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Aviation Industry to Go Private

    Monday, December. 1, 2003
    The Moscow Times
    The government is prepared to take unprecedented steps in turning over the country's aviation industry to private hands, according to a reform concept under discussion by Rosaviakosmos, the Russian Aviation and Space Agency. The draft concept, obtained by The Moscow Times, outlines radical steps to create a giant aviation consortium along the lines of the European Aeronautic Defense and Space Co., or EADS. Without restructuring, the draft says, the nation will face a "threat to lose its status as one of the global aircraft manufacturing centers in the mid-term future."
    The overhaul of the aviation sector could set the pace and pattern for the long-delayed restructuring of the entire domestic defense industry, experts said.
    The consortium, dubbed the Unified Aircraft Building Co., or OAK, would fully emerge as a single-share entity by 2007 and include such brand names as, Sukhoi, MiG, Irkut, Ilyushin and Tupolev. In a development that would change the face of the defense industry, traditionally run by the government, OAK would be controlled by private capital, with the state holding a stake of 25.5 percent. The corporation would streamline producers, concentrate cash flows and drop unfeasible programs. According to the concept, the industry's focus on niche products would help the country shed excess facilities and eventually claim at least 10 percent of the global aerospace market.
    International cooperation would be encouraged in all stages of the production cycle, from research and development to post-sale servicing.
    The concept, discussed last week at Rosaviakosmos, is the brainchild of a working group that brings together government aerospace regulators with managers of state and private aviation companies. The group was set up following the call by Deputy Prime Minister Boris Alyoshin at the Paris Air Show in June to create a unified national aircraft building corporation. The concept was to be drawn up by year's end.
    The current draft is a synergy of views to bring the country closer to an EADS pattern, albeit within one country, Sergei Nedoroslev, a working group member, said by phone Friday.
    "Its main asset is that it will help eliminate the Russia-versus-Russia competition ... We have to be able to compete internationally," Nedoroslev said.
    The reform under discussion is a revision of the defense industry restructuring program spearheaded by then-Deputy Prime Minister Ilya Klebanov in 2001.
    It foresaw the creation of two aircraft holdings with Sukhoi, Ilyushin and Mil in one, and MiG, Tupolev and Kamov in the other. Critics attacked that program for heavy government regulation.
    According to the new concept, which was confirmed by sources present at the Rosaviakosmos meeting, OAK would not include helicopters, and consist of a managing company overseeing four business units.
    Under the timeline, a consortium of Sukhoi, MiG, Ilyushin, Irkut and Tupolev would be created next year.
    The managing company, with an executive board but no property ownership, would deal with personnel, finances and legal issues for its four subsidiaries: combat; civil; special mission and military transport; and components.
    Nedoroslev, whose Kaskol Group is negotiating production of parts for Airbus, said the concept addressed the long-ignored issue of components.
    "We sell $2 billion worth of jets a year and many still have the 'shining aircraft mentality.' In fact, we could make and sell components for at least half that amount," Nedoroslev said.
    Once the consortium is set up, contributing companies would delegate power to an executive board and top managers of each business unit. Management would identify which programs to keep and which to axe.
    By 2007 the new structure would head towards a single-share company where the state would have a blocking stake. The combat unit, however, may be given a special status, whereby a controlling stake would remain federal property for a certain period of time.
    If adopted, the concept will make a definitive step forward and away from hostility towards private entrepreneurship in the defense sector.
    During past discussions on industry restructuring, the top management of Rosaviakosmos and the Ministry of Industry, Science and Technology have disagreed about the role of private management in defense companies.
    But this fall President Vladimir Putin threw his weight behind private companies, saying their work should be encouraged even in the defense sector.
    Private business has agreed it should work hand in hand with the state, a point voiced by Alexei Fyodorov, the president of Irkut Corp., the privately owned and managed maker of Sukhoi fighters.
    "The concept is a working framework and debate continues ... [but] everyone agrees that the corporation has to be created quickly as time is running out," said Yevgeny Zaritsky, head of the Financial Leasing aircraft company.
    "We had a tough debate on the concept with people speaking for and against it. Give us a week to incorporate the proposals. We think we have to move along the way of a [unified] corporation," said Deputy Economic Development and Trade Minister Yury Isayev.
    The deputy head of the aviation department at Rosaviakosmos, Andrei Osipov, said that the next meeting will take place on Wednesday and include last week's suggestions.
    Konstantin Makiyenko, deputy head of the Center for Analysis of Strategies and Technologies, said the reform program is ambitious, even revolutionary.
    "I would applaud the plan, especially in the part where the state will only have a blocking stake in the corporation," Makiyenko said. "If completed by 2007, [the aviation reform] will mean not only a revolution in the governmental policy, but also in Russia's bureaucracy. And Alyoshin will be a worthy prime minister."

    Lyuba Pronina
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