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. Last Updated: 07/27/2016

State Takes Greater Role in Aeroflot Affairs

Shareholders of state-controlled Aeroflot voted at their annual meeting Saturday to strengthen the government's control over the flagship airline and curb the powers of management.

Candidates put forward by the government, owner of 51 percent of the company, won seven seats on the board, which shareholders voted to increase from nine to 11 seats.

Millhouse Capital UK Ltd., which quietly acquired a 26 percent stake in the carrier during the past year, got three seats while employees, who control 13 percent, got one.

Representing the state on the new board are Economic Development and Trade Minster German Gref, Transportation Minister Sergei Frank and his deputy Alexander Neradko, Deputy Finance Minister Vladimir Chernukhin, First Deputy Property Minister Alexander Braverman, presidential aviation adviser Yevgeny Shaposhnikov and Yury Zaostrovtsev, the deputy director of the Federal Security Service.

The three board members representing Millhouse, a company that holds assets belonging to core shareholders of metals giant Russian Aluminum and oil major Sibneft, are three of its topic executives -- David Davidovich, Andrei Osipov and Alexei Tuzhilin.

Aeroflot general director Valery Okulov, representing employees, retained his seat. However, the darling of minority investors, Aeroflot chief financial officer Alexander Zurabov, also put forward by employees, lost by a small margin to Millhouse's Osipov. He was widely expected to have been elected.

Analysts were perplexed by the defeat of Zurabov, a former banker credited with spearheading Aeroflot's strategic development.

"This is a very unusual outcome," said Yulia Zhdanova, transportation analyst at United Financial Group.

After reviewing the balloting, Zhdanova concluded that Millhouse and the government coordinated their votes to maximize each other's presence on the board.

Yelena Sakhnova, an analyst at Aton, said the government might have "just played safe" to ensure that it achieved its goal of controlling seven board seats.

Frank declined to reveal the government's strategy for the meeting, save to say, "We used every possibility we had on our hands to get the maximum result."

Visibly surprised, Zurabov left the meeting saying only that he would continue working.

Shareholders also weakened Okulov's position. According to changes to the company charter, approved Saturday, the general director will no longer have the authority to approve deals worth more than 2.5 percent of the company's assets, or $15 million. Under the previous charter, the limit was 25 percent.

Another significant change is that the board, not the shareholders, now appoints the general director.

Frank said Aeroflot senior managers should be pressured to work more effectively and efficiently and that shareholders should have more control over the decisions they make.

One key decision is whether Aeroflot will favor the U.S. Boeing or Europe's Airbus when it upgrades its fleet of 27 foreign jets. Frank said that although Airbus' proposals were "considerably more attractive" financially, neither company will dominate Aeroflot's fleet.