10MOSCOW265, PUTIN SUPPORTS PLAN TO MERGE ROSTEKHNOLOGIA’S

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Reference ID Created Released Classification Origin
10MOSCOW265 2010-02-05 09:25 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO7291
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHMO #0265/01 0360925
ZNY CCCCC ZZH
P 050925Z FEB 10
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 6160
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXE/EASTERN EUROPEAN POSTS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHAAA/WHITE HOUSE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000265 
 
SIPDIS 
 
DEPT FOR EUR/RUS, EEB/CIP, EEB/IFD/OIA, DOC FOR JBROUGHER, 
USTR FOR EHAFNER 
 
E.O. 12958: DECL: 2/3/2010 
TAGS: EAIR ECON ETRD EINV RS
SUBJECT: PUTIN SUPPORTS PLAN TO MERGE ROSTEKHNOLOGIA'S 
AVIATION ASSETS INTO AEROFLOT 
 
REF: A. A: MOSCOW 147 
     B. B: MOSCOW 155 
 
Classified By: ECONMINCOUNS Matthias Mitman for reasons 1.4 (b) and (d) 
 
Summary 
1. (SBU) On February 2, Prime Minister Putin announced 
support for Transport Minister Levitin's plan to transfer 
Rostekhnologia's aviation assets to Aeroflot.  According to 
Levitin's proposal, all the regional airlines that would have 
become Russia's new national carrier RosAvia, will be 
absorbed by Aeroflot.  On January 26, in apparent 
anticipation of this decision, Aeroflot's board of directors 
approved the purchase of a 25.8% stake owned by private 
concern NRC (reftel B), enabling Levitin to engineer the 
transfer of those Aeroflot shares to Rostekhnologia in 
exchange for RosAvia's assets. 
 
2. (C) Despite the Putin announcement, Boeing continues to 
work with RosAvia's evaluation team on the tender to purchase 
up to 65 narrow bodied aircraft.  According to a Boeing 
representative, RosAvia will present its assessment of the 
business offers to Rostekhnologia by the end of this week. 
Boeing also stated that the process of consolidating 
Rostekhnologia's aviation assets under Aeroflot will likely 
take at least a year.  The tender is expected to be finalized 
over the short run but further delays are likely. End summary. 
 
Terms of the Deal 
----------------- 
 
3. (SBU) On February 2, Prime Minister Putin's website 
reported that Putin fully endorsed Transport Minister 
Levitin's plan to transfer Rostekhnologia's aviation assets 
to Aeroflot.  Levitin's proposal would transfer all the 
regional airlines that formed the basis of Russia's new 
national carrier RosAvia -- Rossiya, Orenburg, Vladivostok 
Air, Kavminvody, Saratov Airlines and Sakhalin Avia Airlines 
-- to Aeroflot. 
 
4. (SBU) The merger process will be complex, since some of 
the airlines are currently joint-stock companies (Vladivostok 
Air, Saratov Airlines and Sakhalin Avia Airlines) while the 
others are "federal unitary enterprises" (state-owned). 
Levitin's proposal is to engage the governor of St Petersburg 
in the process of preparing Rossiya, the largest carrier and 
the core of Rostekhnologia's aviation assets (reftel B), to 
become a joint-stock company before merging it with Aeroflot. 
 Once all the airlines have become joint stock companies, 
Aeroflot and Rostekhnologia will jointly manage the group and 
eventually they will be merged with Aeroflot.  According to 
Levitin, as a result of this merger, Aeroflot would increase 
its share in the domestic market from 15% to 30-35% (which is 
compatible with the anti-monopoly regulations).  Other 
details of the deal, such as the financial structure or the 
timeframe, have not been officially released. 
 
Aeroflot Board Meeting Approves Share Purchase 
--------------------------------------------- - 
 
5. (SBU) On January 26, Aeroflot's board of directors 
approved the purchase of a 25.8% stake in the company from 
NRC (reftel B).  Reportedly, the price of the block 
($300-$400 million) was 18-30% below its current market value 
and the purchase would be financed by a state-owned bank. 
The move reflects Levitin's plan to swap control over RosAvia 
for Aeroflot shares (according to media sources, only 10% of 
Aeroflot shares will be spent to get control over 
Rostekhnologia's assets). Industry analysts stated that 
Aeroflot will be 75% government owned versus the current 51% 
as a result of this deal. 
 
 
Boeing continues negotiations 
----------------------------- 
 
6. (C) Boeing representatives told us that they are 
continuing to work with the RosAvia evaluation team on the 
tender to purchase up to 65 passenger aircraft (reftel B). 
The assessment of the business offers will be presented to 
Rostekhnologia by the end of this week.  Boeing officials 
stated that the process of consolidating Rostekhnologia's 
 
MOSCOW 00000265  002 OF 002 
 
 
aviation assets under Aeroflot will likely take at least a 
year while the tender is expected to be finalized over the 
short run. 
 
7. (C) Although RosAvia sources reportedly stated that the 
airline would likely cancel the aircraft purchase, 
Rostekhnologia officials told us that they "will continue 
with the tender anyway."  However, as Deputy Prime Minister 
Shuvalov cautioned U/S Burns on January 14, price remains an 
issue -- with the possibility that Airbus could offer a lower 
price than Boeing (reftel A). 
 
Comment 
------- 
 
8. (C) Significant time and management effort will be 
required to con
solidate all Rostekhnologia's aviation assets 
under Aeroflot, to integrate routes and unify the fleet. 
During this time, a decision on the tender likely will be 
delayed.  The consolidation of Rostekhnologia's aviation 
assets into Aeroflot -- which in the past has favored Airbus 
over Boeing -- probably will significantly reduce Boeing's 
prospects for supplying the full quantity of aircraft 
tendered.  End comment. 
Beyrle

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