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Cablegate: Russian Companies: Emerging Global Players

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RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHMO #0340/01 0391345
ZNR UUUUU ZZH
R 081345Z FEB 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 6477
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 MOSCOW 000340

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SENSITIVE
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STATE PASS TO USTR
TREASURY FOR TORGERSON
COMMERCE FOR EDWARDS
NSC FOR WARLICK


E.O. 12958: N/A
TAGS: EINV ETRD RS

SUBJECT: Russian Companies: Emerging Global Players

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Summary
-------

1. (SBU) Russian companies are increasingly going "global" --
expanding rapidly overseas through acquisitions and investments.
Russian companies, flush with cash, are joining their Indian and
Chinese counterparts as a new breed of multinationals. Oil and gas
companies are the most active but metals and telecommunications
firms are becoming more involved abroad as well. The focus is no
longer just in the CIS and Europe, but also increasingly in Asia,
Africa, and to a lesser extent even in North America. These firm's
motivations include the need to acquire greater technical know-how,
to expand their profit base, and to take advantage of opportunities
for quick returns. Presidential-hopeful Dmitry Medvedev and other
Russian political leaders, no longer concerned about capital flight,
have expressed support for continued foreign investment by Russian
firms. End Summary

--------------------------------------------- ---
An Emerging New Player in the Global Marketplace
--------------------------------------------- ---

2. (U) Russian companies are increasing their participation in the
global economy. They are rapidly expanding overseas investment.
According to the Russian State Statistics Office (RosStat), Russia's
foreign direct investment (FDI) abroad for the first nine months of
2007 exceeded $28 billion. This compares to $14 billion for the
whole of 2006. UNCTAD'S World Investment Report shows that the
stock of Russian FDI grew nearly eightfold since 2002, increasing
from a starting point of $20 billion to $157 billion in 2007. Among
emerging markets, which now account for around 14% of FDI, Russia is
one of the three biggest investors along with China and Brazil.

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Energy and more
---------------

3. (U) The most significant Russian investors abroad are Gazprom
and Lukoil. Gazprom has been aggressively buying up assets in
Europe and the former Soviet states and has recently expanded its
efforts to include Africa. Lukoil's international presence includes
projects in the Middle East, Africa, and Latin America. Other
Russian energy firms, such as TNK-BP and Rosneft are also active
abroad, especially in the former Soviet states.

4. (U) However, while energy firms are still the big players, other
industries are increasing their foreign activities. According to a
recent study from the Skolkovo Moscow School of Management in
December 2007, 47% of the overseas assets of the top 25 Russian
non-financial multinationals are from non-energy sectors: 25% from
metals and mining and 22% from transport/shipping,
telecommunications, and retail. The biggest metals investors were
Evraz, Severstal, Norilsk Nickel, and Rusal. The largest
telecommunications investors are Vimpelcom and Sistema.

-----------------------------
No longer just CIS and Europe
-----------------------------

5. (U) As to be expected based on geographic and historic ties,
over 60% of the foreign affiliates of Russia's multinationals are
concentrated in Europe and the CIS. However, investments in Africa,
Asia and North America are growing.

6. (U) In Africa, four Russian mining companies: Norilsk Nickel,
Rusal, Russia's diamond monopoly Alrosa, and Renova, have invested
more than $5 billion in the past three years. This February, Rusal
joined with China Power Investment Corp to build a bauxite and
alumina complex in Guinea, where Rusal already owns a mining firm, a
refinery, and a bauxite deposit. Rusal bought a majority share in
Alscon (Aluminum Smelter Company of Nigeria) last year and its
smelter will start operations this month. Renova is active in South
African manganese via the joint venture United Manganese of Kalahari
(UMK).

7. (U) In Asia, telecommunications investments predominate. In
September 2007, a Russian telecom company, Vimpelcom, announced
plans for a global system for mobile communications based in
Vietnam, possibly investing up to $1 billion over the new few years.
Vimpelcom is controlled by another Russian firm Altimo (itself part

MOSCOW 00000340 002 OF 002


of the Alfa Group), which in August 2007 acquired 90% of the
Cambodian mobile operator Sotelco. Sistema gained a foothold in
India's fast-growing telecom market by investing $520 million in its
Indian subsidiary Shyam Telelink in 2008, and plans an additional $7
billion in network infrastructure.

8. (U) Russian FDI in the United States for the first nine months
of 2007 was around $750 million (RosStat figure), a 30% increase
over 2006. The top 25 Russian multinationals now have 9% of their
affiliates in the United States and Canada. Much of Russia's
outward FDI into the United States has been through merger and
acquisitions in 2006-2007, including the purchase by Russia's
biggest steelmaker, Evraz Group, of three US-based companies in
2006-2008: Stratcor, Claymont Steel Holdings, and Oregon Steel
Mills. Another Russian steel producer, Severstal, purchased Rouge
Industries three years ago. In Canada, Norilsk Nickel bought
LionOre last year.

-----------
Motivations
-----------

9. (SBU) The principal motivation is, of course, profits. The
ruble's appreciation vis-`-vis major currencies -- 19% against the
dollar in a 12-month period, 4% against the Euro -- has given the
large Russian companies spare cash to invest overseas and the chance
to acquire profitable foreign companies at a discount. Russian
companies are also eager to take advantage of "get-rich-quick"
opportunities. Alexander Bulygin, Rusal CEO, said that the past two
years were of particular importance for Rusal, which achieved
"significant production and financial" results by acquiring
strategic assets abroad.

10. (SBU) In addition, Russian companies are facing an increasingly
saturated domestic market and need to expand abroad to maintain and
increase profits. A telecoms analyst at J'son & Partners noted that
although the domestic telecom market brought in $20 billion in
revenue in 2007, growth was the result of old clients acquiring new
handsets rather than the firms acquiring new clients. In that
regard, Alexander Goncharuk, Sistema's president and CEO, recently
called India one of the most attractive telecommunications markets,
and one with a high growth potential. Sistema plans to build a
national telecommunications network in India.

11. (U) A third motivation is to acquire needed technical expertise
through overseas acquisitions. For instance, the Evraz Group
recently acquired Oregon Steel and Claymont Steel and is using the
expertise acquired in these deals to press forward with its strategy
of turning itself from a Russian into a global steel producer. At
the same time, they are using Russian capital to revitalize the U.S.
steel plants they acquired.

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Support From Above
------------------

12. (SBU) Russian expansion overseas is still a relatively new
phenomenon, and until recently, few Russian politicians identified
it as a priority. That seems to be changing. Speaking before the
all-Russia Forum of Industrialists and Entrepreneurs on January 31,
First Deputy Prime Minister and presidential hopeful Dimitry
Medvedev expressed support for Russian companies investing abroad.
Previously the government had been neutral regarding Russian
investment abroad, analysts at Skolkovo Research Center in Moscow
told us. Officials were concerned about capital flight and until
2006, when capital controls were lifted, Russia was a net exporter
of capital.

-------
Comment
-------

13. (SBU) Despite global aspirations, few, if any, Russian
companies are expected to be market leaders any time soon. However,
as long as the ruble stays strong vis-`-vis major currencies, and
Russian companies remain relatively cash-rich, Russian foreign
investment will continue. End Comment.

BURNS

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