06MOSCOW10606, AEROFLOT-BOEING DEAL: STILL ALIVE – FOR NOW

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Reference ID Created Released Classification Origin
06MOSCOW10606 2006-09-21 15:24 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO6125
PP RUEHAG
DE RUEHMO #0606/01 2641524
ZNY CCCCC ZZH
P 211524Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 2719
INFO RUCNMEM/EU MEMBER STATES 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 02 MOSCOW 010606 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB AND EUR/RUS 
USDOC FOR 4321/ITA/MAC/EUR/RISA EDWARDS AND BEADLE 
USDOC FOR 3004/CS/ADVOCACY/BLOOM 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 09/21/2016 
TAGS: ECON PREL EAIR RS
SUBJECT: AEROFLOT-BOEING DEAL: STILL ALIVE - FOR NOW 
 
REF: HOLMAN EMAIL 9/20 
 
Classified By: Econ M/C Quanrud for reasons 1.5b and d. 
 
1. (C) Summary: A surprising "white knight" - billionaire 
Alexandr Lebedev, minority shareholder in Aeroflot - with $40 
million from his own pocket has resuscitated the Boeing deal 
that as of September 15th, looked near demise.  Lebedev's 
move might give the Kremlin a face-saving to allow the Boeing 
sale. The deal also gives the Kremlin breathing space, 
allowing Putin, on the eve of meeting with German Chancellor 
Merkel and French President Chirac, to hold up the prospect 
of large-scale Airbus purchase as possible leverage to 
acquire a greater share in EADS.  End Summary. 
 
The Kremlin ) Maneuvering Behind the Curtain 
-------------------------------------------- 
 
2. (C) Early last week, Boeing was hopeful that after so many 
false starts, the Kremlin might finally give the go-ahead to 
Aeroflot's Board to approve the purchase of 22 Boeing 787s at 
its planned September 14 meeting.  Even the announcement of 
Russian state-owned bank VTB purchasing a 5 percent share of 
European Aerospace and Defense Company, EADs, did not dash 
hopes here in Moscow.  (Note: While Boeing CEO Carson 
expressed concern that the EADs purchase portended trouble, 
Boeing Russia president Sergey Kravchenko (please protect) 
was less concerned.  Kravchenko told us this week that EADs 
move to quash Russian aspirations for a voice on the board 
could have only enhanced Boeing's partnership in the eyes of 
the Kremlin.  End Note) 
 
3. (SBU) A more troubling sign, however, was the rescheduling 
of the Board meeting from September 14 to the evening of 
September 15.  No explanation was given at that time, but it 
is now apparent that Aeroflot's Board was waiting for a 
signal from the Kremlin.   The guidance never came, and the 
September 15 meeting adjourned with the decision once again 
hanging in the air - and perhaps, with an even more uncertain 
fate.  Unlike previous delays, when it was announced just 
when the board would next take up the decision, this time 
Aeroflot said that the decision has been postponed 
"indefinitely." 
 
4. (C) The press has had a field day speculating the reasons 
for the Board's inaction, but the overriding conventional 
wisdom is that the Kremlin wanted to retaliate for the 
Rosoboronexport and Sukhoy sanctions by holding hostage the 
Boeing decision.  An additional consideration it seems was 
the Kremlin's reluctance to do anything precipitous in the 
lead up to the Putin-Chirac-Merkel meeting this weekend. 
 
Enter &White Knight8 Lebedev 
---------------------------- 
 
5. (U) In an extraordinary move on September 19, Russian 
businessman Alexandr Lebedev, whose company National Reserve 
Corporation (NRK) owns 30 percent of Aeroflot, put his own 
money on the table to keep the deal open.  He announced he 
had offered Boeing $40 million to keep the current delivery 
slot (of 2010) open for Aeroflot until the end of this year, 
and that Boeing had accepted his offer.  Reftel notes that 
NRK and Boeing signed a preliminary contract that provides 
for the same conditions that were offered to Aeroflot, with 
first delivery of planes starting in 2010. NRK is the holder 
of the slots but would transfer them back to Aeroflot. 
 
6. (C) The one-day postponement of the meeting set in motion 
the Lebedev decision, our contacts told us.  Reading the 
Kremlin's signals - or lack of signals - key players met 
Thursday evening to come up with a game plan in case the 
Aeroflot Board failed to act.  This is not the first time 
Lebedev has tried to save the Boeing deal.  Just two weeks 
ago, he was quoted in the press saying that while he 
supported Aeroflot's purchase of Boeing planes, he also urged 
a similar purchase of Airbus planes in the near future -- a 
solution which many believed would be palatable to the 
Kremlin, allowing the 787 purchase go ahead now.  Lebedev, 
who also is a member of the Duma for the ruling United Russia 
party, is reportedly fed up with the politics behind this 
drama ) which could ultimately cost his business interests 
dearly.  Absent the 787 purchase, Aeroflot will have to find 
alternative long-range aircraft.  Leasing, he calculates, 
would cost the company $800 million over the cost of the 
proposed 787 purchase. 
 
 
MOSCOW 00010606  002 OF 002 
 
 
7. (SBU) Even after the Lebedev announcement, the Russian 
press speculated that Aeroflot will split the deal between 
Boeing and Airbus, with the original terms of a 22 Boeing 
plane purchase remaining in place.  Once the deal with Boeing 
is finalized, Aeroflot would re-energize negotiations with 
Airbus for an additional number of planes.  Aeroflot Chief 
Executive Valery Okulov told reporters at a conference in 
Itkursk September 20 that the firm would purchase the same &
#x000A;number of Airbuses in 2012-2016.  Boeing discounts these 
stories, arguing that Airbus does not need more than the 22. 
But as long as these stories circulate, the Kremlin 
negotiates from a stronger position with the Europeans on 
EADs. 
 
Other Fallbacks Possible 
------------------------ 
 
8. (C) November 1st is the next critical date.  Our contacts 
say that Aeroflot Board will need to meet and must give its 
final approval by this date to ensure the 2010 delivery dates 
are retained.  Not only are the 22 787s at stake.  Also 
linked to the sale of the 787s are six McDonnell-Douglas 
MDD11 cargo planes Boeing intends to sell to Aeroflot.  If 
Boeing pulls its planes off the table, Aeroflot loses out on 
both a modernized passenger and cargo fleet.  (Comment: We 
believe Boeing is serious that November 1 is the real 
drop-dead date.  We understand that Boeing did indeed pull 
its planes off the table - i.e. withdrew its commitment to 
the 2010 delivery date - at the September 15 meeting when it 
became clear the Aeroflot Board would not act. The fact that 
the next Board date has not yet been announced is a matter of 
some concern. End Comment.) 
 
Comment 
------- 
 
9. (C) The longest Boeing sales campaign in the history of 
the firm (and the prospect of the largest single U.S. 
manufactured goods sale to Russia) will be with us a while 
longer, it appears.  Lebedev's voice of reason is a welcome 
addition to the debate, but we see his bail-out offer as a 
heroic attempt of a businessman to preserve the value of his 
investment rather than a signal from the Kremlin.  This 
latest move will keep the 787 deal alive in its current 
configuration for several more weeks, after which it could 
die completely (if it has not yet been finalized) or will no 
doubt start to significantly morph into a smaller or more 
expensive, and certainly a less timely deal -- for Aeroflot. 
 
BURNS

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