Moscow reasserts control over national aircraft industry

By Vasily Zubkov

A commission headed by Russian Industry and Energy Minister Viktor Khristenko recently decided to establish the United Aircraft Corporation (OAK) in accordance with President Vladimir Putin’s March 14, 2006 decree. Prime Minister Mikhail Fradkov has signed the necessary government resolution.
This project, aiming to revitalise the aircraft industry in Russia, is widely supported, which is not surprising because the consolidation of production, financial and intellectual assets in order to manufacture advanced civilian and military aircraft directly influences national security and defence capability.
OAK groups together about 20 leading Russian companies specialised in the construction of civil and military aircraft, such as MiG, Sukhoi, Tupolev and Ilyushin. The state will own no less than 75% of OAK’s capital. The list of private shareholders and their respective stakes will be determined by early April 2007.
Consolidations of a similar scale have already been made in the world history of aeronautics. Boeing, which consolidated the sector in the 1950s, is the only major aircraft manufacturer in the United States. The same is true of Europe’s Airbus. Moreover, the companies Bombardier and Embraer are the main driving forces of the Canadian and Brazilian economies and are also patronised by national governments.

A reform with a targeted speciality

The Russian civilian aircraft industry has suffered more than any other machine-building sector in the last 15 years. Only one Il-96-300 jetliner and one Tu-154 passenger plane, as well as several light-engine aircraft, were assembled in January-June 2006. This is a modest achievement compared to Boeing, which builds 300 planes a year. Russia must promptly overhaul its aircraft industry because the national air fleet is dwindling by 10% each year, otherwise it will soon no longer have regular service planes. The authors of the OAK project hope that the merger will help the civilian aircraft industry to boost production seven-fold and increase its share of the country’s total aircraft output to 45-50%. The government hopes that Russia will eventually control 5% of the global civilian aircraft market. The nomination of the Vice Prime minister and Russian Defence minister Sergueï Ivanov as President of OAK’s board of directors proves that this is considered a priority national project, on par with the other four currently under way.

OAK corresponds perhaps to an international gateway towards a State/private association

Obviously, as in every big company, the observers and experts have many questions about the establishment of OAK. It is common knowledge that the new corporation mostly consists of state-controlled enterprises producing civilian and military aircraft. But some private companies, including the Samara-based Aviakor plant, which assembles Tu-154 and Tu-204 jetliners, as well as foreign-controlled enterprises, would also like to join the new corporation. OAK directors are stressing that new members are still welcome, but the format of their participation remains unclear.
Business tycoon Alexander Lebedev, a member of the Douma (the lower house of parliament), said Russian and foreign minority shareholders can expect to increase their stake in OAK after converting their shares in the companies of the super holding. His prediction was based on recently amended legislation that mostly deals with ways to finance OAK.
In October 2006, Vladimir Putin signed amendments to a law on state regulation of the aviation industry in order to attract foreign investment. Consequently, the share of foreign capital in companies of the national aircraft industry will no longer be limited to 25 % as previously, but will be determined “according to the president’s decision”. That will enhance the access of strategic investors in the Russian aircraft industry, which the president will authorise individually to hold important shares. Moreover, the head of State will also be able to authorise foreigners to set up joint ventures with Russian companies on a 50/50 basis, said OAK vice president Vasily Prutkovsky.

There are also questions concerning assistance and public financing. The aircraft industry has received nearly $600 million worth of federal appropriations in the last five years. According to Viktor Khristenko, the industry will get $20 billion worth of investment in the next decade. Business operation volumes will therefore be able to triple, reaching $7-8 billion. The auditing company Deloitte estimates the value of OAK’s assets at $4.5 billion.