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25.12.07
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Raiders Of The Lost Rotorcraft
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By Graham Stack
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It’s been an extraordinary autumn for Russia’s helicopter industry.
It kicked off in mid-August with a presidential decree launching the final phase of the creation of a national holding company for helicopter plants. The government chose Oboronprom holding, which is 50 percent state-owned and 30 percent privately owned, but de-facto run by the state arms intermediary Rosoboronexport (ROE).
At the end of September, Oboronprom announced that it now held a blocking stake in Rosvertol, the last privately-owned helicopter producer, and maker of the Mi-35 attack helicopters. A flood of major foreign and domestic orders followed. In September, President Vladimir Putin sold $1 billion worth of helicopters, fighters and tanks to Indonesia. In October, the Ministry of Defense announced that Russia’s armed forces will get 300 Mi-28 helicopters by 2015, including 50 by 2010. In early November, the Indian government announced the purchase of 80 Mi-17 helicopters from Russia for an estimated $140 million.
In the same month, sources confirmed that Russia was negotiating its first ever arms deal with Saudi Arabia, following Putin’s groundbreaking visit in February. The arms deal being hammered out amounts to $1.1 billion worth of Mi-35s as well as transport choppers, the Mi-17 and Mi-8. If it closes the deal, Russia will have beaten out both U.S. helicopter producer Sikorsky and France’s Eurocopter.
“Saudia Arabia is the world’s largest arms importer, but up to now has not purchased Russian arms. If this deal is signed, it will be a milestone in the Russian arms trade,” said Dmitry Vasiliyev of the Moscow-based Center for Analysis of Technologies and Strategies.
The trend peaked in Moscow on Nov. 26, when Putin signed into law a decree creating the defense sector state corporation, Russian Technologies, as a holding company both for ROE, after its transformation from a state enterprise into a joint-stock company, and ROE’s diverse holdings.
One week later, Andrei Shibitov, director of the Moscow Milya helicopter plant, was named CEO of Russian Helicopters, marking the beginning of the consolidation of Oboronprom’s helicopter assets into a single listed company. “It will be a long procedure to fully integrate these defense enterprises according to international accounting standards in preparation for an IPO, but in the future there will be a single company that designs produces and markets helicopters,” Vasiliyev said.
Holdings on hold
The policy of regrouping the partly privatized, sprawling and under-financed defense industry into a state-controlled holding was conceived from the start of Vladimir Putin’s presidency. But only in 2004 did it take off – vertically.
What took so long? Apart from the establishment of the Almaz-Antei holding for surface-to-air missile plants and the Sukhoi aviation holding, the 2002 government plan to set up 74 state-controlled concerns and holdings remained entirely on paper due to bureaucratic infighting, conflicting visions and a lack of initiative. This made the fundamental obstacle to restructuring obvious. Most of the defense sector had been at least partly privatized in the 1990s, and the Kremlin retained very little leverage against the entrenched interest groups controlling the financial flows of each individual plant.
This all changed in 2004. Putin’s radical reshaping of the government involved creating the Federal Agency for Industry and giving it oversight of the entire defense sector. Boris Alyoshin, an ardent proponent of the holding policy with a background in the aviation industry was named head of the agency. Additionally, the newly-created Federal State Property Agency was headed by a contingent of St. Petersburgers dedicated to the liquidation of state unitary enterprises as a class by transforming them into joint stock companies.
Most importantly, Sergei Chemezov, proponent of a proactive industry policy for the defense sector and an old friend of Putin became head of ROE. Chemezov lobbied successfully for ROE to be awarded a monopoly on all Russian arms export contracts, leading pundits to dub ROE the Gazprom of the defense sector.
The strengthening of federal power in both the economic and political spheres coupled with a surge in oil prices and the constitutional restriction to two terms in office shifted economic policy away from German Gref’s long-term institutional reforms towards state-accelerated diversification. This set the stage for a concerted industry policy aimed at setting up holdings. This shift was symbolized by the fact that, only three weeks after Putin’s reelection in March 2004, Alyoshin, in his new capacity, submitted a project for a Milya Helicopters holding that would unite companies developing and building Mi-class helicopters. ROE-run Oboronprom was named as the holding's managing company, and soon the plan expanded to embrace the whole of the helicopter sector.
A vertical takeoff for ROE
ROE was allowed to invest in helicopter producers, according to Renaissance Capital’s Marina Alexeenkova, because in an era of post-privatization, the Kremlin had retained at the most blocking stakes, sometimes no stake at all, in individual producers. At the same time, ROE enjoyed significant leverage over these companies, because it selected which plants were assigned the export orders it negotiated.
Oboronprom, under youthful manager Denis Manturov, went about its job extremely efficiently. Acting quietly, Oboronprom overcame the silent opposition of regional governors and factory managers to consolidate a significant part of the nation’s helicopter assets.
At the start of the process, the state had retained no more than blocking stakes in Russia’s main helicopter producers. The main producer of attack helicopters, Rostov helicopter plant (Rosvertol), was completely private, owned largely by management, while the Kamov holding was owned by financial-industrial group AFK Sistema.
From 2004 to 2007, Oboronprom worked hard to gather the helicopter industry under one roof, buying shares in the market, implementing share swaps against stakes in its charter equity, acquiring stakes from other owners and transferring ownership of the state’s remaining stakes. It acquired 31 percent of the Milya Moscow Helicopter Plant, 29.9 percent of the Kazan Helicopter Plant, 63 percent of the Ulan-Ude Aviation Plant, 60 percent of the Stupino Machine Production Plant, 50.5 percent of Vpered Moscow Machine-Building Plant, and bought first a blocking, then a controlling stake in Rostvertol. It purchased AFK Sistema’s shares of Kamov-Holding, including the Kamov Design Bureau and the Kumertau Aircraft Building Plant and Arsenev Plant.
Integrating the major Kazan Helicopter Plant (KVZ) proved to be the greatest political challenge, due to resistance from management owners backed by Tatarstan’s government. Only after Tatar President Mintimer Shaimiev was reappointed by Putin in 2005, did Tatarstan cede its 29.9 percent stake to Oboronprom in return for a 15.7 percent stake in Oboronprom. It was not until 2007 that Oboronprom finally bought out the management stake, resulting in the abrupt departure of Alexander Lavrantyev, KVZ’s director of 17 years and a vocal opponent of Oboronprom.
The last hurdle was to purchase Rosvertol, the last Russian helicopter producer remaining outside Oboronprom. In September 2007, Oboronprom acquired a blocking stake, and by early December, following an additional share issue, it held more than 50 percent of the once private enterprise.
ROE: Raider of the lost rotorcraft?
Four days after Russian Technologies was born, an interview given to Kommersant business daily by hitherto unknown businessman Oleg Shvartsman cast a shadow over the controversial process of defense sector restructuring. Shvartsman detailed the “raiding” methods employed by his companies to re-privatize defense-related enterprises. He claimed to have been acting under direct orders from Kremlin hawks known as ‘siloviki’, to which Sergei Chemezov, head of ROE, and now of Russian Technologies, is said to belong.
Much of the credibility of what the shadowy financier and amateur poet said comes from the way it fits in with observable trends:
“Generally we use voluntary-compulsory instruments – market value, the mechanism of blocking growth, all sorts of administrative matters,” Shvartsman explained in the interview. “But, as a rule, people understand where we are coming from ... In fact, usually we are talking about conflicts that are already smoldering somewhere, already the center of attention for existing companies. They only need to come to an agreement with our older colleagues and reach some sort of consensus. As a rule, it is the lower rung of the market value. But we're not talking about taking over Yukos – the people do get sensible money.”
Analysts mostly disagree that ROE raided the lost rotorcraft producers – because it didn’t need to. ROE, as an arms export monopolist, enjoys so much legitimate leverage over enterprises that it can dispense with such behavior.
“ROE can influence companies using not just financial instruments but also political ones, such as cutting plants out of orders,” Vasiliyev said. “In general, not only foreign export orders, but also state procurement orders stopped going to companies with at least 50 percent state ownership,” said Kommersant aerospace analyst Konstantin Lantratov.
“It was a very long, arduous process, only just drawing to a close now. ROE doesn’t have the financial resources to just move in and buy up everything,” Lantratov said.
“There were some signs of political pressure being exerted, for instance in the way that Lavrantyev was fired from Kazan, which had been most reluctant to enter the holding, in contrast to, for instance, Ulad Ude, which voluntarily transferred a share packet to Oboronprom. ROE started to provide foreign orders only to Ulan Ude, and Kazan was forced to enter the holding.”
Even in the case of Rosvertol, which was completely public before the integration process started, there seems to have been more carrot involved than stick.
“Rosvertol was completely public, and to some extent, it was forced to enter to avoid being left on the sidelines, but on the other hand, it got a good deal out of entering, such as securing state subsidies. Rosvertol is specialized in military attack helicopters and gained considerably from entering the holding,” Lantratov said.
“Rosvertol will gain most from the deal with Saudi Arabia and the new Russian defense order,” said Vasiliev. “Rosvertol was a mostly private company, but the management-ownership agreed on some conditions and sold their stocks for a reasonable price. They know that to survive, they have to unite and integrate, maybe with short-term losses, but long-term gains.”
Investors also seem happy with the deal. “There might be some short-term dilution risk for minorities,” said Renaissance Capital’s Alexeenkova, “but this will be compensated for by a medium-term rise in value.”
Outlook
It is still unclear how tightly integrated the holding is going to be. “The various industrial groups consolidated under Oboronprom have retained some autonomy, such as their own boards of directors. They will coordinate marketing efforts and new projects to reduce internal competition, but Oboronprom will leave cash flows with its subsidiaries, maintaining them as profit centers,” Alexeenkova said.
The defense sector has long grappled with ruinous competition between plants producing the same models - a pernicious legacy of the Soviet “internal competition” system under market conditions. On the other hand, the rivalry between aviation legends such as Sukhoi and MiG in plane-building, and Milya and Kamov in helicopter construction provided one of the main wellsprings of innovation during Soviet times.
“When there are a lot of plants producing the same helicopters you get unwanted competition, which buyers use to play off plants against each other. ROE is thus acting in the interest of the whole industry. Oboronprom is trying to help here and also to share orders evenly between plants, to avoid excessive competition,” Lantratov said.
On the other hand, competition fosters innovation. The newly appointed manager of Russian Helicopters, Shibitov, has stated: “retaining internal competition within Russian Helicopters is the guarantee of its success on the world market. The holding will not kill competition. We want to retain both schools, Kamov and Milya, and the competition between them is the guarantee of our global competitiveness.”
However, the end goal, by 2010, is a single share, international accounting standards, and an IPO, leaving the state with just over 50 percent while including foreign investors.
Foreign producers now seem more comfortable in collaborating with the new holding. “Foreign partners find it easier to talk to Oboronprom, because of the stability involved in the structure,” Lantratov said. “August Westland in particular is conducting talks directly with Oboronprom, and Eurocopter has also declared its interest. In the early 2000s, foreign concerns tried to start collaboration with some individual plants, but they never got very far.”
Oboronprom is currently negotiating with August Westland for a license to produce AW139 light helicopters to fill in a gap in Oboronprom’s product range. Russian helicopter production is predominantly in the medium-size class, while Western models dominate the lightweight class. However, aside from the August Westland project, the Kazan helicopter plant has started production of the lightweight Amstad model and is developing an additional model called Antei.
Rotorcraft, except attack copters, can be used for both military and civilian purposes, and currently around 50 percent of most plants’ production goes to commercial customers. Commercial orders for helicopters are now set to soar as Russia’s infrastructural and mineral extraction boom continues. Logging companies are also important customers.
In fact, it is not a shortage of orders that is giving the Russian Helicopters concern headaches. The problem is now that components suppliers cannot increase their capacity quickly enough to keep up with orders.
“The plants turning out these rotorcraft are not in any way short of orders, they are already working at full capacity,” Lantratov said. “The problem is that during the years of decline, many suppliers of component parts, such as transmissions, disappeared, and this now puts restrictions on output increases.”
So the work of ROE, now Russian Technologies, is not yet done. Having sorted out the helicopter producers, the organization’s attention has now inevitably shifted to defense-sector suppliers. Chemezov has announced and launched plans for state holdings in electronics, motors, steel and composites. ROE is even starting to get into mining. So another round of restructuring looks set to begin. |
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