Publication: Eurasia Daily Monitor Volume: 3 Issue: 179

Recently Vneshtorgbank, Moscow’s state owned foreign trade bank, spent about a billion dollars to buy 5.02% of the shares of the European Aeronautic Defense and Space Corporation (EADS). The revelation of this purchase is a clear sign, corroborated by press reports, that Moscow seeks a place on the corporation’s management team. It turns out that Russia has been talking to Germany, and possibly France, about acquiring shares and management responsibilities in EADS since late 2004 (Business Week Online, September 15, 2004). But it is not fully clear what Russia hopes to achieve, although a blocking position and a seat on the management board are clearly stated Russian objectives (Liberation Website [Paris], September 22; Vedomosti, September 18).

While Russia’s ultimate objectives may not be wholly clear, it is apparent that Russia seeks to force EADS and its parent governments to take its interests into account. EADS’s stock has been falling and, just as Russia announced that it had bought what it hopes is a blocking minority share in EADS, Moscow announced a major purchase of passenger jets from Boeing and from Airbus. Since EADS is the Airbus parent company, this was widely seen as an attempt to use the lure of a big Russian contract to rescue the falling stock price as leverage to gain a seat on the board. Once EADS’s management announced that Russia would not be given a seat on the board, the order for the Airbus purchases was suspended (Times [London], September 20). And Moscow apparently has also broadly hinted that if it were denied a seat on the board of EADS, it would go exclusively to Boeing (Nezavisimaya gazeta, September 22).

In other words, it appears Moscow is attempting to pressure EADS into giving it a seat on the board of directors. This whole affair has caused considerable apprehension in Europe, because Russia has also announced its intention to acquire up to 10% of EADS’s outstanding shares. Furthermore, it would not be Vneshtorgbank sitting on the EADS board if Russia were to achieve its objective, but the Russian state, which owns the bank. Thus Russia would gain its first entree into a major European aviation firm and secure influence over a major European defense producer. While Russian President Vladimir Putin has denied any aggressive intention (New York Times, September 24) it is clear that EADS and the French and German governments share a clear dislike of this possibility.

EADS’s board was quick to rebuff the Russian claims to a management position, stating correctly that the rules of the company’s corporate governance prohibit it from giving Russia a seat on the board and that it would not bend the rules to accommodate it or any other individual stockholder. Nevertheless, given the stakes for European governments and the interests involved, Russia’s attempt to force its way into the European aviation industry could only be resolved at the highest level and was part of the agenda of the tripartite summit of Russia, France, and Germany on September 23-24. Moreover, the fact that this development coincided with Russia’s efforts to abandon oil production sharing agreements with foreign firms in Sakhalin, casts a lengthy shadow over Russian business practices and aspirations in general (Moscow Times, September 22).

EADS, for its part, worries that Russian attempts to force its way onto the board would compromise its efforts to compete for American defense contracts, which would help its efforts to recover from the slump in stock prices (Independent [London], September 15). Naturally Russian observers are also already claiming that EADS’s effort to deny Moscow a blocking position on its board is purely political, a statement that vastly overstates the situation and shows how little Russia understands the rules of Western corporate governance (Moscow Times, September 15).

Apart from the motive of influencing Western corporations and major aviation and defense contractors, Russia evidently hopes to leverage its purchase of shares to help jump-start its own ailing aviation industry. This industry has been converted into a giant state-run and state-owned corporation, United Aircraft (OAK in Russian) in the misguided belief that state management would prove to be more profitable than private ownership and management.

It has long been asserted in Moscow that the only way that this industry can be saved is through a major infusion of Western technology. While this is a long-standing belief in Russian circles, it should be pointed out that it also is one that has never succeeded, because Russia remains unwilling to accept the fact that introducing Western technology into companies that are not properly managed can only result in continued sub-optimal performance. Abundant experience from the Soviet era shows this fact to be true across the board. But apparently Russian elites have to relearn this lesson again. If the Western reports cited in the Russian press are true, Putin also intends to try and lure EADS to participate in this new United Aircraft firm, and Vneshtorgbank will transfer its shares to that entity, forcing EADS to work with it ( September 20,, September 20).

This deal shows that Russia is attempting to use its newfound energy wealth to leverage the Russian state as a major player in European air and space companies and defense industries and is willing to assert its power even though it clearly has little understanding of modern corporate governance.