VZCZCXRO9907
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVI #1733/01 3310727
ZNR UUUUU ZZH
R 260727Z NOV 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 1455
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 04 VIENNA 001733 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
USDOC PASS TO OITA 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON ENRG PREL RS AU
SUBJECT: Austria-Russia Economic Ties Deepening 
 
REF: 07 VIENNA 2853 
 
¶1. (U) SUMMARY:  Austria's commercial ties with Russia, 
which date to the Soviet era, have grown significantly 
since 2000.  Despite a brief dip in 2007, imports from 
Russia (dominated by energy) are rising again.  In 
recent years, Austrian firms (especially banks) have 
expanded aggressively into the Russian market.  High- 
profile investments by Russian oligarchs and fear of 
political manipulation (as with sovereign wealth funds) 
have sparked talk in Austria of shielding strategically 
important companies.  Russia has no official debts with 
Austria.  END SUMMARY. 
 
Bilateral Trade 
--------------- 
 
¶2. (U) Austrian statistics show total trade between 
Austria and Russia of EUR 4.4 billion in 2007 ($6.3 
billion at the current rate of exchange of USD 1/EUR 
0.70, a 5% drop from 2006 (in part due to Euro 
strength), but up 11% from 2005.  In March 2008, 
reacting to weak bilateral trade in 2007, Austrian 
Economics Minister Martin Bartenstein and Russian 
Science and Education Minister Andrei Fursenko agreed 
to promote cooperation in investment, innovation and 
technology through a bilateral "Business Council" that 
convenes every six months.  A weak 2007 masked strong 
expansion since 2000, when bilateral trade was less 
than half its current size (EUR 1.9 billion / $2.7 
billion) and was tilted in favor of Russia (Austrian 
exports of EUR 655 million / $936 million versus 
imports of EUR 1.2 billion / $1.7 billion).  Since 
2000, Austrian exports to Russia have grown much faster 
(295%) than imports from Russia (48%) or Austrian 
exports worldwide (65%).  In the first half of 2008, 
bilateral trade was up 23% (EUR 2.6 billion / $3.7 
billion) over the same period in 2007. 
 
¶3. (U) Imports from Russia fell 24% to EUR 1.8 billion 
($2.6) in 2007 from 2006, constituting 1.6% of Austrian 
imports (2006: 2.3%) and making Russia number 14 among 
Austrian suppliers worldwide.  The decline was solely 
due to lower oil and gas imports.  Due to the price 
hike, the value of oil and gas imports rose almost 40% 
in the first half of 2008 and was the main reason for 
the 27% increase in imports from Russia compared to 
H1/2007. 
 
¶4. (U) Austrian exports to Russia in 2007 were up 15% 
(following a 31% increase in 2006) and reached EUR 2.6 
billion ($3.9 billion), or 2.3% of Austrian exports 
worldwide.  Russia was Austria's number eleven export 
market, comprising 40% machinery, 25% chemical 
products, 15% metal / finished products.  In the first 
half of 2008, Austrian exports to Russia rose 20% over 
H1/2007. 
 
Energy:  Gazprom's Oldest Western Customer 
------------------------------------------ 
 
¶5. (U) Austria is highly dependent on Russian natural 
gas -- much less so oil --  covering 62% of Austrian 
gas consumption.  In fall 2006, Austrian oil and gas 
leader OMV extended until 2027 its contracts with 
Gazprom for gas deliveries of 7 billion bcm/annum. 
Gazprom also received the right to market its gas 
products by itself in three Austrian states (Carinthia, 
Styria, and Salzburg).  Gazprom founded a Vienna-based 
trading company, Centrex, to market gas in Austria and 
neighboring countries. 
 
¶6. (U) OMV Gas (a wholly-owned subsidiary) currently 
operates the Central European Gas Hub (CEGH), a web- 
based trading platform in operation since 2005 offering 
commercial, logistical, and auctioneering services to 
gas traders.  A February 2008 agreement gave Gazprom 
the option of a 50% stake in the CEGH (reftel) and 
allows for joint gas storage as well.  As agreed in 
November 2008, from 2009 OMV will hold only 30% of the 
CEGH.  It will sell 20% to the Vienna Stock Exchange, 
while Gazprom's stake will be divided between Gazprom 
Germania (30%) and Centrex (20%).  This new structure 
is intended to promote the CEGH as a "Central European 
 
VIENNA 00001733  002 OF 004 
 
 
Gas Stock Exchange" according to OMV (septel). 
 
¶7. (SBU) OMV remains schizophrenic about Gazprom's 
interests in Austria: OMV has profited enormously from 
imports since 1968 but is wary of Russian intentions 
vis-a-vis the Nabucco gas pipeline and the prospect of 
direct competition on the Austrian and Central European 
markets.  Despite OMV leadership in Nabucco, the GoA 
and OMV are willing to cooperate with Russia on the 
major "rival" pipeline -- South Stream -- in an effort 
to bring more gas to OMV's physical hub in Baumgarten. 
Only the direct aftermath of the Georgia crisis 
prevented the GoA from negotiating an agreement with 
Russia on South Stream in September. 
 
Financial Ties to Russia 
------------------------ 
 
¶8. (U) The two leading Austrian banks in Russia are 
Raiffeisen International/RI (a fully consolidated 
subsidiary of the Raiffeisen Zentralbank/RZB with 
responsibility for emerging Europe) and Bank Austria- 
Creditanstalt/BA-CA, a member of the Italian UniCredit 
group with responsibility for eastern/southeastern 
Europe.  In 2007, RI created Russia's largest foreign 
bank by merging the JSC Impexbank into its Russian 
subsidiary ZAO Raiffeisenbank, founded in 1996.  BA holds 
100% of ZAO UniCredit Bank (the former International 
Moscow Bank) and the Russian investment bank UniCredit 
Aton.  RI is the seventh largest bank in Russia and the 
number one foreign bank, while BA is the tenth largest 
Russian and third largest foreign bank.  In 2007, total 
assets of foreign banks in Russia reached EUR 563 
billion, of which RI held about 2.2% (EUR 12.2 billion) 
and BA 1.8% (EUR 10.3 billion).  Austrian banks have the 
third-highest claims on Russia after German and French 
banks.  On November 11, RI subsidiary ZAO Raiffeisenbank 
announced a special agreement with the Central Bank of 
Russia, whereby the Central Bank will underwrite inter- 
bank loans issued by Raiffeisenbank by providing partial 
compensation for any losses incurred by the bank on 
Russia's inter-bank loan market.  BA subsidiary ZAO 
UniCredit, which is also eligible for this guarantee, 
reportedly is still considering the offer. 
 
¶9. (U) Other Austrian banks with large holdings in Russia 
include Erste Bank and the regional Raiffeisen Landesbank 
Upper Austria which hold respective stakes of 10% and 
3.6% in the southern Russian bank Center Invest. 
Austrian bank activities in Russia are supplemented by 
leasing companies, brokers, etc.  The Vienna Insurance 
Group, Austria's largest insurance company, owns 25% of 
Moscow-based Russian insurer MSK-Life. 
 
¶10. (U) The Russian VTB Bank Austria, formerly Donau- 
Bank, was established in Vienna in 1974 and is a 
specialist in financing trade with Russia and other 
countries from the former Soviet Union (CIS), portfolio 
management, and structuring and syndicating loans for 
Russian and CIS clients.  In 2007, VTB parent JSC VTB 
Bank (the former Vneshtorgbank), in which the Russian 
government holds a majority, reorganized VTB Bank Austria 
as its regional headquarters for Western Europe corporate 
and trade financing (the former Western European 
headquarters, VTB London, became responsible for 
investment banking).  With a EUR 340 million ($486 
million) capital injection from its mother, VTB Austria 
bought a 97.7% share in VTB Bank Germany and 87% in VTB 
Bank France.  In 2007, VTB Austria's balance sheet 
totaled EUR 2 billion, the consolidated balance sheet of 
the VTB Subgroup (Austria, Germany and France) EUR 4.1 
billion.  The Austrian Kontrollbank -- Austria's export 
credit agency and Ex-Im Bank equivalent -- has had a 
cooperation agreement with VTB since 2007.  Kontrollbank 
provides 100% guarantee cover without restrictions for 
business with Russia. 
 
¶11. (U) Russia has no debts with Austria.  In August 
2006, Russia made an early payment of EUR 1.25 billion to 
complete the redemption of the former Soviet Union's 
debts with Austria (under a Paris Club agreement). 
 
Foreign Direct Investment 
------------------------- 
 
VIENNA 00001733  003 OF 004 
 
 
 
¶12. (U) Latest available figures show strongly rising 
Austrian FDI in Russia; Russian FDI in Austria is also 
growing rapidly.  At the end of 2005, Austrian 
investment in Russia was about EUR 0.8 billion ($1.2 
billion) or 1.3% of Austria's total FDI stock abroad. 
In 2006, it rose to EUR 1.8 billion ($2.6 billion) or 
2.2% of total Austrian FDI abroad.  Preliminary figures 
show an EUR 2.6 billion ($3.7 billion) increase in 2007 
and of EUR 740 million ($1.1 billion) in the first half 
of 2008, so that Austrian FDI in Russia is likely to 
exceed EUR 5 billion ($7.1 billion) by the end of 2008. 
Reasons for the increase include Austrian takeover of 
Russian banks (para 8) and investments by companies 
such as the Vienna Insurance Group, Egger (particle 
board), Kaindl (particle board), Neusiedler (paper) and 
Mayr-Melnhof (paperboard).  Around 350 Austrian firms 
have subsidiaries in Russia. 
 
¶13. (U) Russian FDI in Austria reached EUR 461 million 
($659 million) at the end of 2006, less than 1% of 
total foreign FDI in Austria.  The only prominent 
Russian investment at that time was in VTB Bank (para 
10), which has operated in Austria for more than 30 
years.  With several recent investments, including 
Gazprom's investment in trading platform CEGH, 
preliminary figures for Russian FDI in Austria show an 
increase by about EUR 262 million ($374 million) in 
2007 and another EUR 111 million ($159 million) in 
H1/2008, so that total Russian FDI in Austria is likely 
to top EUR 1 billion this year. 
 
¶14. (U) Russian oligarchs are significant portfolio 
investors in Austria.  In mid-2007, Oleg Deripaska 
purchased via Rasperia Trading a 25% share in Austro- 
German STRABAG, Europe's sixth largest construction 
conglomerate, for EUR 1.1 billion ($1.5 billion).  At 
the same time, Deripaska entered a deal via Russian 
Machines (a subsidiary of Basic Element Holding) to 
borrow EUR 1 billion ($1.7 billion) to obtain a 20% 
share in the Canadian automotive supplies company Magna 
International and with it, Austrian subsidiary Magna 
Steyr Fahrzeugtechnik (MSF).  NOTE: Austria's largest 
automotive company, MSF assembled 200,000 BMW, 
Chrysler, Mercedes and Saab vehicles in 2007, with 
total sales of EUR 2.7 billion ($4.1 billion) and 7,000 
employees - END NOTE.  In October 2008, the global 
financial crisis apparently compelled Deripaska to back 
out of the loan-financed Magna deal.  He will remain in 
STRABAG after Raiffeisen-parent RZB loaned him EUR 460 
million to refinance his participation in that deal. 
 
Tourism 
------- 
 
¶15. (U) Russian tourism to Austria is on the upswing. 
Increasing numbers of Russians spend their vacations in 
Austria.  In 2007, Austria recorded 88.4 million 
overnight stays by foreign tourists.  Though Russian 
citizens accounted for only 786,600 (or 0.9%), this was 
a 25% increase from 2006 and 49% over 2005, in a two- 
year period when the total number of overnight stays of 
foreign tourist rose less than one percent. 
 
Russian Residents in Austria 
---------------------------- 
 
¶16. (U)  An increasing number of Russians are 
reportedly taking residence in Austria (some 19,000 
Russian Federation citizens live here according to 
Statistics Austria).  Preferred locations include the 
Lake Woerthersee area in southern Austria, the alpine 
resort Kitzbuehel, and Klosterneuburg (a Vienna 
suburb).  Roman Abramovich is an avid visitor who 
reportedly owns an estate in the Salzkammergut (Upper 
Austria) and has become a player on the Austrian real 
estate market. 
 
COMMENT: Austrian Schizophrenia on Russian Money 
--------------------------------------------- --- 
 
¶17. (SBU) While Austrian-Russian business relations 
have been smooth and are bolstered by Austria's 
neutralist foreign policy, many remain skeptical of the 
 
VIENNA 00001733  004 OF 004 
 
 
potential baggage that Russian ties may bring.  The 
January 2006 Gazprom standoff with Ukraine and the 
invasion of Georgia hurt Russia's public standing here, 
and many are aware of Austria's gas dependence.  Some 
observers painted the latest CEGH deal in a negative 
light, and say that Gazprom pressured OMV. 
 
¶18. (U) High-profile investments by Russian oligarchs 
have become part of the debate over sovereign wealth 
funds (SWFs).  Despite a long positive track record 
with the Abu Dhabi International Petroleum Investment 
Company/IPIC (17.6% owner of OMV since 1994), a few 
Austrians are voicing concerns about investments from 
Russia and other countries lacking adequate rule-of- 
law.  In November 2007 (echoing the German debate) 
then-Economics Minister Martin Bartenstein proposed 
shielding strategically important companies by law from 
non-EU state ownership.  Bartenstein suggested an EU- 
wide regulation for the energy sector and national 
regulations for other industries.  The GOA could not 
agree before collapsing in mid-2008, and it remains to 
be seen whether the incoming GoA will revisit the 
topic. 
 
GIRARD-DICARLO