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Cablegate: Austria-Russia Economic Ties Deepening

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

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