VZCZCXRO9903
RR RUEHDBU RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHMO #0334/01 0430953
ZNR UUUUU ZZH
R 120953Z FEB 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 1875
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RHEHAAA/WHITE HOUSE WASHDC

UNCLAS SECTION 01 OF 04 MOSCOW 000334 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS AND EEB/TPP/MTAA (NAFZIGER) 
STATE PLS PASS USTR (MALMROSE, HAFNER, KLEIN) 
COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON) 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD WTO RS
SUBJECT: CRISIS-RESPONSE MEASURES FOR THE RUSSIAN CAR 
INDUSTRY 
 
REF: A. STATE 4753 
     ¶B. MOSCOW 180 
     ¶C. 08 MOSCOW 3745 
     ¶D. 08 MOSCOW 3669 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET OR DISTRIBUTION 
OUTSIDE USG CHANNELS. 
 
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SUMMARY 
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¶1. (SBU) Russia's car companies are heavily indebted and 
steadily losing market share to foreign competitors.  The GOR 
continues to employ a range of state support measures to help 
Russia's major vehicle manufacturers cope with the global 
financial crisis, including direct financial support, 
subsidized lending and debt restructurings.  A weakening 
ruble and increased duties on imported automobiles (Ref C) 
have provided some modicum of protection to domestic 
producers by making foreign cars more expensive.  However, 
sales of Russian automobiles, what one critic called "scrap 
on wheels," remain low and with stockpiles increasing, some 
factories are beginning to cut production.  As the financial 
crisis continues, the GOR's overarching concern will be 
avoiding the social unrest that might stem from massive 
layoffs at Russia's major car assembly facilities and at the 
upstream steel and metallurgical coal plants that supply them 
basic materials (Ref B). END SUMMARY. 
 
¶2. (SBU) Per Ref A request, we summarize below the general 
actions that the GOR has taken to help Russia's car companies 
cope with the financial crisis, including increased duties on 
imported vehicles, and investment incentives for global car 
parts and components manufacturers who agree to set up 
production in Russia, a move that will indirectly benefit 
Russian car makers.  We also summarize the situation at each 
major Russian car company, and the individual GOR support 
measures that have already been adopted or are being 
contemplated for each company.  Finally, we assess the likely 
effect of these measures on sales and production. 
 
--------------------------------------------- - 
Investment Incentives for Car Parts/Components 
--------------------------------------------- - 
 
¶3. (SBU) Russian car makers will benefit indirectly from 
investment incentives that the GOR is now offering to global 
automobile parts and components manufacturers.  As disclosed 
during Russia's WTO accession negotiations, because of 
quality problems and shortages of domestically produced car 
parts, Russia is now offering favorable investment terms to 
multinational companies that apply to the Ministry of 
Economic Development (MED) to establish parts assembly and 
production within Russia.  MED is currently considering 28 
proposals, but has acknowledged that some of the deals may be 
abandoned or put on hold because of the financial crisis. 
For instance, in early February, Sumitomo and Czech firm 
Cadence canceled a $60-million joint venture production 
facility in St. Petersburg that was supposed to produce 
plastic car parts for Suzuki vehicles. 
 
¶4. (SBU) Russian officials insist that these investment 
programs, and similar investment incentives previously 
offered to global car manufacturers, do not provide for 
mandatory local content requirements or run afoul of other 
international trading norms, though they do provide for 
preferential duty treatment as the percentage of local 
content in domestic assembly and production increases over 
time. 
 
--------------------------------------- 
Increased Duties and Ruble Depreciation 
--------------------------------------- 
 
¶5. (SBU) Russia's domestic car manufacturers have derived 
some benefit (see below) from recent duty increases on 
imported vehicles and the rapid depreciation of the ruble 
against the dollar and Euro, which have made foreign cars 
more expensive (Ref C).  However, many observers believe that 
most Russian consumers will simply choose to save longer in 
order to buy a foreign car, rather than purchase Russian 
models that are widely viewed as unreliable and of inferior 
quality.  As one Bank of Moscow analyst recently stated to 
 
MOSCOW 00000334  002 OF 004 
 
 
the media, the Lada Classic (produced by Avtovaz, Russia's 
leading car maker) is a piece of uncompetitive "scrap metal" 
that few Russian consumers want to buy. 
 
------------------------------------------- 
Subsidized Loans and Government Procurement 
------------------------------------------- 
 
¶6. (U) On February 10, the GOR announced two further support 
measures for domestic car makers.  The first measure provides 
2 billion rubles ($56 million) in 2009 for subsidized loans 
to consumers who purchase domestically produced cars with a 
purchase price less than 350,000 rubles ($9,722).  The second 
measure provides for 12.51 billion rubles ($347 million) in 
GOR procurements of domestically produced vehicles through 
several ministries, including the Ministries of Defense, 
Internal Affairs (e.g., police cars), and Emergency 
Situations. 
 
--------------------------------------------- ---- 
Avtovaz:  State-Owned Vehicle Losing Market Share 
--------------------------------------------- ---- 
 
¶7. (SBU) Avtovaz, Russia's largest car manufacturer, produces 
the iconic Soviet-era Russian brand "Lada" and engages in 
joint production ventures with Renault and GM.  While the 
company's ownership structure is not fully transparent, 
Renault acquired 25% of the stock in 2008 and a small 
percentage of the stock is publicly traded.  We believe that 
the largest block of shares is owned by Rostekhnologii and 
its affiliated companies, and Sergey Chemezov, the President 
of Rostekhnologii, is also Chairman of the Board of Avtovaz. 
Rostekhnologii is a state-owned conglomerate that also owns 
aviation assets, titanium production, and much of Russia's 
military-industrial complex. 
 
¶8. (U) Avtovaz employs 104,000 workers at its production 
facilities in Tolyatti (population 705,000).  The company's 
vehicle sales declined 6% in 2008 compared to 2007. 
(According to estimates from the Association of European 
Businesses, foreign car sales increased 26% in 2008 compared 
to 2007, while domestic car sales dropped 9%.)  Avtovaz 
produced nearly 740,000 cars in 2008, but as it lost market 
share to foreign car producers, it entered 2009 with an 
inventory overhang of over 110,000 vehicles (equivalent to 
more than two months' production).  Avtovaz plans to produce 
only 600,000 vehicles in 2009.  Avtovaz has laid off 400 of 
1,200 workers producing the GM Niva (a sport utility vehicle) 
and has temporarily reduced its other productions lines to 
two shifts of six hours each.  In early February, Avtovaz 
temporarily idled all of its production lines because of 
payment disputes with its suppliers (since January 1, it had 
been paying 30% cash and 70% in promissory notes on the 
accounts payable to its suppliers).  However, the payments 
problems with suppliers were reportedly resolved, and the 
company resumed production on February 9. 
 
¶9. (SBU) Rostekhnologii is one of only seven state-owned 
corporations that receive money directly from the federal 
budget, is only required to report financial results to the 
GOR once per year, and does not operate in a fully 
transparent manner.  As such, it is entirely possible that 
Avtovaz could receive GOR money transfers via Rostekhnologii 
without any public disclosure of the support.  In late 2008, 
Rostekhnologii received more than $5 billion in state support 
to weather the financial crisis, though, according to press 
reports, the GOR intended that much of the funds would be 
used to prop up the company's defense and aviation holdings, 
rather than Avtovaz. 
 
¶10. (SBU) Rostekhnologii President Sergey Chemezov is 
reportedly now seeking an additional $7.22 billion in state 
support in the form of GOR capital contributions and state 
guarantees.  If the GOR grants Chemezov's request, it is not 
yet clear how much of that funding will ultimately flow to 
Avtovaz.  Avtovaz also announced that in March it would begin 
providing subsidized loans to consumers wishing to purchase 
the Lada and other Avtovaz models by using its own financial 
resources and those of two leading Russian banks, Sberbank 
and VTB.  The company is also reportedly seeking buyers for 
its car dealership subsidiary, which accounts for roughly 25% 
of total sales, in order to raise about $150 million in cash. 
 
------------------------------- 
 
MOSCOW 00000334  003 OF 004 
 
 
GAZ: Badly in Need of a Bailout 
------------------------------- 
 
¶11. (U) GAZ employs 115,000 personnel at its production 
facility in Nizhniy Novgorod (population 1.3 million).  The 
company makes the Gazelle (an all-purpose delivery truck), 
has just launched the Volga Siber (a sedan that is similar to 
the discontinued Chrysler Sebring and is produced using old 
technology purchased from Chrysler), and also produces a few 
other light truck models.  The company is owned by 
billionaire oligarch Oleg Deripaska, who has already received 
about $4.5 billion in GOR bailouts to aid his struggling 
metals businesses and to pay off his foreign creditors. 
Despite the overall strong demand for cars in Russia in 2008, 
GAZ's sales fell 25% in 2008 compared to 2007.  GAZ is viewed 
as the most heavily indebted of Russia's auto makers, with at 
least $1.3 billion in debts, much of it reportedly in the 
form of short-term external borrowings that are due in 
mid-2009.  Some press reports in January indicated that GAZ 
would have to lay off at least 25,000 workers if it were 
unable to secure GOR assistance.  The company has temporarily 
gone to shorter work weeks and idled some production lines. 
 
¶12. (U) On February 4, the GOR Anti-Crisis Committee chaired 
by First Deputy PM Shuvalov met to discuss how to assist GAZ 
through the crisis.  The committee reportedly considered 
several options, including a restructuring of GAZ's debt, a 
GOR guarantee of the company's bank loans, bonds and 
commercial paper, or a GOR takeover of the company through a 
quasi-bankruptcy reorganization (while Russian bankruptcy law 
technically only allows for liquidations, the committee 
reportedly discussed a procedure that would be akin to a U.S. 
Chapter 11 bankruptcy reorganization).  Some committee 
participants told the press that GAZ would receive the lion's 
share of government procurements of Russian cars in 2009. 
The committee charged the Ministry of Economic Development 
with preparing a package of GOR support measures for GAZ by 
the beginning of March. 
 
------------------------------ 
Sollers/UAZ:  Least Vulnerable 
------------------------------ 
 
¶13. (U) Sollers/UAZ employs 16,500 workers in Ulyanovsk 
(Lenin's home town, population 604,000) and 2,175 workers in 
Naberzhnye Chelniy (Republic of Tatarstan, population 
506,000).  The company is privately held by Vadim Shevtsov, a 
business associate of billionaire oligarch and Severstal 
owner Aleksey Mordashov.  The company has fared better than 
Avtovaz and Gaz, because it has largely become an assembler 
of foreign economy class brands, including Fiat, Ssangyong 
and Isuzu, while still producing some Russian car and truck 
brands.  In December 2008, Sollers reportedly received a 4 
billion ruble ($111 million) credit facility from the 
state-owned bank VTB to help it through the crisis, and is 
reportedly seeking up to 6.1 billion rubles ($169 million) 
more to refinance debt and increase the company's working 
capital. 
 
--------------------------------------------- 
Kamaz:  Captive Clients for Heavy Duty Trucks 
--------------------------------------------- 
 
¶14. (U) Kamaz is a heavy duty truck and bus manufacturer that 
has few consumer sales.  Kamaz's main production facility is 
in Naberzhnye Chelniy, where it employs 72,000 workers.  The 
company is owned by the state and a consortium of Russian 
banks, and its largest client is the Russian military. 
Despite the fact that the company does not operate in the 
consumer market and is to some degree insulated from direct 
competition with foreign truck producers because of state 
procurement contracts, in December 2008, it received a 7 
billion ruble ($194 million) credit facility from state-owned 
bank VTB to tide it through the crisis. 
 
------------------------------- 
COMMENT: STABILITY IS PARAMOUNT 
------------------------------- 
 
¶15. (SBU) State support for the domestic car industry is more 
about ensuring stability in Russia's regions than about 
rescuing individual companies.  The GOR is driven by a desire 
not only to save jobs in the car industry itself, but also to 
avoid layoffs at upstream steel and metallurgical coal 
 
MOSCOW 00000334  004 OF 004 
 
 
facilities that supply basic materials to the industry.  Many 
of Russia's car makers and their upstream suppliers are the 
single-largest employers in the medium-sized cities where 
they are located, and a shuttering of their plants would have 
a devastating impact on local and regional unemployment 
figures.  As Russia's domestic car makers continue to cope 
with eroding market share and weak consumer demand, we expect 
that the GOR will employ all means necessary to avoid massive 
layoffs and the social unrest that might ensue (Ref B). 
BEYRLE