The early promise and momentum offered to the aerospace industry by the new
Russian administration, in terms of restructuring and rationalizing, appear
to have dissipated. Despite statements made by senior government figures before
the election and the belief that the Putin administration's less indulgent approach
to vested interest would force through reform, particularly in the regions,
little appears to have changed.
Programmes that should have long been consigned to history, or merged, continue
to linger, despite having little prospect of health. Of late, some programmes
thought to be dead have even made Lazarus-like recoveries, to move into the
wings of the theatre that is the Russian aerospace industry. The view of many
is what does it matter! These programmes have no hope, but are a useful way
for the design bureaux to keep their huge design teams busy and keep alive the
great traditions of the Russian aerospace. But, that is exactly what the problem
is! The relaxed stance of government, for whatever reason, has allowed many
of the senior managers to ignore reality or to foster the belief that things
will change if they wait long enough. The appointment of one of their number,
in the form of Alexander Dondukov, formerly Chairman of Yakolev, hardly introduced
a radical reorganizer of an industry still largely owned by the government.
In fact, some speculated that this was a way of keeping a senior figure in the
industry, as his charge, Yakolev, increasingly slipped from view. Casting him
as an instrument or supervisor of change into a viable modern aerospace industry
consolidated into two or three major producers appears optimistic in the extreme.
The consolidation of the loosely affiliated groups around Ilyushin, Tupolev,
RSK MiG and Sukhoi remains largely incomplete and, some would argue, should
remain so, with the only reasonable strategy being the disappearance of some
of the groups' altogether. Some of the participants have tried to consolidate
and Sukhoi has been reported as trying to push MiG out of the way, but the company
led by Nicholai Nikitin tenaciously hangs on, showing that who you know still
carries enormous weight in Russian aerospace.
Recent changes with the departure of Sitnov from the Ministry of Defence Procurement
Executive suggested that much of the cold war strategic structure of two key
producers such as fighter designers and producers may be thrown away, but to
date there is little evidence. Helicopter designer, Mil, is struggling in bankruptcy.
The focus on the vertical integration of the designer with its producers appears
to have been overshadowed by who will be temporary manager, representing the
Byzantine factionalism that appears to dominate the company's management. There
also seems to be little regard as to whether, along with other Russian helicopter
producers, the company is addressing the serious lack of a light helicopter:
probably the only growth aerospace market in Russia. The latter view has led
Tyumenaviatrans (TAT) to contemplate the possibility of buying foreign helicopters,
as the management does not believe that the domestic producers are capable of
producing the product, despite a number of programmes currently in flight-testing
or development.
The government, as the largest shareholder in most of the sector and in principle,
directly and indirectly, the largest customer, has done little to resolve the
problem. Assets have been sold to investors at prices that did not reflect the
theoretical value of the businesses. Probably more importantly, they were sold
to corporates and individuals, domestic and international, that had little intention
of meeting their investment commitments or had no idea of the commitment required
for the building of the industry. In hindsight, some of the deals that allowed
foreign portfolio investors to take large stakes in Russian enterprises, when
industrial investors stood back, should have given an early indication of how
perilous the situation could become.
The Russian Aerospace Agency has been charged with bringing some reason to
the industry through control of funding by government of programmes along with
the FSVT, now absorbed by the Ministry of Transport. After an initial flurry,
it has found its way blocked by the entrenched interests and lack of funds,
leaving the programme for aerospace development through 2015 resembling a list
rather than a focused path of investment. In fact, there appear to be so few
programmes not listed for funding, one wonders what transgression the guilty
parties perpetrated to not be included.
The recent Audit Chamber report, in a series of very Soviet observations, outlined
what it saw as the means of saving the industry, which amounted to a combination
of protectionism, a suggestion of reviewing privatizations, without any real
explanation of what you did with them if you found them questionable and a threat
to foreign governments. In other words, if you don't accept our certification,
we won't accept yours. While agreeing with some elements of the Audit Commissions
observations, they have a fundamental flaw. International and domestic customers
are not buying cheap major Russian civilian aircraft because they are largely
unable to finance them. To make them attractive, there are two options: firstly,
invest in a certification system that conforms to international standards, a
view accepted by almost all industrial participants, and devote the limited
resources available to achieving that goal for certain key programmes: probably
not the Il-96 in our view.
Secondly, create a financing structure that will provide airlines with the
opportunity to lease aircraft on reasonable terms and, in turn, provide sufficient
working capital to allow producers to build them. The recent deal reported to
have been closed by Alexander Roubstov of Ilyushin Finance for $120m for a structure
from Sberbank with 85% guaranteed by the state at 9%, is a step in the right
direction, but only a step, given its focus on finishing, rather than full manufacture.
The deal is certainly more attractive than the option provided by US Eximbank,
which offers the providers of finance the option of making unsecured lending
on finishing the Russian component of the Il-96 T/M programme with the knowledge
that the bank has the lien on the aircraft. To also make the area more financially
attractive to investors, the archaic Russian leasing structure should be overhauled
to reflect the realities confronting producers.
For the industry, the concern remains as to what the major producers will do
when all the airframes are finished. This is a problem already besetting Aviakor
and, in the near future, Aviastar, when the An-124-100 and Tu-204 airframes
are completed. Component and assembly production will undoubtedly provide some
work, but it is questionable whether the skills will be absorbed into other
areas, such as the automotive industry, leaving Russian aerospace as a niche
producer of durable regional aircraft.
