With the announcement of the Sukhoi “success" in the Russian Regional Jet tender held by Rosaviakosmos (RAKA). And talk from Sukhoi of a development process that is likely to start in May targeted at flying an aircraft by 2005 and entering production in 2007, one can be forgiven for being lulled into a feeling of confidence that all is well with the programme. The major question for the programme"s future among the talks of development and engine selection remains unanswered, who is going to pay?

One of the contenders for the role Boeing, is reported by sources to remain steadfast in its long held position that it will not take part in the risk sharing elements of the aircraft"s development, but will contribute design assistance in the aircraft"s development and marketing support in the future. A position that many sources believe has been reinforced by its own circumstances of late and extensive Russian experience, making it to only to aware of the problems of being involved as a principle while not having the control of the risks associated with such a programme. Sources report that Boeing will therefore largely retain the stance when it shortly clarifies its position in the light of the award of the tender, although one suspects the pill will be some what more sugar coated.

One of the problems for finding other sources of funding for the $600m RRJ programme may be the changing environment of Russian opinion towards the industry"s protection in its current form. The rabid protection of the industry at all costs now appears to be something of a “busted flush" among policymakers increasingly influenced not by the old guard of the industry, but by the demand of a rapidly growing air transport sector led by young entrepreneurial companies such a Siberia Airlines. These companies are pressing the need for access to appropriate aircraft now! Or as one senior Aeroflot manager put it recently “yesterday". They see the protectionist measures as a restraint on development and although mouthing platitudes about supporting the domestic market want economical and reliable aircraft from any source. The current situation made all the more galling when the domestic industry is unable to meet the currently demand in terms of suitable or available product.

The cooling of the support of protection has not been lost on the Russian Government as it has percolated through Duma hearings and the Committee of State Customs, with plans by Deputy Minister of Economic Development and Trade Yury Isayev, to introduce plans for some level of reform to the Russian cabinet on the 10th of April 2003. The plan is reported to include the expected concessions on the import of parts and components for the aerospace industry, but also some easing on aircraft imports in certain categories to meet the airline"s needs. In principle such deals would be short period leases, but many suspect, particularly the aerospace industry, that this will be the thin end of the wedge. They are therefore unlikely to be mollified by the discussions of higher tariffs on aircraft over seven years old, given that the key market for anyone"s aircraft for the meantime, remains the top 10-15 carriers, whose demand given current market conditions is not going to be for seven year old imported aircraft.

For the RRJ and other Russian civil aircraft developments it seems likely that the situation of acquiring funding may get difficult before they get any easier. The obtaining of development funding from sources outside of Russia, already reported to have been attempted by Sukhoi for the RRJ, is to be frank almost impossible. International financial institutions reviewing the proposal dispassionately are unlikely to be eager to even take the plain vanilla risks of equity commitments in the development of an aircraft in an increasingly crowded regional jet market, never mind the risks of both Russia and the experience of the programme"s participants excluding Boeing. Funding will therefore have to be sought from domestic or other international institutions, the latter grouping still constrained by the calculation of chances of success given the potential opening of the Russian market. Among domestic sources an obvious contender would be the government, which has already committed funding, although it is rather vague on the timing of the expenditure and the actual amount. In the short term, the medium of government support has been RAKA, which has it own series of financial challenges related to the ISS and would seem unlikely to have much to spare in either 2003 or 2004. Sukhoi currently has access to little of its own funding given the consolidation of the Sukhoi Group has yet to occur allowing it access to the cash flow of military sales. Support from other quarters within Russia may emerge, but corporates, both private and state owned, have shown little interest in the sector and those that have, have little to crow about. The source of the initial equity funding therefore remain elusive.

What does this mean for the RRJ? It goes on, being developed in a typically Russian fashion with schedules set and missed, work suspended while funding is sought. Demand for the aircraft exists from carriers, and while “orders" are likely, prepayments are not or at least in sufficient quantity to make any difference. If the programme is to succeed it requires significant government funding or guarantees to entice investors and lenders in. Such funding may however; limit international sales, but provided some level of tariff protection is kept in place the aircraft will have a significant captive market.

The scenario is however, given future liberalization of the Russian market, difficult to envisage.