Russians Want More EADS

When it comes to the Kremlin's investments and partnership deals in European business, political goals often take precedence over the bottom line in determining who gets a major contract, especially in traditionally state-controlled industries, such as aerospace and energy.

Russian airline Aeroflot recently confirmed a pledge to buy 22 of Airbus' upcoming A350 XWB long-haul jets instead of arch-rival Boeing's 787 Dreamliner, even though the American counterpart costs less and could be delivered earlier.

"From an official point of view, Aeroflot states that the Airbus planes are a better fit for its routes, but it is obvious that the decision (to choose Airbus over Boeing) is in part politically driven," said Maxim Syssoev, a spokesman for United Aircraft Corporation (UAC), an umbrella group of state-controlled Russian aerospace and defense companies which also cinched a series of production deals with Airbus parent EADS in March.

The pan-European aircraft maker will cede 5 percent of its upcoming A350 XWB's design and production to UAC.

"UAC's partnership with EADS is linked to Aeroflot's decision to choose Airbus," added Syssoev.

Tying production deals with aircraft orders is nothing new for Airbus. In China, Airbus won an order for 150 single-aisle A320 jets last year, some of which are being assembled in the northern port city Tianjin.

Co-production deals lead to more aircraft orders

"It makes sense for partners in aircraft production to become customers," commented EADS spokesman Gregor von Kursell. These work-share agreements are a question of survival. By selling more planes worldwide, we can support jobs back home."

Although outsourcing jobs outside the euro zone may save on development and labor costs, such moves are deeply unpopular at Airbus plants in Europe, where 10,000 jobs are being slashed over the next four years, partly due to massive structural problems and a two-year delay in rolling out the super jumbo A380 jet.

Aerospace analysts looking at the bottom line, however, are deeply skeptical about whether linking such cooperation deals with future orders necessarily makes good business sense for both the Russian and European sides.

"Russian companies have a rich socialist history of market cluelessness," said Richard Aboulafia, an executive at the Teal Group, a US-based aerospace consulting firm. "Aeroflot originally held Boeing's 787 order positions. It's safe to assume the switch to A350 XWB was purely political."

Partnership deals are dandy, but not controlling stakes

Aboulafia and others are even more wary of EU-Russia relations being strengthened through equity crossholdings in each other's defense industries. In 2005, EADS had acquired a 10 percent stake in Russia's Irkut, which is part of the UAC group and manufactures fighter jets, while Russia's state controlled Vneshtorgbank (VTB) now has slightly more than 5 percent of EADS.


Russian President Vladimir Putin has made no secret of his ambition for state-controlled entities to buy their way into European industry, especially in Germany. Düsseldorf-based E.ON, for example, tried to thwart Russia's Gazprom from acquiring a substantial stake in the energy concern.

As for EADS, which not only owns Airbus, but is also involved in the defense business, Russian officials have hinted that they wanted to double their stake, represented by VTB bank, to 10 percent. The present EADS shareholding structure, however, strictly limits control to French-German interests, represented by the French government, Lagardere and DaimlerChrysler as well as Spain's Construcciones Aeronauticas.

Differing views on increased Russian stake in EADS

"Increased Russian ownership would be disastrous for EADS," Aboulafia said, referring to EADS's attempt to procure a Pentagon contract for airborne refueling tankers. "It would prevent further expansion into the most important defense market in the world -- the US," he added.

At present there are no plans to change the EADS voting structure, said von Kursell, a decision supported by German Chancellor Angela Merkel, who is concerned about tighter links with Russia jeopardizing relations with the United States.

But there are Russia experts, such as Sabine Fischer of the EU Institute for Security Studies, who do not see the Kremlin's desire for a voting stake in EADS as a national security threat.

"You cannot open up a company to Russian investment and say we cannot give you voting power for security reasons," she said. "The Russians have their own highly developed defense industry anyway. If the Russians play by the market rules, it is difficult to justify keeping them out."