R 171102Z JUN 09
FM AMCONSUL YEKATERINBURG
TO SECSTATE WASHDC 1296
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG

UNCLAS YEKATERINBURG 000037 
 
 
DEPT FOR EUR/RUS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EINV PGOV RS SCUL
SUBJECT: CHELYABINSK OBLAST:  SOUTHERN URALS REGION COPES WITH 
ECONOMIC HARD TIMES 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
¶1.  (SBU)  Begin Summary:  Consul General, Public Affairs 
Officer, Department TDYer and LES Pol/Econ assistant traveled to 
Chelyabinsk and Magnitogorsk May 26-28.  In Chelyabinsk, we met 
with the leader of the of the Pravoe Delo (Right Force) 
political party, toured an American investment and met with the 
American chief of the Emerson Electric corporation.  In 
Magnitogorsk, the CG met the mayor while opening a photographic 
exhibit at the city art gallery.  End Summary 
 
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Chelyabinsk political scene quiet 
 
¶2.  (SBU)  In Chelyabinsk, we had lunch with city duma deputy 
Aleksey Sevastyanov, USG exchange program alum and current 
leader of the Pravoe Delo political party in Chelyabinsk. 
According to Sevastyanov, Pravoe Delo claims about 1500 members 
in Chelyabinsk oblast, with branches in Miass, Magnitogorsk and 
other cities.  Entrepreneurs and small and medium business 
owners make up the bulk of the party's membership.  The economic 
crisis has hit small and medium businesses the hardest, 
according to Sevastyanov, due to the lack of availability of 
credit.  Some are being bought out by larger firms.  Meanwhile, 
the government has been focusing its attention on assisting 
industrial giants such as Mechel and the Magnitogorsk 
Metallurgical Combinat (MMC) in weathering the crisis. 
Sevastyanov said that his group, which is pro-Kremlin in 
orientation, does not advocate any revolutionary ideas, but 
stands for the development of the rule of law, an end of 
corruption and opportunities for small businessmen. 
¶3.  (SBU)  The current political scene is relatively quiet, with 
major elections just having occurred in March.  Sevastyanov said 
that the region's young people are not politically minded and 
that pensioners, the segment of society most likely to protest, 
were recently mollified by the government's promise of a raise 
in benefits by 2010.  He said that NGOs are not under any 
particular pressure in the region, but reiterated his complaint 
that Chelyabinsk Governor Sumin steadfastly refuses to appoint a 
human rights ombudsman. 
 
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American investors cope with economic downturn, other problems 
 
¶4.  (SBU)  We traveled to the outskirts of Chelyabinsk to visit 
the Carbo Ceramics plant which manufactures ceramic propant used 
in the oil and gas industry.  The Texas-based company invested 
over US$ 42 million in the plant, which opened in 2007 and 
employs about 100 workers.  The economic crisis has reduced 
demand in Russia, forcing the company to export more of its 
product to Europe and the U.S.  But the high quality of Carbo's 
product still finds buyers among western firms doing business 
here such as Hallibruton, Schlumberger and TNK-BP.  The company 
has switched from using low-quality Urals bauxite to higher 
quality ore from other parts of Russia to maintain its standards 
of quality. 
 
¶5.  (SBU)  Dinner with Dwight Bohm, American director of the 
Emerson Electric portion of the Emerson-Metran U.S.-Russian 
joint venture revealed both the potential and the pitfalls that 
face American investors in Russia.  The global economic crisis 
has ended a four-year period of steady growth for Emerson's 
business in Russia.  Mr. Bohm expected that his company's 
revenues would reach only 2007 levels in 2009.  He hoped that 
the company could maintain this level through next year, by 
which time he believed the economic crisis would be over. 
Emerson had not engaged in significant layoffs; to do so would 
be very risky in the context of Russian labor law.  He allowed 
that the metallurgy industry in Chelyabinsk olbast was suffering 
and that cuts in employment would continue. 
 
¶6.  (SBU)  Mr. Bohm revealed that Emerson was negotiating a 
buyout of its Russian partner.  The main reason for this seemed 
to be the failure of the Russian side to fully comprehend the 
need for transparency and adherence to the high standards of 
business ethics maintained by the St. Louis- based Emerson 
corporation.  A series of accounting irregularities, conflicts 
of interest in the supply chain and a criminal investigation of 
the principal Russian partner had taken their toll on the 
business relationship.  Mr. Bohm lamented that the business 
culture and practices in Russia were simply not up to western 
standards.  He allowed that the criminal investigation - about 
which he declined to elaborate - was the last straw and led to 
Emerson's takeover effort. 
 
¶7.  (SBU)  In general, Mr. Bohm praised the attitude of the 
regional authorities to American investors, but noted that 
dealing with federal authorities was much more difficult and 
that lines of jurisdiction were often unclear.  For example, 
Emerson's operation occupies space in a plant that once made 
equipment for the Russian Ministry of Defense, which remained 
its landlord.  When confronted with a sudden massive rent 
increase year, the company was virtually without recourse. 
Though regional officials wanted to be helpful, they were unable 
to assist.  Negotiations were unsuccessful in reducing the 
increase to a more reasonable amount.  Carbo Ceramics managers 
echoed this theme, stating their plant is located on two parcels 
of land, one of which is controlled by regional and the other by 
federal authorities.  They noted that regional authorities had 
been very accommodating in meeting the company's needs for 
infrastructure connections, but that federal authorities had 
been far less forthcoming. 
 
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Magnitogorsk welcomes photo exhibit 
 
¶8.  (U)  In Magnitogorsk, we met mayor Yevgeniy Venianovich 
Karpov who joined in opening the PAS-produced photographic 
exhibition "My Discovery of America," which combines the work of 
a Yekaterinburg photographer and the poetry of Vladimir 
Mayakovskiy and drew large crowds and rave reviews in 
Yekaterinburg.  Mayor Karpov, who rose through the ranks of MMC 
before his election as mayor in 2005, spoke proudly of his 
city's history and contribution to the Russian economy, but 
emphasized its lively cultural life and it's crown jewel - the 
European champion Metallurg professional hockey team.  Karpov 
was open and friendly and raved about a recent trip he took to 
the United States as a tourist, visiting Las Vegas, Los Angeles 
and Hawaii.  Karpov is one half of an unusual political power 
couple in Russia:  his wife is a city duma deputy.   Press 
coverage of the event was very positive. 
 
¶9.  (SBU)  Comment:  The bustling streets of Chelyabinsk gave 
the impression of a city that is coping reasonably well with 
economic stresses.  Magnitorgorsk looked a bit down on its luck, 
but a newly built cathedral gleamed on a hilltop overlooking the 
city's sprawling industrial complex.  A superficial tour of MMC 
itself revealed an orderly operation.  Our guide alluded to 
layoffs in the company, but would not give details.  He 
commented that cutbacks in working hours that had been imposed 
earlier in the year had been rescinded and shifts were once 
again working five days per week.  The important question facing 
MMC is whether it can produce steel of high enough quality to be 
competitive on the world market. 
 
¶10.  (SBU)  Comment continued:  The road connecting Chelyabinsk 
and Magnitogorsk was one of the best that we have travelled on 
in the region.  It was in decent repair and had more stretches 
of four-lane divided highway than we have seen elsewhere.  We 
left the beaten track for Arkaim, located in the remote steppe 
of the southern Urals about 160 km from Magnitogorsk, where we 
visited the 18th century B.C. archaeological site of a former 
proto-civilization. Arkaim is one of several ancient city states 
in the region that are being investigated by archeologists. 
Though the actual excavations on the site are minimal, the 
location, which is sometimes touted as "the Russian Stonehenge," 
has become a popular destination for those seeking sources of 
cosmic energy and mystical healing powers.  Our guide, a 
historian, while acknowledging that the site may have been 
constructed to allow observations of astronomical phenomena, 
downplayed the modern cult associations with the site.  She 
emphatically stated that, despite the large crowds that gather 
there for the summer solstice, paganism has no place in modern 
Russia.  End Comment 
 
 
SANDUSKY