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Civil Aviation International Collaboration

Russian law stipulated preferential treatment (tax holidays, guarantees on investment) for Russian and foreign investors in aviation-related research and manufacturing ventures. However, it limited the share of foreign capital in aviation enterprises to less than 25 percent and requires that board members and senior management staff be Russian citizens. There was speculation that the 25 percent limit could be raised or done away with altogether to make way for further investment. Some observers, however, doubted that proposals to raise the limit only to 49 percent would be sufficient to garner significant new capital infusions from abroad for Russia’s aircraft industry.

In 1996, the United States and Russia concluded a Joint Memorandum of Understanding (MOU) reflecting U.S. concerns about barriers to the Russian civil aircraft market and the application of international trade rules to the Russian aircraft sector. The MOU states that U.S. aircraft manufacturers will be able to participate in the Russian market and share in its growth. The MOU also makes clear that the Russian aircraft industry will become fully integrated into the international economy over time. Russia pledged to eventually undertake the same international trade principles in the aircraft sector as the United States and many others have done as embodied in the WTO Agreement on Trade in Civil Aircraft. In the interim, the MOU commits Russia to take steps, such as the granting of tariff waivers, to enable Russian airlines to meet their needs for non-Russian aircraft on a non-discriminatory basis.

Although Russian aerospace companies had lost their position as prime manufacturers of large civil aircraft, they have been somewhat successful in supplying materials, parts, and engineering services for Western commercial aircraft and engines. Boeing plans to invest has reportedly invested more than $1.3 billion into Russian joint ventures since the early 1990s and plans to bring that total to $2.5-$3 billion by 2010. This investment has enabled Boeing to tap into the vastly underutilized expertise of Russian aerospace experts who have extensive experience as well as different approaches to engineering and manufacturing than their Western-trained counterparts. Boeing operates the Boeing Design Center in Moscow, employing Russian engineers to work in research, materials, design, information technology, and modification work on the 777, the 787, and other commercial aircraft models. Russia is a key supplier of raw materials–especially titanium–used in Western aerospace production.

European industry also has pursued this approach. In July 2001, Airbus’s parent company EADS signed a cooperation agreement with the Russian Aerospace Agency and agreed to invest more than $2 billion in the Russian aerospace industry over a ten-year period. The agreement calls for a broad range of cooperative projects, including Russian participation in the A320, A380, and other Airbus projects.

Sometimes these investments appear to have been tied to increasing market presence in Russia of Western-manufactured equipment. The EADS joint venture was followed soon after by the acquisition of 18 new Airbus aircraft by the Russian flag carrier Aeroflot. However, purchases and leases of Boeing and Airbus aircraft by Russian airlines remain limited due to a number of factors, including Russian government policies such as high import taxes intended to promote procurement of Russian-produced aircraft and the inability of Russian airlines to secure sufficient financing.

Russian aircraft manufacturers have sought to make their domestically produced aircraft competitive and attractive to Russian and foreign carriers by upgrading them with Western avionics and engines to bring them into compliance with international noise, emissions, navigation, and other requirements. Several large US aerospace companies are engaged in joint production projects and supply equipment used on Russian aircraft platforms. GEAE, Honeywell, and Pratt & Whitney supply engines for various Russian-built aircraft and helicopters. Hamilton Sundstrand provides propellers. Honeywell also provides power units and avionics, and its Traffic Collision Avoidance System (TCAS) is installed on about 300 Russian-built aircraft.

Russian manufacturers also have sought partnerships and cooperative ventures with Western manufacturers to help them develop new aircraft. For example, Pratt & Whitney entered into a strategic partnership with Perm Motors Joint Stock Company, which is developing an internationally compliant upgrade to the widely used PS-90A engine in Russia.

In 2004, Boeing entered into a contract with Russian manufacturer Sukhoi to help develop and market the Russian Regional Jet (RRJ), which is designed to replace aging Russian airplanes and intended to compete worldwide with those made by Bombardier and Embraer. SNECMA Group of France is developing the engine, in cooperation with NPO Saturn, with French government assistance worth €250 million. The RRJ was to undergo its first test flight in 2007 and enter service in 2008. Aeroflot, Sibir, and Concorde Aviation were among the airlines that had placed orders for the first variant, called the RRJ-95.

Nonetheless, significant additional hurdles must be overcome before Russian aircraft production rates will increase. Upgraded Russian aircraft typically are not economically and operationally competitive with Boeing and Airbus aircraft. New aircraft programs are unproven, and continued financial and production obstacles present challenges to Russian manufacturers. The absence of global support networks, and limited opportunities for resale of used aircraft are additional disincentives for Western airlines to purchase Russian aircraft.

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Page last modified: 09-07-2011 13:13:07 ZULU