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Multibillion Boeing-Aeroflot Deal Falls Victim to Politics in Russia

This week Aeroflot, Russia’s state-owned airline, saw its multibillion dollar deal to purchase 22 Boeing 787 Dreamliner aircraft blocked by the Russian government, which seems to now be pushing the Airbus A350 instead (some news sources say the deal is just on hold). It is widely assumed by analysts that the deal was blocked for political reasons.

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It is truly regrettable how the current Kremlin administration is somehow unable to see the difference between private corporations and governments. I don’t think that the international business and investment community needs another reminder of how business decisions in today’s Russia are too often dictated by political calculations rather than shareholder value. This further example of non-market decision-making is repellent to basic principles of the GATT. Coming the same week as the Democratic overtures on Jackson-Vanik it is something of an exisite irony. Score one more for the Russophobes. Click here to listen to the report from Marketplace:

STEPHEN BEARD: Aeroflot had placed a preliminary order for 22 of Boeing’s forthcoming 787 Dreamliner jets, but the Kremlin now wants the airline to buy the planned Airbus A350. This appears mainly to be about America. Relations between the U.S. and Russia have worsened. This week Putin accused the U.S. of “overstepping its borders in every way.” What’s more, says Nick Redman of the Economist Intelligence Unit, Putin is miffed that the U.S. has not done more to clear the way for Russia’s membership of the World Trade Organization. NICK REDMAN: The United States not yet having rewarded Russia, I don’t think Putin feels any need to reward the United States, in the form of Boeing, by giving this contract. Boeing’s loss will be Airbus’ gain. The European company could certainly use some help. Today the French and German leaders meet to try to restart Airbus’ stalled restructuring program. Ten thousand jobs across the company could go.

Many of you will recall that last September this same Aeroflot-Boeing deal almost fell through before billionaire Alexander Lebvedev (and 30% Aeroflot stakeholder) saved the deal by putting up $40 million of his own collateral. Here’s what he told the Washington Post:

“We are hurting ourselves much more as a country by damaging Aeroflot than anything we gain by snubbing the Americans, if this is the purpose,” said Lebedev, who is also a member of parliament for the ruling United Russia party. “This is a very, very attractive contract for Aeroflot, and if it goes away, then Aeroflot will have to find long-range aircraft from somewhere, maybe leasing companies, and it will cost not less than an extra $800 million.”

Additional information of interest: The chairman of Aeroflot is one Viktor Ivanov, a former KGB officer and close confidant of Vladimir Putin. The freezing of the Boeing deal also comes the same week as a presidential meeting with Foreign Minister Philippe Douste-Blazy and French Defence Minister Michele Alliot-Marie (as well as First Deputy Prime Minister Sergei Ivanov). During this meeting Putin alluded to acquiring a larger stake in EADS (the parent defense company of Airbus), and Douste-Blazy expressed enthusiasm about Russian companies buying Airbus. Here are some excerpts from the transcript:

PRESIDENT VLADIMIR PUTIN: France is one of the main shareholders in the European EADS Group. We have already said that the acquisition of a stake in EADS by one of our banks is not a step towards some kind of hostile takeover. This is absolutely not the case. We are ready for constructive cooperation and we are hopeful that our companies will be able to reach an agreement on just such cooperation. If agreements are not reached, then our financial institutions will simply work with these securities on the stock market, and nothing more than that. But I think that meaningful cooperation would be a lot more useful and interesting for manufacturers here in Russia and for our European partners. FRENCH FOREIGN MINISTER PHILIPPE DOUSTE-BLAZY: We are very pleased that you have raised this issue, Mr President, because we have two major aircraft manufacturing companies in our country, and we would be very happy if Russian companies were to buy our Airbus 350 planes. I am not saying this because I represent Toulouse. Furthermore, we are very interested in Russia’s Beriev aircraft, and we are requesting European certification for them at the moment. It would be good to create a whole fleet of these Russian aircraft in order to fight summer fires. … FRENCH DEFENCE MINISTER MICHELE ALLIOT-MARIE: As far as our cooperation in the aircraft manufacturing industry is concerned, we have been working a lot in this area together with Mr Sergei Ivanov. We have strengthened our cooperation over the last years. We are very interested in Russian heavy helicopters. SERGEI IVANOV: Our MI-26 helicopters. MICHELE ALLIOT-MARIE: The French army is very interested in these helicopters. We are also interested in reconnaissance aircraft, in unmanned aircraft. We are likewise interested in new-generation aircraft. I think that our designers could work together and this would give a real boost to our cooperation. … VLADIMIR PUTIN: I hope that we will reach agreements on a number of other promising areas for cooperation, including the energy sector, during Mr Chirac’s visit to Russia at the end of March. We already have some ideas and proposals to make.

Oh, and if you haven’t been paying attention, despite the recent agreement on cutbacks, the Germans have been getting pretty angry at the French in the management of EADS since the problems of the A380 and Daimler.