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Defense Industries

Irkutsk Aviation Industrial Association: A New Name in the Russian Defense Industry

Konstantin MAKIENKO


In 2001 a new trend became noticeable in the Russian military-industrial complex where, amid the backdrop of the operations of tradi­tional economic players known from Soviet times, there was a dramatic intensification in the processes of corporate development, leading to the emergence of new brands. The continua­tion and development of this process could in future lead to a deep restructuring of the whole brand landscape of the Russian defense indus­try. As was seen throughout the past dec­ade, corporation building intensifies in sectors related primarily to the production of weapons and military hardware for export. In 2000-2001, the Su-27/30 family of jet fighters accounted for up to half of Russian exports of weapons and military hardware. Consequently, the proc­esses of corporate development, including that of new economic players, were most intense in sectors related to the manufacture of both jets themselves, and their subsystems and com­ponents.

The variety of forms and methods of corporate development stands out. In the area of devel­opment and production of onboard radio elec­tronic equipment, the creation of two corpora­tions was announced in 2000 and 2001: Aero­space Equipment and Tekhnokompleks. While the central element in the corporate structure at Aerospace Equipment is a central management company, at Tekhnokompleks this role is played by the innovation center, the Ramenskoe In­strument Design Bureau. In both structures the controlling packet of shares belongs to the state, although the central element remains primarily private.

In the sector of engine production for the Su-27/30 family of fighter jets, 2001 was marked by the creation of the corporation Saturn, com­bining the Rybinsk Motors plant and the Lyulka-Saturn design bureau. Here the process of corporate development is taking place in a more traditional, classical way—through the ef­fective purchase of one company by another. The central element in this case is the serial production plant, while the government has a 38% stake in Saturn.

Finally, the trend of building a corporate struc­ture was clearly defined around the Irkutsk Aviation Industrial Association (Russian acro­nym IAPO), which in 2000-2001 transformed its Moscow representative office into a central management company, and began the process of acquiring its own innovation center, gradually buying up the firm Russkaya Avionika.

Changes in IAPO shareholder structure

IAPO was incorporated in 1993. It is known that, until 1997 or 1996, 40% of the company's shares belonged through front companies to the closed joint-stock company Belukha, which at that time was one of the most active nongovernmental players in the military-industrial complex. This refers to the shares of JSC MBV (19.91%) and JSC Triang (19.95%). Around the summer of 1997, the management of Belukha, for undetermined reasons, was forced to sell its shares to Rossiysky Kredit Bank. As of 1998, IAPO had 1,253 shareholders, of which 41 were legal entities that controlled 95.58% of shares, and 1,212 were individuals who controlled 4.42%. The main shareholders were JSC FTK (19.97%), the company Broker (a subsidiary of Rossiysky Kredit, 15.2%), the Cypriot company Crawford Holding (14.99%), AVPK Sukhoi with 14.7%, CS First Boston (10.87%), JSC Erkon (10.18%) and JSC Forpost with 5%.1

IAPO's current shareholder structure was formed after the financial and banking crisis in August 1998, as a result of which Rossiysky Kredit went bankrupt. Of the 42% of shares that belonged to Rossiysky Kredit, 15% were acquired by companies "close to the manage­ment," probably JSC Forpost, which increased its stake from 5% in 1998 to 20% at present. Twenty-five percent initially ended up under the control of foreign portfolio investors. Fif­teen percent from this stake is still controlled by foreigners represented by Brunswick UBS Warburg, and 11% were bought by the Oppenheimer fund, which then resold its stake to the United Aviation Instrument Making Consortium (OAK).2  Besides management, Brunswick and OAK, other holders of large share packets are AVPK Sukhoi (14.7%) and JSC Aerokom (11%), which unites employee shareholders.3 Thus, one can assume that IAPO management managed to take advantage of the post-crisis situation to accumulate 51% of shares in compa­nies that it controls. The current struc­ture of IAPO's shareholder capital is shown in Table 1.                                  .


Table 1. Structure of IAPO shareholder capital

Company

Stake

Commentary

JSC Kompania FTK

20%

Controlled by or is close to management

AKB Forpost

20%

Controlled by or is close to management

JSC Aerokom

11%

Consolidates shares of plant employees

AVPK Sukhoi

14.7%

 

OAK

11%

 

Brunswick UBS Warburg

14%

 

Other legal entities

5.4%

 

Other individuals

4.3%

 

Source: IAPO press service. Total may not add to 100% due to rounding.


Production in 1994-2000

As the overwhelming majority of other Russian enterprises in the military-industrial complex, following the collapse of the USSR, when state defense contracts shrank to virtually nothing, IAPO manufactured products largely for export. These products included the Su-27UBK combat trainer, the Su-30K fighter jets, and the Su-30MKI multi-role combat aircraft. The planes were exported to China, India and Vietnam.

Exports to China are restricted exclusively to Su-27UBK combat trainers, deliveries of which accompany the fulfillment of contracts for Su-27SK and Su-30MKK combat jets. Of the 48 fighter jets that China received in the first half of the 1990s, according to various sources, ei­then 104 or twelve5 were two-seat combat trainers, and the remainder standard Su-27SKs. After the beginning of large-scale deliveries of Su-30MKK fighter jets to China and the rollout of licensed production of Su-27SKs in China, IAPO secured a contract to build another 28 Su-27UBKs for this country. But the Irkutsk plant was unable to enter the Chinese market with the more modern version of the Su-30KN, the combat capabilities of which approximately cor­respond to or exceed those of the Su-30MKK made by the Komsomolsk-on-Amur plant (KnAAPO). China's air force continued to buy products primarily from KnAAPO. Nonethe­less, there is a hypothetical possibility that China's navy will order a batch of Su-30KN fighter jets, optimized for carrying out anti-ship missions.

Deliveries of Su-27UBK jets to Vietnam also accompany the transfer of purely combat versions of the Su-27SK.

But IAPO's main client in the 1990s was India, which will remain the main buyer of the Irkutsk company's products for the foreseeable future. The first contract was signed in November 1996 and called for the delivery to India of 8 Su-30K fighter jets and 32 multirole Su-MKI aircraft. The contract, worth up to $1.8 billion, called for a large amount of research and development, the result of which was supposed to be the creation of an up-to-date version of the Su-30 fighter, with the latest avionics, radar with phased array antennae, front horizontal tail and thrust vectoring engine. The first 8 Su-30Ks were delivered in 1997, the R&D on the Su-30MKI was largely completed by the end of 2001 and the first ten fighters of this type are expected to be transferred in 2002.

In 1998, an additional contract was concluded for the delivery of another 10 Su-30K, which were paid for with the remainder of a Russian credit of $820 million that was extended to India in the early 1990s. The delivery was made in 1999.

At the end of 2000, Russia and India signed a contract worth $3.3 billion, which called for the licensed production of 140 Su-30MKIs and AL-31FP engines. The implementation of this agreement will continue until 2017. Thus, as of March 2002 IAPO has contractual obligations to deliver 32 Su-30MKIs worth between $1 billion and $1.5 billion, and transfer ten Su-27UBKs worth $250 million to $300 million to China as payment for Russian state debt.

Promising production programs

IAPO is currently carrying out the following production programs:

·   Participation, on the basis of a 2000 contract, in setting up licensed production of Su-30MKIs in India,

·   Delivery to India of 32 Su-30MKIs under a 1996 contract,

·   Delivery of Su-27UBK jets to China,

·   Construction of Be-200 amphibious aircraft for Russia's Emergency Situations Ministry.


Table 2. IAPO exports

Importer

Date of delivery

Quantity

Value

China

1992

4-6 Su-27UBKs

Unknown

Vietnam

1994

2 Su-27UBKs

$40-60 mln

China

1996

6 Su-27UBKs

Unknown

Vietnam

1996

4 Su-27UBKs

Up to $120 mln

India

1997

8 Su-30Ks

$240-280 mln

India

1999

10 Su-30Ks

$300 mln on Russian credit

China

2000

8 Su-27UBKs

As payment for Russian debt

China

2001

10 Su-27UBKs

As payment for Russian debt

Source: CAST database.

Table 3. IAPO sales forecasts

Program/Year

2001

2002

2003

Licensing contract for Su-30MKI

12

25.3

130.6

Deliveries of Su-MKI

208.6

286.7

Deliveries of Su-27UBK

187.5

203.8

116.8

Deliveries of Be-200

30

60

80

Total, mln dollars

229.5

497.7

614.1

Source: IAPO press service.


Production figures for 2001 have not been pub­lished yet, but sales are targeted at $229.5 mil­lion. This includes work worth $12 million on setting up licensed production of Su-30MKIs, the delivery of $187.5 million worth of Su-30UBKs to China, and the delivery of $30 mil­lion6 worth of Be-200s for the Russian Emer­gency Situations Ministry. In 2002, overall sales will grow to $497.7 million, including the pro­ject for licensed production in India worth $25.3 million; the delivery of Su-30MKIs to In­dia worth $203.8 million; Su-30UBKs to China worth $203.8 million; and Be-200s to the Emer­gency Situations Ministry worth $60 million. In 2003, sales are expected to grow further to $614.1 million. Overall sales forecasts and their breakdown are given in Table 3.

In general, the contract to set up licensed pro­duction of Su-30MKIs in India would alone keep IAPO working until 2017. It is also known that, if Russia wins a tender called by the Ma­laysian air force for the delivery of 12-16 multi­role, generation "four-plus" fighters, the con­tract will be filled from the Russian side by IAPO. Another promising program in which IAPO plans to take an active part is the devel­opment and serial production of multirole transport aircraft together with the Ilyushin de­sign bureau and India's Hindustan Aeronautics Ltd. And, finally, IAPO and the Russkaya Avi­onika avionics design bureau, which it controls, have been selected by the Russian air force as contractors in the modernization of Russia's fleet of Su-27UB and Su-30 fighters along the lines of the Su-30KN.

Transformation into a quasi-corporate structure

In 2000-2001, the management of IAPO, having consolidated a controlling stake in their com­pany, began to transform it into a corporate structure. Using the Irkutsk aircraft plant as a production facility, IAPO launched active op­erations of the management company in Mos­cow, which maintains ties with the federal au­thorities, the Sukhoi design bureau and the cen­tral company that controls it — AVPK Sukhoi. A strong financial division was set up within the management company that prepared and began to implement the first program among Russian defense companies to raise major capital on the financial market. In the initial phase, to 2003, IAPO is implementing a promissory note pro­gram, the goal of which is to reduce the cost and increase the maturity of borrowing on the domestic market. Over this period, the company plans to undergo an internationally recognized audit, secure a credit rating, and get listed on a Russian trading floor. By 2004, the company plans to prepare to enter the foreign markets with an issue of American Depositary Receipts (or Global Depositary Receipts).

At the same time, IAPO has acquired a control­ling stake in Russkaya Avionika, a leading Rus­sian design bureau that modernizes fourth-gen­eration combat aircraft. IAPO now has its own innovation center, which increases the degree of its independence from the Sukhoi design bureau. Furthermore, IAPO has a controlling stake in the Yaroslavl-based ITELA JSC, which develops and manufactures tracking sensors and control systems for aircraft, and a 70% stake in BETA-AIR JSC, which builds and sells the amphibious Be-200. Thus the Irkutsk Aviation Industrial Association is gradually transforming into a multi-profile, modern company that works ac­tively on the foreign capital market, has a de­veloped system of international cooperation, and a dynamic, modern management.


1 INFO-TASS, VEGA electronic data bank, August 14, 1998.

2 "Yedinstvenny riskuyuschy - tot, kto dayet dengi," Interview with Aleksei Fyodorov, president of IAPO. Vedomosti, July 18, 2001.

3 Ibid.

4 UN Register, Russia Report for 1992, http://domino.un.org/REGISTER.NSF.

5 A. Fomin,"Su-27. Istoria istrebitelya," RA Intervest­nik, Moscow, 1999, p. 198.

6 "Aviapromyshlennost vstupayet v 21 vek," The offi­cial bulletin of the International Aerospace Salon MAKS-2001, p. 18.



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