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Cablegate: Nakhodka Looks to Oil and Gas for Growth

VZCZCXRO4951
RR RUEHCHI RUEHCN RUEHDBU RUEHFK RUEHGH RUEHHM RUEHIK RUEHKSO RUEHLN
RUEHNAG RUEHPB RUEHPOD RUEHSK RUEHSL RUEHVC RUEHYG
DE RUEHVK #0100/01 2690129
ZNR UUUUU ZZH
R 260129Z SEP 09
FM AMCONSUL VLADIVOSTOK
TO RUEHC/SECSTATE WASHDC 1213
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEHVK/AMCONSUL VLADIVOSTOK 1318
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 VLADIVOSTOK 000100

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET ENRG EINV ETRD ELTN ELAB EWWT PGOV
PREL, SOCI, RS
SUBJECT: NAKHODKA LOOKS TO OIL AND GAS FOR GROWTH

VLADIVOSTO 00000100 001.2 OF 002


1. (SBU) Summary: According to Nakhodka city officials, the
financial crisis has not hurt the city's economic potential.
Unemployment is low and the construction of oil and gas
infrastructure, as well as housing for the expected influx of
(mostly Russian) workers, is expected to increase Nakhodka's
prosperity. The city hopes to provide oil and gas to Russia and
other countries in Northeast Asia without damaging the
environment. Much of this growth will be generated by Rosneft.
Vostochniy Port, however, has suffered from the financial crisis
and some companies have had to reduce staff by approximately 50
percent. Companies, however, remain optimistic and look forward
to future growth. End summary.

-----------------------------
Despite the U.S., All Is Well
-----------------------------

2. (SBU) In a September 24 conversation, First Deputy Mayor of
Nakhodka Boris Gladkikh told us that, despite the world
financial crisis (which started in the United States), Nakhodka
has not lost its economic potential. He said the official
unemployment rate is 1.2 percent (approximately 1,200 persons),
or almost three times less than in Primorye in general (3.5
percent unemployment), but added there are 2,000 job vacancies.
According to Gladkikh, most of Nakhodka's unemployed simply did
not want to take up the positions available. "Engineers do not
want to work as waiters," he said. The city's port and location
along the Trans-Siberian Railroad meant that it would continue
to serve as a transportation hub in the Russian Far East,
Gladkikh said.

-------------------------------------
Energy to Boost Nakhodka's Prosperity
-------------------------------------

3. (SBU) According to Gladkikh, Nakhodka plans to receive gas
originating in Sakhalin once a pipeline running from Khabarovsk
to Primorye is finished in 2012. This pipeline will provide
Nakhodka and other cities a link to the undersea pipeline that
runs from Sakhalin to Khabarovsk.

4. (SBU) Gladkikh also told us construction of facilities at
Kozmino Bay near Nakhodka is proceeding according to plan, and
the first stage of the Eastern Siberia-Pacific Ocean oil
pipeline project, which will carry oil from Skovorodino to
Kozmino Bay, is over 90 percent complete. After the first stage
of construction, crude oil will be delivered from Skovorodino in
Amurskaya Region to Kozmino Bay via railroad. From there, up to
15 million tons of crude oil per year will be shipped by tankers
of up to 150 thousand ton deadweight. Gladkikh said the final
agreement on this stage of the project would be signed on
November 1 and the first tanker will deliver crude oil from
Kozmino Bay to countries in North East Asia in December. By
2012 the Eastern Siberia-Pacific Ocean pipeline will be
complete, and up to 30 million tons of crude oil will be
delivered from Skovorodino to Kozmino Bay by pipeline (2,500
kilometers).

---------------------------------
Workers Come From All Over Russia
---------------------------------

5. (SBU) Gladkikh said that income taxes from over 5,000 people
working in Kozmino Bay provided extra revenue to the Nakhodka
city budget. Only half of the workers there, however, are
local. The rest came from places such as Moscow, Krasnoyarsk,
Omsk, Khabarovsk, and Yuzhno-Sakhalinsk. Foreign workers have
not taken part in construction projects at Kozmino, he said.

---------------------------
Rosneft Betting on Nakhodka
---------------------------

6. (SBU) Gladkikh said Rosneft intended to process up to 20
million tons of crude oil for gasoline, kerosene, bitumen, and
polyethylene at a refinery to be built in Nakhodka. When the
first stage of construction is completed, the plant will process
10 million tons of oil. The second stage will double the
refinery's processing capacity. Gladkikh mentioned that up to
25,000 people will construct the refinery. When the refinery is
completed, 3,500 people will work there. He said the city of
Nakhodka was ready to construct 3,000 apartments in 30 apartment
buildings for the specialists who will work at the refinery,
because Rosneft will finance the construction.

7. (SBU) Gladkikh said it was likely foreign specialists would
be invited to work on the construction of refinery plant,

VLADIVOSTO 00000100 002.2 OF 002


although the preference is for Russian workers and companies.
He said there would likely be limit on foreign workers in order
to give more opportunities for Russians. He added that foreign
workers in Nakhodka are mostly from China (working in
construction and agriculture), North Korea, and CIS countries
such as Tajikistan, Turkmenistan, and Ukraine.

-----------------------------------
Environmental Safety A Top Priority
-----------------------------------

8. (SBU) Gladkikh emphasized that environmental safety a top
priority during the port construction. Green Peace and local
environmentalists took part in public hearings devoted to
construction in Kozmino Bay. The contractors listened to
concerns of environmentalists in order to get public approval.

---------------
Vostochniy Port
---------------

9. (SBU) Gladkikh said the financial crisis had reduced the
amount of cargo going through the four Nakhodka ports. The main
port, Vostochniy, saw a 50 percent decline of container
deliveries from South Korea, Japan, China, and Australia in
2009. Approximately 16 million metric tons of coal is shipped
through the coal terminal next to Vostochniy port each year.

-----------------------------------------
Vostochniy International Shipping Company
-----------------------------------------

10. (SBU) On September 24 Chief Executive Officer of Vostochniy
International Container Services (VICS) John Scourtis presented
an overview of his company's operations and gave us a tour of
Vostochniy Container Terminal. He told us the number of
containers VICS shipped in 2008 fell 19 percent. From January
to August 2009 business fell 63 percent, in part due to the
sharp decline in shipments of electronics. As a result, VICS
had to reduce staff by 50 percent; VICS currently employs 600
people. Scourtis forecasted that for 2009 VICS would move
containers totaling 153,689 TEU, compared to 400,724 TEU in 2008.

11. (SBU) Scourtis said VICS was focused more on international
cargo delivery because domestic routes, such as from Vladivostok
to Magadan, are up to three times more expensive than some
international routes such as from Vladivostok to Pusan. To
attract more clients, VICS intended to offer discounts.

12. (SBU) VICS's main client, according to Scourtis, is the Far
East Shipping Company (FESCO). He said FESCO accounted for
approximately 75 percent of VICS's total cargo delivery.
Despite recent hard times Scourtis said he was optimistic about
VICS's future, and he hoped that by 2015 his company will see
business return to 2007 levels. In fact, VICS plans to renovate
its facilities and purchase new cranes from China to speed its
operations. VICS may also invest money to further develop
railroad infrastructure in the area.
ARMBRUSTER

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