SUKHOI AVIATION HOLDING: TWO VIEWS OF ONE PROBLEM

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One of the problems that defense enterprises are currently solving is their integration with a view to establish large and more efficient industrial companies of the “holding” type. The entire international aviation industry is moving along this path. This is the point of the decree of President Vladimir Putin of October 26, 2001, “On establishment of the public stock company Aviation Holding Company Sukhoi (AKHK Sukhoi).” According to the document, the Komsomolsk-on-Amur Aviation Production Association (KnAAPO) and V. Chkalov Novosibirsk Aviation Production Association (NAPO) will be transformed into public stock companies, 100% of shares in which will be federal property, with contribution of 74.5% stakes in the aforementioned companies into the authorized capital of the state unitary enterprise Aviation Military Industrial Corporation (AVPK) Sukhoi and retention of 25.5% stakes in each company in federal property. After that, AVPK Sukhoi will be reorganized into the public stock company AKHK Sukhoi with retention of 100% of its shares in federal property. Fulfillment of the presidential decree is currently in progress.

On its basis, the government issued resolution No. 929 of December 29, 2001, “On measures for establishment of the public stock company AKHK Sukhoi” and resolution of the Property Relations Ministry No. 1608-r of June 21, 2001, “On preparation for privatization of the federal state unitary enterprises Yu. Gagarin Komsomolsk-on-Amur Aviation Production Association” outlining the deadlines and rules for privatization of the KnAAPO. Privatization of the KnAAPO needs to be finished by March 2003, and establishment of AKHK Sukhoi by June 2003.

Some measures were already taken. For example, inventory of property of the companies was done, and their property was transferred to the intermediary balance. Meanwhile, it turns out that the KnAAPO, NAPO and AVPK Sukhoi stick to different approaches to establishment of AKHK.

Of course, this problem appeared not recently and, according to Alexander Poveshchenko, advisor to the General Director of AVPK Sukhoi, the problem had a long history connected with beginning of establishment of AVPK Sukhoi in 1996. Integration of five airplane building companies was to be done then. Meanwhile, in 1996 AVPK Sukhoi included only the Sukhoi Design Bureau (50% plus one share), Taganrog Aviation Technological Corporation (TANTK, 38%) and Irkutsk Aviation Production Association (IAPO, 14.7%). The KnAAPO and NAPO refused to become subsidiaries of AVPK Sukhoi.

Since then, authorities of Russia made several decisions on privatization of these companies, but they remain not privatized still, with support of the local authorities. What is the essence of the problem? The management of the KnAAPO and administration of the Khabarovsk Territory say that establishment of a vertically integrated corporation on the basis of AVPK Sukhoi will turn the aircraft building companies into subsidiary enterprises, they will lose economic independence and, what is the most important, their tax payments to the local budget will decrease substantially. According to experts of the KnAAPO, AVPK Sukhoi cannot be the managing company, because this will breach the presidential decree on establishment of the aviation holding, which says that the AKHK is established “with a view to prevent reduction of tax payments to the budgets of all levels.”

For example, the KnAAPO calculated that reassignment of functions of the main contractor of the $2 billion Chinese order for production and supply to China of 38 Su-30MKK fighters from the KnAAPO to AVPK Sukhoi will make the regional budget fall short of 852,253,460 rubles. This is a very big figure. The KnAAPO is one of the most well-to-do defense enterprises of Russia and accounts for one-third of tax payments in the Khabarovsk Territory.

Until spring 2002, the KnAAPO was the main enterprise for production of airplanes for export. However, in March Prime Minister Kasyanov issued a resolution appointing AVPK Sukhoi as the main contractor of the Chinese contract. Konstantin Pulikovsky, Presidential Plenipotentiary in the Far Eastern Federal District, and Khabarovsk Governor Victor Ishaev spoke against this. The KnAAPO filed a suit against the government to the Supreme Arbitration Court to invalidate the resolution of the Prime Minister. On August 5, the Supreme Arbitration Court declined the suit. Meanwhile, the KnAAPO and authorities of the Khabarovsk Territory do not surrender. During the visit of President Putin to the Far East, Pulikovsky told him about this problem. This problem was also debated within discussion of the terms for establishment of AKHK Sukhoi during the visit of Security Council Chair, Vladimir Rushailo, to the Far East. On September 4, he met in Komsomolsk-on-Amur with the management of the KnAAPO, who offered him their vision of the terms of fulfillment of the Chinese contract and establishment of AVPK Sukhoi.

General Director of the KnAAPO, Victor Merkulov, says that it is necessary to change the presidential decree on establishment of AKHK Sukhoi and to establish the holding not on the basis of the managing company AVPK Sukhoi, but on the basis of the research and production divisions of the KnAAPO. According to Merkulov, this measure will create a better investment climate, will ensure clarity and transparency of defense order fulfillment and will minimize the duplication of production facilities and managing structures.

Merkulov explains, “I am not turning the world on its head. Viability of my point of view is confirmed by the presidential decree “On the public stock company Tactical Missile Armament Corporation.” This document implies giving up of the idea of reassignment of shares to managing companies of holdings and transition to establishment of corporations on the basis of the head enterprises in the production cooperation. This scheme eliminates unnecessary intermediaries, creates preconditions for effective work of the integrated structure, and solves the problem of obtaining of licenses for production of armament.” He also says that the KnAAPO is vitally important for the city and for the entire region, has sufficient financial funds and skillful personnel and can organize and maintain serial production of the airplane of the fifth generation. Meanwhile, according to him AVPK Sukhoi does not have production facilities, licenses for the relevant activities and quality certificate, and actually fulfills only the secondary, intermediary functions during fulfillment of contracts for production and development of airplanes.

In turn, Alexei Poveshchenko, advisor to the General Director of AVPK Sukhoi, considers apprehensions of the management of the KnAAPO unjustified. According to Poveshchenko, according to clauses 48 and 49 of the Civil Code, all subsidiaries included into the integrated structure of a holding, as well as the managing company, are independent legal entities. Belonging of stakes in a stock company to various individuals and entities does not influence either the tax status or the tax regime of the stock company. This means that, regardless of the quantity and status of shareholders and the size of their stakes, a subsidiary is registered in a tax agency and pays the taxes and charges to the federal, regional and local budgets at the place of the subsidiary’s location in accordance with the law.

Thus, according to Poveshchenko, consolidated operations of companies, efficient management and tax planning done by the managing company and controlled by the state will not reduce tax payments to the budget of the Khabarovsk Territory. He also says that changing of the organizational and legal status of the KnAAPO for 100% state-owned form of property will not change the principles of distribution of tax payments between the federal and the regional budgets.

Poveshchenko specially emphasized that in preventing fulfillment of resolutions of the President and the government on establishment of AVPK Sukhoi, Administration of the Khabarovsk Territory and the management of the KnAAPO ignore the defense interests of the state, do not support the policy of the President reflected in the Basics of Policy of Russia in Aviation Industry for the Period until 2010, aimed at retention of Russia’s status of a world aviation power. He adds that AVPK Sukhoi has been established on the basis of a presidential decree, and it is necessary to bear this in mind.

Thus, there are two views of the problem. It is up to officials of the Russian Aerospace Agency, Ministry of Industry, Science and Technology, and the government as a whole to decide what the aviation holding will be like. In early October, a consultation will be held under supervision of Director of the Russian Aerospace Agency, Yury Koptev, in the KnAAPO, which will be dedicated to the issues related to continuation of fulfillment of the decree of Vladimir Putin on privatization of the KnAAPO and establishment of the AKHK. After the consultation a meeting of the Security Council will be held under supervision of President Putin, which will be dedicated to further steps for reforming of the defense industry of the Far Eastern Federal District, including privatization of the KnAAPO. Time will show which decision is made. The main point is that we would like to hope that this decision will be objective and will meet the interests of the military industrial complex’s development and development of national industry as a whole.

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