Monopoly Won't Take Off

Last week, at a meeting of the government's military industrial committee, Industry and Energy Minister Viktor Khristenko presented a plan to create a corporation by the end of 2006 that will put all aircraft production in Russia under the control of a single monopoly. Khristenko stated that President Vladimir Putin wanted this corporation to be created as soon as possible. By April 25, a final draft of the project should be sent to the president to sign. Khristenko then said that the new corporation would be majority government owned. Initially, it would produce $2.5 billion to $2.8 billion of predominantly military aircraft per year. By 2015, production is projected to expand by 10 times, and the corporation should meet the demand from Russian airlines for planes and even export aircraft abroad.

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The Soviet Union produced hundreds of military and civilian aircraft every year, fully covering its own needs and those of its client states in Eastern Europe and the Third World. After 1991, military aircraft production declined to a 10th of its former level. The Defense Ministry virtually stopped buying new weapons, so military aircraft were produced almost exclusively for export. Civilian aircraft production practically ground to a halt after 1991.

Plans to revive Russia's once powerful aircraft industry by turning it into a huge monopoly have been floating around in government circles for several years. The main idea is to funnel arms export earnings into lagging civilian aircraft production and to return to the days when Russia was a global competitor to Boeing and Airbus.

The goal will be hard to achieve. Some of the old Soviet defense factories and design bureaus are doing fairly well and are producing modern weaponry for export. But the remaining producers, as well as the entire civilian aircraft industry, are run-down, reduced in many cases to empty shells, as most of their sophisticated equipment was sold off by their management. Some continue to eke out a living, especially in the Moscow area, by leasing out space in their buildings. Others have moved from modern defense production to general metal production and will make anything the oil industry or the public will buy. Still, not a single plant has been officially closed or declared bankrupt.

Though production levels plummeted, factories continued to build new jets after 1991. To minimize costs, they used up their stockpiles of Soviet-made parts and components. The factories supplying these parts got virtually no orders for more than a decade and fell apart. A large number of technologies were lost, and Russian factories today cannot make many of the things once made in the Soviet Union.

In 2004, the last An-124 Ruslan transport plane rolled off the assembly line at the Aerostar aircraft factory in Ulyanovsk. It was built using Soviet components fitted onto the last Soviet frame. This final Ruslan was bought by one of Russia's most successful private air transport companies, Volga-Dnepr, which specializes in heavy and bulky cargo and transports many of NATO's payloads to Afghanistan and other destinations. Volga-Dnepr President Alexei Isaikin told me that his company would have gladly ordered more An-124s, but no more can be built at present. Aerostar cannot build more commercially successful Ruslan planes because it does not have the parts. To make matters worse, the Ruslan was built in cooperation with Ukraine, and the design bureau that developed the original An-124 is in Kiev. Production cannot be resumed without new research and development and without finding new parts suppliers, some of which are likely to be Western companies.

Putin has officially declared the resumption of An-124 production a national priority, but will a revamped plane be commercially viable? Putting together a jet using old Soviet parts is dirt cheap, but Ukrainian sources indicate that a new and improved An-124 may quadruple in price to $200 million to $300 million apiece.

The jets built for export by using Soviet equipment, a workforce paid Soviet-era wages and leftover parts generated a huge amount of illicit earnings that were then divvied up between plant managers and corrupt bureaucrats. Many aircraft industry managers think the only reason for creating the Kremlin-controlled corporation is to increase the bounty the industry pays the bureaucracy, and for this reason they fiercely oppose the creation of the new monopoly. Then again, almost everyone involved in the new corporation seems so completely absorbed in the fight to figure out who gets what cut that there seems to be very little hope the fray will spark a real industry revival.

Pavel Felgenhauer is an independent military analyst based in Moscow.