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. Last Updated: 07/27/2016

BUSINESS AND THE LAW: Fight Mounted Over Aviation Law

U.S. industrial giant United Technologies is launching a campaign aimed at reversing a Russian law banning the development or manufacture of products by aviation companies with large foreign shareholders, officials said.

At issue is a federal law that prohibits Russian companies with foreign ownership greater than 25 percent from designing, testing, manufacturing or repairing aircraft or any other product used for aviation. The law also states that any Russian company involved in such activities must be run by Russians.

While the ban is not retroactive - companies that had foreign shareholders before it came into force Jan. 8, 1998, are not affected - it represents a "major barrier" for foreign companies trying to invest in Russia's aviation industry, said Natalya Chistyakova, manager of external affairs and government relations at the Moscow office of United Technologies Corp.

The 25 percent rule effectively prevents a new venture from giving foreigners a concrete say in their investments, because a 25 percent plus one share stake is required under Russian law to block board decisions. Foreign investors, therefore, face being held hostage by their Russian partners without legally being able to make their wishes known.

Chistyakova stressed that no foreign company would want to invest in an aviation company without being able to acquire a major stake in it and install its representatives on the board of directors to block unfavorable decisions by other shareholders.

United Technologies' Pratt & Whitney aircraft engine unit has two major projects already under way in Russia.

One is with Khimki-based Scientific Production Association Energomash to produce the RD-180 rocket engine that will be used to power Lockheed Martin Astronautics' new Atlas IIAR and the Evolved Expendable Launch Vehicle family of rockets.

Energomash and Pratt & Whitney set up the RD AMROSS joint venture to co-produce the Russian-designed engines. The venture's shares are evenly split between the two companies.

The other project is the upgrade of the PS-90 jet engine at Perm Motors in Siberia. The new engine, the PS-90A2, is expected to be installed in such Russian airliners as Tu-204s, Il-96-300s and Il-76MF transportation carriers, Chistyakova said.

Pratt & Whitney owns 25 percent plus one share of Perm Motors' stock.

Chistyakova said the January 1998 law has not affected United Technologies' current joint ventures because the shares in Perm Motors were bought in November 1997 while the RD AMROSS venture with Energomash was established in July 1996.

United Technologies feels obliged to lobby for a lifting of the ban because it is deterring additional investment in the aviation sector, Chistyakova said.

She said her company is currently casting about to see what other foreign companies are interested in joining the campaign against the ban.

Chistyakova said an entire report will be prepared to "prove the economic feasibility of lifting this ban."

The report is expected to be submitted this year to the government and to the Consultative Council for Foreign Investments, which is comprised of representatives of major foreign investors, including United Technologies, as well as of top government officials.

Chistyakova said her company strongly hopes the government will endorse the report, draft an amendment to the ban and submit it to the State Duma for approval.

United Technologies' concern about the ban is shared by Joint Venture Euromil, set up in 1994 by the Moscow-based Mil design bureau, the Kazan plant and French-German concern Eurocopter to design and market an upgrade of the Mi-8 helicopter.

Vladimir Yablokov, general director of the joint venture, said no major aviation project can take off in Russia without the backing of foreign investors.

A senior official with the Economics Ministry's aviation department agreed that foreign investment was vital to the survival of the aviation sector, saying his agency would welcome a reversal of the January 1998 law. The department is presently ceding control of the aviation industry to the Russian Space Agency.

Without foreign support, Russia's cash-strapped aviation industry will see "large holes" in the products that it will be able to produce, said the official who asked not to be identified.

The official added, however, that even if United Technologies' proposal to lift the ban gets support from the government, it could be years until an amendment becomes law. A reversal would have to be drafted into a bill and pushed through both chambers of the parliament before President Boris Yeltsin can sign it into a law.