[lbo-talk] Kremlin seeks to boost power of aerospace and motor industries

Chris Doss lookoverhere1 at yahoo.com
Sat Feb 25 07:22:11 PST 2006


Financial Times February 25, 2006 Kremlin seeks to boost power of aerospace and motor industries By Arkady Ostrovsky

At first sight, Russian President Vladimir Putin's decision this week to approve the merger of the country's aircraft makers and design bureau into a single state-run company looks simply like another big move in the consolidation of state control over the economy.

The creation of the United Aircraft Corporation follows the Kremlin's earlier decisions to renationalise large parts of the oil business; raise its stake in Gazprom, the gas giant; and gain influence over the motor industry through Rosoboronexport, the secretive state arms export agency, securing management control of carmaker Avtovaz.

These decisions raised concerns about increasing state intervention undermining the market economy.

But in the aerospace merger, other factors are also at play, notably an apparent attempt to revive the country's military-industrial complex, which declin-ed sharply after the end of the Soviet Union.

Starved of military orders, some aircraft plants were reduced to making speedboats for Russia's new rich. Now soaring energy export revenues have allowed the Kremlin to boost military spending - and push a stream of orders into the defence industry. Russia's defence budget has tripled from $7.3bn (£4.2bn) in 2001 to an estimated $23bn this year, according to Pavel Felgenhauer, an independent defence analyst. A third is allocated to equipment and research and development.

However, Mr Felgenhauer says, equipment prices are rising in line with the defence budget while the quality remains the same or is declining.

The Kremlin hopes consolidation will boost efficiency and says the purpose of consolidation is "to preserve and develop the scientific and industrial potential of the aviation complex . . . and ensure the security and defence capabilities of the state". The move could also boost exports, a vital source of revenue.

Military jets were a lucrative export earner, but in recent years orders from traditional customers such as China and India have dried up, forcing Russia to seek new markets. Russian manufacturers, who once produced a quarter of the world's aircraft, now make one a month and do not even feature in the fleet expansion plans of Aeroflot, the national carrier.

What is true for aerospace is also true for cars. As well as supporting Rosoboronexport in taking control of Avtovaz, Mr Putin recently indirectly backed a mooted merger of Russia's three main vehicle makers - Avtovaz, Gaz and Kamaz.

The government plans to inject $5bn into the automotive sector and $10bn into the new aerospace company. "It is a matter of pride and prestige for Russia to have its own auto industry," says Rory MacFarquhar, a Russia analyst at Goldman Sachs.

But the drive for state control poses awkward questions about previous moves to privatise enterprises. The state will have a stake of at least 75 per cent in the new aerospace company.

Most of the companies involved are already state controlled, but one - Irkut - is a successfully restructured public company in which EADS, the pan-European aviation and defence group, owns 10 per cent and institutional investors hold 30 per cent. Bringing Irkut, which makes Sukhoi jets, into the holding company amounts to its renationalisation. The moves also fit the established pattern of Kremlin officials taking control of large slices of the economy, as happened in the oil industry. The creation of a state-run holding company in vehicles shows the growing economic power of the siloviki - a group of former and present members of security services.

Rosoboronexport, the siloviki flagship run by a friend of Mr Putin, is emerging as a financial-industrial power. Apart from cars, the group is looking at metals and is eyeing up VSMPO-Avisma, the largest producer of titanium, a metal widely used in aircraft manufacturing.

Observers say Rosoboron-export is modelled on the financial and industrial groups created by Russian oligarchs in the 1990s under former president Boris Yelt-sin.

The risk is that, having fought the oligarchs, Mr Putin is creating a new generation of politically powerful businessmen.

Nu, zayats, pogodi!

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