Intensive lobbying by disgruntled customers may have won the day, but raises questions over the politics of private investment (1,200 words)

Published: 10/4/2001

Months of wrangling and recrimination between the Russian government, through Tupolev and Aviastar's incoming industrial investor, New Community (NC), over the basis of NC's investment, may have finally come to an end with the announcement that NC will quit its management positions at the plant within two weeks. The first group of managers will leave by 9th October and the balance on 16th October, with the resignation on the 2nd October of Executive Director Valery Maltsev, who has appeared to be running the factory, despite the presence of General Director Yury Ryazanov, who replaced Gennady Korotnev in late April. The story of the last five months is riddled with contradiction. From the NC perspective, the industrial holding company committed more funds than it intended without securing a sealed deal with the major shareholder, OAO Tupolev, for a scheme that would have given NC control of the company. According to Maltsev, in the first two months, NC had planned to invest Rb166 m ($6m) but actually committed Rb236m ($8m), with the funds going to pay five months of deferred wages, tax bills and to acquire components. The company also says that it audited Aviastar's operations to gain a better understanding of the company's situation and developed a programme to deliver the company from its apparent crisis. The programme proposed that, as part of that recovery, the plant would build three Tu-204s in 2001, nine Tu-204s in 2002, 12 Tu-204s in 2003 and then more than 12 aircraft in 2004-2005. The continued debate over control, which had long been simmering under the surface, came to the fore in mid-July, when NC refused to commit further funds to the plant, arguing that the state had failed to meet the terms of an agreement signed on18th April, under which NC undertook to invest Rb2 billion ($67m) over two years in return for a blocking stake of 26% by 26th April and a dilutive share issue within two years, reducing the Tupolev holding to 52% and lifting NC's to 48%. The stalling of the transfer to NC seems with hindsight to have had little to do with the technicalities of the transfer and the appropriate board approvals, but to NC's approach in terms of taking control of the plant and its future strategy. A number of sources both privately and publicly baulked at what was seen as the new management's high handed attitude to both customers and suppliers, particularly the unilateral cancellation of firm orders for nine aircraft from customers including Kato Aromatic, Volga Dnepr and AirRep, on the grounds that the terms of the original terms of the deals were not profitable. This provoked what can only be described as a diplomatic offensive by Mohammed Kamal of Kato Aromatic, one of the plant's largest customers and the major backer through Sirocco International of the Tu-204-120, currently undergoing European certification. Kamal has also been one of the industry's most loyal foreign supporters through the 1990s. According to reports, Kamal has used his extensive contacts within government circles to draw attention to NC's behaviour at the plant, resulting in a broadside from OAO Tupolev in mid-August that castigated the new management team for its treatment of the existing customers. While accepting that the terms of some of the contracts were not profitable, Alexander Polyakov, Vice President of Tupolev, commented that the previous management had been working with Kamal to renegotiate the contracts that at a reported $6-6.5m fell well short of the $12m cost claimed by NC. Kamal's influence also extended to the region's government and the Russian Aerospace Agency, which publicly withdrew support from the new management team. NC claims that, on the 22nd August, believing a compromise could be found, it had asked Tupolev to present new plans for ownership and a working group had been formed by the holding company with the Ulyanovsk Region to prepare a proposal for a new investment agreement within one month. However, nothing happened and on 3rd October, an announcement on the plant's public address system revealed the departure of the NC management team from Aviastar. For some of those associated with the plant, the departure of the NC team is a positive move, as is the reported return of some of the former managers, led by Viktor Mikaelov from OAO Tupolev. Mikaelov is described by one western source associated with the plant as one of the “hardest men in Russian aerospace” and his return is to be welcomed, given that he commands the respect both within and outside Aviastar, even if one source suggested that a younger man may be required to steer the plant's future development. The question at this point, however, is whether he can sufficiently restore good relations with Aviastar's customers and overcome the irritation and even anger at what they see as the heavyhanded attitude and illegal cancellation of existing contracts by the departing management team. Unconfirmed reports have suggested that the customers have been informed that the cancelled contracts have been resurrected. It also remains to be seen as to whether he can stabilise the depleting finances of the plant. NC's view is that the plant is simply incapable of going forward without its support. This perspective is supported by reports from both within and outside the plant which claim that the heating has now been cut off due to unpaid bills in September and that the NC policy of paying wage arrears, but not suppliers, despite statements to the contrary, has left much of the workforce without components for the completion of the two aircraft currently on the floor. However, it seems almost certain that Tupolev's aggressive stance against NC has been gained with some undertakings of support from Kamal and possibly other customers, as well as the government, although the government's funding resources are very limited in 2001 and, judging by the first stages of the federal budget, are not going to improve markedly in 2002. It would seem likely however, that a solution will be found, particularly given the landmark Chinese deals recently signed, the first aircraft of which is due to be delivered late next year. The promise of stability offered initially by NC may still prove to be elusive, for the meantime at least. While accepting the rationale behind government action in this particular situation, the events at Aviastar do raise questions about the government's ability to manage and promote the process of bringing private investment into the aerospace industry. This is especially so if those new entrants want to take any kind of radical approach to the established relationships and structures of the companies in which they are investing. Does the government really reserve the right to reverse deals that have been struck by an industry desperate for new capital, because powerful interests who find themselves in conflict with new managements lobby to have their interests protected?

Article ID: 2801