Published: 9/3/2001

The great Russian air leasing programme may be finally underway, with the announcement by Yury Ponomarev, President of state-owned Vneshtorgbank, that it would provide both Ilyushin Finance and the Financial Leasing Company, the winners of the government's leasing tender, with funding to the tune of $175m. The funding, to be provided over seven years, is still conditional on the government actually putting up its own money and guarantee. Comments from Ponomarev suggest that the government, as the bank's owners, had decided that the investment satisfied both commercial criteria and, probably more telling, that its participation supported the “national economy”. The terms of the funding may be short, but this should be seen in the context of the five-year money previously advanced by Sberbank to aircraft producers. The deal is also further enhanced by the suggestion that the bank may take stakes in the leasing companies. The level of interest rate has not been revealed, but the government subsidies of rates and guarantees make it seem likely to be much more attractive than deals currently available. The proof of this particular pudding, however, will lie in the government producing the funding. Events so far suggest that the machine of Russian finance and government may have finally got itself into gear and could produce a series of structures that will result in funding for the building of major aircraft. There is still a concern that the government is overly optimistic about non-budget support for its plans for the industry, with the overall federal plan (2002-2010) calling for $5 billion of investment, of which $4 billion is expected to come from other sources, including local authorities and private investors. There is also a feeling, in certain quarters, that the government 's commitment to funding leasing may still fall short of the required investment for long-term success and the view it has of itself as a pump primer for the development of a market may be naïve. The results of the tender - in terms of the winners - were fairly predictable in all but one respect and that was the treatment of Aviastar, producer of the Tu-204 and Russia's largest aircraft builder. In contrast to KAPO and VASO, it appears that under the new leasing assistance, the only funding to the plant will be interest rate subsidies to Leader Group, which has plans to buy and lease 80 Tu-204s over a prolonged period of time. Ilyushin Finance's plans for leasing Tu-204s were not included by the government in the company's potential funding under the tender, much to the irritation of Alex Rubtsov of Ilyushin Finance. While Leader says it is happy to go with only the subsidies, as opposed to the guarantees and financing, it remains unclear why Aviastar has not been included. The causes may lie in the ongoing brinkmanship between New Community (NC) and the government over the holding company's investment in the producer. NC's investment is currently in limbo as a result of a dispute over its acquisition of a shareholding and longer-term control of the plant. Currently, NC is refusing to commit further funding to Aviastar unless its holding requirements are met. The government has begun to make more conciliatory noises, but perhaps sees this as a card up its sleeve, in order to persuade NC to commit considerable resources, without state-owned Tupolev losing control, with the offset being government assistance in providing funding for the plant's output. If NC does finally commit its funds, the needs of Aviastar are certainly not as great as those of VASO. Even so, it seems a strange contradiction of the government's recent strategy of weeding out the weaker players in the industry and supporting the strongest. The reasons for Aviastar's failure to receive comparable support would appear therefore to be political and the official desire to bring NC to heel after a number of months of tension between the two sides. Such a theory is further fuelled by NC's approach to Kato Aromatic to increase the price of Tu-204s under the contract between the carrier and the plant, arguing that the original pricing was unviable. This is reported to have led to serious political ructions at the highest levels of government. However, the leasing scheme in its current manifestation has really taken no advantage of the opportunity to restructure the aerospace industry. The three major producers remain, with VASO, in particular, reprieved after the cancellation of the orders for the Il-96T/M. The question remains as to what the long term future is for three producers of complete major aircraft in a world dominated by two players, with a captive local air transport market now only slowly recovering from ten years of retrenchment.

Article ID: 2729