TITLE:                   MACHINE-BUILDING IND OF KHABAROVSKY KRAI

SUBJECT COUNTRY(IES):    RUSSIA

POST OF ORIGIN:          RUSSIA

SERIES:                  INTERNATIONAL MARKET INSIGHT (IMI)

ITA INDUSTRY CODE:       MTL

DATE OF REPORT (YYMMDD): 990127

DELETION DATE (YYMMDD):  200101

AUTHOR:                  ANDREI VASENYOV

APPROVING OFFICER:       RICHARD STEFFENS

OFFICER'S TITLE:         PRINCIPAL COMMERCIAL OFFICER

NUMBER OF PAGES:         8


INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND
U.S. DEPARTMENT OF STATE, 1999.  ALL RIGHTS RESERVED OUTSIDE OF
THE UNITED STATES.

SUMMARY

1. For decades, machine building was the leading industry of
Khabarovsky Krai.  Military and civil ships, airplanes and
energy equipment were the leading products of the Krai, and this
sector supplied goods for heavy industry and defense plants.
During Russia s prolonged transition to the market, the
Khabarovsky Krai economy has experienced dramatic crisis.
Despite a significant decline in state orders and lack of
financing, the machine building sector of the Krai still offers
some commercial opportunities for U.S. businesses. Shipbuilding
repairing yards in Komsomolsk on Amur and Sovgavan, plants like
Dalenergomash and Amurkabel, and other enterprises seek
partnerships with American businesses for broader participation
in the Sakhalin offshore oil projects. End summary.

CURRENT CONDITION OF THE SECTOR


2.  Khabarovsky Krai has been the most industrialized territory
of the Far East of Russia. Until the middle of the 1990s,
defense oriented machine building enterprises dominated the
industrial structure of the Krai's economy. Previously state
order driven, many of these companies have not yet adjusted to
market conditions. Further, not having received state orders for
years, many companies are presently in deep crises.  Lack of
potential local consumers of their production, extremely high
power and transportation tariffs, and huge debts make the future
existence of the majority of the machine building enterprises
doubtful.

3.  Khabarovsky Krai machine building firms have made little
progress in adopting new technologies and materials. The Federal
"Conversion" Program approved in 1995 was to provide defense
plants with funds to arrange production and marketing of
consumer goods. The Program received only 15% of its proposed
financing, and has all but been abandoned. The federal
government (Department for the Defense Industry Reformation) is
presently developing similar program, which will be in force
from 1999 till 2005.

4. The following table shows changes in the volume of
manufacturing of basic machine building products in Khabarovsky
Krai:

Industrial products                             1990
1992    1995    1996    1997
Compressors units (units)                       163
154     26      0       0
Diesel engines (thousand horse power)   191
161     2       11      12
Metal cutting machine tools (units)             839
736     530     394     0
Automobile batteries (thousand units)   304
262     99      111     81
Cables (weight of copper, thousand tons)        33.4
19.1    11.7     5.1     4.3

5. Before 1991, 85% of the machine building production of the
Krai was consumed by enterprises in western regions of the
country. Today, 72% of local production in the industry is
consumed in the Far Eastern territories, 15% is exported, and
only 13% is shipped to the European Russia.

6. Many machine building enterprises in Amursk, Komsomolsk and
Khabarovsk have all but stopped manufacturing their traditional
products. Several attempts to begin producing equipment for the
local timber manufacturing and wood processing business have
failed.  Amurmash, the major industrial enterprise of Amursk (25
miles from Komsomolsk), has not been able to afford regular
production of city buses and now is considering reconstruction
of its tremendous industrial facilities for pulp production.
Trying to survive, the plants are searching for new niches
developing small wood processing, car repair, metal working, and
even food production facilities. Many have established
commercial subsidiaries engaged in trade and service businesses.

THE PRESENT ROLE OF THE KRAI ADMINISTRATION

7. Because of the defense orientation of the sector, the
Khabarovsky Krai administration owns shares (from 10% to 51%) of
at least two/thirds of all machine building enterprises
operating in the territory. The Krai administration s Committee
of Industry, Transportation and Telecommunication participates
in strategic decisions of the major machine building companies.
Managers from the Department and Division of Industry represent
the Krai administration on the Board of Directors of companies
where the administration owns shares. The krai administration
also helps companies seek investors, provides loan guarantees,
controls federal programs on machine building on the regional
level, and submits to the Krai Duma legislative initiatives on
taxation, ownership and other topics related to this industrial
sector.

LEADING MACHINE BUILDING ENTERPRISES IN KHABAROVSK KRAI

Aircraft Manufacturing

8. The Gagarin Aircraft Manufacturing Association in Komsomolsk
on Amur (named after the first Soviet astronaut Gagarin) is one
of the largest producers of aircraft machinery in the Asia
Pacific Region.  It is currently one of among Khabarovsk Krai's
most successful enterprises, and for years has been the largest
taxpayer of the territory.  The enterprise has received
recognition in international markets for its production of one
of the world best fighter planes, the SU series. The main
facility of the enterprise also produces an amphibian flying
boat, the "Be 103," and an aircraft for regional and domestic
airlines, the "Sukhoi 80." The Aircraft Association is one of
the major exporters of the Krai. During his November 19, 1998,
visit to the Aircraft Association, Prime Minister Yevgeny
Primakov promised not to let the plant be privatized, and to
provide it with foreign and state contracts.

9. Gagarin's plant also encompasses a number of independent,
non-defense manufacturing operations. Among these are Stils,
which manufactures the "Amur" and "Strela" motor boats, yachts,
scooters, children s bicycles, oxygen pressure chambers for
medical needs, and snowmobiles; and Avest, an electronics
factory. Avest has a joint venture with Gold Star (S. Korea) to
assemble television, radio, and other home appliances. Avest
products are reasonably popular among the population of the RFE.
Since the August 17th crisis, Avest has stopped assembling
because its cash assets were frozen in Inkombank, and the cost
of imported supplies became unaffordable.

Shipbuilding Enterprises

10. The ship building and ship repairing sectors are well
developed in the Krai and are represented by the following
enterprises: Amursky Shipbuilding Yard in Komsomolsk, Oston and
Sudostroitelny Zavod Shipbuilding Yards in Khabarovsk, Yakor and
Severny Yards in Sovgavan and a shipbuilding yard in the city of
Nikolaevsk on Amur.   Currently, these plants are operating at a
very low percent of capacity, as most of the Russian fishing and
sea cargo companies cannot afford new boats, and prefer to
repair their vessels in the Republic of Korea and Northern China
for lower price and better quality.

11. After the August 1998 crisis, ship repairing yards of
Sovgavan received more contracts for repair work. Yakor is
repairing Sakhalin Morneftegaz vessels, and seeks foreign
partners to modernize its industrial lines. Efim Lipovetsky,
Head of the Division of Industry of the Krai administration,
mentioned that the federal Fishery Committee and Japanese
businesses are negotiating an agreement on
restoration/renovation of the shipbuilding sector of the Russian
Far East, predominantly represented by the enterprises of the
Khabarovsk Krai. The Japanese side is expected to provide
financing and orders.


12. In 1997, the Amursky Shipyard became the first Khabarovsk
Krai enterprise engaged in the "Sakhalin 2" offshore oil and gas
project by constructing oil drilling platforms. The yard also
produces a multi purpose river sea type freighter "Volga" of
5,500 ton displacement, a seagoing salvage tug, and hang
gliders.  Amursky and Mitsui (Japan) designed a USD27 million
project on the reconstruction of the yard to participate as one
of the local suppliers of Sakhalin oil projects.

Enterprises Producing Diesels, Power Engines and Heaters

13. Marine diesel engines and marine diesel generator sets are
constructed by the Khabarovsk DalDiesel Joint Stock Company. The
company was put into operation a century ago, and was the major
diesel supplier for the Soviet river and marine fleets. Since
the demand for plant production has fallen dramatically,
DalDiesel seeks investors to start production of consumer goods.
Currently the plant's management is investigating the
possibility of establishing a car assembly division.

14. The Joint Stock Company "Dalenergomash" is Russia's major
manufacturer of compressors, pumps, blowers, gas turbines,
induced  and forced draft fans, gate valves, main operated
pumps, and large and small industrial heat exchangers.
Dalenergomash machinery may be employed in heavy industry,
mining, power production, and in the gas and chemical
industries.  Prior to 1991, the plant exported 38 countries,
including Finland, India, Pakistan, and eastern Europe. The
company is one of Sakhalin Morneftegaz's suppliers of pump
units, and wishes to find a foreign partner to assist in
production of advanced equipment for Sakhalin oil projects. The
company has  maintained high quality products, and developed a
network of consumers.

15. The Gorky Plant produces load hoisting equipment, including
vessel winches, and pier cargo cranes. It was among the largest
enterprises in the Krai capital city, Khabarovsk. The company
possesses industrial lines to manufacture supplies for marine
vessels, such as heat generators, desalting sets, and air and
oil coolers. Currently Gorky is exploring consumer goods
production.

Other Machine Building Operations

16. The Khabarovsk Amurcable joint stock company is the only
cable producer in the Russian Far East. The company manufactures
20 items including power and communication cables, signal and
blocking, cables, rubber insulated cables for marine vessels,
small dimension cables, wires for electric devices, winding
wires, bar conductors, and more. A substantial portion of
company's production is exported to Pacific Rim countries. By
the end of 1998, Amurcable developed a special cable for oil
pumps used on Sakhalin. The company seeks an American partner to
develop more sophisticated products for Sakhalin.

17. A broad variety of fish and food processing equipment is
manufactured at Dalremmash joint stock company. The company,
widely known in Eastern Russia, supplies the major fishing
companies and fish processing plants operating in Primorsky
Krai, and the Magadan, Sakhalin, and Kamchatka regions.


18. The Khabarovsk Machine Tool Plant produces table drilling
milling machines, a universal on table wood processing machine
(the "CD 2M"), screw cutting machines (the "SMT 1"), finish
drilling, and lathe machines. The Khabarovsk Machine Tool Plant
is experiencing drastic declines in orders and financing. In
1998, the company designed a special portable unit to process
small remnants from wood cutting in the forest. The company
seeks a partner to produce new equipment.

19. The Amurlitmash joint stock company in Komsomolsk
manufactures foundry equipment: continuous shot blasting
barrels, batch type shot blast cleaning barrels, batch type shot
blasting chambers with rail running cars, universal shot blast
cleaning chambers, shot blasting machines for sheets, and rolled
metal electro hydraulic machines. The company used to export
equipment to Belgium and other countries.  Future development of
the plant depends upon the successful operations of steel
producing companies in Komsomolsk.

20. The Khabarovsk Plant for Heating Equipment Production
(KPHEP), established in 1958, is the only plant in eastern
Russia producing a full range of heating and plumbing devices
and equipment employed in civil construction. At present, 15
percent of company's stock is owned by Santa holding, the former
federal organization that used to manage the metal working
sector; 60 percent belongs to the plant's employees; and the
other 25 percent   to private persons.  Despite the depression,
the company's management has kept all industrial facilities in
working condition,  developed new lines for pipe production, and
enlarged its network of consumers.  It has decreased  employees
by two-thirds to reduce costs, saving the most qualified staff
of 890 persons.  The development of a gas pipeline network is
among the major priorities of the Khabarovsk Krai
administration. KPHEP has designed a business plan envisioning
electric welding production of iron multipurpose pipes of
different diameters.  The company is ready to perform secondary
30 percent of the stock, which could be passed to an investor
for approximately USD 800,000.

21. The Komsomolsky Electro Technical plant is the only battery
producer in eastern Russia. Private persons own 85% of company's
stock. The company also manufactures plastic consumables, and is
recognized among most successful operations of the Krai. The
company wishes to perform a secondary issue of 100,000 new
common shares, with a face value of one share 100 rubles. The
issue will make 25% of the registered capital. The investment
would be spent on an industrial line for improved and expanded
production.

22. EKSPO LTD is a private company producing diversified pumps
and devices to local oil products into railway tanks. The
company possesses facilities to produce doors, window frames,
and other wooden construction materials for the local
construction industry. Currently EKSPO seeks a USD 170,000
credit to increase the production of pumps.

CONTACT INFORMATION

23.  Local officials

Viktor Tevelevich, Vice Governor, Head of the Committee on
Industry,
Transportation and Telecommunication of the Khabarovsk Krai
Administration
56 Karl Marx Street,
Khabarovsk, Russia 680000
Tel: (7 4212) 236 911, 327 537
Fax: (7 4212) 328 756

Stanislav Chastny, First Deputy of the Head of the Committee on
Industry,
Transportation and Telecommunication of the Khabarovsk Krai
Administration,
Head of the Department of Industry and Industrial Products
56 Karl Marx Street,
Khabarovsk, Russia 680000
Tel: (7 4212) 236 655
Fax: (7 4212) 328 756

Efim Lipovetskiy, Deputy to the Head of the Department of
Industry and
Industrial Products, Head of the Division of Industry
56 Karl Marx Street,
Khabarovsk, Russia  680000
Tel: (7 4212) 328 576
Fax: (7 4212) 328 756

24. Major Machine Building Companies of the Khabarovsky Krai

Gagarin Aircraft Manufacturing Association
1 Sovetskaya Street, Komsomolsk on Amur, Khabarovsky Krai,
Russia 618018
Tel: (7 42172) 632 00
Fax: (7 42172) 298 51
e mail: knaapo@kmscom.ru
Contact: Vyacheslav Shport, Deputy Director

Amursky Shipbuilding Yard
1 Alleya Truda Street
Komsomolsk on Amur, Khabarovsk Krai, Russia 681000
Tel: (7 42172) 450 22
Fax: (7 42172) 469 38
Contact: Albert Avanesyan, Head of Foreign Economic Department

Oston Shipbuilding Yard
1 Kirova Street,
Khabarovsk, Russia 680018
Tel: (7 4212) 715 347
Fax: (7 4212) 715 339
Contact: Gennady Koshkaryov, Director

Khabarovsk Shipbuilding Yard
1 Suvorova Street,
Khabarovsk, Russia 680003
Tel: (7 422) 513 394

Fax: (7 4212) 552 529
Contact: Gennady Koshkaryov, Director

Amurlitmach
1 Kulturnaya Street
Komsomolsk on Amur, Khabarovsk Krai, Russia 681008
Tel: (7 42172) 293 73
Fax: (7 42172) 287 77 or 402 69
Contact: Vladimir Zhuk, Director

Amurkabel Joint-Stock Company
87 Artyomovskaya Street,
Khabarovsk, Russia 680001
Tel: (7 4212) 552 327
Fax: (7 4212) 552 148
Contact: Nikolay Kostyuchenko, Director General

Komsomolsk Electrotechnical Plant
54 Kirovs Street,
Komsomolsk on Amur, Khabarovsky Krai, Russia 681027,
Tel: (7 42172) 454 59
Fax: (7 42172) 454 63
Contact: Vladimir Schetinin, Director General

Gorky Plant
22 Gagarina Street,
Khabarovsk, Russia 680052
Tel: (7 4212) 228 015
Fax: (7 4212) 228 007
Contact: Eduard Ten, Marketing Director

DalDeisel Joint Stock
73 Tikhookeanskaya Street
Khabarovsk, Russia 680026
Tel: (7 4212) 342 677
Fax: (7 4212) 345 765
Contact: Victor Rudenko, Deputy Director

Dalenergomash
28 Leningradskaya Street
Khabarovsk, Russia 680013
Tel: (7 4212) 392 591, 392 710
Fax: ( 7 4212) 324 778, 345 074
Contact: Gennady Korovin, Head of Marketing Department


Khabarovsk Machine Tool Plant
20 Promyshlennaya Street
Khabarovsk, Russia 680031
Tel: (7 4212) 379 545, 379 560
Fax: (7 4212) 379 562
Contact: Vladimir Lebedko, Director

Dalremmash
158 Prospect of 60-let Octyabrya
Khabarovsk, Russia 680014
Tel: (7 4212) 372 294, 372 883

Fax: (7 4212) 372 984, 372 956
Contact: Nikolai Gilyov, Director

Plant for Heating Equipment Production
73 Suvorova Street
Khabarovsk, Russia 680015
Tel: (7 4212) 513 472
Fax: (7 4212) 522 850
Contact: Vladimir Igo, Director

Yakor
6 Korabelnaya Street
Sovetskaya Gavan, Khabarovsky Krai, Russia 682880
Tel: (7-42138) 330-84
Fax: (7-42138) 332-51
Contact: Vladimir Voronin, General Director

Ekspo Ltd.
6 Lesozavodskaya Street
Komsomolsk-on-Amur, Khabarovsky Krai, Russia 681000
Tel: (7-42172) 438-53, 469-27
Fax: (7-42172) 469-27
Contact: Sergei Matveev, Director