Bankrupting Russia's Best Manufacturers

The oldest and historically most successful Russian manufacturer of military aircraft -- the Moscow-based MiG -- may soon face bankruptcy.

MiG -- which produces the planes so popular in the arms market -- has no money these days, just debts. It has no clear future and faces the real possibility of losing its ability to produce its famous MiG planes.

This unexpected turn of events has arisen due to an initiative of MiG itself, which decided on a reorganization of its aircraft production unit; as a result, the military industrial concern MAPO was formed, which united several factories in the military aviation industry.

During the 1980s, the main MiG assembly factory annually produced 300 MiG-23s, then one of the best fighters in the world. Demand for it on the world market has held stable for many years. But in the last four years, as government orders for MiGs dried up, the factory survived largely on foreign sales. A significant portion of the funds from such contracts was used to modernize the MiG-29, now flying in more than 40 countries around the world.

But at the end of 1995, the factory management realized that tough times lay ahead. The Russian army had no intention of ordering new planes, and suppliers of engines and other plane parts raised their prices such that the price for a MiG rose from $23 million to $50 million.

So the idea arose of uniting MiG with 11 other factories -- suppliers of engines, weapons systems, avionics. The Kremlin supported the idea, and in January 1996 MAPO was formed. It was assumed that MAPO would amass the financial, technological and organizational abilities of all 12 units of the new holding company, which would then allow the successful production, modernization and sales of the MiG family of aircraft.

But once the holding company was created, the initiator -- the MiG factory -- was horrified at the result. Instead of solving old problems, the factory faced new problems and lost much of what it had before the reorganization. The holding company became something like a cosmic black hole: Money sent to MAPO for the MiG factory disappeared. The aircraft factory, with hundreds of billions of rubles in its accounts, was unable to pay taxes, pay suppliers, pay for electricity and distribute salaries. Money for delivery of MiGs ordered under old contracts was held up in the accounts of the new superstructure.

The MiG idea of uniting its forces resulted instead in the creation of a business office on the grounds of the factories and production facilities -- a costly, inefficient office with some 600 employees. And the holding company was a government organization, supported by the government budget.

But now the factory can't opt out of the game, and staying with the holding company means eventually losing the ability to produce. So whose planes will they be buying on the world arms market?

The tragedy is that even the most able and competitive businesses in Russia are becoming victims of bad ideas and mismanagement by the owners, particularly if that owner is the government. What will happen if the maker of the famous MiGs doesn't survive this ill-advised reorganization? Only history can answer that question. Germany, which after World War II lost its world standing in producing military aircraft, is still unable to produce a single fighter of its own 50 years later.