But study warns of high risks to investors and threats from 'entrenched management'

Russian aerospace and defence companies must consolidate to compete globally, a report by Russian investment bank United Financial Group says.

Elena Sakhnova, the report's author, says the sector's aim of merging all aircraft producers into one holding company could be achieved by 2008. But, she warns, consolidation entails high risks for potential investors and is threatened by the "personal interests of entrenched management within some defence companies, reluctant to risk their salaries and benefits".

Defence is one of the few areas in which Russia can compete successfully on international markets, the report says. Russian weapons provide a level of performance comparable to that of Western competitors but cost approximately a third less.

Defence exports from Russia reached a record high of $5.1 billion in 2003, and based on current export orders and delivery schedules are likely to remain almost unchanged at $5 billion in 2004, the report predicts, with sales to India and China accounting for nearly 80% of the total.

The report describes Russia's aerospace and defence sector as "the most technically advanced segment of the engineering industry" following huge investment in Soviet years. Data from the Russian Centre for Analysis of Strategies suggests that 200-300 new Sukhoi Su-27 and Su-30 fighters could be exported in the next 10-15 years, bringing in $5-9 billion in revenue.

Irkut, which manufactures the fighters, has launched a programme to sell 40% of its shares to foreign investors through US depository receipts issued by the Bank of New York. The company made an initial public offering of 23% of its shares in March 2003. Irkut, planning a merger with RSK MiG, hopes to attract investors and raise the company's international profile to ensure a listing on a foreign stock exchange.

But the arrival in the market of Lockheed Martin's F-35 Joint Strike Fighter, now under development, could have a serious impact on the industry. "Once this happens...it is not currently clear whether Russia will have sufficient resources - or time - to develop fifth-generation fighters," says the report.

The Russian government plans to increase defence spending from $3.5 billion in 2003 to $6.3 billion in 2005, but investment still lags far behind 2003 US spending of $150 billion. "I doubt Russia will be able to develop a fifth-generation fighter by the time the USA does - it might be a huge problem for the industry," says Sakhnova.


Source: Flight International