U.S. SANCTIONS: EFFECT ON SOVIET PIPELINE AND AEG

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84T00109R000100080007-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 5
• Document Creation Date: December 21, 2016
• Document Release Date: August 13, 2008
• Sequence Number: 7
• Publication Date: February 8, 1982
• Content Type: CABLE

r n k., c r rn t: n, T I A I
Approved For Release 2008/08/13: CIA-RDP84TOO109ROO0100080007-6
00 RUEAIIE
ZNY CCCCC ZOC STATE:: ZZH
STU3502
00 RUEHC
DE RUFHCL #2879101 0391844
ZNY CCCCC ZZH
0 081836Z FEB 82
FM AMEMBASSY BONN
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3994
INFO RUEHLD/AMEMBASSY LONDON 047b
RUFHFR/AMEMBASSY PARIS 1865
RUEHRO/AMEMBAS SY ROME 7721
RUEHBSIAMEMBASSY BRUSSELS 9791
RUEHROC/AMCCNSUL MILAN 0387
RUEHMO/AMEMBAS SY MOSCOW 1589
RUFHNA/USMISSION USNATO 709?
ZEN/AMCONSUL DUSSELDOFF PCUCH
BT
EZi:
C 0 N F I 0 E N T I A L BONN 02879 COMBINED SECTION
EZ2:
ALSO FOR USOECO AND USE_C
E.O. 12065: XDS 2/8:102 (UOESSNER, WILLIAM P.) OR-M
TAGS: ENPG, E#WT. GE. SU
SUBJECT: U.S. SANCTIONS: EFFECT ON SOVIET
PIPELINE AND AEG.
1. C< ENTIRE TEXT.
2. SUMMARY: ON FEBRUARY 5, AEG BOAPD MEMBER IWPANGEL
AND AEG-KAKIS DIVISION HEAD KERLEN PROVIDED ECON MIN
AND ENERGY OF= ICER WITH A RUN DOWN. ON A CONFIDENTIAL
BASIS. OF THE EFFECTS OF L.S. SANCTIONS ON THE. CONSTRUC-
TION OF THE SOVIET GAS PIPELINE ON AEG. THE FIRM BELIEVES
SANCTIONS WILL NOT PREVENT THE DELIVERY OF INITIAL GAS
VOLUMES, TO EUROPE IN ACCORDANCE WITH THE SOVIET'S CON-
TRACT. AEG WILL BE HARD HIT BY THE SANCTIONS* THE FIR P
MAY HAVE TO LAY OFF 29000 WORKERS AND CLOSE TWO PLANTS < +
PLANTS WHICH HAVE JUST BEEN MODERNIZED IN AN ATTEMPT IC
COMPETE FOR GAS TURBINE BUSINESS ON A WORLD-FIDE BASIS.
THE FIRM WILL OF SUEJF:CT TO NON-OELIVE::RY Pt.NALTIES FRCP
THE SOVIETS, AND. AT THE SAME TIME. GE MAY SEEK PAYMENT
FOR THE 41 ROTOR SETS IT HAS AGREED TC SUPPLY. BECAUSE
THE TERMS CF THE GE-AEG CONTRACT REQUIRE AEG TC TAKE
State Dept. review completed
C 0 N F I C E N T I A L
Approved For Release 2008/08/13: CIA-RDP84TOO109ROO0100080007-6
25X1
i
0
25X1
IW
0
0
0
0
0
0
S
 Approved For Release 2008/08/13: CIA-RDP84T00109R000100080007-6
MSGN0 13 t, i x x s tiF WU IUcsnc- -1c.'wv
DELIVERY IN THE U.S. A TO ASSLME FtSPCNSIBILITY
EXPORTING THE ROTORS 9 GF CAN AND MAY CONTENC THAT S
OBLIGATIONS END WHEN THE COMPONENTS ARE AVAILABLE FOR
ONWARD SHIPMENT ON ITS LOADING DOCK. END SLMMARY.
3. THE AEG RELATIONSHIP UITH GE:
UNTIL RECENTLY 9 GE U AS THE LARGEST SINGLE SHAREHOLDER IN
AEG WITH ABOUT 10 PERCENT OF OUTSTANDING ALG STOCK. TF-E
KANIS DIVISION HAS BEEN MANUFACTURING TURBINES ENDER GE
LICENSE FOR MORE THAN 10 YEARS. FOR EXPORT THROUGHOUT
1 THE WORLD. THERE IS A GENERAL AGREEMENT BETWEEN THE TUC
FIRMS. MOST RECENTLY RENEWED IN 19819 PE#MITTING THE
MANUFACTURE OF FRAME 5 TWC- STAGE GAS TURBINES. LNDER THIS
GENERAL AGREEMENT. THE FIRMS NEGOTIATE SUPPLY AGREEMENTS
COVERING GE ROTORS. NOZZLES. AND VANES AS AEG BICS FOR
'
. AEG WAS IN CONSTANT CONTACT WITH
EACH SPECIFIC CONTRACT
GE AS IT PREPARED ITS BIC FOR THE 47 FRAME 5+S I T IS TC
SUPPLY FOR THE SOVIET-WEST EUROPE PIPELINE. EEFCRE SIGNING
ITS C34TPACT (A THREE-WAY AGREEMENT AMONG AEG. MANNESPAA-
CR+OUSET LOIRE. AS GENERAL CONTRACTOR. AND MACHINOIMPORT.
THE SIVIET PARTICIPANT) IN NOVEMBER. 19819 AEG VERIFIt,C
THE AVAILABILITY OF GE COMPONENTS. INCLUDING THE FACT THAT
THERE WERE NO IMPEDIMENTS TO THE EXPORT OR REEXPORT
TO THE USSR. Or THE U.S. MANUFACTURED COMPONENTS.
CONTRACT DOES NOT CONTAIN ANY PENALTY
EG G
H
R. T
E A
E
CLAUSES. ACCORDING TO OUR AEG BRIEFERS SUCH CLAUSES WERE
NOT THOUGHT NECESSARY BECAUSE OF GE*S CLOSE COOPERATIVA IN
THE OEVFLOPMF47 OF THE AEC BID AND BECAUSE OF THE LONG
+
AND COOPERATIVE RELATIONSHIP BETWEEN THE FIRMS. ThE A(E
GE? CONTRACT CALLS FOR GE TO SUPPLY THE ROTOR SETS TO AEG
WHICH WILL BE RESPONSIBLE FOR EXPORTING THEM FROM THE L.S.
THUS. IF GE CHOSE TO. IT COULD CLAIM CONTRACT FULFILLMENT
IF THE ROTOR SETS WERE AVAILABLE FOR TRANSFER TO AEG ON
ITS LOADING DOCK IN SCHENECTADY. N.Y. STRICT COMPLIANCE
IS NOT DEPENDENT ON AEG'S ABILITY LEGALLY TO EXPORT THE
ROTOR SETS. (WE WERE GIVEN NO INDICATION AS TO HOW GE
INTENDS TO TREAT THIS CONTRACT PROVISION. BUT AE* IS CLEARLY
WORRIED THAT IT MIGHT HAVE TC PAY FOR COMPONENTS WHICH IT
COULD NOT EXPORT INTO THE SOVIET UNION.)
5. AEG-SOVIET CONTRACT:
THE THREE-SAY CONTRACT RFFLRRI:".D TO ABOVE CONTAINS VERY
STRICT PENALTY CLAUSES. ALL 47 TURBINES ARE TC BE AT THE
DOCK FOR ONWARD SHIPMENT BY SIPTLMBEF. 1983. IN ADDITION!
THERE ARE SPECIFIC DEADLINES FOR EACH SINGLE TURBINE.
THE FIRST GROUP OF ^ABOUT 12" TURBINES IS DUE FOR EXPORT
IN AUGUST 1982. FALLING BEHIND ON EVEN CNE DELIVERY CCLLD
TRIGGER SUBSTANTIAL PE:"NALTIES.
6. EUROPEAN =FAME 5 STOCK:
AEG HAS 4 ROTOR SETS IN STOCK (THESE WERE. EXPORTED BEFCRL
DECEMBER 29). AEG OFFICIALS ESTIMATE THAT THE TOTAL OF
ROTOR SETS IN THE HANDS CF GE'S SEVERAL EUROPEAN MANUFAC+'^
TURING ASSOCIATES IS ABOUT 2F. THEY BELIEVE. JOHN BROWN
HAS 69 ALTHSOM i SEVERAL. AND NUOVO PIGNCN1 THE REMAINC?R.
FOR THE PRESENT. AEG IS CONTINUING TO MANUFACTURE THE
=RAME 5 TURBINES USING THE 4 ROTOR SETS IN ITS STOCK.
7. AEG INTENT IONS:
FRG LAW REQUIRES COMPLIANCE ONLY WITH COCOM RULE:S. U.S.
LAWS ARE NCT ACCEPTED AS HAVING EXTRA-TEFRITCRIAL APPLJ-?
C O N F I D E N T I A L
Approved For Release 2008/08/13: CIA-RDP84T00109R000100080007-6
?
i
i
?
?
?
?
?
?
9
i
?
?
 !` r t, r- T ? I k T T ! t
MSGNO 13 Approved For Release 2008/08/13: CIA-RDP84TO0109R000100080007-6
CABILITY. NuNETHELESS, AEG APPEARS TCVHAVE NO INTENTION
OF ATTEMPTING TO EVADE THE CLPPENT U.S. PESTRICTIONS.
VOILE IF THIS )AS THE FIRM'S INTENTION, THEY WOULD HARCLY
ADMIT IT TO THE U.S. GOVERNMENT, WE BELIEVE SEVERAL FACTORS
MAKE IT UNLIKELY THAT AEG WILL SEEK TO EXPORT THE FOUR
ROTOR SETS NOW IN THEIR POSSESSION.
1) AEG, NOT GE, WAS THE EXPORTER OF THE ROTOR SETS IA
QUESTION. THIS MAKES THE FIRM DIRECTLY LIABLE FOR THEIR
ONWARD SHIPMENT;
2) AEG DOES CONSIDERABLE BUSINESS IN THE U.S., AND WCLLD
NOT RISK ITS OPERATIONS FOR THE SALE OF 4 TURBINES. (SELL
INS 4 TURBINES WOULD NOT HELP VIS-A-VIS THE SOVIETS. THE
PENALTY CLAUSES DESCR'BED ABOVE WOULD STILL OPERATE TO
THE FIRM+S DETRIMENT); AND
3) A LARGE PORTION 'JF AEGIS BUSINESS IS wITM THE GERMAN
GOVERNMENT AND THE FIRM IS UNLIKELY TO JFPORCIZL ITS
POSITION ON OFFENSE CONTRACTS BY VIOLATING GOVERNMENT
WISHES.
8. AEGIS FINANCIAL SITUATION:
AS A COMPANY, AEG TCLrFUNKLN IS NOT IN GOOC HEALTH. LACER
THE PREVICUS BOARD CHAIRMAN, IT HAD BEEN DECIDED TO CLOSE
THE KANIS DIVISION'S TWO GAS TURBINE FACTORIES IN ESSEA
BECAUSE THERE DID NOT SEEM TO BE SUFFICIENT CEPA ND TO
JUSTIFY THE: M) 0ERNIZATION RLGUIRL O TO REMAIN COMPETITIVE..
THE CURRENT BOARD CHAIRMAN, OR. OURR, REVERSED HIS PREP
DECESSOR'S DECISION, AND THE FIRM HAS INVESTED OVER OM
100 MILLION IN THE KAKI. PLANTS. DURR SOUGHT TO EXPANC
KANIS' MARKETING EFFORTS AND TO MAKE THE DIVISION COMPETI-
TIVE ON A WORLD' WIDE BASIS. THE FIRM C CMFLTED FOR THE
CONTRACT FOR THE SOVIET GAS PIPELINE BOTH IN ANTICIPATION
OF FUTURE SOVIET BUSINESS (FOR THE SECOND STRAND OF THE
WEST EUROPEAN LINE AND FOR OTHER SOVIET PROJECTS) AND IC
PROVIDE WORK UNTIL SUCH TIME AS THE REVITALIZED MARKETING
EFFORT PRODUCED ADDITIONAL CONTRACTS IN NEW MARKETS.
KANIS EMPLOYS ABOUT 2,000 WORKERS IN THE ESSEN AREA, AAC
AEG HAS TOLD US THAT NO ALTERNATIVE. EMPLOYMENT EXISTS
WITHIN THE FIRM, IF THE DIVISION FOLDS. IN ADDITION, AEG
ESTIMATES THAT MORE THAN A THOUSAND OTHER JOBS, IN FIRPS
WHICH APE SUB-CONTRACTORS TO KANIS, WOULD BE LOST IF THE
PLANTS ARE SHUT DOWN. UNEMPLOYMENT IN THL ESSLN AREA
EXCEEDS THE NATIONAL AVERAGE OF 8.2 PERCENT AND IS ESTIMATED
BY THE LAND GOVERNMENT TO BE ABOUT 9.1 PERCENT, WITH
23,200 PERSONS PEGISTEERED AS UNEMPLOYED.
9. CAPABILITIES OF ALTHSCMe ATLANTIQUE (.-A):
AEG HAS TOLD US THAT WHILE AA HAS MANUFACTURED GAS TUR
SINES UNDER LICENSE IN OTHER SIZES, THEY HAVE NE VEF PR(
r
DUCED A FRAME 5, ALTHOUGH THEY HOLD THE NECESSARY LICEASES
TO MAKE THE ENTIRE TURBINE, INCLUDING THE ROTOR SET. A-A
ACCEPTED AN ORDER FRCM THE SOVIETS To PRODUCE 40 REPLACEw
MENT ROTOR SETS TO BE USED AS SPARES FOR THE PIPELINE
AND IS IN THE PROCESS OF OBTAINING THE NEEDED FACTORY
SPACE AND EQUIPMENT. ACCORCING TO AEG, WHICH IS IN CLCSE
CONTACT WITH ALL THE OTHER GE LICENCEES IN EUROPE, AooA
WILL 3E HARD PRESSED TO MEET ITS 1984 DELIVERY DATE FOR
THE REPLACEMENT ROTOR SETS. EVEN WITH UNLIMITED INVESTMENT,
AEIG BELIEVES IT WILL BE IMPOSSIBLE FOR A-A TC PRODUCE ALL
OF THE REQUIRED ROTOR SETS WITHIN ANY REASCNABLE TIME
=RAME, THERE IS NO POSSIBILITY OF DOING SO IN TIME TC
AVOID THEM PENALTY CLAUSES IN THE AEG-SOVIET CONTRACT.
C 0 N F I D E N T I A L
Approved For Release 2008/08/13: CIA-RDP84TO0109R000100080007-6
S
0
0
s
i
0
0
i
0
0
0
0
r
S
 n n t.a C T i1 C h! T T A i
Approved For Release 2008/08/13: CIA-RDP84TO0109R000100080007-6
MS:,NO 13 ?,a 4A%1 L1M "LC/t1G10G^ "1C ?-7 c-
10. SOVIET TURBINE PR CTI ON CAPABILITIES:
AEG TELLS US THAT THE S VETS MAKE A SERVICEABLE 19 ME6A+
VATT (MW) TURBINE, AND THAT IT IS POSSIBLE. TO BUILD THE
PIPELINE FOR LIMITED DELIVERIES OF GAS USING THESE TURBINES.
THE SOVIETS ALSO HAVE A PROTOTYPE OF A 25 MW TURBINE SIMI+
LAR TO THE FRAME 5. THIS IS STILL I N THE DEVELOPMENT
STAGE, BUT COULD APPARENTLY BE READY TO GO INTO SERVICE
BEFORE THE PHASED GAS DELIVERY CONTRACTS REQUIRE THE
DELIVERY OF VOLUMES wHICH EXCEED THE SUM CF EXCESS CAFA}
.I CITY IN THE PRESENT LINES FRCM EAST TO WEST AND A NEW
LINE RUN WITH 10 MW TURBINES. THE SUVIETS REPORTEDLY ARE
ALREADY DISCUSSING THE PRODUCTION OF THEIF 2t MW TLRBIAE
IN EUROPE UNDER LICENSE. SUCH A DEVELOPMENT, IN AEGIS
VIEW, WOULD N3 T ONLY CUT OUT EUROPEAN PARTICIPATION IN THE
PRESENT PIPELINE, BUT WOULD ALSO MAKE THE SOVIETS FAR
MORE LIKELY T-IAN HERETOF CFE TO DEVELOP THEIR OWN ;,AS
?RODUCTION EQUIPMENT CAPABILITY. SUCCESSFUL DOMESTIC FRO-
DUCTION WOULD ALSO ALLOW THE SOVIETS TO COMPETE ON A VCRLD++
WIDE BASIS.
11. SOVIET ATTITUDES TOWARD THE SANCTIONS:
AEG BELIEVES THAT THE SOVIETS HAVE TAKEN A "WAIT ANO SEE"
ATTITUDE UP TD NOW. THEY HAVE BEEN EXPLORING THE FOSSIL
BILITY OF INCREASING DELIVERIES THROUGH THE EXISTING
PIPELINE.(AEG BELIEVES THAT SUFFICIENT SPARE CAPACITY
EXISTS TO ENA3LE THE SOVIETS TO DELIVER AT LEAST THE
FIRST PHASE OF ABOUT ONE-THIRD OF TOTAL CONTRACTED VOLLME
JN SCHEDULE WITH NO GREAT DIFFICULTY.) IN EARLY FEBRUARY,
THE SOVIETS HELD A MEETING WITH THEIR GENERAL CONTRACTOR,
MANNESMAN-CROUSET+LOIRE, TO ENQUIRE ABOUT THE EFFECT CF
THE SANCTIONS. KERL'N TOLD US THAT AEG DID NOT ATTEND
THE SESSION, 3UT WAS BRIEFED ON THE OUTCOME. THE SOVIETS
APPEAR TO BE BEGINNING TO PIT PRESSURE ON THE GENERAL
CONTRACTOR, WHICH IN TURN IS EXPECTED TO PRESSURE ITS
SUPPLIERS. IN AEG'S CASE, THE SITUATION IS MADE EVEN PCRE
COMPLICATED BECAUSE THEY ARE RESPONSIBLE FOR THE EXPORT
OF GE ROTORS FROM THE U.S. AND HAVE NO ONE TO APPLY PRESSURE
TO IN TURN. APPARENTLY, THE SOVIETS HAVE THE FLEXIBILITY
TO HOLD OFF DECLARING SUPPLIERS IN OLFAULT AT THEIR OFIION.
? 12. COMMENT: AEG IS CAUGHT IN THE MIDDLE. THE FIRM
NEGOTIATED OPENLY WITH GE BASED ON A LONG ANC MUTUALLY
BENEFICIAL RELATIONSHIP. IT LANDED AN ORDER WHICH IT
? ! BADLY NE:E.OCO BY COMPETING ON PRICE AND ON DELIVERY TIMES
(CRITICAL BECAUSE OF THE DIFFICULTIES OF MOVING LARGE
EQUIPMENT ACRDSS THAWING TUNDRA). IT HAS ALWAYS TAKEN
DELIVERIES OF ITS ROTORS FROM GE ON THE LOADING DOCK ARC
lAS HAD NO PROBLEM WITH EXPORTING THESE CGMPCNERTS IN
THE PAST. ALL CONTRACTS WERE SIGNED BEFORE THE IMPOSITION
? OF SANCTIOOS AND IN FULL COMPLIANCE WITH ALL EXISTING
REGULATIONS. THE FIRM FEARS THAT GE' MAY SEEK PAYMENT FCR
COMPOUENTS WHICH IT CANNOT USE AT THE;: SAME:: TIME THE SOVIETS
40 1 TRIGGER THE PENALTY CLAUSES FOP NON-RECEIPT CF THEIR TLH.
SINES. AEG BELIEVES THE EMBARGO WILL NOT PREVENT THE
SOVIETS FROM DELIVERING GAS TO THEIR EUROPEAN CUSTOMERS
ON TIME. IN ADDITION, THE SOVIETS MAY POSSIBLY OEVELCF
TURBINE TECHNOLOGY THEMSELVES THEREBY REDUCING THEIR
FUTURE DEMAND FR WESTERN GAS TURBINES:. FINALLY, AEG
+? BELIEVES ITS BUSINESS WILL SLFFER IN OTHER GECGRAPHIC
9
AREAS WHICH ARE VITAL TO THE FIRM+S SURVIVAL BECAUSE, AS
A GE MANUFACTURING ASSOCIATE, THE FIRM REMAINS DEPENDENT
C 0 N F I D E N T I A L
Approved For Release 2008/08/13: CIA-RDP84TO0109R000100080007-6
0
S
0
?
?
S
S
0
 Approved For Release 2008/08/13: CIA-RDP84T00109R000100080007-6
MSGNO 13 \i i n/\7 c1x -UCiu4ro4- =1G ?T~~
ON U.S. PRODUCED PARTS. THE FIRM HAS NO ANShEP TO CUSTCs
MERS? E.O. OPEC COUNTRIES, W'HO ASK IF THE U.S. IF LIKELY
TO BAN SHIPMEMTS OF ROTOR SETS IN THE. FUTURE, WITH OR
WITHOUT A SIGVED CONTRACT BETWEEN AEG ANC GE. END COP+MENT.
BURNS
NNNN
NNDD
C 0 N F I D E N T I A L
Approved For Release 2008/08/13: CIA-RDP84T00109R000100080007-6
?
0
0
0
I
I
0
0
0
0
I
0
i
?