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Boeing, VSMPO Sign $18Bln Deal

With President Vladimir Putin's blessing, Boeing struck an $18 billion deal Friday with VSMPO-Avisma to supply titanium for its airplanes.

The agreement came exactly a week after the United States announced it had imposed sanctions on state arms trader Rosoboronexport, which is acquiring VSMPO-Avisma, and could help Boeing land a large planes order with Aeroflot.

The development should alleviate fears that the sanctions will harm U.S. companies' business in Russia.

As part of a 30-year deal, Boeing and VSMPO signed off Friday on a joint venture under which Boeing will purchase $18 billion-worth of VSMPO's titanium products.

Meeting with a trio of senior Boeing executives at his Novo-Ogaryovo residence outside Moscow, Putin said the venture was "an attempt to enter a new level of cooperation," according to a version of his comments posted on the Kremlin web site.

Representing Boeing at the meeting were company vice president Thomas Pickering, a former U.S. ambassador to Russia and undersecretary of state for political affairs; Alan Mulally, CEO of Boeing's commercial airplanes division; and Sergei Kravchenko, head of Boeing in Russia and the CIS.

VSMPO general director Vladislav Tetyukhin and Rosoboronexport chief Sergei Chemezov, a close ally of Putin's, also attended the meeting.

Chemezov confirmed late Friday that Rosoboronexport had agreed to buy more than 51 percent of VSMPO from current owners Tetyukhin and company chairman Vyacheslav Bresht, and would soon pay for the shares, Bloomberg reported.

Putin's approval of the Boeing-VSMPO deal appeared to be a defiant reaction to the United States slapping trade sanctions on Rosoboronexport and military jetmaker Sukhoi. Under the sanctions, the two Russian firms' trade with U.S. firms is restricted, while their trade with U.S. government agencies is banned altogether.

The sanctions come under the Iran Nonproliferation Act of 2000, but their timing -- they took effect July 28, the day after Russia sealed a $3 billion arms sale to Venezuela -- has been widely seen as a response to Russia aiding Venezuelan President Hugo Chavez, a staunch critic of U.S. policies.

As well as its cooperation with VSMPO-Avisma, Boeing acts as a consultant and minority investor in the Superjet medium-sized passenger jet project, formerly known as Russian Regional Jet.

U.S. firms, and Boeing in particular, would suffer the most from the sanctions, analysts in Washington and Moscow said last week. Putin's comments, however, appeared to suggest that trade relations would not suffer.

"Since 1992, ... your company has proved itself a reliable partner," Putin said. "We, for our part, will with pleasure support the development of your activity, of your business in Russia."

National flag-carrier Aeroflot has yet to announce whether Boeing or European rival Airbus will win a $3 billion order for 22 new long-haul airliners.

By appearing to broker the Boeing-VSMPO deal, the Kremlin was sending out a familiar message, said Roland Nash, chief strategist at Renaissance Capital. "Putin wants to signal, 'Yes, you can have private enterprise, but enterprise under the eyes of the Kremlin,'" Nash said.

"The Kremlin has made it clear that any deals happening in strategic sectors must have its stamp of approval."

Although VSMPO-Avisma exports 75 percent of its output, it also supplies titanium for submarines, rockets and nuclear power stations in Russia. The company produced about 30,000 tons in 2005, one-third of the world's titanium, making it the largest producer of the metal.

Boeing's venture with VSMPO gives it a major, low-cost titanium parts supplier at a time when prices for the light, durable metal are set to soar.

Analysts predict titanium demand will rise by 13 percent over the next three years, with prices for the metal seen as rising by one-third by 2008. High aviation fuel prices and increased insurance costs due to terrorist threats are leading aircraft makers to demand lighter, more fuel-efficient aircraft parts.

Boeing would save 20 percent on costs through the $60 million, 50-50 joint venture, at the titanium maker's Verkhnyaya Salda plant in the Urals, VSMPO's Tetyukhin said. The venture will also supply other projects, including Sukhoi's Superjet.

As VSMPO's largest client, Boeing already buys 40 percent of its titanium from Verkhnyaya Salda, which also supplies close to 60 percent of Airbus' titanium needs.

The latest jets from both companies, Boeing's 787 Dreamliner and Airbus' A350, each require 36.3 tons of titanium. One-tenth of the Dreamliner's parts are made from Russian titanium, Tetyukhin said at Friday's meeting.

"This agreement is an outstanding example of how a joint venture should work, with benefits for both of our companies," Mike Cave, vice president of airplane programs at Boeing's commercial airplanes division, said Friday in a statement.

"VSMPO will expand its capabilities in titanium parts production, and Boeing will increase efficiency and reduce the waste associated with titanium machining," Cave said.

The venture will perform rough machining and stamping of titanium forgings -- turning primary metal into polished, semi-finished products. The final machining and processing of the forgings into airplane components will be mostly done at Boeing's U.S. facility in Portland, Oregon.

In 10 years, VSMPO hopes to progress to making final parts for Boeing, Tetyukhin said Friday, Bloomberg reported. After the Rosoboronexport takeover, VSMPO's business strategy will not change, Tetyukhin said.

VSMPO recorded a net profit of $128 million and revenue of $506 million in the first half of 2006, according to Russian accounting standards.

After Russia's sale of arms to Venezuela, it is also in talks to sell arms to Mexico and other Latin American nations, Rosoboronexport's Chemezov said on the sidelines of a Boeing reception late Friday, Bloomberg reported.

"Venezuela's example has proved catching," Chemezov said, Bloomberg reported. "Latin America used to be a blank spot for us, now they all want it -- Brazil, Argentina, Chile."

(The Moscow Times 14.viii.06)

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