Industry seems in no-win situation (700 words)

Published: 8/7/2001

On 2nd August, the ongoing debate over the duties imposed on the imports of aerospace equipment into Russia received a new boost, when Prime Minister Mikhail Kasyanov approved a decree that pulls together various exemptions relating to the temporary imports of aerospace equipment, although the major beneficiary appears to be Aeroflot. The decree was also accompanied by an announcement that, over the next two months, the Russian Aerospace Agency (RAKA) and the Ministry of Transport would review the 20% customs duty currently levied on aerospace imports with the possibility of reducing it to a reported 15%. The new decree #574 lets Aeroflot off the hook for the duties and taxes, believed to be between $600-800m, for the import of 10 Boeing 737, 2 777s and four A-310s imported during the 1990s. As late as the end of March, Deputy Minister Alexander Dondukov of the Ministry of Economics and Trade Development, demanded repayment of these duties, owing to Aeroflot's failure to meet its obligations under resolution #716 to acquire by 2005, 12 Il-96Ms, three Il-96Ts and six Il-96-300s by way of an offset. The reason for the leniency no doubt lies in the fact that Aeroflot is unable to pay the back duty, given that it would have represented twice its present sales, so obliging the government - its majority shareholder - to back down. According to reports, however, Aeroflot is not completely off the hook in terms of the Russian aircraft purchases, although the number has fallen considerably to eight aircraft, as opposed to the original 21. The type of aircraft remains unspecified, but they will be leased through the new government guaranteed leasing structures to be announced later this month and in which Aeroflot is participating, with Sibir. The lack of information on the type of aircraft must be causing some concern at VASO, as the snail-like progress of the Il-96T/M is faltering. Recent reports have claimed that the P&W engine set on the aircraft has recently been removed for use elsewhere, because of the delay in the development of the programme, although according to sources close to P&W, it is a temporary measure. The discussions on reducing the duties on aerospace equipment for Russian civil aviation are not being welcomed by either of the agencies charged with imposing them, particularly the Ministry of Transport/GSGA, which has been reported as being in favour of the maintenance of the trade barriers. Publicly, the producers are against the lifting of the duties, evidenced by a somewhat polemical series of statements from the Aviastar spokesman, Alexander Savostanyanov, suggesting that the authorities, in considering the reduction in duties, were bowing to US pressure and the requirements of the WTO. However, the industry has become dependent on Western components and engines and sees the continued use of these products as being critical to its success, given that much of the industry's supply chain is in tatters. This view is supported by Valery Maltsev, Executive Director of Aviastar-SP and the representative of its new investor, New Community, who have remarked that the current privileges afforded to Aeroflot on the issues of duties is a particular thorn in the side of the Tu-204 producer. They argue that the situation should be a level playing field for everyone, and it could be inferred that, given plans to develop production of the RR powered Tu-204-120, they would like to see the duties lifted. What stance will taken by RAKA and the Ministry of Transport in two months' time is anybody's guess, but it is clear the Russian industry is caught between a stone and a hard place on this issue. High tariff barriers may prevent aircraft coming into the market, but the airlines need new equipment and the producers currently do not have the capacity or the funding to answer the demand. Easier access of foreign aircraft would also have the potential effect of eliminating the producers' cash generating overhaul business, as well as hampering the prospects for programmes that are struggling to survive. The industry, however, needs to produce viable products and higher cost through duties can only serve to dilute one of the industry key competitive advantages: namely, price.

Article ID: 2694