07MOSCOW85, RUSSIA’S VNESHTORGBANK AND EADS (C-RE6-01894)

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Reference ID Created Released Classification Origin
07MOSCOW85 2007-01-12 08:21 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO6407
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0085/01 0120821
ZNY CCCCC ZZH
P 120821Z JAN 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 6312
INFO RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000085 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS AND EB/TRA 
STATE PASS USTR FOR DONNELLY, MOLNAR, ERRION 
NSC FOR MCKIBBEN AND GRAHAM 
TREASURY FOR BAKER AND GAERTNER 
USDOC FOR 4321/ITA/MAC/EUR/RISA BROUGHER 
USDOC FOR 3004/CS/ADVOCACY/BLOOM 
 
E.O. 12958: DECL: 01/11/2017 
TAGS: PINR ECIN EINV PGOV RS
SUBJECT: RUSSIA'S VNESHTORGBANK AND EADS (C-RE6-01894) 
 
REF: A. 2006 STATE 197039 
     B. 2006 MOSCOW 13003 
 
Classified By: ECON M/C Quanrud by reason 1.4 b and d. 
 
1. (C) Summary. A Senior Vneshtorgbank (VTB) official tells 
us VTB's decision in early summer to purchase 5.38 percent of 
EADS stock was made for investment/financial reasons alone, 
and without GOR political interference.  The public 
announcement September 12 by Presidential Advisor Sergey 
Prihodko of the GOR's desire to obtain a seat on EADS' Board 
came as a surprise to VTB, who well understood a seat was not 
in the works, given bylaws created to protect the five 
original EADS shareholders from hostile maneuvers.  While VTB 
President and Chairman of the Board Andrey Kostin sits on the 
Board of the emerging United Aircraft Corporation (UAC), he 
was not on the board at the time of the EADS stock purchase, 
and VTB says UAC did not factor into their original decision. 
 VTB has no plans to sell the stock to UAC now; should they 
be forced to do so (and no official approach has been made to 
date) the bank would expect to receive full market price for 
the shares.  End Summary. 
 
VTB'S EADS STRATEGY VS. THE 
KREMLIN'S DESIRE FOR A BOARD SEAT 
--------------------------------- 
 
2. (C) In a December 29 meeting with Econ M/C and EconOff, 
Senior VTB Vice President Vassily Titov told us that VTB's 
initial purchase of EADS stock this past June was motivated 
by pure commercial considerations, and that the GOR was not 
part of the decision.  VTB seeks in general to buy 
potentially profitable stock, regardless of whether it is 
EADS or not.  Its purchase of 5.38 percent of EADS was 
undertaken because VTB analysis showed that at 13-18 Euros, 
EADS was undervalued.  Since VTB's purchase, Airbus received 
certification for the A380 SuperJumbo, boosting the stock 
value significantly.  Sold today, VTB would be up a cool $100 
million on the deal.  If further financially attractive 
opportunities to buy EADS stock arose, VTB might pursue them, 
but the opposite was also true, although VTB considers EADS a 
good investment. 
 
3. (C) Titov said that the question of Russia obtaining a 
seat of EADS Board should be directed to Russian politicians, 
not businessmen.  VTB never sought an EADS Board seat; knew 
even before the stock purchase that a seat was not in the 
cards; and did not set out to be a strategic investor in 
EADS.  (Note:  Board membership requires the approval of the 
five original members and would likely only be approved after 
a much more significant acquisition of EADS stock.)  Titov 
volunteered that even though VTB had not crossed the 10% 
reporting threshold requirement under Dutch law, it had 
disclosed its purchase publicly in the interest of 
transparency, not to put pressure on EADS. 
 
4. (C) The GOR has articulated a more ambitious view of 
Russia's role in EADS.  In the September lead up to the 
Franco-German-Russo Summit in Paris, Presidential Advisor 
Sergey Prihodko publicly called for Russia to raise its stake 
in EADS to 10 percent and join the Board, as part of a larger 
strategy to promote the Russian aircraft-manufacturing 
industry though the United Aircraft Corporation (UAC). 
(Titov stated flatly that he and other senior bank personnel 
were as surprised by Prihodko's announcement as anyone.) 
After fierce responses from both France and Germany to this 
suggestion, Putin and his European counterparts agreed in 
September to form a Franco-German-Russo Aviation Industry 
Working Group to explore avenues for cooperation and 
"possible board membership" for Russia, effectively taking 
the issue out of the headlines. 
 
5. (SBU) EADS has every reason to be looking at Russian 
aircraft manufacturers for partnership opportunities, and 
likely finds the emerging UAC a more comfortable counterpart 
in many ways than the chaotic configuration of half-dead 
companies that compromised the remnants of the former Soviet 
civair manufacturing industry prior to UAC.  More than a year 
ago, Russia was officially offered 3% of the work on the 
A350XWB, but that number will likely grow, as more than 45% 
 
MOSCOW 00000085  002 OF 003 
 
 
of the work is now available for subcontracting.  Discussions 
are moving beyond the A350 to include work on the A380 
SuperJumbo and other projects.  Already this week, EADS and 
UAC announced agreement to jointly build civilian transport 
cargo planes in the Moscow region starting later in 2007.  In 
general, EADS will likely have to rely more heavily on UAC in 
its rush to find suppliers and thereby avoid further 
production delays for the A350XWB. 
 
WILL VTB'S EAD
S STAKE MOVE TO UAC? 
---------------------------------- 
 
6. (C) According to Titov, VTB does not intend to sell its 
EADS stock to UAC, and no one has approached the firm to date 
with such a request.  Asked what VTB would do if the GOR 
theoretically forced the bank to turn the stock over to UAC, 
Titov replied that the bank would expect to receive the full 
market price for the shares in order to cover the its balance 
sheet.  Publicly, Putin has said the GOR would seek EADS' 
approval before any stock transfer might take place. 
 
7. (SBU) UAC officials, however, are eager for EADS shares. 
Deputy Prime Minister and UAC Chairman Sergey Ivanov has said 
that he would like to see UAC obtain the EADS shares as an 
"insurance policy" for UAC-EADS cooperation. 
Director-General of UAC Alexsey Fyodorov told the press, "We 
have ... never concealed our desire that UAC should . . . 
hold ten percent of EADS, so as to ensure the 
industrial-strategic partnership."  EADS, for its part, 
appears to have been trying to secure its partnership with 
Russia (in the first instance for aircraft sales) with a 
similar cross-investment strategy:  EADS through its 10% 
ownership of Irkut, already owns approximately 1% of UAC. 
VTB President and representative on the UAC Board of 
Directors Andrey Kostin has suggested that "cooperation (with 
EADS) could be an exchange of stock, co-production, or even 
the creation of a Pan-European aircraft-manufacturing 
holding." 
 
 
UAC-EADS NEGOTIATIONS ACTIVE . . . 
---------------------------------- 
 
8. (SBU)  Discussions between UAC's emerging leadership and 
EADS have picked up in the wake of the formation of the 
Franco-German-Russo working group formed in September. 
Negotiating directly with EADS are Alexey Fyoderov, 
Director-General of UAC (formerly head of MiG), Mikhail 
Pogosyan, Deputy Director-General of UAC (head of Sukhoi), 
and Oleg Demchenko, head of Irkut.  They all traveled to 
Toulouse, France the second week of December to meet with 
Louis Gallois, CEO of Airbus and Co-CEO of EADS, and Tom 
Enders, the other Co-CEO of EADS, and Olivier Andries, 
Executive Vice President of Airbus. 
 
9. (C) Both Deputy Prime Minister and Minister of Defense 
Sergey Ivanov and Presidential Aide Igor Shuvalov appear 
solidly behind greater UAC-EADS cooperation.  Sergey Ivanov 
has said publicly that the high-level make up of the UAC 
Board is a sign of GOR interest in the success of the 
aircraft-manufacturing sector but Ivanov has not articulated 
a clear preference for EADS over Boeing.  Contacts confirm 
that Presidential Aide Igor Shuvalov prefers EADS to Boeing 
and has pushed for greater Russia-EADS cooperation for years 
(leading some to suspect that he has a personal stake at 
interest and that he blocked the Boeing deal). 
 
 . . . AND APPROACHING OFFSET TERRITORY 
--------------------------------------- 
 
10. (C) There is already significant evidence that the 
evolving EADS-UAC relationship is spilling into the realm of 
commercial airline purchases -- at least for state-owned 
airline Aeroflot.  The commercial merits of Aeroflot's 
potential deal with Boeing for 22 Dreamliners were seemingly 
unbeatable, especially after the A350XWB fell badly behind 
schedule last year.  Regardless, the GOR now has explicitly 
linked the wide-body deal to cooperation with UAC (reftel B). 
 As a further sign of the possible interlinking of the 
issues, Aeroflot last month renewed negotiations with Airbus 
 
MOSCOW 00000085  003 OF 003 
 
 
for the A350XWBs and also chose to purchase without tender 
six A330s -- over adding to their existing Boeing 737 fleet. 
 
COMMENT 
------- 
 
11. (C) The GOR's hamfisted attempt to gain a seat at the 
EADS table this past fall was in many ways so unnecessary. 
EADS, one could argue, benefits as much from a strong Russian 
partner (to make up for its evident manufacturing gaps) as 
the newly emerging UAC needs strategic partners to help it 
past the starting blocks.  The Russians potentially bring 
cash to the table, as well, which can't be unwelcome, but 
there are limits to that proposition as well.  (Titov said 
VTB will only invest in EADS while it makes financial sense 
to do so, and the bank has no plans to join others in 
subsidizing EADS.)  For its part, EADS has said publicly that 
Russia has nothing technologically new to offer Airbus, but 
that UAC could do basic work on part of the aircraft.  That, 
in the end, may be where this entire conversation comes out. 
As for Boeing, we remind that Boeing is partnering with the 
only arm of UAC that even has a viable aircraft design on the 
table -- Sukhoi's Superjet100 -- so it is far too early to 
count them out this game. 
RUSSELL

Wikileaks

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