On May 17th, the head of Ukraine's Antonov design bureau, Petro Balabuyev, resigned after more than 20 years on the job to protest against efforts to unite the design bureau with the country's two leading production facilities: the Aviant plant (in Kyiv) and the Kharkiv state aviation production facility. Balabuyev's resignation was accepted a week later, and Ukrainian President Viktor Yushchenko signed a decree ordering the merger shortly thereafter. All three state facilities take part in the creation of Antonov aircraft, but for the better part of the last year their directors have been locked in a battle fought in local courts and the national media.
The merger war, largely waged between Balabuyev and his much younger opponent, Kharkiv plant director Pavlo Naumenko, is only the latest misfortune for Antonov and Ukrainian aeronautics. In 2003, an An-124 Ruslan heavy-duty military transport plane was seized by a court in Canada; just over a year later another Ruslan was seized in Belgium: both in compliance with a decision by a Swedish arbitration court against Ukraine's State Property fund. The Antonov design bureau gets little state funding, but the leasing of Ruslans (An-124) had brought in well over half of its income.
And if all this weren't enough, in December 2002 an aircraft carrying many of Ukraine's top aviation designers and engineers crashed in Iran, killing all 45 on board. The passengers, including some Russian specialists and officials, were headed for the official inauguration of Iran's version of another Antonov plane, the An-140 commuter airliner, which is licensed by the design bureau.
International intrigue?
Several Ukrainian media have hinted that their country is being targeted by foreign powers intent on monopolizing the international aeronautics industry, which is ultimately linked to defense and security issues. The U.S. and Israel in particular accuse Iran of sponsoring transnational terrorism and therefore oppose any deals that would provide it with military technology. Not only can the An-140 be converted for military use, but the Iranians were and still are building the planes themselves, with support from Ukrainian specialists.
The seizure of the Ruslans in Canada and Belgium indeed has an Israeli connection. His name is Mark Rich, a naturalized American citizen of Jewish ethnicity who fled the United States in the 1980s after being indicted by a Federal Grand Jury for $48 million in tax evasion and allegedly buying oil from Ayatollah Khomeini's Iran while U.S. hostages were still being held there. Despite subsequent public outcries, during his last day in office, President Bill Clinton pardoned Rich, whose wife had donated more than a million dollars to the Democratic Party. By this time, Rich was already living in Switzerland, from where he had become involved in a joint venture in Ukraine's state owned Lisichansk oil refinery (Luhansk) through a company called TMR Energy Ltd. (registered in Cyprus). After privatization of the refinery by Russia's TNK oil company, TMR cried foul and won a $42-million claim against Ukraine's State Property Fund (responsible for privatization) with the Arbitration Institute of the Stockholm Chamber of Commerce in May 2002.
In June 2003, Antonov's first Ruslan was seized in Goose Bay Newfoundland in compliance with the Swedish court's decision. At the time, the plane was under lease to the Italian military as part of a memorandum on airlift services signed with NATO earlier that same month. In August 2004, the second Ruslan was seized in Belgium. The Canadians released the first plane in January this year, but the one in Belgium is still under arrest. In the meantime, Antonov has lost hundreds of millions of dollars in forfeited revenues, not to mention legal fees, according to Roman Marchenko, a senior partner at Ilyashev & Partners, which has represented the Antonov design bureau since 1998.
Rich has apparently earned no money from the seizures, although, according to Antonov press service chief Andrii Sovenko, Rich's representatives regularly attended court hearings in Canada. Rich has instigated similar international litigation against Russia and Azerbaijan, said Marchenko, who questions the legitimacy of any of the claims.
But even more interesting is that the controversial international businessman, born as Marc David Reich, in Belgium 1934, is commonly known to have close ties with the Israeli special services. According to a 21 Feb 2001 report published by CNN.com, Avner Azulay, a former Mossad agent and the managing director of Rich's charitable foundation, rounded up support among influential Israelis and Americans to petition Clinton to pardon Rich. In addition to generously supporting several Israeli social and cultural institutions, Rich used "contacts developed in the course of his extensive business dealings" to help Jews leave the former Soviet Union and Iran, CNN reported. Could Rich now be helping to bankrupt Ukraine's most profitable aviation enterprise?
Regarding the crash, a Ukrainian-Iranian commission determined that the cause of the accident was pilot error. Reuben Johnson, a defense correspondent for Aviation International News, said the Iranian air traffic control system is probably to blame. "It's not up to standards," he explained, because funding comes from Iran's comparatively high over-flight fees, which leads many airlines to fly around the country, thus depriving its air-traffic control system of income. "Several crashes very similar to this one have taken place in Iran in the past," said Johnson.
Antonov's Sovenko also doubts that his company's dealings with the Islamic republic could provoke any international intrigue: "I must say that during cooperation with Iran we have tried to stick to international restrictions." And as far as the military capabilities of the An-140s are concerned, Sovenko said, "just about any aircraft can serve a military function." At any rate, the serial production of the planes continues. To date, four have been manufactured. However, just as Balabuyev was threatening that he would resign.
The managing director of Iran's national aeronautical corporation (HESA) Mr. Fallakh visited Antonov to discuss continuation of the 1995-licensing contract.
What about the arrests of the Ruslans? Well if you are trying to get money out of a country like Ukraine, what else do you seize?
Russian hegemony?
Ever since the Soviet Union fell apart, and especially since Vladimir Putin became president, Russia has been trying to reassert its influence over former Soviet republics. For cultural, historical and strategic reasons, Ukraine is of particular interest to Moscow. Ukraine is no less important to Russia economically. Gas and oil pipelines, steel mills, and, yes, aviation facilities are all attractive to Russian investors eager to consolidate regional resources to better compete with international giants. Moreover, as Putin continues to reel in independent-minded Russian oligarchs, Russian investment into strategic Ukrainian industries increasingly equates to Russian hegemony.
Like many other of its industries, Ukraine's aeronautics grew up well integrated with Russia's. So the fact that companies from the two countries still work together on joint projects shouldn't surprise anyone. Taking part in foreign projects is a global trend, but for Ukraine, Western cooperation means the introduction of Western components, and these are a continual expense, as the components eventually need to be replaced or upgraded, explains Johnson. Nevertheless, because aviation is high tech, high cost and closely related to defense, the interests of national producers and businessmen will always take precedence over those of even the most "brotherly" of Slavic neighbors.
For example, the An-70 military transport plane is joint project between Ukraine and Russia, but the Russians have virtually pulled out due to entrenched opposition from a consortium of Russian firms that support a modernized version of the Il-76. Russian air force officials have publicly criticized the An-70 as "hopeless." Johnson doesn't agree: The An-70 "is the one aircraft that Russia really needs... for things like peacekeeping missions and troop movements in the Far East." But the project's future remains clouded. "Russia doesn't say it wants to stop financing the An-70, but it gives very little," says Antonov's Sovenko, "with such support it will take over 80 years to carry out the project."
The An-70 was also seen as a strong contender to replace the U.S. C-130 Hercules in eight European countries, but Airbus's A400M won the day. According to Johnson, other Russian firms that were originally part of the An-70 project even hoped "to switch gears and get onboard the EADS/Airbus A400M program as subsystem suppliers."
It is, of course, natural that the Russians as well as the Europeans should try to protect their own industries. This takes long-term planning, political will and significant funding. Unlike in Russia, Ukraine's aviation industry has remained firmly in the hands of the cash-strapped state. But according to documentation presented by Antonov's press service, the design bureau only gets 18% of its income from the state budget. All the rest it earns, including 47% from the leasing of Ruslans through its Antonov Airlines. This figure used to be 63% before the two seizures in Canada and Belgium, said Sovenko.
Faced with such a financial predicament, companies like Antonov have long gotten used to finding their own funding. A statement released by employees of the design bureau in protest against the merger vividly expresses the prevailing feeling of fierce autonomy: "The (Ruslan) aircraft truly belong to us employees, because when we were left without financing, abandoned to the whims of fate, our management got permission to transport commercial air freight. The first to take this path, the firm learned from its mistakes, overcame hardship and mistrust and was able to achieve authority in the business world, creating a new market."
The same type of entrepreneurial independence marks Antonov's relations with Russian companies. However freedom to lease aircraft and joint projects to build them are two different things. In addition to the ill-fated An-70, Ukraine also works with Russia on the An-148 and Tu-334 commercial aircraft. Serhiy Araslanov, a spokesman for the Kharkiv production facility, which supports the merger of Ukraine's main aviation enterprises, sees projects like the Tu-334 as an example of what is wrong with the country's industry. According to him, Ukraine shouldn't be taking part in the development of this plane because it is a potential competitor to its own An-148. In other words, individual enterprises like Antonov are gaining at the expense of the nation's industry as a whole. There were even plans to produce a joint Antonov-Ilushin aircraft, Araslanov said. To him managers like Balabuyev are "Soviet" in their thinking.
Was Balabuyev compromising Ukraine's industry in his work with the Russians? Ekho Moskvy radio station reported that in August 2003, Balabuyev signed a contract with Russia's Volga Dnepr, which also leases Ruslans to NATO, to start producing more of the profitable heavy transport planes. Balabuyev and Volga Dnepr additionally agreed
a year later to lease the same number of the planes to NATO so that neither would run short, said Sovenko: Volga Dnepr has 10 Ruslans, and Antonov has seven; NATO needs six of the planes on call. Another interesting fact is that Ukraine used to hold significant shares in Volga Dnepr, but the State Property Fund sold them several years ago.
Lastly, in the ongoing battle between the design bureau and the Kharkiv production facility, at least one Russian company has come out for Balabuyev. Ukrainian media reported that the head of Russian Tupolev's design bureau had threatened to cancel the Tu-334 contract if Antonov was forced to merge with the Kharkiv plant.
It's at least safe to say that Balabuyev maintained cordial relations with Russia's aviation industry. Antonov's Sovenko still describes competition with Volga Dnepr as "civilized." On the other hand, he recalls, the European Aeronautics and Space Agency fiercely competed with both companies for the NATO contract. As for the Kharkiv plant, Araslanov says they limit themselves to production and maintenance of Antonov aircraft.
Multinational marketing?
The Tu-334 could not only present competition for the An-148, but for Boeing. A quick look at Ukraine's major carriers reveals a current preference for the 737. Apparently, the Ukrainian public is also keen on the U.S. aircraft builder, as evidenced by the prominent mention of the 737 in airline ads. But the Tu-334 's lower price and "national status" in both Russia and Ukraine could help it push out companies like Boeing.
Since the breakup of the Soviet Union, Boeing has made significant headway on to CIS markets.
To protect its ailing industry, Russia raised tariffs on the leasing of foreign planes. Boeing responded with largess. For example, the U.S. registered company opened a high-tech center in Russia that provided work for Russian specialists and companies. The move also helped ease Russian tariffs. It's this kind of aggressive marketing that has become the standard in world aviation. As Ukraine's licensing contract with Iran shows, aviation companies often have to give the buyer country part of the work or something equally attractive in order for a contract to be signed. "That's the only way that you get into markets now," Johnson underlines.
While Ukrainian aviation companies are offering concessions, Ukrainian officials may be soliciting them. Underpaid and lacking a strong sense of state loyalty, bureaucrats in Kyiv are all too vulnerable to taking bribes, including from foreign aviation companies trying to lease out their aircraft. Accusations of compromising state interests not only involve Russian companies. The Ukrainian Observer has obtained a document indicating that the key expert witness against Antonov in its battle with TMR Energy Ltd. in Canada may have had a connection with Boeing.
Professor Anatoly Stepanovich Dovgert, the deputy head of the international law department at the Institute of International Relations in Kyiv, had posted a biography on the web site of a law firm where he still works (Yurvneshservis) which read: "Represented interests of GPA group plc. (Ireland) and Boeing Aircraft Group (USA)." When contacted by the UO, Dovgert denied having worked for Boeing. Dovgert's testimony that Antonov was responsible for the debts of the State Property Fund was the main reason the Canadian court sanctioned the arrest of the Ruslan in June 2003.
Whether Boeing is worried about future competition from Antonov and Tupolev or not, currently it is working constructively with both. "I see a desire to cooperate not to kill," Antonov's Sovenko says about the American giant. "We must find our place ... we can't afford to be poor but proud." It's the Ukrainian authorities whom Sovenko blames for the costly arrests of the Ruslans: "Ukraine didn't even try to protect itself against the decision of Stockholm arbitration court."
Ukrainian infighting?
It would be difficult to prove that the state intentionally kept the Ruslan-seizure issue from being resolved. However, both the current and previous administrations in Kyiv have advocated
a merger of Ukraine's aviation enterprises, which put them at odds with Balabuyev. The only difference being that Yanukovych's government supposedly supported a looser relationship between Antonov, Kharkiv and Aviant.
By comparison, Yushchenko's team seems resolved to go all the way. In an interview earlier this year with the Ukrainian weekly Zerkalo Nedeli, newly appointed Minister of Industrial Policy Volodymyr Shandra was upbeat about the prospects of reviving the industry: "The Ministry of Industrial Policy is currently conducting talks with the company JP Morgan Europe and the Swiss Bank Credit Suisse First Boston. We offered them to invest in a joint leasing project ... the bank (sic) has already responded, stating that they are very interested and ready to invest in this project. At issue is billions of dollars." To make all this happen, according to Shandra, plant directors have to stop bickering and merge their facilities like everyone else in the world is doing. It's economy of scale and leasing that will win the day - the argument goes.
Kharkiv's Araslanov agrees wholeheartedly, noting that a merger would increase efficiency and streamline decisions on contracts, which are now being held up due to the mutual mudslinging. Antonov's reliance on the leasing of Ruslans "can't last for long because it's unnatural" and ultimately makes the company vulnerable to crises like the seizures in Canada and Belgium.
The people at Antonov, of course, hold another view. They suspect a plot that goes beyond Kharkiv plant director Naumenko. "Who is insisting on the merger and why is he being supported from above?" reads the Antonov employees' statement. "Naumenko is just the tip of the iceberg, not the engine that is driving the process," adds Sovenko.
According to this view, a high-ranking member of the Yushchenko administration is good pals with Naumenko. They both served in the Soviet-era Komsomol. Shortly before Balabuyev's resignation, this official visited the Kharkiv plant and then called for a merger on national television. After the merger, the argument goes, Antonov airlines or the Ruslans will be sold for a hefty profit, while the newly created company will drown in debts. The design bureau can't be privatized, but the leasing outfit - the real breadwinner - can. As for Naumenko, his opponents say that he will finally be able to write off the Kharkiv production facility's debts and quite possibly head the new conglomerate.
According to the Russian newspaper Rossiyskiye Vesti (November 2004), the Kharkiv plant lost around $1.8 million in the first half of 2004. "We don't have any debts in the direct sense," said Kharkiv's Araslanov. The company's account payable is large because it must take out loans to fulfil orders, so a lot of loans mean a lot of orders. Last year the company built three aircraft and this year it has contracts for 10 more, he explained. "This (debt issue) is really just a diversion."
Diversion or not, almost everyone agrees that the design bureau is healthy. According to Antonov's records, it's one of the top five taxpayers in Ukraine and earned $126 million in 2004. But despite their disparate financial situations, both companies have been equally active in attacking each other with lawsuits. Since last October, Antonov has filed eight lawsuits against Kharkiv for a total of UAH 173 million. Kharkiv has filed tens of millions in counter suits.
Antonov says Kharkiv owes it 80 million hryvnias and about as much in fines for royalties on designs. Kharkiv accuses Antonov of causing it losses by changing designs after production was started. Both have won court cases against each other. In the meantime, rank and file employees work side by side.
But now, with Balabuyev out of the picture, it would seem that Naumenko's plant has got the upper hand. The government is on his side, right? Not exactly, says Araslanov. In Ukraine, signing a decree and implementing it are two different things. "There are those who would like to carry out the decree formally ... like a Potemkin village," says the Kharkiv facility spokesman.
With all the other troubles it has, can Ukraine really afford to let this conflict drag on? Reuben Johnson is skeptical: "If present trends aren't reversed, Ukraine will end up like Italy, which used to make its own airplanes but now makes pieces of other countries'."
|
