In place of the industry's efforts with state assistance, we are now presented post decree with a commission largely staffed by a series of ministries including Economic Development and Trade, Industry and Energy, Rosprom and the Presidential administration, to be headed, according to reports, by the former Deputy Prime Minister Victor Khristenko. Khristenko, say reports, appointed due to poor relations between the Presidential administration and the director of Rosprom Boris Aleshin, viewed as the architect of the unification process, but now tarnished with the public failure to make significant inroads to date. Aleshin has recently described the speculation of who might lead the commission as being irrelevant and that its formation in response to the decree was the important step. Suggesting that he also may believe that Khristenko has secured the role, as Aleshin knows that the chairman figure is critical to moving the process ahead. The speculation of who will head up the commission even leading some sources to suggest that sidelined, but still influential, Yury Koptev, former general director of the Russian aerospace agency, could potentially be seen by the state as a safe pair of hands to run the commission and the process. Although his previous reluctance to undertake change within the industry and maintenance of the status quo in the past would suggest a process that could be largely cosmetic and politically unacceptable.

The appointment of the commission's chair is scheduled say media reports, to be made by Prime Minister Fradkov by March 3rd and the commission will then set out to undertake what appears to be a brief limited to the creation of legal entity OAK and the valuation of the 19 potential constituent companies and the shares that the state and minorities will be entitled to in the new entity. The initial shareholder structure followed by the absorption of MIG and KAPO, currently state entities, but planned to be privatized and converted to joint stock companies for inclusion in OAK, within the proposed divisional structure of military, civil, transport and aircraft components. Although for those companies straddling divisions such as MiG, the role of the current corporate structure remains unclear.

Aleshin and the head of "non-commercial" OAK, former Irkut first VP, Valery Bezverkhny, have said in recent interviews that the new corporation could be established following valuation exercises within 6-7 months and the process of unification completed within 18 months. The time scale for the merger of the various entities however, appears ambitious given both the politics and scale of the exercise, and the fact that the external agencies likely to be charged with the valuation work have yet to be retained after a number of months of tentative discussions.

The issue of restructuring and integrating the industry, despite the public declarations of a unified producer under a single roof, now appear to have taken a back seat in favour of simply establishing the corporation and getting something achieved. Leaving the management of the new venture to undertake the required work. Although in recent public pronouncements and from industry feedback, it appears in the view of some of the constituent parts, post creation OAK differs little from that which existed before, with projects continuing to be driven by the individual units, such as Ilyushin continuing to work on the MTA in cooperation with Irkut and Sukhoi continuing to be funded directly for the development of the fifth generation fighter. With little talk of serious structural change to create a more efficient producer although this is undoubtedly the government's end game. The identification of a smaller number of key programs for OAK than has been the case in the past is a positive move. With reports suggesting a focus on 11 programs with 6-7 from Irkut and MiG, suggests a greater level of discipline in future use of resources, but how those projects will be executed still requires clarification. Particularly as the fact remains that as presently discussed, the issue of state provided financing appears to take little or no regard of the imminent establishing of OAK.

The likely CEO of the new corporation remains unknown, but Fradkov has made it known that he will appoint an industry "advisor" to assist him in the unification process and it is this person when appointed who is being seen as the appointee in waiting. It is assumed that the individual will be either Alexei Federov, currently general director of MiG and 14% shareholder in Irkut or Mikhail Pogosyan general director of Sukhoi. Although the pushing aside of Bezverkhny is being seen as a reflection on Irkut's ability to establish sufficient consensus to restructure the industry, and it has led to suggestions that Pogosyan may take the role. The fact that Irkut has the support of EADS and the significant role played by private shareholders in Irkut however is likely to give Federov considerable leverage, enough to secure the job.

The list of the component companies within OAK remains something of a moveable feast outside the major participants, and it seems optimistic to anticipate that the state's stated goal of achieving initial control of at least 75% of the new entity will not lead to some minority shareholders agressively debating the valuation methodology of the merger and make inclusion difficult on the terms proposed. The difficulty winning agreement combined with ongoing disputes elsewhere, already leaving the position of some key elements uncertain in the initial stages of the process. In particular with lessors IFC and FLK, where recent statements from senior government officials have suggested that IFC, subject to concerted negative action from government over the last six months, is looking increasingly marginalized and potentially might be excluded from OAK in favour of a single leasing company in the form of FLK, although some reports suggest that a final decision has yet to be made.

Overall our feeling from the last few days is that we are at the beginning of a long process that the state has decided is better started rather than debated, as without movement, little or nothing will be achieved. The major issues of the industry still have to be resolved and require a level of commitment and management that has not been seen to date. There also has to be an acceptance that the restructuring of the industry will have its victims both large and small, and shuffling the pieces is no substitute for the clear and decisive leadership of change within the industry. The lack of current clear thinking perhaps ilustrated by the absence of Rosboronexport from the unifying process. Despite the agency's role as the major seller of defense equipment to global customers and as such an obvious participant in the industry restructuring.