WILL PRIVATIZATION FLY? Russia’s aerospace industry could be the first off the ground

The Salon de l’Aeronautique et de l’Espace is the ultimate air show. For 10 days in June every other year, the skies thunder over Le Bourget airport near Paris as the world’s newest, most dazzling flying machines demonstrate their abilities.
Among the participants last summer was Apollon S. Systsov, minister of aviation industry of what was the Soviet Union.
Before last year, Systsov was unique among attendees: His priority was not to sell planes.

Because the government owned and ran the ministry’s factories (in fact, it was the world’s largest aircraft manufacturer), he had been more interested in showing off the Soviet Union’s technical and industrial triumphs than in booking orders.
Last June was different. In the months before the show, he had been laying the groundwork for an audacious move. Recognizing that the collapse of the Soviet system was inevitable, he began planning to turn his ministry into a private, profit-seeking company.

By the time he arrived at British Aerospace’s chalet near the airport to have lunch with Robert McKinley, the company’s managing director of the commercial-aircraft division, and several other British Aerospace executives, Systsov was a Soviet minister with a capitalistic mission.

The Britons were impressed by his ideas and his understanding of their products.
Systsov is one of many former Soviet ministers engaged in a frenetic, largely behind-the-scenes effort to transform the thousands of state-owned factories they controlled into private companies.

For these former ministers, privatization is a Herculean task. And time is not on their side.

The economy in Russia, the republic in which the ministries had most of their operations, continues to worsen; economic activity could shrink by a catastrophic 40 percent this year. Inflation could run at 700 percent, partly a result of the huge Russian government deficit (now 25 percent of the gross national product), which shows no sign of shrinking.

Rather than risk the anger of the armed forces and a military coup by laying off large numbers of the military, the Russians are opting to privatize state-owned enterprises.

Meanwhile, the government continues to print more rubles, which continue their free fall, deepening the economic gloom.

That the former ministers must privatize efficiently and quickly is a foregone conclusion, but how they are to do this is the big question. The underpinnings of a market economy are, for the most part, non-existent. There are vibrant commodities exchanges, and hundreds of private banks have been formed over the past year or so, but accounting, management, distribution and regulatory systems are in their fledgling stages.

Few Russian factories produce competitively priced products, and creating the lean enterprises that can compete in a market economy may require layoffs so numerous as to be politically unacceptable.

Furthermore, because property law is rudimentary, no one has a clear idea of who owns what. So chaotic is the business environment that it is likened by many foreign entrepreneurs to the American Wild West.

Most of the men who ran the monolithic Soviet ministries are in their 50s and 60s, and they must go from the certainties of a command economy (the central government placed the orders; there was no competition or quibbling over prices) to the vagaries of a free market. These would-be capitalists must develop new products and new skills – competing, hustling for clients, raising vast amounts of capital.

Even with a full-fledged free-market infrastructure in place, privatization is not an easy matter. And although Russia shares many of the same problems as Eastern Europe, its approach to privatization is fundamentally different.

For one, there has been no attempt to prevent senior Soviet officials from taking a leading role in privatizing state-run companies. Eastern European governments, on the other hand, have taken steps to restrict former Communist bosses from dominating the private sector.

Also, the privatization of Russia’s largest enterprises is taking place mostly outside public and government purview.

Of the 60 to 70 full ministers in the Soviet Union, about 25 percent of them are involved in creating private companies out of the monopolies they used to control, says Boris Rumer, a fellow at the Russian Research Center at Harvard University.
The Ministry of Aviation Industry was one of the biggest in the former military-industrial complex. In addition to producing all of the country’s military aircraft, it was the only source of planes for Aeroflot and for most Soviet allies.

Its headquarters is in an austere building in central Moscow. Systsov’s suite of offices is behind the main building in a much smaller, unmarked structure.

Systsov has the manner of the chairman of a major industrial corporation. Sitting in a large conference room adjoining a private office that is almost as large, the stocky executive speaks with the disarming candor of someone who is comfortable with responsibility and power. Born 63 years ago in a town on the Volga River, Systsov, whose father was a Russian-language teacher, began his ascent to the top of the aviation industry when he went to work as a laborer in an aircraft-manufacturing plant at age 18.

For the next five years, he split his time between the plant floor and a local technical school, where he studied mechanical engineering at night. Slowly moving up through the ranks, he became deputy minister in 1981 and minister four years later.
Systsov says the shortcomings of the Soviet Union’s command economy were apparent to him long before he first thought about privatizing the ministry three years ago. He began studying capitalism soon after he became deputy minister. After reading what Soviet economists wrote about capitalism, he found a copy of Paul Samuelson’s “Economics,” which he describes as “a great book.”

“We had the notion that capital was something ideological,” Systsov says. “We did not understand that capitalism is the normal economic system. Now we recognize that our confusion was quite a serious mistake.”

Former President Mikhail Gorbachev’s halfhearted steps toward a market economy were also a mistake, he says. Despite having lived his entire life in a communist society, Systsov says he is comfortable with the goal of maximizing profits: “Profit will be our No. 1 goal. It has to be.”

He doesn’t seem overly concerned about his ministerial status. Asked if he is still the minister, he throws up his hands and exclaims, “Nyet,” adding, through his interpreter, “I do not have a position in the government, because there is no government.”

But when he is asked whether he works in the minister’s office, carries the minister’s business card and makes decisions for the ministry, his response in each case is the Russian affirmative, “Da.”

Although the Soviet Union is no more, replaced by an 11-member Commonwealth of Independent States, Systsov and many former Soviet ministers are likely to maintain their power for two practical reasons. First, they are probably the only people with the background to manage the giant enterprises that dominated the Soviet economy for decades. Second, there is a desire among the Russian leadership to keep the ministers on the side of reform.

As minister of aviation industry, Systsov earns one of the Russian government’s highest salaries, 1,100 rubles a month (earlier this month, the black-market rate was about 300 rubles to the dollar).

Of course, Systsov, like other senior government officials, also receives such perquisites as subsidized housing and a limousine.
As an executive of what he hopes will be a private aircraft-manufacturing company, his salary will be 3,000 rubles plus bonuses, and he stands to gain much more once privatization is completed.

On a recent afternoon, a senior engineer dropped by Systsov’s office to discuss problems in assembling the Ilyushin 96, a new 350-passenger jet being built that is similar to those produced by Airbus Industrie, the European aircraft-manufacturing consortium.

In the past several months, Systsov has gone to see dozens of Western aircraft manufacturers, working to create joint ventures, secure subcontracting business and attract investment. In early December, he went to Wall Street to meet with financiers and potential investors.

His ministry has produced an amazing variety of planes, including military aircraft, passenger and freight planes, helicopters and crop dusters. It makes the world’s largest commercially available cargo planes and helicopters.

The Ruslan, a massive 226-foot-long cargo plane, has a 240-foot wingspan. Named for the mythological figure immortalized in Pushkin’s poem “Ruslan and Ludmila,” the Ruslan is similar to but larger than the Galaxy military planes made by Lockheed Corp. and not available for commercial use.

Citing the Ruslan’s ability to carry as much as 150 metric tons of cargo, Systsov is hopeful this cargo plane and a new version called the Dream will find markets in the West.

Michael R.P. Hayles, managing director of Heavylift Cargo Airlines, one of two British companies that now operate a total of five Ruslans, says the planes are “excellent.” Kuwait chartered one of Heavylift’s Ruslans to transport oil-firefighting equipment in the aftermath of the Persian Gulf War.

Air Foyle, the other British company, has used Ruslans to transport sailing yachts competing for the America’s Cup.

Systsov acknowledges that the current political and economic upheaval has delayed his privatization plans. He had long discussions about his plans with Gorbachev’s government before the August coup, he says.

As a result of those discussions, two of the ministry’s factories are now partly owned by workers. He recently submitted a written privatization plan to the Russian republic’s Ministry of Economics; although the republic has yet to take any action (Systsov complains that the republic’s officials are constantly replaced), he says privatization is inevitable.

None of the industries in the new commonwealth is well-positioned to compete in international markets, but aircraft manufacturing is one of the most promising. The Russians can produce planes at relatively low cost. With inexpensive labor and an abundance of raw materials, Russian planes should cost less than half as much as similar planes built in the West.

The Soviet Union consistently dedicated its biggest investments, its best technology and its most talented people to military production. Although military aircraft were the primary beneficiaries, there were spillover benefits for passenger planes. Even so, civilian planes have low-quality avionics and are extremely inefficient. They require far more maintenance than Western-made planes, and their engines burn fuel twice as fast.

The Ilyushin 86s that now fly between New York and Moscow must make two refueling stops, in Ireland and Newfoundland.

Systsov is confident these shortcomings will be overcome, partly through the use of Western equipment and technology. He plans to replace the Ilyushin 86’s Russian-made engines with ones built by General Electric and Snecma S.A. of France.
The Ilyushin 96, the new passenger plane, will use engines produced by Pratt &Whitney and navigational equipment from Rockwell International. It is expected to make its debut at the 1993 Paris Air Show.

Pratt &Whitney expects that 200 to 300 of the IL-96s will be sold in the Commonwealth of Independent States before they are marketed to the rest of the world.

Systsov will serve as the privatized aviation company’s sole vice president, responsible for joint ventures and the raising of capital from the West.

The enterprise, still unnamed, will be structured as a holding company. This umbrella group will coordinate production among plants making the various aircraft components, create joint ventures with the West, obtain financing and develop international markets. Each of the factories will be owned separately – by the employees, the holding company and the Russian government.

Under the Russian republic’s privatization laws, workers will be able to purchase shares of stock in their factory at a 30 percent discount.

In addition, Russian citizens are to be given money to purchase shares in companies other than their employers’. Although the amount of money has not been set, Russian President Boris Yeltsin says the government should ultimately own not more than 5 percent of many Russian companies.

Russia, like Eastern Europe, plans to create a stable middle class by making it possible for citizens to purchase shares in the companies of their choice. This may prevent a concentration of capital, and, as a result, privatized companies may not be able to make decisions that are unpopular with workers, such as laying them off. This could be a serious handicap in a competitive marketplace.

Systsov acknowledges the problem, but he says capital will eventually consolidate as individuals sell off their shares to investors.

Assuming it emerges from the current chaos, Russia’s economy is likely to look more like Japan’s centralized system – with giant holding companies controlling scores of interrelated companies – than the U.S. system.

It may also resemble Germany’s pre-World War II economy, which, like Russia’s, was dominated by heavy industry. The German economy was controlled by large oligopolistic firms that supplied each other but did not compete.

Giant monopolies may appeal to Russians who, while they were dissatisfied with many aspects of the command economy, are deeply pained by the disintegration of the Soviet Union.

Specialists in Russian law say the ministers are receiving informal approvals for their plans and are acting with the certainty that control will remain in their hands after privatization.

Says one, “The ministers aren’t worrying about the niceties.”