitation of Rostekhnologia, to supply up to 65
passenger aircraft (737-800s)to RosAvia. This project is
valued at approximately $4 billion and may include Ex-Im
financing (reftel). Boeing is competing against Airbus and
Russia,s United Aircraft Corporation (which is not viewed to
be a viable competitor). In December, Director General of
Rostekhnologia, Sergei Chemezov told us that the final
decision to purchase aircraft, originally
scheduled for mid-December, would be delayed until the end
of January, claiming that Rostekhnologia needed more time
to review a &more attractive8 proposal from Airbus.


4. (SBU) Established in late 2007, Rostekhnologia is a
Russian state corporation set up to facilitate the
development, production and export of hi-tech industrial
products for civilian and military purposes. RosAvia is a
newly formed national airline that is 51% owned by
Rostekhnologia and 49% owned by the City of Moscow. RosAvia
has absorbed regional Russian carriers that have struggled
amid the global financial downturn, such as Rossiya (City of
St. Petersburg airline),Vladivostok Air and possibly
Atlant-Soyuz (City of Moscow airline). The inclusion of
Atlant-Soyuz in the RosAvia consortium has been a point of
debate given the airline,s heavy debt load.


Aeroflot-RosAvia Deal
--------------


5. (SBU) According to various media and industry sources, on
December 30, during a meeting chaired by Shuvalov, Minister
of Transport Levitin suggested that control of RosAvia be
transferred to Aeroflot. Rostekhnologia would receive the
28% stake in Aeroflot, currently owned by NRC, controlled by
Alexander Lebedev, a Russian banker (who has reportedly
agreed to sell). Although the structure of the deal has yet
to be established, Aeroflot would apparently buy the stake
from NRC and swap it for control in RosAvia.


6. (SBU) This measure looks to be a further step in
consolidation of Russian airlines in a time of crisis. While
most analysts voice the opinion that taking over RosAvia with
its large debt burden and near-bankrupt small airlines is not
in Aeroflot,s best interest, others highlight that the deal
would allow Aeroflot to strengthen its leadership in the
domestic market, including the Russian Far East. Levitin
reportedly believes that the swap would help Aeroflot become
a leading airline not only in Russia but potentially in
Europe
as well. Media and industry sources say that Aeroflot

MOSCOW 00000155 002.2 OF 002


officials
will discuss the possible acquisition of RosAvia with
Shuvalov
and Rostekhnologia officials, on January 30.


In the Meantime, Boeing is Proceeding with Tender Negotiations
-------------- --------------


7. (C) Dr. Sergey Kravchenko, President of Boeing Russia and
CIS, told us that Levitin,s proposal regarding RosAvia was
not
received well by Rostekhnologia and that an agreement on the
ownership structure of RosAvia could not be reached between
Rostekhnologia and the City of Moscow. As a result, RosAvia
is focusing on Rossiya as a central airline, while Chemezov
asked St. Petersburg,s Governor Matveenko to play an active
role
in RosAvia,s projects. Kravchenko confirmed that a final
decision regarding RosAvia has not yet been made and that
Deputy
PM Shuvalov, Minister of Economic Development Nabiullina and
Rostekhnologia Director General Chemezov are involved in the
discussions. Kravchenko does not believe the conditions of
the
tender have changed. He stated that Boeing is proceeding
with the
bid while meetings between the Boeing and Rostekhnologia
teams are
scheduled on January 15.

Comment
--------------


8. (C) Transferring control over RosAvia to Aeroflot is a
complex
process that could not be accomplished quickly. Different
forms
of ownership of RosAvia,s member airlines (some private and
some
state owned),and the debt burden of most of them, makes the
process challenging for the Russian decision makers.
Furthermore,
the question remains over Aeroflot,s ability to run a much
larger
number of airlines, since its management of two existing
subsidiaries (Aeroflot Don and Aeroflot Nord) have not led to
significant improvements. Notwithstanding these hurdles, a
decision to transfer control over RosAvia to Aeroflot is
still
possible, considering the pressure from Minister Levitin. If
it
goes through, the tender to purchase additional aircraft
could be
adversely affected.

9.(C) Post will continue to advocate with GOR on behalf of
Boeing
for its tender and will report additional details on RosAvia
tender
developments as they become available. End Comment
Beyrle