Bombardier’s Russian ambitions slowed by Crimea tension

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Tensions over the conflict in Ukraine have slowed discussions between Bombardier Inc. and its Russian joint venture partners, one of the first signs of business impact on a Canadian company from the annexation of Crimea.

The Montreal-based aerospace and rail equipment giant has been in talks on a joint venture in Russia for final assembly of some of the company's Q400 turboprop airplanes.

But those discussions have turned a bit bumpy because of the tense situation over Russia's incursion into Crimea and the United States' response, said Bombardier Aerospace president Guy Hachey.

"It's softened up a little bit the discussions," Mr. Hachey said at an investors' conference in New York on Thursday.

The tit-for-tat sanctions announced by Western and Russian governments this week have increased the level of uncertainty for companies with investments in Russia, and some Canadian businesses have expressed discomfort with Ottawa's current limited sanctions against the Putin government. Bombardier has not expressed an opinion about sanctions, but some firms have urged the federal government to proceed cautiously, arguing this week's actions have dented a burgeoning confidence in Russia and hurt their business prospects in the region.

Bombardier's planned assembly line is part of a $3.4-billion (U.S.) agreement it struck last year to sell up to 100 Q400 NextGen turboprops to Russian industrial and defence conglomerate Rostec and to leasing firm Ilyushin Finance Co.

Russia and the Commonwealth of Independent States represent a potentially big market with an estimated 350 turboprops that could be sold there.

Bombardier Aerospace spokeswoman Marianella de la Barrera said talks with the Russian partners are still ongoing, but "they are not as frequent as they would have been, had this not developed."

There has been a little less travel to Russia by Bombardier executives, she said, and discussions are "a little more guarded." Bombardier is "keeping in close contact with our government relations team, and they are keeping us up to date and abreast of the situation," she added.

Russian authorities have already approved production of the Q400 in a special economic zone in Ulyanovsk, a city about 900 kilometres southeast of Moscow. A letter of intent has been signed, and Bombardier still hopes to finalize a definitive agreement some time this year.

Bombardier's rail unit – Bombardier Transportation – also has a strong presence in Russia, particularly in the signalling market.

So far, sanctions against Russia – from Canada and the United States – have primarily targeted individuals. On Thursday, U.S. President Barack Obama levelled more economic sanctions against Moscow, singling out 20 players both inside and outside the government, but also including a Russian bank that backs them.

But few companies that operate in Russia are reporting consequences from the escalating East-West tensions – at least not yet.

For Canadian auto parts giant Magna International Inc., which operates six plants in Russia, the crisis in Ukraine has not had any effect on the company's operations, said chief executive officer Don Walker. The Russian operations, which generated sales of about $400-million (U.S.) last year, remain a key area for growth at Magna, he said.

"Russia is not our No. 1 target for growth, but it is a strategic area, so we'll continue on a path to invest there as long as we're getting the returns we expect and we are getting asked by our customers to support them in Russia," he said. "It hasn't really changed our view on what we'll do there."

Most countries want a strong auto industry and Russia is no exception, he noted. That includes having a strong supplier base.

Brian Langenberg of Chicago-based Langenberg & Co., who follows large global industrial players – including Bombardier – said big companies that do business in Russia "know what they are doing," are aware of the risks and have limited their exposure there. "Nobody has got heavy assets on the ground in Russia," he said.

Langenberg & Co.'s recent analysis of about 50 major international industrial companies shows that none has more than about 4-per-cent exposure to the Russian market.

VimpelCom Ltd., a global telecommunications company, is the foreign financial backer of Wind Mobile Canada. Although VimpelCom is based in Amsterdam, its major shareholder is a firm controlled by Russian billionaire Mikhail Fridman.

Earlier this month, VimpelCom said it wrote down the entire value of its Canadian assets during the fourth-quarter of 2013 because of "challenges" it faces in this country, including its inability to gain full control over Wind. Its impairment of its Canadian assets amounted to $768-million (U.S.). The company also made a separate writedown on the impairment of its Ukrainian assets worth more than $2-billion during that same quarter.

At the time, chief financial officer Andrew Davies told analysts that VimpelCom continues "to explore all options" for Wind including a potential sale of the business. When asked on Thursday if VimpelCom's assessment of Wind is now being complicated by Canada's stance on Russia and Ukraine, spokesman Bobby Leach stated: "We don't see any effect."

One sector of the Canadian economy that could benefit from the ripple effects of the tensions is grain producers, as wheat prices have soared this week. Ukraine is a big grain producer and a leading exporter of the commodity.

With files from Greg Keenan and Rita Trichur