Russia's Grand Plan To Restore Its Glory

Is it an opportunistic piece of financial speculation, or the start of a new strategic partnership? That's the question following recent reports that Russia's Vneshtorgbank (VTB) has laid out $1 billion for nearly 5% of the European Aeronautic Defence & Space Co. (EADS), which owns Airbus. Neither VTB nor EADS would comment.

VTB's interest might be explained by the price of EADS shares, which have fallen 28% this year, largely over concerns about Airbus' new A380 megajet. But state-owned VTB works closely with the Kremlin, and Russia's own aviation industry is about to launch a major restructuring. Under a Kremlin-approved plan, eight aircraft plants and five design bureaus are to be merged into a giant holding called United Aircraft Corp. The company, which will be 75% state-owned and boast close to $3 billion in revenues, could benefit from links to Western aerospace outfits. Indeed, EADS will own about 2.5% of United Aircraft through its 2004 purchase of 10% of Irkut Corp., a unit of the holding company.

The shakeup is just the latest example of a major shift under way in Russia. In a bid to reestablish the country's industrial might, President Vladimir V. Putin is overseeing the creation of large corporations, owned or heavily backed by the state, that will dominate strategic sectors and act as national champions abroad. It is in aerospace that Russia's yearning to regain lost prestige is most evident. During the Cold War, Russia was second only to the U.S. in aviation. While Russia still accounts for some 25% of the global market for military aircraft, it makes just a dozen or so passenger jets annually, or less than 1% of the world market. Its planes are still based on Soviet-era models that pollute, gulp fuel, and have a poor safety record.


Over the coming decade the government has promised to invest $13.7 billion in United Aircraft. Moscow also seems keen to attract foreign partners that have the technology needed to drag Russian aircraft designs into the 21st century. The industry is pinning its hopes on niche models such as the Sukhoi Superjet 100, a new 95-seat passenger plane that has the backing of Boeing (BA), French engine maker Snecma (BA), and Italy's Finmeccanica. "Russia's aviation industry will be saved by cooperation with European and American companies," says Victor Soubbotine, general director of Sukhoi Civil Aircraft Co., which will become part of United.

Such cooperation could include a strategic tie-up with a company such as EADS. Russia is "a potential source of lower-cost components for Airbus, which needs to address its lack of competitiveness," says Nick Cunningham, an analyst at London brokerage Panmure Gordon.

Although EADS may not want to create a strong link with Russia, which could hurt its chances of winning U.S. defense contracts, Moscow's hopes are still likely riding on injections of Western technology. It's probably the only way Russia's aviation industry can get back in the global game.

By Jason Bush

The Good Business Issue
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