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Russia & CIS Observer

№ 1 (24) february 2009

from the publishers of

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30 • AEROSPACE INDUST RY

• AERO INDIA 2009

Russia/CIS Observer Quarterly is produced by: Publisher Evgeny Semenov Editior-in-Chief Maxim Pyadushkin Art Director Andrey Khorkov Director, Marketing & Advertising Konstantin Rogov Commercial Director Sergey Belyaev Translated By: Andrey Bystrov All rights reserved.

No part of this publication may be reproduced in whole or in part without the written permission of A.B.E. Media.

Disappointing figures ..........................2

Another Russian debut in India ..........21

An industry for sale ..............................3 • AIR TRANSPORT Opportunities born from crisis ..............4 Critical situation MS-21 program looks for suppliers ......6 for Russia’s airlines ............................23 New Russian jetliner The big five ........................................27 for low-cost operators ..........................8 • BUSINESS AVIATION • DEFENSE Russia’s business aviation: Never the Not a bad year....................................10 same again?........................................28

© № 1 (24), February 2009 Tel./Fax: +7 (495) 933 0297 Correspondence: P.O. Box 127, Moscow, 119048, Russia To subscribe

Flexing of muscles..............................12

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Unmanned export ..............................16

Competing for clients ........................29 Flying armor ......................................14

Selling to live......................................18

• SPACE BUSINESS Going strong ......................................30

Visit our website at www.cis.ato.ru RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

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Disappointing figures Maxim Pyadushkin espite efforts undertaken by the Russian government to support the country’s national aircraft industry, domestic manufacturers have not been able to increase their production output. According to preliminary statistics released by Russia’s Ministry of Industry and Trade, the Russian industry rolled out only 10 commercial airliners in 2008. This result shows the disappointing conditions of Russia’s fixed-wing aircraft manufacturing sector – which has been producing a dozen aircraft per year since 1995.

Most of the newly-produced aircraft were narrowbody Tupolev Tu-204s in various versions, which were assembled at the Ulyanovsk-based Aviastar-SP facility. Two Tu-204-300 airliners were

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livery of six Tu-204 airliners, and it is already operating several second-hand aircraft of this type.

In November, the Kazan-based KAPO facility handed over one Tu-214 jetliner to Transaero airlines. This was the second aircraft out of 10 ordered by the air carrier through the FLC leasing company. The first Tu-214 was delivered to Transaero in April 2007. The airline had also hoped to receive the second one in 2007, but the deliveries slipped behind schedule.

Another delay happened with the delivery of two Il-96-400 cargo aircraft from the Voronezh VASO plant. These aircraft also were assembled in 2008, but are still waiting for a customer. Initially, they were assigned to the AtlantSoyuz carrier, which then canceled its cargo transport activities after deciding to focus on passenger services. Later,

A.B.E. Media

The Russian industry can produce aircraft, but often fails to find customers for them, as demonstrated by these two Il-96-400 freighters – they are still waiting for customers

handed over to the Vladivostok Avia carrier. Another four Tu-204-100s were assembled for Russia’s new charter airline, Red Wings. But as a representative of the Ilyushin Finance leasing company explained to the Russia & CIS Observer, this airline managed to receive only three aircraft in 2008, while the fourth Tu-204 will be delivered this year. In 2007, Red Wings signed a contract with Ilyushin Finance for the de2

Ilyushin Finance offered these aircraft to Aeroflot Cargo, but this deal is still under negotiation.

The ministry’s statistics also include a Be-200 amphibian firefighter among Russian commercial aircraft assembled last year. It was delivered by Irkut Corporation to the Azerbaijani Ministry of Emergency Relief. Also in 2008, Aviastar-SP finally handed over the first Tu204-120CE cargo aircraft to Air China

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

Cargo. This version, powered by RollsRoyce engines instead of the standard Russian-supplied PS-90s, was assembled in 2006 as the first out of five aircraft ordered by the Chinese carrier.

In view of such poor results, the Russian industry continues to lose ground in lobbying for protective measures against the import of foreign-built commercial airliners. The government already realizes its industry is unable to repeat the Soviet-era production rates and product range to fully satisfy the demand from national carriers. At the very end of December, the government decided to zero its import taxes on commercial aircraft with seating capacities of up to 50 passengers and with empty weights of up to 15 tons. This measure should come into force in mid-March this year.

Russian carriers will have a chance to renew their fleets of regional turboprops, as the new rules make the import of such popular aircraft as the ATR42, Embraer 120 and Bombardier Q200/Q300 much less expensive. Several ATR42s are already operated by the UTair airline, while Atlant-Soyuz and Region-Avia have Embraer 120s in their fleets.

This has been the second tax reduction made by the Russian government.

In December 2007, it zeroed import taxes on large widebody airliners with over 300 seats. Further measures are now being discussed. United Aircraft Corporation, the holding that controls Russian fixed-wing aircraft manufacturers, has recently suggested allowing temporary imports of commercial airliners through its leasing subsidiaries if an airline signs a firm agreement to lease the same number of domesticallybuilt aircraft of the same class. The reality, however, is that Russia’s major carries already have large direct orders for foreign-built airliners despite the protective customs taxes.

An industry for sale

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Ukraine sees privatization as key to rescuing its aircraft manufacturers

he systemic crisis in which the Ukrainian aircraft industry finds itself can only worsen with the global economic downturn. Three of the four leading national aerospace enterprises — the Kiev-based Aviant plant, Kharkov State Aircraft Manufacturing Company (KSAMC) and Kiev Aircraft Repair Plant No 410 — remain in difficult financial positions for a third straight year.

Throughout 2006 and 2007, not a single airframe was delivered by Ukrainian aircraft manufacturers to customers.

The situation only slightly improved last year, when Aviant supplied four newlybuilt Antonov An-32P fire-fighting aircraft for the Ukrainian Ministry of Emergency Relief. Also in 2008, KSAMC started factory tests on an An74TK-300VIP airplane destined for Libya. Despite these developments, uncertainty hangs over the prospects of other foreign orders (KSAMC is under contract to build three An-74T-200A aircraft for Egypt and two more An-74s for Libya; Aviant has seven An-148s on order from Kazakhstan’s Scat airline).

This is because the Ukrainian manufacturers have insufficient operating capital to honor their existing contracts.

The government, for its part, has so far failed to provide financial support for the industry. Instead of providing state subsidies – which are indispensable to the technically-intensive aircraft industry in times of financial trouble – the decision was made to put the manufacturers up for sale in a bid to attract foreign investors.

The privatization roadmap for a critical portion of Ukraine’s engineering sector is outlined in the development strategy for its national aircraft industry through 2020, approved by the Cabinet

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The Ukrainian KSAMC facility has contracts to supply An-74 airliners to some Arab countries, but the economic crisis may leave the manufacturer without sufficient operating capital to fulfill the orders

KSAMC

Natalia Pechorina

in December 2008. According to this document, state-owned aircraft manufacturers should be transformed into joint-stock companies over the next two years. By 2015, the companies’ shares are to be sold to private investors — on understanding that the government would “retain influence" over the new owners' strategic decisions.

The strategy notes that, in order to stabilize the industry’s financial and economic position in 2009-2010, “it will be necessary to make use of the growing global demand for passenger and cargo aircraft.” Therefore top priority should be attached to the fulfillment of existing contracts for various versions of the An-74, An-148, An140-100 and An-32 aircraft.

The strategy will be implemented in three phases: 2008-2010, 2011-2015 and 2015-2020. The development plans for Phase One call for the priority production of An-148, An-140 and An-74 commercial aircraft in several variants.

Also mentioned is the Aviaimpex KT112 light helicopter, which is notably absent from other planning documents – such as the state program to develop the aircraft industry through 2010.

Phase Two (covering the 2011-2015 timeframe) concentrates on series pro-

duction of the An-70 military transport and An-38 and An-124 civil aircraft.

The document does not specify how production is supposed to be organized for the An-38 turboprop and the An124 heavy freighter, both of which used to be built in Russia. The Novosibirskbased NAPO plant has since stopped building An-38s due to a lack of orders.

There are plans to resume An-124 construction at the Aviastar-SP factory in Ulyanovsk, but this remains a distant possibility. Back in 2007, Russian cargo operator Volga-Dnepr — the world’s largest An-124 operator — teamed up with the Motor Sich engine specialist of Ukraine (which previously supplied powerplants for this aircraft type) to set up the Cargo Aircraft Managing Company. Their joint venture was tasked with overseeing the resumption of An124 production. However, there have been no further reports on its activities.

Phase Three of the strategy extends through 2020 and envisages the development and production of new aircraft types. Unfortunately, this section contains nothing more than unsupported declarations. And, given that the strategy takes no account of the ongoing financial and economic crisis, these declarations may well prove to be Utopian.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

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Opportunities born from crisis Andrey Bystrov he Russian government continues its efforts to bring the country’s aerospace and defense industry under control, and the economic crisis that hit the sector at the end of 2008 may help ease this task.

In December 2008, the state-owned Oboronprom Corporation finally had its long-awaited chance to receive a controlling stake in NPO Saturn – one of the country’s largest aircraft engine manufacturers. This development signaled an end to a protracted stand-off between Oboronprom (which was empowered to consolidate the national powerplant industry) and the private shareholders of NPO Saturn, along with its friendly UMPO engine production facility. The takeover became possible because of the financial problems both companies are now facing.

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Saturn’s stand

Since 2007, Oboronprom has been on a mission from the Russian government to consolidate dozens of separate companies involved in the development and production of powerplants, including aeroengines (see Russia & CIS Observer No 21, pp 6-7). This work is now nearing completion: Oboronprom has already come into possession of controlling stakes in most of the enterprises scheduled to form two of the planned three powerplant holding companies.

Until recently, however, NPO Saturn and UMPO – the two companies destined by the Kremlin to merge into a separate holding company - were strongly opposing Oboronprom’s efforts to consolidate them. Rather, these businesses were inclined to pursue their own integration strategy. Indeed, they were independent enough to do so, with the state holding just 37% in Saturn and 28% in UMPO - far less than controlling stakes.

This situation was vexing for the government, because privately-owned NPO Saturn and UMPO are the country’s largest engine manufacturers, with combined revenues of more than $1.2 billion in 2007.

Without them on board, there would be little point in merging the other engine makers into a single structure.

Marina Lystseva

Delays in SaM146 deliveries for Superjet 100 prototypes became the reasons for the state to accuse NPO Saturn’s leaders of “ineffective management”

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NPO Saturn is especially crucial to the future of Russia’s powerplant construction. Apart from working on important military programs such as the development of an engine for Russia’s future fifth-generation fighter, it has partnered with Snecma Moteurs of France to develop the SaM146 engine for the Sukhoi Superjet 100 regional airliner – on which the hopes of Russia’s domestic aircraft industry are riding.

Since 2007, Oboronprom made repeated passes at NPO Saturn, trying to persuade the company’s General Director Yury Lastochkin – the de-facto owner of the company’s private stock – to sell it the 13 percent-plus-oneshare it was short of for a controlling stake. But Lastochkin stood his ground.

Nevertheless, despite the announced growth in revenues by more than 110% in 2007, NPO Saturn’s financial standing last year was exacerbated by a huge loan portfolio which – according to different sources – stood at between 10 and 16 billion rubles as of October 1. The company’s SaM146 flagship program started to skid – or at least was being presented as skidding in the media. In mid-2008, Sukhoi Civil Aircraft (a designer of the Superjet 100) blamed NPO Saturn for delays in shipping engines for the first prototypes, saying that this could force a slip in Superjet deliveries to launch customer Aeroflot.

The government has put its backing behind Sukhoi: in late October, Russia’s Finance Minister Alexey Kudrin slammed NPO Saturn for delays in SaM146 deliveries, accusing the company’s leaders of “ineffective management.” The company finally shipped the second engine for the No. 2 Superjet flying prototype at the end of November, but it did little to put the company back into the Kremlin’s good graces.

In the meantime, the economic crisis had struck hard. Saturn defaulted on its bonds in September. Its investment

A E RO S PAC E I N D U S T RY

program ground to a halt. The company started delaying wages and eventually, in November 2008, announced the layoff of 4,000 personnel.

In December, Prime Minister Vladimir Putin came to NPO Saturn’s home city of Rybinsk to break the stalemate. He scolded NPO Saturn management for an “unreasonably adventurous financial policy,” which resulted in the company’s failure to “timely repay its loan debts in the situation of unstable financial markets.”

Putin also referred to possible mass layoffs at Saturn as inadmissible. “I understand that optimizing [Saturn’s] production processes may be inevitable,” he said, “but there should be no mass personnel cuts at this enterprise.”

The prime minister promised NPO Saturn 10 billion rubles (about $280 million) in loans from state-owned Vneshtorgbank, and said the government would provide further assistance to the enterprise by encouraging the Defense Ministry, transport operators, the United Aircraft Company and the energy sector to place new orders with the manufacturer.

Deputy Minister of Industry and Trade Denis Manturov, who attended the Rybinsk meeting, said that NPO Saturn could expect to receive additional budget funding through the federal program to support Russia’s engine construction industry. The program budget is set at 367 billion rubles for 2009, and will amount to 289 billion annually in 2010 and 2011, Manturov said.

In exchange for these offerings, according to the Moscow delegation, the state wanted full control over the Rybinsk company. Oboronprom would buy a 49% share in Saturn, bringing its stake in the company to 86%. Additionally, Oboronprom would buy 58% in UMPO, which would give it control of over 80% of that company’s stock.

“It is obvious that, without broadening the scale of state participation in [Saturn’s] capital, it will be impossible to solve its current problems,” Putin explained.

NPO Saturn

A top-ranking mediator

Prime Minister Vladimir Putin (right) promised NPO Saturn loans from state-owned banks and said the government would encourage the Defense Ministry, transport operators and the energy sector to place new orders with the manufacturer

Manturov confirmed that documents already had been prepared for the purchase of the Saturn and UMPO shares.

He added that his ministry and the Finance Ministry were looking into the possibility of issuing an additional amount of Saturn shares in 2009, worth 3 billion rubles, in order to boost the company’s registered capital.

Honors of war

Immediately after this meeting, Vneshtorgbank issued 3.5 billion rubles to NPO Saturn in the first installment of an 11.5-billion loan. Another installment, worth 7.5 billion rubles, was received at the end of December.

A source close to the talks told the Russia & CIS Observer that Oboronprom could complete the deal to purchase its stakes in NPO Saturn and UMPO “sometime in 2009.” In early January, the Russian media reported that two companies which are said to have links to Oboronprom had bought 49% of NPO Saturn shares between them.

The exact sum of the deal was not reported. While in Rybinsk, Putin said the shares would be purchased from the private investors “at market prices.” A source close to the talks explained that Oboronprom would pay 800 million rubles each to Lastochkin and UMPO General Director Aleksandr Artyukhov.

Whatever the final sum might be, at the end of the day Lastochkin appears to have lost out on this transaction. Instead of the

13 percent-plus-one-share Oboronprom was originally asking him to sell, he eventually was made to give it all up. His fate as the head of Saturn is unclear. Some analysts believe that he might be eventually removed from his post. But an informed industry source says that “this issue is off the agenda for the moment.”

All in all, it would appear that NPO Saturn’s strategy of non-alignment lasted only as long as the company managed to maintain a positive cash flow. This has moved industry analysts and journalists to interpret the situation at NPO Saturn as a signal of the Kremlin’s drive to use crisis-induced hardships at the most successful enterprises for their aggressive nationalization.

But Putin refused these allegations publicly soon after returning from Rybinsk. “The state is not planning to avail itself of this possibility and move on to full nationalization” of either NPO Saturn or any other private companies, he argued. “The state is prepared, wherever business itself wants it, to buy into the capital of real-sector enterprises and banking institutions; to use this as one of the methods of recovering such enterprises from crisis; and to subsequently return them to private owners.”

Time will tell whether this is going to be the case with NPO Saturn. In the meantime, analysts believe, the government may want to work hard in order to overcome its long-standing image as an inefficient manager.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

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MS-21 program looks for suppliers Maxim Pyadushkin hile Airbus and Boeing are not expected to develop new narrowbody airliners as replacements for their successful Boeing 737 and A320 families until 2020, Russian aircraft manufacturers want to take their own chance in this market — and expect the country’s new MS-21 shortto-medium-range aircraft to make its maiden flight in 2014.

Last August, the MS-21 program successfully passed its conceptual design approval phase and won an endorsement of the manufacturing plans.

Now the team of MS-21 designers, headed by Irkut Corporation, is preparing to select suppliers of major subsystems and components. The next development milestone – preliminary design authorization – is expected to take place in 2009.

The MS-21 is designed with a passenger capacity of 150-200 seats and an operating range of up to 5,000 km. This positions it in a highly lucrative air transport segment, where replacements are required for large numbers of ageing

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Soviet-era jetliners in the fleets of Russian air carriers, beginning with the Tupolev Tu-154.

According to the forecast of Russia’s GosNIIGA research institute, airliners with 140-210 seats will comprise 47 to 59% of Russian airlines’ demand for commercial aircraft with a capacity over 110 passengers through 2025. This forecast is being confirmed by industry statistics, which show that national carriers now prefer to purchase airliners with a range of 3,000-6,000 km and a capacity of 140-220 seats. From 2004 to 2007, Russian carriers imported about 200 foreign aircraft, while more than half of them was medium-range narrowbody jetliners of the A320 and Boeing 737 families. The domestic offer in this segment is quite limited at the moment, as the Russian industry produces only Tupolev Tu-204 airliners at a rate of few aircraft per year.

Such production output is not enough to satisfy the demand from Russian air carriers. In addition, the Tu-204 family is a bit oversized, so its shortest, 160seat version (the Tu-204-300), has become the most popular among the customers.

Russia’s United Aircraft Corporation (UAC) estimates that within the next 20-25 years, the global demand for airliners in the MS-21 size category will amount to about 10,000 aircraft. Irkut Corporation modestly expects to take 12-15% of this market. Although only about 500 airliners out of this number are expected to be delivered to Russian carriers, the corporation’s representatives insist the MS-21 is being created first of all for the Russian market.

MiG

According to UAC president Alexey Fedorov (right), total MS-21 program investments are estimated at $8 billion

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The MS-21’s development started in 2002, when the Yakovlev design bureau won the government tender to create a new short-to-medium-range airliner.

Irkut joined the program a year later when it merged with Yakovlev. The development intensified in 2007, when the program’s concept and business plan were approved. A major change from the initial plans was the shift to a higher passenger capacity. Designers abandoned the smallest 130-seat version, apparently leaving this segment to a possible growth of another Russian program – the Sukhoi Superjet 100 regional airliner. A 210-seat version was also added to the MS-21 family.

Today, Russian designers plan to focus their efforts on the basic 150-seat MS-21-200 version. Its first flight is now scheduled for the first quarter of 2014. In 2015, the aircraft is expected to be certified under Russian standards, while a year later it is to obtain its certification from the European EASA joint airworthiness authority.

Two other variants – the 180-seat MS-21-300 and the 210-seat MS-21400 – should be certified in 2018 and 2020, respectively.

The MS-21 program costs also have become clear. The designers hope to get serious financial support from the Russian government. According to UAC president Alexey Fedorov, total MS-21 program investments are estimated at $8 billion; half of this sum will be nonrepayable subsidies from the state budget. As Irkut reported, the government has already approved about 72 billion rubles (approximately $2.1 billion) for the MS-21 development – these initial funds were allocated in 2008. The other half of the costs will be provided by the companies that participate in the program.

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Irkut

The MS-21 family will include three modifications with different passenger capacity but very closely unified by airframe and aircraft subsystems

Choice of suppliers

MS-21 program managers are currently preparing to select suppliers for the aircraft’s major subsystems and components. In 2007-2008, Irkut conducted negotiations with leading Russian and foreign suppliers to investigate their interest in joining the program. In October-November 2008, UAC sent out an offer to potential partners for participation in competitive tenders for MS-21 components.

The results of this selection are to be announced in 2009.

Although Irkut won’t reveal the list of potential suppliers, some likely candidates can be pinpointed. One of the major program challenges is the choice of engines, which should provide the desired fuel efficiency along with the expected reduction in noise and emissions. Earlier, several manufacturers were discussed as possible suppliers for the MS-21 engine. From the Russian side, those are likely to be Perm Motors with its future PS-12 powerplant, and a Russian-Ukrainian team headed by Moscow’s Salyut company with the D-436M12 engine version. As for the possible foreign contenders, industry sources have named Pratt & Whitney and RollsRoyce as leading candidates – although both companies have been very cautious in publicly stating their intentions for this program. It’s quite possible that the final choice will be made for a team of Russian and foreign partners, which would jointly develop the future airliner’s engine.

Strong competition is also expected in the area of avionics. One of the possible candidates is the French Thales group. Thales has a significant experience in working with the Russian industry, as it is developing avionics and simulators for the Superjet program, and is an avionics supplier as well for export versions of Russian combat jets.

A contender for the MS-21 training simulator is a team of Canada’s CAE and Russian company Dinamika. The latter is based at the TsAGI Flight Research Institute, and is known for its development of full-mission and parttask simulators for various Russian military and civil aircraft and helicopters.

Dinamika also took part in the Superjet program, designing the engineering simulator for it. With its Canadian partner, Dinamika plans to set up a training facility in Russia with jointly-designed simulators for Russian and foreign commercial airliners.

The MS-21 is also expected to be the first program involving all major Russian aircraft design and manufacturing facilities. In addition to Irkut and its subsidiaries Yakovlev and Beriev, another Russian aircraft designer – Sukhoi – is likely to take part. UAC recently signed a contract with Sukhoi and its subsidiary Sukhoi Civil Aircraft to develop a composite wing – one of the MS-21 airframe’s most difficult components.

Need for composites

The extensive use of composites is one of the MS-21 designers’ goals, which

also should provide the aircraft’s promised operational efficiency. In order to bridge the composite technology gap faced by the Russian industry, UAC decided to set up the Aerocomposite joint venture in late 2008. The other partners in this operation will be Sukhoi and Progresstech companies.

Aerocomposite will develop and manufacture composite aircraft components. In fact, this is an effort to create a new branch of the Russian aerospace industry that will serve as a decisive factor in UAC’s ambitious plans to develop new commercial aircraft. According to UAC planning, Aerocomposite will focus on design work in 2009-2010, while the decision to launch a composite production capability in Russia is expected to be taken in early 2010. Several options are currently being discussed, including the launch of composite production at existing aircraft manufacturing plants, as well as the construction of a new facility from scratch.

UAC doesn’t conceal the fact that in order to save time and money, Aerocomposite will not develop composite technologies on its own, but will buy them from abroad. A foreign partner has yet to be chosen, but negotiations are underway with two candidates – US-based Spirit AeroSystems and Italy’s Alenia Aeronautica. The program’s preliminary cost estimate is set at 400-700 million euros.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

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New Russian jetliner for low-cost operators Maxim Pyadushkin ollowing the success of the Superjet 100 regional jet program – which is Russia’s first experience in developing a viable commercial aircraft in the post-Soviet era – the country’s United Aircraft Corporation (UAC) now plans to explore other segments not taken by the leading aerospace manufacturers.

In late December, it unveiled the technical parameters for its future short-to-medium-range widebody airliner. This aircraft is designed to carry 300 passengers to ranges of 3,500 km, and is sized to replace such ageing widebody aircraft as Airbus’ A330/A310 and Ilyushin’s Il-86 – becoming the aircraft of choice for Russian low-cost carriers.

Also in December, UAC received a contract from the country’s Ministry of Industry and Trade to work out the development program for this new widebody airliner. The program schedule should be ready by year-end, while the aircraft is expected to make its maiden flight in 2012. Discussions about the new aircraft started back in 2007, but

Sergey Sergeev

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then UAC representatives expected it to be developed from the existing Tupolev Tu-204 narrowbody airliner. Dubbed the Tupolev Tu-534, it was to use the wing and engines from Tupolev’s Tu204, plus a new widebody fuselage with a capacity for approximately 280 seats.

As UAC press-secretary Konstantin Lantratov explained to the Russia & CIS Observer, it’s now been decided to abandon existing projects of Tupolev and other Russian design bureaus, and jointly develop the new aircraft.

The new widebody family’s basic variant will have a takeoff weight of 115 tons.

Its fuselage is expected to be six meters longer than the Tu-204, which makes it similar to Boeing’s 767-200/300, but with a smaller wing and wider body. The basic model will accommodate 310 passengers in single-class configuration with seven-abreast seating in economy class.

Its designers say it is optimal for flights of up to 3,500 km. The future family will also include shorter-fuselage versions for 210 and 250 seats with ranges of 5,200 km and 7,300 km, respectively, as well as a cargo version with a maximum payload of 35 tons and a 4,000 km range.

The new Russian widebody airliner is expected to replace ageing Ilyushin Il-86s (pictured) on popular domestic routes

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UAC experts expect that the new widebody airliner will be in demand, first of all, because of its lower operational costs. Currently, many carriers use jetliners with passenger capacities of 200-300 seats for flights of up to 4,000 km. Initially these models were designed to fly much longer distances – 12,00015,000 km, so their use on short flights is not always economically efficient. According to UAC calculations, the new widebody airliner should be 10-20% more fuel efficient compared to the Airbus A310 and A330, as well as Boeing’s 767 and even the new Boeing 787-3. The wider fuselage provides this new aircraft with even more advantages when compared to foreign and Russian competitors in terms of the weight per passenger ratio – from 40 to 80%. All this makes the new airliner’s cost per flight hour very attractive for the airlines. Based on preliminary calculations, it will be 4080% lower compared to existing and future widebody aircraft.

It appears that the new aircraft first of all is oriented toward the Russian market. It is expected to replace the ageing Il-86 (the first Soviet widebody airliner) on domestic flights to popular holiday destinations such as the Black Sea coast. The promotion of a singleclass version means that UAC hopes to see Russian low-cost carriers among its first customers. For such operators, the option to install a built-in airstair (like the one incorporated on Il-86s) is also being discussed – providing autonomy in ground operations.

From 2012-2022, UAC expects to sell 150-180 of these new widebody airliners in Russia and CIS countries, while the total worldwide demand is estimated at 500 aircraft. Another advantage is that the new project is expected to have minimal technical risks. The new widebody airliner is planned to incorporate a comparatively small share of composites in the fuselage, while some airframe elements and subsystems can be derived from the existing Russian airliners. For example, the designers plan to use two Perm PS-90A2 turbofans, which will also power export versions of the Tu-204.

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DEFENSE

Not a bad year

Sukhoi

Russian military aircraft exports remained strong in 2008

Konstantin Makienko he official results of Russia’s 2008 arms sales have not been released yet, but Deputy Prime Minister Sergey Ivanov said last December that they might exceed $8 billion. It is expected that, like in previous years, aircraft equipment will comprise the bulk of arms export deliveries.

Last year’s overall performance demonstrated that heavy fighters of the Sukhoi Su-30MK family and modernization solutions (primarily radar upgrades) for earlier-exported Mikoyan MiG-29 warplanes continue to enjoy the highest demand with foreign customers.

Export sales of the Mil Mi-17 family of transport helicopters also remain strong.

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Sukhoi and Irkut

The major portion of export work conducted by the Russian aircraft industry in 2008 was related to the contracts for Su-30 family multi-role fighters from Algeria, India, Indonesia, Malaysia and Venezuela. Unlike in previous years, information about last year’s export deliveries has not yet been made public, so all the figures below are preliminary.

10

India most probably received the largest number of Russian fighters in 2008. It can be safely assumed that New Delhi took delivery of the last two Su-30MKI fighters under a deal signed in April 2007. That contract envisaged the sale of 18 such aircraft to replace the same number of Su-30K warplanes delivered to the Indian Air Force in 1997 and 1999. The first 16-ship batch was handed over to India in 2007. In addition, India last year was expected to receive at least four aircraft under the November 2007 contract for 40 Su30MKI fighters and knock-down kits, in addition to the 140 kits contracted in 2000. According to estimates, India took delivery of at least six Su-30MKI fighters in 2008 under the terms of the current contracts. It is also possible that 10 to 12 Su-30MKI kits were supplied to Hindustan Aeronautics Ltd for subsequent assembly at its Indian facilities.

Irkut Corporation continued to deliver Su-30MKM fighters to Malaysia under a $950 million contract signed in 2003. A total of 18 such aircraft are to be supplied to that country. Irkut previously shipped six Su-30MKMs in 2007. According to estimates, the Royal Malaysian Air Force last year received another six of the type.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

The contract should be completed by 2009. No exact information is available about the number of Su-30MKI (A) fighters delivered to Algeria last year under a contract signed in 2006. In all, Algeria is to receive 28 such aircraft. The original schedule envisaged eight deliveries in 2007, followed by another 10 annually in 2008 and 2009. However, only six fighters were delivered in 2007. It is unlikely that Irkut – which currently operates to its full production capacity – could have managed to catch up with the schedule during 2008. Most probably, the Algerian Air Force received eight Su30MKI (A) fighters last year, bringing its total fleet to 14 units.

The export structure of Sukhoi-built aircraft appears to be somewhat more transparent. The company last year completed its 2006 contract to deliver 24 Su-30MK2V fighters to Venezuela.

The first four aircraft were shipped in 2006, followed by another 12 in 2007.

The final eight-strong batch was delivered during 2008. Also last year, Sukhoi supplied the first two Su-30MK2s for Indonesia under a $335m contract signed in 2007. A total of six fighters will be delivered to that country (three Su-30MK2s and three Su-27SKMs).

DEFENSE

Sukhoi carried on with its second three-year contract to modernize Russian Air Force warplanes, upgrading eight Su-27 fighters from a Far-Eastern air force regiment to the Su-27SM standard. During the 2004-2006 timeframe, 24 fighters were similarly upgraded; another 16 aircraft underwent modernization in 2007-2008. Overall, the Russian Air Force now has 40 warplanes upgraded to the Su-27SM standard. Under separate contracts, Sukhoi last year handed one newly-built Su-34 tactical bomber to the Russian Air Force, and upgraded five of the service’s Su-24 bomber fleet to the Su24M2 configuration.

MiG Corp.

A.B.E. Media

The key achievement for MiG Corp. in 2008 was the final resolution of a collapsed 2006 contract to supply 34 MiG-29SMT/UBT fighters to Algeria.

After receiving the first 15 aircraft by April 2007, the Algerian Air Force alleged that the fighters incorporated some second-hand equipment. In the course of year-long negotiations Algeria rejected all compromise proposals

by MiG, from replacing the controversial equipment to substituting the entire airframes with new aircraft of the same type. Russia eventually agreed, in February 2008, to take the previously delivered MiG-29SMTs back from Algeria. In December last year, the Russian Defense Ministry announced its decision to purchase the whole 34-ship Algerian batch from MiG Corp. for 22-23

Su-30MK exports in 2008 Country

Type

Deliveries Minimum

India India Malaysia Algeria Venezuela Indonesia Total

Su-30MKI Su-30MKI (kits) Su-30MKM Su-30MKI (A) Su-30MK2(V) Su-30MK2

6 10 6 8 8 2 30, plus 10 kits

Maximum 6 12 8 10 8 2 34, plus 12 kits

Source: Center for Analysis of Strategies and Technologies

billion rubles ($620-650 million at the current exchange rate).

Among other developments, the manufacturer worked to repair and upgrade MiG-29 fighters for Bulgaria, Serbia and Slovakia in 2008. The company also signed a $964-million contract to modernize 64 Indian Air Force MiG-29B fighters to the MiG-29SMT configuration. Another modernization order, worth $106 million, came from Peru: MiG Corp. will repair and upgrade 19 MiG-29s for that country’s air force.

Some Russian media have reported that the Peruvian fighters would be upgraded to the SMT version, but these speculations appear to be erroneous. It is more likely that the modernization effort will include the RVV-AE air-to-air missile capability. It is also possible that the fighters will be able to use these missiles to engage two targets simultaneously.

In separate development, Russia last February delivered the first Ilyushin Il76EI aircraft to Israel for installation of the Elta Phalcon airborne early warning system. This work was completed dur-

Mil Mi-17 transport helicopters were among the Russian defense best-sellers in 2008 — including this one delivered to Croatia

ing 2008, after which the aircraft was handed over to the Indian Air Force late last year. It arrived at an Indian Air Force station in Goa in January 2009.

Helicopters

Another notable accomplishment last year became the signing of the largest contract in the history of Russian helicopter manufacturers. Under the $1.2 billion deal, Mil undertook to deliver 80 Mi-17V-5 helicopters to India. Of no less significance were the orders for Russian rotorcraft from Brazil and Thailand, which have up to now operated only US and European-built helicopters. Brazil ordered 12 Mi-35M attack helicopters for $350 million, while Thailand purchased three Mi-171 transports for $27.5 million. In all, according to some reports, Russia last year landed over 100 export orders for rotorcraft of the Mi8/Mi-17 family. About one half of these came from Middle Eastern countries.

On the delivery side, the largest export helicopter shipments in 2008 were to Venezuela and Indonesia. The former took delivery of 14 Mi-17V-5 transports and two Mi-172 VIP versions, whereas the latter received six Mi-17V-5 transport rotorcraft. Eight Mi-171Shs were delivered to Croatia, five Mi-17s army aviation rotorcraft to Colombia, two Mi-171s to Pakistan’s drug enforcement agency, one Mi26TS fire-fighting helicopter to China, and one military Mi-171 — the first of two such airframes on order — to Mongolia. Given that the total backlog of Russian helicopter exports stands at over 100 units, even this list appears to be incomplete.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

11

DEFENSE

Flexing

Reuters

of muscles

Maxim Pyadushkin ussia continues to increase its defense expenditures with the aim of reviving the country’s military might.

The defense budget for 2009 amounts to 1.34 trillion rubles (about $37 billion), reflecting a nominal increase of 31.5% compared to 2008 – which was the highest during the past five years. Such growth was partly inspired by the August war in South Ossetia, which showed that Russia’s army is capable of conducting a successful campaign outside of the country’s territory, but also spurred a discussion on whether military expenditures are sufficient for the needed modernization of the armed forces. While the intentions for boosting Russian military spending are good, the actual growth in procurement may be limited by potential budget cuts because of the economic crisis.

The federal budget for 2009-2011 was adopted by the lower chamber of Russia’s parliament (State Duma) at the end of

R

12

October. Compared to the draft version discussed earlier, the defense spending for 2009 was increased by 60 billion rubles – an amount that was added after the consideration of the August war experience.

This additional money will be directed to the armed forces’ military procurement.

“The additional funding is allocated mainly for the purchase of modern armament, first of all for aviation”, explained Sergey Ivanov, Russia’s vice premier who supervises the military and defense industry. The Defense Ministry will also get another 20 billion rubles to set up two new military bases in South Ossetia and Abkhazia, he said.

Out of the 1.34 trillion rubles allocated for this year, the Russian Armed Forces will get 962.4 billion. Another 22.4 billion will be spent on nuclear weapons, while 174.1 billion rubles is allocated for national defense research studies.

The national defense expenditures for the next two years are expected to grow at a slower pace. In 2010, the government plans to spend 1.39 trillion

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

rubles on national defense (a nominal increase of 8.9%), while a year later, the defense expenditures will grow by another 6.5% to 1.48 trillion rubles.

Nevertheless, Russian lawmakers were not completely happy with the approved money. Among the reasons cited by critics is that the proposed defense spending for the next three years will amount to just 2.6%, 2.53% and 2.3% of the country’s GDP (gross domestic product) for the corresponding years. The lawmakers insist that this is well below the levels of defense expenditures set up earlier. In 2000, Russia’s Security Council agreed that the expenditures during these years should be higher – 3.21% of GDP.

Focus on modernization

Russian government officials agree the recent experience in the Caucasus showed that, despite the ultimate military success, the country’s armed forces should speed up their reorganization and re-equip with new weapons. Meeting with commanders of the military

DEFENSE

military plans to bring 400 of them into service. The Russian Defense Ministry reportedly received 600 billion rubles for procurement in 2009 out of the procurement budget’s total of 1.3 trillion rubles.

But as Sergey Ivanov explained earlier, this figure also includes the spending for other Russian paramilitary and law enforcement agencies. In addition, some of this money will be spent for “capital investment and housing construction for servicemen.” In 2010, the military procurement budget is to be increased by another 30 billion rubles, while in 2011 it will grow again, by 70 billion rubles.

Crisis challenges

But the economic crisis that hit Russia in the second half of 2008 is likely to become the major challenge for the military’s reinforcement plans.

In the previous crisis of 1998, the economic conditions surprisingly gave certain advantages to Russia’s defense industry. At that time, the industry was working mainly for export customers, so the Russian ruble’s sharp devalvation gave a boost to defense production – decreasing production costs and making the price of Russian weapons more competitive on foreign markets. The export revenues sometimes allowed manufacturers to finance the development of weapons ordered by the Russian national armed forces.

With the current economic crisis, the Russian government has announced its intention to support the country’s defense industry to ensure the military will get what they have ordered. Dis-

cussing procurement plans at the end of December, Prime Minister Vladimir Putin stressed that defense procurement orders are becoming the major source of revenues for the industry, and that the military-industrial commission will strictly control timing and quality of the execution of government contracts. But despite the announcements, the government is refraining from providing direct subsidies to defense manufacturers. So far, only two companies – engine manufacturer NPO Saturn and the MiG Corp. jet maker – have managed to get financial support from the budget or state-owned banks to cover their losses.

Following the build-up of this latest crisis, the government is discussing the possibility of revising this year’s budget.

It is not clear whether the military will cancel or suspend some of their procurement programs, as the budget is to be revised in February. But the manufacturers could lose out – if not in numbers of products being delivered, then in revenue. The Defense Ministry reportedly plans to cut the price of all procurement contracts that have already been placed by 15%. On the other hand, the government is ready to support its leading manufacturers. According to Vladimir Putin, budget allocations for the existing programs can be redistributed in favor of more important ones. This means support for large government-controlled defense holding companies created in the last few years, and the continuation of the defense industry’s re-nationalization.

Russia's expenditures on national defense 1.5

1.34

1.2 Trillion rubles

districts in late September, Russian President Dmitry Medvedev explained the steps that should increase the national armed forces’ effectiveness.

First, all combat units should maintain constant alert, he said. The other priority is to give the military new, high-tech weapons. “We need an army that is equipped with the most modern armament,” said Medvedev. The president also mentioned the need to improve troops’ command and training systems.

But lawmakers say the growing budgets still don’t guarantee that the armed forces will get what they really need. According to the Duma Defense Committee, the balance between the army’s operational expenditures and re-armament program funding should be 50:50 by 2011, while the approved budget shows that in fact it will remain the same as in 2008 – 54.7% for operational expenditures against 45.3% for weapons procurement programs.

Nevertheless, the Russian government is convinced that the approved spending of $4 billion on military procurement in 2009-2011 is enough to support the country’s military might. Vladislav Putilin, deputy head of the government’s militaryindustrial commission, said “the threeyear procurement plans will support a 100% equipment status of the armed forces, and increase the percentage of modern armament in military units.”

He explained that within the next three years, Russia’s armed forces will purchase more than 70 strategic missiles, over 30 Iskander tactical missiles, 48 combat aircraft, 6 unmanned aircraft, more than 60 helicopters, 14 naval ships, nearly 300 tanks and more than 2,000 other vehicles. Putilin also mentioned the planned procurement of a “large number of launch vehicles and spacecraft” that should ensure the fulfillment of the country’s space program.

Besides the procurement of in-production weapons, the armed forces plan to test new ones. According to the approved budget, they are going to start evaluation tests on 487 new systems, components and elements of new armament and military equipment. The testing of 600 new items is to be completed in the next three years, and the

1.02 0.82

0.9 0.67

0.6

0.55

0.3 0.0

2005

2006

2007

2008

2009

Source: Russian Federal Assembly

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

13

DEFENSE

Flying armor

The Russian Air Force gives a green light to the procurement of new attack helicopters Maxim Pyadushkin t the end of 2008, the Russian Air Force announced plans to reequip its Army Aviation service with new helicopters. According to Air Force Commander Col-Gen Alexander Zelin, the Army Aviation will purchase 100 new combat and training helicopters within the next three years, and will be completely re-armed with new rotorcraft by 2020. The procurement focus will be on new attack helicopters that are to replace an ageing fleet of Mil Mi-24 rotorcraft. Backed by a growing Russian defense budget, the military now has to find a mission need for new rotary-wing aircraft from both Mil and Kamov.

The long-running competition between Russia’s two helicopter designers – Mil and Kamov – seems to be finally over. It started back in the 1980s, when the Air Force initiated development of the new attack helicopter. Initially Kamov had an advantage with its innovative coaxial-rotor single-seat Ka-50 rotorcraft. But later the military decided that one pilot would not be able to successfully operate both the aircraft and weapons, so they wanted to have two-seat helicopters. After a long and controversial selection, in 2003 the official choice was made for Mil’s simpler Mi-28N design, equipped with a tail rotor and a tandem cockpit.

The first three pre-production Mi28Ns were handed over to the Army Aviation Combat Training Center in Torzhok in December 2007. A year later, the Mi-28N attack helicopter officially ended its official evaluation tests, which included more than 800 flights.

The governmental commission has 14

Leonid Faerberg

A

The Russian Air Force will use its Mi-28Ns as a main rotorcraft for massive fire support on the battlefield

recommended taking this helicopter into service. The rotorcraft’s series production already has been launched at the Mil facility in Rostov-on-Don, which has rolled out about a dozen Mi28Ns so far.

Mi-28 will be the main battlefield attack helicopter, mainly due to its heavy armor protection. According to Air Force representatives, its cockpit can withstand the hit of a 30-mm armor-piercing shell. The helicopter’s survival system allows the crew to stay alive under loads of up to 14g. The new onboard radar enables a Mi-28N to detect obstacles flying at low altitudes in zero visibility, including fog and battlefield smoke. Armed with 30-mm rotating gun, laser-guided Ataka-V (AT-16) missiles, guided Igla anti-aircraft missiles or unguided rockets, the helicopter can hit enemy armored vehicles, rotorcraft and aircraft at ranges of up to 5 km.

As Zelin explained, Army Aviation units will get two squadrons of 18 helicopters during 2009-2011. He also promised they will be displayed during

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

the military parade on Red Square on May 9 this year.

According to representatives from Russian Helicopters (the joint holding for Russia’s main rotary-wing aircraft designers and producers), now Mil can kick off further evolution of this new helicopter into the Mi-28NM variant. The new version would feature more powerful 2,500-hp Klimov VK-2500 turboshaft powerplants (replacing the Mi-28N’s TV3-117VMA engines). The helicopter’s aerodynamics will be improved by removing the ballonets from the nose section and adding new streamlined ammunition boxes for the 30-mm rotating gun. Designers also decided to fully unify the tandem cabins, adding a control stick in the weapons operator’s cockpit.

The more significant change will be the replacement of the Tor electro-optical targeting system with a new gyrostabilized electo-optical unit developed

by Russia’s UOMZ company. This new system will enable the replacement of Ataka-V missiles with air-launched ver-

DEFENSE

rangefinder marker. The Ka-52’s communication system enables the exchange of information and the distribution of targets between other helicopters in a battlefield group, which effectively turns the Alligator into a command aircraft.

Another advantage is the more powerful VK-2500 engines, which compensates for the two-seat Alligator’s increased weight. But in general, as the designers say, the two-seat version inherites the Ka-50’s speed, thrust-toweight ratio and agility. Its coaxial rotor design enables the helicopter to fly sideways at speeds of up to 80 km/h and backwards at 90 km/h. The coaxial rotors also increase vertical speed, as well as the helicopter’s ceiling because the absence of a tail rotor allows all engine power to be directed to the main rotors.

During flight tests, the Ka-52 reportedly demonstrated a vertical lift speed of 30 m/sec.

According to its designers, the coaxial rotors enable the Ka-52 to use a flight

Leonid Faerberg

sions of the new Khrizantema (AT-15) anti-tank guided missiles. Compared to the Ataka, the supersonic Khrizantema has a more powerful warhead capable of penetrating up to 1,250-mm armor. It also has two guidance modes: automatic, where it is guided by a millimeterwave radar beam; and semi-automatic, with guidance by a laser beam rider. It therefore can simultaneously engage two targets, such as tanks, low-flying aerial targets and field fortifications.

The development of the Mi-28N’s rival – Kamov’s Ka-52 – lags a bit behind.

In autumn 2008, it finished the first phase of testing and Russia’s military placed an order for a pre-production batch of 12 helicopters. This Kamov rotorcraft is being assembled at Russian Helicopters facility at Arseniev in the Russian Far East. The first helicopter is expected to be handed over to Army Aviation’s Combat Training Center in 2009 to finish the evaluation testing.

The purchase of coaxial-rotor Ka52s means that the Russian Air Force has finally decided to take two new types of attack rotorcraft into service.

The twin-seat Ka-52 was developed in the early 1990s on the basis of the single-seat Ka-50 Black Shark, after it became clear that the Russian Air Force wanted to have a new assault helicopter with two pilots, which is why the Kamov model originally lost ground to the Mi-28N. The first twin-seat Ka-52 prototype made its maiden flight in 1997. Unlike the Mi-28 with its two tandem cockpits, the twin-seat Kamov helicopter has two pilots sitting shoulder to shoulder in a common cockpit.

Kamov designers insist the Ka-52 is not a simple two-seat version of the Black Shark, but a highly modernized variant. In addition to its new cockpit, the two-seat Ka-52 (dubbed Alligator) received a new Argument-2000 onboard navigation unit and flight and weapons systems that enable the helicopter to operate round-the-clock in all weather conditions. The on-board weapons system is to include a dualband Arbalet-52 radar with two antennas – one in the nosecone, another on the rotor hub, along with a laser-

next step may be the introduction of new Hermes-A ATGMs with self-homing seekers that have a range of 15-20 km compared to 10 km for the Vikhr. A Ka-52 equipped with Hermes missiles was displayed for the first time at Moscow’s MAKS-2007 air show.

Another likely option is to install laserguided Ataka-V missiles, which are already used on the Mi-28N. The Ka-52 can also carry four Igla-V or two R-73 air-to-air missiles, as well as 80-mm unguided rockets.

The Air Force has found a special role for the Kamov helicopter. As Maj. Gen. Alexander Chernyaev, Chief of Army Aviation’s Combat Training Center, explained to the Russia & CIS Observer, “the Mi-28 is a rotorcraft for massive fire support on the battlefield, while the Ka-52 is suited more for special missions,” adding that the purchase of both types is absolutely justified. Air Force representatives admit that the major reason for assigning such a special role to the Ka-52 is its insuffi-

Although Ka-52 prototypes are being tested without a radar antenna on the rotor hub, designers promise to complete its development before the first pre-production rotorcraft enter evaluation trials

mode called the “whirlpool” in attack maneuvers – when the helicopter slides sideways at a speed of 100-180 km/h around a target while taking aim at it.

The Alligator is armed with a 30-mm gun and 12 Vikhr (AT-12) laser-guided antitank missiles. Its designers say the

cient armor protection compared to the Mil rival. So it will be used in operations with limited enemy counteraction – such as observation and target detection. The Ka-52 is expected to finish its official evaluation tests by the end of this year.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

15

DEFENSE

Unmanned export Russia goes shopping for UAVs in Israel Denis Fedutinov he Russian Defense Ministry is considering purchasing unmanned aerial vehicles (UAVs) from Israel. This plan was first announced in November 2008 by Mikhail Musatov, a member of the State Duma Defense Committee.

Army Gen Nikolay Makarov, Chief of the Russian Armed Forces General Staff, later confirmed the information.

Only a few years ago, the possibility of Russia procuring armaments from abroad would have been dismissed as impossible. The Defense Ministry’s sudden interest in foreign UAV designs is due to the sheer obsolescence of indigenous systems in service with the Russian army. The Yakovlev Pchela UAV was developed in the 1980s, whereas Tupolev’s Tu-141 Strizh and Tu-143 Reis drones date back to the 1970s.

During the second Chechen military campaign in the late 1990s and the early 2000s, the Russian army attempted to update its fleet of unmanned airborne reconnaissance

Having no contemporary UAVs available, Russia had to dispatch manned aircraft like Tupolev Tu-22 strategic bombers (pictured) on reconnaissance sorties during the August combat operation in South Ossetia

platforms. This decision was influenced by the experience of the US forces, which had successfully used UAVs in Yugoslavia, Iraq and Afghanistan. But the funding provided by the Russian Defense Ministry proved quite limited: there was just enough money to upgrade the Stroy-P reconnaissance system with Pchela UAVs, and to create the Tipchak mobile aerial reconnaissance system.

Russia could initially import a small batch of MALE class UAVs like this IAI Heron aircraft

16

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

Denis Fedutinov

Leonid Faerberg

T

A further impetus for re-equipping the Russian army with new UAVs came during the 2008 conflict with Georgia over the breakaway republics of Abkhazia and South Ossetia.

Throughout April and May – prior to the open hostilities – Georgia was using Israeli-made Hermes 450 tactical UAVs for aerial reconnaissance. Russia had no contemporary UAV designs available, so it dispatched manned aircraft on reconnaissance sorties. As a result, one Tupolev Tu-22 strategic bomber flying a reconnaissance mission was shot down during the August combat operation in South Ossetia.

This came as a heavy blow to the Russian Air Force. By contrast, Georgia did not sustain any significant losses when several of its Hermes UAVs were shot down over Abkhazia.

At the end of 2008, Russian top brass acknowledged the army needed advanced reconnaissance UAVs. Gen Makarov commented at the time that UAV designs currently available from Russian manufacturers do not meet contemporary requirements. The Vega Radio Engineering Corporation,

DEFENSE

which was designated the UAV lead integrator in 2005, has failed to develop the systems required. Its present product range primarily consists of small-sized unmanned aerial vehicles.

There are several private UAV specialists – but these, too, mostly offer mini-UAVs. The St Petersburg-based company Tranzas and the Yakovlev design bureau have yet to complete the development of several advanced military UAV designs.

It is clear that some UAV classes will remain unrepresented in Russia for years to come. This is why the Defense Ministry has turned to foreign products. In May and June 2008, the General Staff studied different UAV designs available on the world market.

Israel was apparently chosen for its profound expertise in the creation and operation of unmanned vehicle systems of assorted sizes and applications. Apart from actively utilizing such systems at home, Israel remains the leading exporter of small, medium-sized and large UAV models.

In late November, the Russian Defense Ministry sent a delegation to Israel, led by Col.-Gen. Vlaimir Popovkin, deputy defense minister for armaments, and Alexander Gorbunov, advisor to the defense minister on industrial issues. The aim of the visit was to negotiate the purchase of Israeli UAVs. The details are not available as the Russian side made no further comments.

It appears probable that Russia will be seeking to buy UAVs in those classes which are neither readily available nor under development at home, so as not to subject domestic manufacturers to foreign competition. The choice will most likely be made for the latest UAV designs - provided that the Israeli Defense Ministry approves their sale. There has been a precedent: in the early 2000s, Russia’s Irkut Corporation purchased several Aerostar UAVs for the country’s Ministry of Emergencies from the Israeli company Aeronautics Defense Systems. But when a further attempt was made to

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acquire several additional systems and technologies, the Israeli military banned the sale.

Russia could initially go for a small batch of UAVs. An indirect proof of this is the tentative price of the contract that has been leaked to the Israeli media – $10-20 million. This sum will just cover a single high-end reconnaissance system complete with several MALE (medium-altitude, long-endurance) UAVs. If operational evaluations are successful, one possible development may be to set up a joint UAV production facility in Russia. Naturally, this would require considerable investment in interface adaptation, production launch, personnel training, etc.

The two most probable Israeli suppliers are IAI and Elbit. Both companies offer a wide range of UAV systems with a high level of equipment commonality. On the other hand, Elbit’s track record of supplying military equipment to Georgia could hurt its chances for a contract from the Russian Defense Ministry.

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DEFENSE

Selling to live

With a lack of state support, Ukrainian arms manufacturers have only export contracts to rely on for survival Serhiy Zgurets he value of Ukrainian defense exports in 2008 is expected to be on a par with the decade’s record high of the year before. The Kiev-based Center for Army, Conversion and Disarmament Studies estimates Ukraine’s revenues from last year’s arms sales at $11.2 billion or higher.

But a significant portion of Ukrainian arms exports still comes from the Defense Ministry’s surplus stocks.

There are not many indigenous designs available for export, apart from several recent developments in the area of precision guided munitions, transport aviation, radar technology and light armored vehicles. Additionally, Russia is no longer Ukraine’s sole rival on the international arms market. There are now countries such as China, Poland, Singapore, South Korea and Turkey, whose defense sectors have made a huge developmental leap over the past 10 years.

The Ukrainian arms exporting agencies authorized to sell military and dual-use products abroad are the Ukrspetsexport state-owned company and its subsidiaries. Another 14 firms are allowed to export their defense-related products on condition that they coordinate their pricing strategy with Ukrspetsexport. The total value of Ukraine’s arms exports is the sum of revenues generated by both the official arms exporters and

T

original equipment manufacturers that are permitted to market their own products.

According to Yury Petrochenko, Chairman of Ukraine’s State Service of Export Control, Ukrainian companies involved in arms exports stepped up their marketing efforts in 2008. “They grew more aggressive, in the best sense of the word,” he explained. “We have seen a surge in applications for permits to open negotiations and sign contracts.” In Petrochenko’s words, the proportion of Defense Ministry surplus hardware in overall arms exports continues to decline, while that of newlydesigned weapons systems is growing steadily.

Ukrainian companies are beginning to expand abroad. Cooperation with Russia is still going strong. In fact, throughout the first half of 2008, Russia remained the largest importer of Ukrainian armaments among the CIS countries, accounting for 20.9% of Ukraine’s total arms exports by volume. It was followed by Azerbaijan with 6.7%, Georgia with 6% and Kazakhstan with 5.4%.

The bottom-line results of Ukrainian arms sales in 2008 are not yet available. The year before, though, more than a third of the country’s armament shipments (36%) were to Russia and other CIS countries. According to Ukrspetsexport, Southeast Asia was the second largest importer in 2007 (28%), followed by the Middle East and North

Africa (18%). Deliveries to Sub-Saharan Africa stood at 12%.

Aviation

Ukraine is one of the few countries capable of building fully indigenous military transport aircraft. Airplanes and aviation equipment historically account for more than 30% of the country’s exports. Despite this fact, Ukrainian companies were mostly exporting second-hand aircraft from 2005 to 2008 – at an average total of $100-120 million a year.

Last year, one of Ukrspetsexport’s subsidiaries supplied a foreign customer with four Sukhoi Su-24M front-line bombers that were built in 1986. In addition, the Western media reported that a late December 2008 delivery was made by Ukraine of two Ilyushin Il78MP tankers out of four ordered by Pakistan. These aircraft are reportedly outfitted to refuel all of Pakistan’s Chinese-built warplanes, as well as French Dassault Mirage fighters.

An earlier high-profile transaction saw 14 MiG-29s shipped to Azerbaijan in 2006-2007. This became Ukraine’s first export contract for locally-upgraded fighters. Ukrainian specialists undertook the development of a MiG-29 modernization package without consulting the Russian original equipment manufacturers. Their objectives included improving the detection and tracking range of the aircraft’s radar, and introducing an airto-ground missile capability. Although these goals were only partially met,

Ukrainian arms exports 1998-2008 Year

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008*

Volume, $ million

300

446

600

575

550

714

780

800

1,000

1,000-1,200

1,000-1,200

Note: * forecast

Source: Center for Army, Conversion and Disarmament Studies

18

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

Serhiy Zgurets

DEFENSE

A batch of MiG-29 fighters shipped to Azerbaijan in 2006–2007 represented Ukraine’s first ever attempt to produce a modernization package for this combat aircraft type without turning to its Russian developers for help

there are plans to integrate the upgrade solutions in a future massive modernization effort on the Ukrainian Air Force’s MiG-29 fleet.

Ukraine continued to export retired military Mil Mi-24 and Mi-8 helicopters, albeit on a smaller scale than in previous years. About 50 Mi-24s and 10 Mi-8s were sold abroad in 2000-2004.

From 2005 to 2008, the figures were 20 and five, respectively. One reason for the drop in export figures is the shortage of spares, which makes it increasingly difficult to fix ageing helicopters up for sale.

In the medium term, Ukraine will try to keep up its export of surplus aircraft –significant numbers of which will be withdrawn from the country’s arsenals over the next two or three years. On the other hand, many of these examples are nearing the end of their operational life and may prove a tough sell.

The export of Ukrainian aero engines has been fairly successful. The powerplant developer IvchenkoProgress and the mass-production manufacturer Motor Sich have recently merged into a single corpora-

tion. Ukraine sold an estimated 800 million hryvnyas ($160 million) worth of military engines abroad in 2006. This export performance continued throughout 2007-2008, mainly thanks to sizeable Russian orders: 450 helicopter engines were delivered to Russia in 2007, and another 600 in 2008. These powerplants are designed to fit virtually all models of Mil and Kamov helicopters. As Motor Sich General Director Vyacheslav Boguslayev says: “Nearly 100% of all components used in our engines are Russian made.”

The most feasible Ukrainian-Russian aerospace project at the moment is the Progress AI-222 engine for Russia’s new Yakovlev Yak-130 combat jet trainer. Apart from direct sales to Russia, 38-39% of all Motor Sich export sales involve Russian intermediaries. Chinese orders make up another 22-23%.

Motor Sich is currently under contract to build about 200 aero engines, at a unit price of some $1 million, to be installed on China’s newest L-15 jet trainer. Other major customers for Ukrainian aero engines include India and Iran.

Precision missile systems

Until recently, various versions of the Vympel R-27 (AA-10 Alamo) mediumrange air-to-air missile comprised the bulk of Ukrainian guided weapons exports. The Kiev-based Artem company assembles these missiles from Russian components in support of Russia’s fighter sales to foreign customers. Artem’s workload, therefore, directly depends on how many fighters Russia is selling abroad.

Between 2005 and 2008, 1,089 R-27 missiles worth a total of $300 million were exported by Ukraine (953 of these were supplied to China; other end-users included Algeria, Azerbaijan and Kazakhstan).

Ukrainian missile exports peaked in 2005-2006 but dropped to just 90 in 2007, of which 43 weapons were supplied for the Ukrainian MiG-29s delivered earlier to Azerbaijan. The decline in R-27 sales was due to China’s decision to stop buying them from 2007, having either bought enough to satisfy the immediate demand or being able to move on to procure Russia’s new Vympel RVV-AE (AA-12 Adder) radarguided medium-range missiles.

Under a 2007 contract between Ukrspetsexport’s subsidiary Progress and

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DEFENSE

Russia’s Rosoboronexport state arms exporter, Ukraine supplied Russia with 100 R-27 and Raduga Kh-59 (AS-13) missiles in 2008 from the Defense Ministry’s stocks. The probability is high that the missiles were bought for subsequent resale to one of Rosoboronexport’s foreign customers.

Russia is now working to launch series production of RVV-AE and R-27 missiles on its own territory. If carried through, this program could significantly limit Ukrainian presence on the airborne munitions market in the medium term. In the meantime, Ukraine’s Luch Design Bureau is completing the effort to develop a new short-range air-to-air missile codenamed Gran. This design is viewed as a potential replacement for the obsolete R-73 missile currently used on Ukrainian MiG-29 and Sukhoi Su27 fighters.

Space equipment and services

Another aspect of Ukraine’s defense exports has been its participation in Russian military and civilian space pro-

Serhiy Popsuevich

Once a bestseller of Ukrainian arms exports, exports of the R-27 missile have dropped after China lost interest in them. In addition, Russia’s plan to launch local R-27 production could shrink the market for Ukrainian manufacturers

20

grams. Revenues from such activities are counted towards the total value of Ukrainian arms sales. The country reportedly earned an estimated $400 million from space-related exports in 2005-2008; annual revenues are forecast to grow slightly in years to come, to $110 million.

Through the Ukroboronservice organization – which is a subsidiary of Ukrspetsexport –the Dnipropetrovsk-based Yuzhnoe Design Office and Yuzhmash Production Association are providing after-sales support and field supervision services for 80 R-20 Voyevoda (SS-18 Satan) intercontinental ballistic missiles operated by the Russian Strategic Missile Forces. This contract brings some $10 million a year in revenues to the Ukrainian companies. The Russian military intends to keep the Voyevoda on combat duty until 2016.

Ukraine also builds Zenit launch vehicles under a contract from the Russian Space Troops. Nearly 70% of the Zenit unit cost is comprised of Russian components: RD-171M first-stage engines, second-stage combustion chambers and flight control systems.

The demand for Zenit-2SB vehicles continues to grow, including from the commercial Land Launch international program – in which Ukraine is represented by its state arms exporters. Under the Land Launch contract, Ukroboronservice currently supervises the construction of six Zenit launch vehicles. One such rocket, delivered to Russia last year, was used to orbit Israel’s Amos 3 telecom satellite. In late April 2008, Ukroboronservice signed a contract worth over $1 billion with the Land Launch Russian operator, International Launch Services, to deliver another 24 Zenit launchers through 2014.

Another significant generator of export revenues for Ukraine has been the contract to annually supply various systems and instruments for Russian unmanned Progress and manned Soyuz-3M transport/resupply vehicles for the International Space Station, as well as telemetry solutions for their safe docking with this Earth-orbiting space outpost.

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

Overhaul and upgrade services

Overhaul and modernization of Soviet-, Ukrainian- and Russian-made weapons systems for foreign customers accounted for at least 10% of Ukraine’s arms exports in 2005-2008.

At present, domestic orders represent just 8% of total workload at the Defense Ministry’s repair facilities; the rest comes from export contracts. In particular, Ukraine is overhauling a batch of Polish Mi-24 helicopters and awaiting a similar contract from the Hungarian Defense Ministry. The Progress company beat Russian competition in 2008 to win the tender for overhauling nine Pakistani Mi-17 military transport helicopters.

Ukrainian armor and air defense specialists also are fully booked with export orders. Overhaul work has recently been completed on several S-300 SAM systems for Kazakhstan.

Plans for the future

Further growth of Ukrainian arms exports is conditional on proper industrial retooling, the development of new weapons systems and their procurement by the national armed forces.

However, this year’s military budget envisages only $23.5 million for R&D and weapons acquisition – compared to $160 million last year. This total sum is smaller than even the requisite annual funding for the project to create a prospective corvette for the Ukrainian Navy, which is just one of the Ukrainian Defense Ministry’s 57 armament development programs. In this situation, export contracts remain the only possible means of survival for Ukrainian defense companies.

Another way out of the financial hardships would be to launch defense industrial projects with European partners and promote joint products on the domestic and international markets. Of no less importance is the task to retain the critical Russian market and continue cooperation with Russian partners, despite the complicated nature of political relations between the two countries.

A E RO I N D I A 2009

Another Russian debut in India The MiG-35’s AESA radar will be demonstrated at Aero India 2009 Maxim Pyadushkin ndia traditionally is an important market for Russian defense products, and the Indian Air Force operates a large number of Soviet/Russian-made aircraft – ranging from obsolete MiG-21 fighters to the most modern Sukhoi Su-30MKIs. Despite the growing competition from aerospace companies in the US and Europe, Russian manufacturers expect to keep their position as the Indian military’s leading supplier, and are displaying their latest innovations at the Aero India 2009 air show. Russia’s showcase exhibit on the air show’s static line and in the flying display is its MiG-35 fighter prototype.

This aircraft made its debut at the Bangalore air show two years ago.

Since that time, MiG has continued to work on this aircraft, finishing the design of its major subsystems – including the first Russian active electronically-scanned array (AESA) radar, the Zhuk-AE. This active phased-array radar’s first working prototype also will be displayed for the first time at Aero India 2009.

The MiG-35’s presence is explained by Russia’s participation with this aircraft in the Indian Air Force tender for 126 Medium Multi-Role Combat Aircraft (MMRCA),

Pogosyan from Sukhoi as MiG’s new CEO in December. This appointment was backed by an immediate 15 billion rubles in subsidies from the state budget. Another action in support of this manufacturer came in January, when the Russian Air Force finally agreed to buy out 28 ex-Algerian MiG-29SMTs, which will add another 20 billion rubles to the company’s revenues.

While the MiG-35 inherited its airframe from Russia’s well-known MiG29 fighter, the designers say it is a new aircraft. It will be reportedly much closer to the new MiG-29K 9-41 shipbased fighter version, which was developed for India with a lot of composite

MiG

I

which will be India’s major weapons purchase for the coming years. MiG’s rivals in the tender are the Lockheed Martin F-16, Boeing’s F/A-18, the Dassault Rafale, Eurofighter’s Typhoon and the Saab Gripen. The Indian side released its RFP in August 2007, with the evaluation flights planned to start in 2010.

The future order – which is estimated at approximately $7-10 billion – can give a significant boost to MiG Corp. as well as to the entire Russian aircraft industry. MiG is currently struggling to recover from the failure to deliver 34 MiG-29SMT/UBT fighters to Algeria in 2007-2008. The cancellation of this contract brought the company’s debts to a record 44.6 billion rubles ($1.4 billion). In a desperate attempt to save the second largest national combat aircraft manufacturer, the Russian government placed Mikhail

The MiG-35 will be the first Russian aircraft equipped with an active electronically-scanned array radar

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A E RO I N D I A 2009

MiG

components in the airframe and new wing devices. Because of its extra fuel capacity, the MiG-35’s range has been increased by 50%, and it will carry twice the weapons load compared to India’s current MiG-29s.

Additionally, as with the MiG-29K, production MiG-35s are expected to be powered by Klimov RD-33MK engines. They can deliver a maximum thrust of 9 tons, which is 0.7 ton more than the basic RD-33 variant. The MK version has also received a smokeless combustion chamber to eliminate the aircraft’s smoke trail – making it less detectable by the enemy. Offered as an option is the Klimov KLIVT all-dimensional thrust vector control system, which previously was integrated on the MiG-29OVT technology demonstrator.

But the MiG-35’s main innovation is its Zhuk-AE multi-function X-band radar with an active electronicallyscanned array, being developed by the Moscow-based Phazotron-NIIR company. In fact, the Zhuk-AE is a further development of Phazotron’s Zhuk slot array radar family used on various MiG-29 fighter versions – making it the first AESA radar of Russian design.

Previously, only one Russian combat aircraft – the MiG-31 interceptor developed in the 1970s – had an electronically-scanned array radar, but that was passive. The Zhuk-AE is being designed especially for its use on the MiG-35 and can track and engage both air and ground targets, turning the

MiG-35 into a truly multi-role combat aircraft.

The new radar’s mock-up was first demonstrated with the MiG-35 at Aero India 2007, but for the past two years the designers have conducted intensive testing both on the ground and in the air. At the beginning of December, Phazotron reported on completion of another round of testing, saying that Zhuk-AE “steadily operates in various modes, detecting and tracking air and ground-based targets.” The testing has also confirmed the major technical solutions applied in the radar, as well as the performance capabilities of its subsystems. The company’s report cited MiG test pilot Mikhail Belyaev, who said that “from the very first flights, the radar showed very good results.”

Currently, the radar prototype is operating again on a ground-based test bench – validating the operation of transmit-receive modules made by the Tomsk-based Micran company. Earlier, Phazotron chief designer Yury Guskov explained to the Russia & CIS Observer that the main challenge for designers is to ensure stable performance of the modules, which requires long-term testing.

The Russia & CIS Observer was told by Phazotron representatives that the existing radar prototype to be shown in Bangalore has a smaller antenna array than the one planned for the series production version. Today, it has a diameter of 650 mm, and incorporates only 680 transmit-receive mod-

MiG-35 prototypes should start evaluation testing in India in March 2010

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ules instead of the planned 1,064. More space inside the aircraft’s nosecone is needed to place the larger antenna array, he said, adding that more space will be cleared because Phazotron intends to decrease the size of the radar’s amplifier and some other equipment, while MiG designers also promise to decrease the size of the aircraft subsystems in the nosecone.

According to Phazotron’s Yury Guskov, the Zhuk-AE is able to detect an enemy fighter at a distance of about 130-140 km with its current small antenna array. With the increased diameter and higher number of transmit-receive modules, this detection range is expected to grow to 250-280 km. The Zhuk-AE’s final version is expected to be installed on two MiG-35 prototypes that should go to India for evaluation testing in March 2010.

According to the MMRCA tender requirements, the winner will deliver only four fully-assembled aircraft to the Indian Air Force, while the others are to be manufactured at Indian facilities.

India already has an experience of producing Soviet and Russian aircraft under license. It started with the MiG-27 in the 1980s, and now is assembling Su30KMI fighters at the local facilities of Hindustan Aeronautics Ltd. In addition to the aircraft itself, Russian manufacturers say they are ready to transfer the Zhuk-AE’s production technologies to India as well, which should give the MiG-35 an additional advantage over its rivals in the bidding.

But Phazotron hopes to find an application for its AESA radar in Russia as well. Company representatives said it is expected to be installed in a future version of the MiG-29K ship-based fighter to be developed for the Russian Navy. But this prospect seems to be rather distant. The country’s only aircraft carrier, the Admiral Kuznetzov, is currently equipped with Sukhoi Su-33 sea-based fighters, while the Navy doesn’t plan to lay keels for any new carriers until 2015. On the positive side, this means that Russian designers have plenty of time to finish the radar’s development.

Critical situation for Russia’s airlines Alexey Sinitsky lthough the Kremlin’s spin doctors had coined the “Russia is an energy superpower” mantra during the heady days of soaring oil prices, the country has now suffered a significant downward spiral during the current economic crisis.

Russia cannot expect to be spared by the global downturn, and in reality, today’s slump may be much more painful for Russia than in many other countries, and much harder to recover from.

This crisis is directly affecting the airline industry, as key factors influencing air travel are an economy’s growth rate, the development of trade, and personal income levels. In addition, the air transport sector’s heavy dependence on credit only doubles the impact.

A

A brewing crisis

While the overall air travel statistics for 2008 were positive, Russia’s airlines are heading into turbulent times. According to preliminary estimates, Russian

airlines carried about 50 million passengers last year, up 10% from the 45.11 million transported in 2007. International traffic grew by 13.6% to 23.7 million passengers; domestic traffic was up 8.9% to 26.4 million. Passenger kilometers flown totaled 123.5 billion, indicating an 11.3% year-on-year increase.

In absolute volume terms, 2008 became the most successful year in the recent history of Russian air transport.

Admittedly, the market grew at a slower pace than in 2007, which had seen an 18.6% increase in passengers carried and an 18.2% growth in passenger kilometers flown. Still, a yearly average growth rate in excess of 10% is a commendable achievement for any market.

Last year can be divided into several distinct periods. From February to May, air travel grew more than 20% faster than in the similar period in 2007.

(January 2008 saw a slightly slower growth). There were two growth peaks during 2008 – in February, when domestic traffic soared nearly 30% from the previous year, and in March, when

60

7

50

6

40

26.4 24.25

30 20 10

19.21

20.77

15.88

17.26

20.86

2005

2006

2007

23.7

2008

5 4 3 2 1 0

0 Domestic flights

International flights

Source: Russia’s Transport Clearing House

international traffic exceeded the 2007 result by 32%.

International traffic lost about 15% points in July, leveling off in August at about 113% compared to same month the year before. Domestic traffic sank 10 percentage points in June (a very unusual trend for the high summer travel season), and continued to lose between 3 and 5 percentage points over subsequent months.

From September on, the decline in traffic on domestic and international routes continued almost completely in sync – except for November, when domestic traffic plummeted more than 11% when compared to November 2007. The total number of passengers carried in October came pretty close to the 2007 levels. In November, total passengers carried represented 93.5% of the comparable figure from the year before; it was slightly higher in December, at 97%. Official sources predict a 10% decline in passenger traffic for 2009. Independent analysts fear it may be as bad as a 20-30% downturn.

Fig. 2. Passengers carried per month, 2007–2008

Passengers, million

Passengers, million

Fig. 1. Passengers carried by Russian airlines (total international and domestic flights), 2005-2008

A I R T R A N S P O RT

n Ja

.

r. ay ne ly g. p. t. r. c. v. b.

Fe Ma Ap M Ju Ju Au Se Oc No De 2008

2007

Source: Russia’s Transport Clearing House

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

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A I R T R A N S P O RT

State support needed

Prohibitively high aviation fuel prices and problems obtaining credit have led to the collapse of several Russian airlines, including the five carriers that were attempting to create the AiRUnion alliance (KrasAir, Domodedovo Airlines, Samara Airlines, Omskavia and Sibaviatrans). This damaged the reputation of the entire industry.

Banks reevaluated airline risks upward, either denying loans to carriers or hiking the interest to 25% or more.

Since last October, airlines have been pressing the urgency of state support for their sector. Air transport authorities, for their part, were busy trying to prevent a repetition of the chaos caused by the AiRUnion demise, which saw thousands of passengers stranded at airports. Some fairly quaint initiatives were proposed in the name of consumer protection, such as forbidding airlines to sell tickets earlier than two months prior to the flight date – an idea completely out of touch with accepted international practices. Another suggestion was to have airlines maintain

their minimum solvency margin at 25% of the annual revenue – secured either through a deposit, insurance coverage or a bank bond. As an example, this would require that Russian flag carrier Aeroflot maintain a solvency margin of some 20 billion rubles (around $600 million at current exchange rates).

Withdrawing a quarter of the annual revenue to pay a deposit would spell the end of any airline. Insurance coverage also appears to be a bad idea, as business risk insurance is still in its infancy in Russia. As for a bank bond, securing one would require the airline to provide the bank with commensurate payment.

In other words, all these proposals seem equally wild, and none are given serious consideration at the moment.

The only actual measure taken so far has been to strengthen financial control over the sector. In mid-January 2009, Transport Minister Igor Levitin decreed amendments to Part 11 of the federal airworthiness regulations (FARs), which describe the certification requirements for commercial air transport operators. In accordance with the amendments, an airline facing a shortage of funds must develop and implement a recovery program. The amended document is vague as to where the government’s Air Transport Agency that supervises the air transport industry is going to find enough experts for assessing carriers’ financial perfor-

Despite the annual growth in number of passengers carried, the second half of 2008 turned to be a disaster for Russian air carriers

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Leonid Faerberg

This second-half 2008 traffic slump is explained by the recent changes in prices of oil and aviation fuel, both in global markets and at home, and also by a variety of other factors. Of greater importance now are the consequences of this downturn, rather than its root causes.

mance. Equally unclear are the evaluation methods those experts would use.

It would be unfair to say that the industry’s pleas for help remained totally unanswered. The government in late December released a list of 295 “strategic” companies that may receive state aid in the form of state-guaranteed loans, interest subsidies and other measures of financial support. At present, the list includes only six air carriers: Aeroflot, S7 Airlines, Transaero, UTair, Ural Airlines and the Airline Company Ltd. The choice of carriers on this list appears to be quite logical for those who are in agreement with the controversial idea that only the largest airlines merit priority state support. There are two peculiar things about it, though. One is the mention of the mysterious Airline Company Ltd. This name implies the Rosavia airline – a proposed carrier to be formed from the remnants of AiRUnion. Rosavia officially was registered in mid-January 2009, but the government evidently reserved a place for it on the “aid list.” The other peculiarity is the absence of the state-owned GTK Rossiya airline from this list.

Understandably, there will not be enough state aid for all companies.

Therefore, certain criteria must exist for placing specific businesses on the list.

According to official sources, one such data point for air carriers is the minimum annual traffic level of 1 million passengers, at least one half of which should have been transported on scheduled flights. This easily qualifies GTK Rossiya for inclusion: as per preliminary performance data, the airline carried 3.5 million passengers last year, posting the fourth best result (but losing its traditional third top place to Transaero).

Instead, GTK Rossiya has been put on the list of state-controlled airlines that will become part of the proposed Rosavia. Other carriers on this list are the five former AiRUnion members whose air operator’s certificates have been revoked (KrasAir, Domodedovo, Samara, Omskavia and Sibaviatrans), as well as Atlant-Soyuz, Kavminvodyavia, OrenAir, Saratov Airlines and Vladivostok Air. Rosavia’s stakeholders

AIR TRANSPORT INFRASTRUCTURE 5th ANNUAL PROFESSIONAL CONFERENCE

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Russia’s air transport market has demonstrated sustained growth in recent years. The increase in both passenger and cargo traffic is driving the development of the associated ground infrastructure, which has finally started to catch up with the industry’s needs.

The decline in demand for air travel, first recorded in late 2008, is posing new challenges for the numerous programs to modernize and expand the national airport network and overhaul the country’s air traffic control system. Now, like never before, there is a critical need for comprehensive analysis of the current situation, for sharing opinions and experience, and for the pooling of efforts by all industry players to work out a strategy that would preserve and improve the country’s air transport infrastructure.

The Air Transport Infrastructure conference is a unique industry event bringing together airports, air carriers, air traffic management, fuel suppliers, service providers, financial circles and regulatory authorities. It provides a forum for discussing problems that directly affect further development of the air transport industry.

April 22, 2009 • Moscow • Aerostar Hotel

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KEY ISSUES: • AIR TRANSPORT INFRASTRUCTURE: adjusting development plans to global crisis • AVIATION FUEL MARKET: adapting to new realities and building competitive environment • AIRPORT MODERNIZATION: optimizing ground equipment supplies and implementing up-to-date IT solutions

MEDIA SUPPORT

• AIRLINES AND AIRPORTS: improving cooperation amid market recession • REGIONAL AIRPORTS: implementing new management schemes and seeking investments

WHO SHOULD ATTEND CEOs of Russian and international airports, airlines, ground equipment and fuel suppliers, service providers, government officials, representatives of financial and investment circles, leasing and insurance companies are invited to discuss key industry issues, exchange views and best practices.

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A I R T R A N S P O RT

are the Russian Technologies State Corporation (51%) and the Moscow city administration (49%).

Restructuring by force

The planned merger of predominantly state-controlled airlines into a megacarrier may herald the beginning of a new phase in the development of Russia’s air transport sector. The state has a long-standing reputation as a terribly ineffective owner, as was vividly illustrated by the collapse of AiRUnion.

The largest airline in the failed alliance – KrasAir – had the majority of seats on its board filled by state representatives. There remains hope that, after the property of AirUnion has been transferred to Russian Technologies in what can be best described as covert privatization (by law, state-owned property ceases to belong to the state once it is transferred to a state corporation), the state-controlled carriers will benefit from more efficient ownership. On the other hand, it is not yet known whether such a hurried integration of these airlines will be justified.

Comparisons of the Russian situation to airlines in the West – which have resorted to significant consolidation – are hardly to the point here. Foreign carriers opt for mergers as the last op26

tion, having exhausted all the internal efficiency boosting resources. This is far from true of Russian airlines. In addition, consolidation in Russia presents a tremendous organizational challenge, including the merging of several airlines with different sizes, geographic locations and corporate values into an efficient business.

There also will be the problems of optimizing a future mega-carrier’s fleet and putting a single route network in place. Additionally, consolidation is threatening the membership of GTK Rossiya and Vladivostok Air in the International Air Transport Association (IATA), which could deliver a powerful blow to their prospects for international commercial cooperation.

Despite all these difficulties, the mission to create a Russian “rival to Aeroflot” is well under way – although the question does remain as why the 51% state-owned Aeroflot would need to have such a rival. In fact, the consolidation effort for a new mega-carrier involves such massive administrative resources as makes it hardly possible to predict the outcome of this unprecedented experiment in Russian civil aviation.

All Russian airlines are going through a very difficult period at the moment.

High fuel prices prevented them from

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

Sergey Sergeev

Moscow-based Atlant-Soyuz airline will become a basis for the creation of a new Russian mega-carrier that will also include GTK Rossiya, assets of former AiRUnion alliance and several other government-controlled air carriers

compiling sufficient resources during the summer high season to get through the lean winter months. Borrowing is becoming increasingly difficult, and the population’s purchasing power is shrinking. Large carriers are relatively safe: apart from their sheer size, they have been promised state support. The outlook is much grimmer for small airlines that have no international routes as sources of reliable revenue flows.

Further market consolidation may be afoot, with larger carriers consuming smaller ones.

For many years now, Russian air transport authorities have cherished the idea of slashing the number of airlines, arguing that fewer carriers would be easier to supervise (there are now 173 airlines in Russia, as compared to 269 nine years ago). However, the demise of small air carriers shrinks the country’s transport network and channels passenger flows through the capital. As an example, the easiest way to get from Chukotka in Russia’s Far Eastern Federal District to Khabarovsk – which is also in the country’s Far East – by air today is via Moscow. Any further decrease in the accessibility of air transport could be fraught with grave economic, social and even political consequences.

A I R T R A N S P O RT

The big five

Top Russian airlines demonstrate growth despite the crisis

ecause of the global credit crunch in 2008, Russian airlines could not repeat the impressive 18% growth they enjoyed in 2007. However, the crisis hasn’t yet changed the overall growth trends – the number of passengers in 2008 still rose by almost 10%. Unfortunately, increasing the number of customers does not necessarily mean good financial results and may not guarantee the future of airlines.

Russian airlines carried 49.7 million passengers in 2008. Although this figure may not be impressive compared to the world’s leading carriers, it still represents real progress for Russia’s airlines – which were transporting barely 20 million passengers annually 10 years ago. But growth in the Russian airline business is slower than in markets such as India or China, primarily because ticket prices remain beyond the means of many Russian citizens.

The top five Russian carriers accounted for more than 50% of passenger flights in 2008. Aeroflot remained dominant with 9.2 million passengers – a 13.5% increase over the results of 2007.

Benefiting from its position in bilateral flight agreements between Russia and other countries, Aeroflot has more international access than other carriers. The airline’s number of domestic travelers rose by 27% in 2008, despite the September accident in Perm – which involved Aeroflot regional subsidiary Aeroflot Nord, and resulted in 88 fatalities.

Although Aeroflot is increasing its share of domestic passengers, S7 Airlines still holds first place in this market. According to the airline’s official results, it carried 5.9 million passengers, keeping its place as Russia’s second largest air carrier. However, the annual growth was quite

B

modest – just 3.4% (in 2007 the company had nearly 5.7 million passengers).

In 2008, the main shareholders and managers of S7 Airlines – Natalya and Vladislav Filev – created a new carrier named Globus. A number of S7 aircraft were transferred to this new carrier, along with a thriving charter network.

Globus has not allowed its results to be made public, but the airline may have carried around 600,000 people in 2008.

The creation of Globus and the transfer of aircraft have prompted questions from the government, since the state owns 25.5% of shares in S7 Airlines.

Another private airline, Transaero, rose to third place in the passenger number rankings for 2008, overtaking the state-owned company GTK Rossiya. In

the New Year holidays, leisure traffic remained buoyant because many flights had been booked early in autumn - before the credit crunch’s full impact was apparent – and passengers did not want to incur cancellation charges. The real situation in the leisure market will become clear this spring.

GTK Rossiya is in fourth position with 3.4 million passengers, but has been losing its market share for several years. The airline was set up in 2006 as a merger between two state-owned carriers: St. Petersburg’s Pulkovo and GTK Rossiya from Moscow. Officials expected that a consolidated company would be successful. But without an effective business plan, the consolidation benefits were wasted. Now, GTK Ros-

Expanding its fleet with Boeing 747 and 777 jetliners in 2008, Transaero managed to repeat its 50% annual growth in passenger numbers and became the third largest Russian air carrier

Sergey Sergeev

Polina Zvereva

2007 and 2008, Transaero registered 50% annual increases in passenger numbers, and even the financial crisis hasn’t reversed this trend. Since 2005, Transaero expanded its fleet with several Boeing 747s and 777s. Last year, it carried some 4.8 million travelers, using these additional aircraft on routes from Moscow and St. Petersburg to distant leisure destinations in Asia and the Caribbean. This strategy has worked well, but as economic worries increase, people may choose closer and cheaper destinations for their vacations. During

siya is expected to be merged with the new carrier Rosavia, which was recently established by the Atlant-Soyuz airline (serving 1.4 million people in 2008) and the Russian Technologies state corporation. But analysts doubt that this consolidation attempt will be more successful than the previous one.

Meanwhile, GTK Rossiya’s position in the airline ranking may be threatened by UTair, which carried approximately 3.2 million customers and became Russia’s fifth biggest carrier in 2008.

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B U S I N E S S AV I AT I O N

Russia’s business aviation: Never the same again?

Anna Nazarova and Elizaveta Kazachkova he global economic recession is producing a noticeable effect on Russia’s business aviation market – even if the full impact cannot be measured yet in terms of pure statistics.

According to Russia’s United Business Aviation Association, business charter traffic to and from Moscow fell only 15% in November 2008 compared

Sergey Sergeev

T

Even the less pessimistic players on the Russian scene agree that the industry is in the state of alert anticipation, as customers strive to optimize their structures and cut costs. While certain expenses can be avoided by aviation users in switching to scheduled carriers, there still are many routes where business charters cannot be replaced – especially when it comes to flexibility or convenience. Rustem Arinov, the Head of Aircraft Management at Moscow’s office of Capital Jets, forecasts that the

The days of large-cabin luxurious jets are likely to be over, as the crisis is making Russian business aviation sector look more seriously at operating as a business

to the same period of the previous year, and even showed some signs of recovery during the winter months.

However, most local operators and charter brokers admit that the demand for their services has suffered an acute decline, which some estimate at almost 50%. This has led to increased competition as well as a 10-15% decrease in flight hour prices.

“There is an evident decline in business aviation activity,” says Evgeny Bakhtin, general director of Avcom-D, one of Russia’s oldest operators and the business aviation terminal owner at Moscow’s Domodedovo airport. “One of the clear signs is an increase in offers on the used aircraft market, with owners getting rid of their assets.”

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decrease in demand will continue over the medium term as the economic situation continues to deteriorate, but once business comes round from the initial shocks of the ongoing crisis, people could start using business jets again.

In the meantime, operators working in the Russian market are doing the same as their clients – looking for ways to enhance their efficiency. Some of the international operators like Europe’s VistaJet have chosen to temporarily suspend their plans for Russian expansion until better days. While such better days are expected to come, Sergey Koltovich, a consultant for Jet Alliance, observes that the market might never be the same again. According to Koltovich, the era of large-cabin luxurious jets is in the past, and business

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

aviation is likely to finally achieve its real meaning: meeting the needs of companies and their executives.

Another consequence of the crisis, along with an inevitable decrease in the number of operators – especially charter brokers – may be that the remaining companies will be more aggressive in fighting what has traditionally been lagging in this country: inadequate legislation and undeveloped infrastructure, unfair import policies and the absence of domestically-produced aircraft.

Whatever the outlook – be it cautiously optimistic or outright downbeat – it remains clear that the financial crisis and decreasing oil prices have changed the face of Russia’s business aviation clientele, as banking, oil and construction have been the major drivers behind the country’s financial growth in the last few decades.

However, as costs need to be cut but traveling still has to be done, Russia might be witnessing the dawn of its longawaited general aviation sector. Peter Hogsberg, Regional Director of Air Alpha (the Danish firm representing Pilatus and Piper Aircraft in Russia), expresses much optimism in the future of smaller single- and twin-engine turboprops for the country’s vast territory.

Having finally acquired Russian type certificates for Pilatus PC-12 and four Piper models, and establishing a maintenance station in Samara, Air Alpha is anticipating a relevant market response.

“If you look at the size of the country and you look at the infrastructure that is hardly existent, there are places where you can’t get any other way than by air,” Hogsberg explains. “People will still do business, even with the economic crisis going on. In due time it will blow over, and everyone will be back to trying to earn money”.

B U S I N E S S AV I AT I O N

Competing for clients

Moscow’s Sheremetyevo airport opens a hangar facility for business aviation

he Russian business aircraft fleet has expanded dramatically over the past five years.

By contrast, relevant ground services at Moscow’s main airports had lagged. However, the situation is starting to change: January 2009 saw the beginning of final construction for a business aircraft hangar at Moscow’s Sheremetyevo airport.

Of all the Moscow airports, Sheremetyevo historically has been the least inclined to handle business charter flights. It has operated two business aviation terminals for over a decade now, but business traffic at Sheremetyevo remains comparatively low – at not more than 10 movements a day.

This situation is partially due to the closedown of one of the runways for repair in spring 2006. The airport then chose to slash the frequency of charter and business aviation flights in order to reduce overall throughput.

As a result, the bulk of business traffic moved to two other Moscow airports: Domodedovo and Vnukovo. At about the same time, Vnukovo inaugurated a new business aviation terminal and hangar complex, further increasing its attractiveness to business operators.

Sheremetyevo is going to find it hard to regain the loyalty of business operators, who demand a special level of services. Vnukovo has moved so far ahead in this respect that it will be difficult to match, as this airport offers an expanded parking area, a hangar area, a Jet Aviation MRO (maintenance, repair and overhaul) station and the spacious Vnukovo-3 terminal operated by specialist management company Vipport.

But Sheremetyevo still has a chance.

Prior to the economic crisis, Vnukovo

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had difficulties meeting the high business aviation demand, and was charging such high fees that it began to alienate foreign operators.

Sheremetyevo’s plans to win back the premium segment had been fairly ambitious. The original idea was to free up the entire departure lounge at Terminal 1 for use as a business terminal. This project eventually was scrapped. Nevertheless, the airport operator decided to go ahead with the development of a business aviation center, and set up the Avia Group subsidiary for this purpose.

Apart from building the hangar and terminal, Avia Group is tasked to open an MRO facility at the airport. It is to operate jointly with Finnish specialist Airfix Aviation, which holds maintenance licenses on all the major business jet types in operation.

The first phase of Sheremetyevo’s business aviation center project involves the hangar area’s completion, which began construction in 2007, along with the introduction of a deicing station. The two-bay heated hangar is large enough to fit two Boeing Business

Jet-sized (BBJ) corporate airliners, or several smaller business aircraft.

The project’s second stage will involve the construction of a passenger terminal, which currently is in the conceptual design phase. After it opens in 2010, the 5,500 sq. meter terminal will be able to process up to 35 departing passengers per hour, along with the same number of arrivals. At an annual throughput of 75,000 passengers, it will service both international and domestic business aviation flights. The underground floor of the future terminal will have a confidential entrance for VIP passengers. Situated on the ground floor will be departure and arrival areas, bars, a duty free shop, passport, customs and security control, four VIP lounges; while the first floor is to house a modern business center.

The airport is working with several airlines to introduce a range of additional services for the business aviation facility, including a maintenance station for business aircraft. All this may turn the airport into a capable player in the Russian market of business aviation services.

Sheremetyevo’s new business aviation hangar will be able to house two BBJ-size corporate airliners or several smaller aircraft

Sergey Sergeev

Anna Nazarova

RUSSIA/CIS OBSERVER № 1 (24) FEBRUARY 2009

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Going strong Igor Afanasyev he Russian space industry had another successful year in 2008, leading the world in the number of space launches and satellite deployments. A total of 27 launches were performed from Russian cosmodromes – one more than in 2007. This positive trend is expected to continue in 2009, although the financial crisis may affect the industry’s longer-term development.

Russia’s space launch operations last year were conducted from Baikonur Cosmodrome (19 launches), Plesetsk (six), Kapustin Yar (one) and the Yasny launch site (one). The most frequently used launch vehicles were of the Proton-K/M family (10 launches). Among other rocket types involved were eight Soyuz-U/FG series vehicles, two Kosmos-3Ms, two

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Molniya Ms, two Dnepr rockets, one Soyuz-2.1b, one Rockot and one Zenit3SLB. All the launches were successful – except for a March 15 mission, when the Briz-M final stage of a Proton-M rocket failed to deliver the US-built AMC-14 telecom satellite to geostationary orbit.

The craft is now ascending to the proper orbit under its own power.

Russian launch vehicles deployed a total of 43 spacecraft in 2008, compared to 49 the year before. More than half of these (22 satellites) were launched for foreign customers. The number of spacecraft launches for Russia also grew, to 21 from 17 in 2007.

These included six manned vehicles, six navigation satellites, four communications satellites (three military and one civilian), two optical reconnaissance satellites, two missile launch detection satellites and one experimental craft.

Grigory Sukharev

More than half of a total 43 spacecraft deployed by Russian launche vehicles in 2008 were launched for foreign clients, including this European GIOVE-B satellite orbited from Baikonur Cosmodrome

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Launches from Baikonur Cosmodrome under the Roskosmos Federal Space Agency’s manned space program included the Soyuz TMA-12 and -13 crew transport vehicles atop Soyuz-FG rockets, and the unmanned Progress M-63, M-64, M-65 and M-01M supply craft carried to orbit by Soyuz-U’s.

Under a separate contract, a ProtonM/Briz-M lifted off from Baikonur carrying the Russian Express-AM33 geostationary communications and broadcasting satellite.

Two Proton-M/DM-2 rockets from Baikonur Cosmodrome deployed six Glonass-M satellites to enhance the Russian Glonass global positioning constellation.

Two optical reconnaissance satellites (one Persona and one Kobalt-M) were lofted from Plesetsk Cosmodrome by a Soyuz-2.1b and a Soyuz-U launch vehi-

cles, respectively, in the interests of the Russian Defense Ministry. A Rockot/ Briz-KM rocket, launched from Plesetsk, deployed three Gonets-M military communications satellites and the Yubileyny experimental microsatellite. Two Oko ICBM launch detection satellites were launched, one from Plesetsk on a Molniya M rocket and the other from Baikonur on a Proton-K/DM-2. These two craft joined Russia’s missile defense early warning constellation.

Seven geostationary telecom satellites were launched for foreign customers: THOR 5 for Norway’s Telenor Satellite Broadcasting telecom provider; АМС14 for US-based SES Americom Inc. and Ciel-2 for Canada’s Ciel Satellite group; Astra 1M for the European satellite services provider SES ASTRA; AMOS 3 for Israel's IAI Spacecom; Inmarsat-4 F3 for the Inmarsat international communications company; and Nimiq 4 for Canada's Telesat. AMOS 3 was deployed by a Russian-Ukrainian Zenit-3SLB rocket with the DM-SLB upper stage. The other six spacecraft were carried to orbit by Proton-M/BrizM rockets, with the launches operated by the International Space Services consortium. All the geostationary space launches were conducted from Baikonur.

Two Kosmos-3M rockets from Plesetsk carried the SAR-Lupe 4 and SAR-Lupe 5 military radar reconnaissance spacecraft to sun-synchronous orbits in the interests of Germany’s Bundeswehr.

A Soyuz-FG/Fregat from Baikonur deployed the GIOVE-B demonstrator satellite intended for verifying the critical technologies of Europe’s Galileo space-based satellite navigation system.

This mission was performed under the management of the Russian-European Starsem commercial launch services company.

For the first time in years, a space launch was conducted from the Kapustin Yar cosmodrome. A Kosmos3M deployed five Orbcomm-R satellites for the US-operated global messaging system, along with one Orbcomm-CDS3 new-generation technology demonstration satellite.

Sergey Kazak

S PAC E B U S I N E S S

The six Glonass-M spacecraft sent into orbit in 2008 by two Proton-M/DM-2 rockets were not enough to complete the development of Russia’s Glonass global positioning satellite constellation

Five RapidEye Earth observation satellites were launched on a Dnepr rocket from Baikonur Cosmodrome for the German company, RapidEye AG. Finally, a silo-launched Dnepr rocket from the Russian Strategic Missile Forces' Yasny base inserted Thailand’s THEOS Earth observation satellite into a parking orbit.

Space activities for Russia

Last year saw a slight increase in the overall number of space launches in Russia and, more importantly, in the number of Russian spacecraft placed in orbit.

The country fully met its obligations under the International Space Station program. Russia also maintained the minimum required strength of its military orbital constellation, which reached about 60 spacecraft by late 2008.

Despite this, the 2008 space launch schedule was not fully met: the CORONAS-Photon solar imaging mission, Meteor-M and Electro-L meteorological satellites, and Condor-E radar remote-sensing satellite remained on the ground. In fact, not a single Russian-built science spacecraft was orbited last year.

Russia keeps lagging behind the world in terms of Earth remote sensing: its only operational civilian Earth observation satellite currently in orbit is the Resurs-DK1 which was launched back in 2006. Russia still does not have a single synthetic aperture radar (SAR) satellite design, although such space-

craft are already being operated by Canada, China, Germany, India, Israel, Italy and the United States.

The Glonass constellation failed to expand to the 24 operational satellites required for global positioning capability. Together with the spare satellites, a completed constellation should comprise between 28 and 30 spacecraft.

Reliable coverage of Russia’s territory requires a minimum of 18 Glonass satellites. This strength was achieved only occasionally last year. Typically, not more than 15 to 17 spacecraft were operational at once, as some of the satellites were down for scheduled maintenance and others withdrawn from service at the end of their operational life. In addition, the development schedule for new, longer-lived Glonass satellites suffered more delays in 2008.

The situation with launch vehicles also faces challenges. The current Soyuz and Proton workhorses have been around for more than 40 years. The new Angara launch vehicle, which has been identified as a priority project, is due to enter development testing in 2010. Static test firings of the rocket’s separate stages were originally planned for 2008, but have not been started yet. In the meantime, the construction of the Angara launch site at the Plesetsk cosmodrome is approaching completion. The launch pad was installed there in mid-October.

The Russian space industry is plagued by continuing deterioration of

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S PAC E B U S I N E S S

production infrastructure and an acute shortage of qualified workforce. Years of severe underfunding have cost Russia its ability to manufacture a number of space equipment components, which now have to be procured abroad.

Key trends in 2008

The main positive development of 2008 became the Russian government’s acknowledgement of the strategic role the space industry has to play in ensuring national security and technical progress.

The planned budget allocations for space exploration were increased on two occasions last year – in March and July, eventually bringing the combined funding of the Federal Space Program, the Glonass program and the program to develop Russian space launch sites up to 49.7 billion rubles (some $1.5 billion).

This year, 79.7 billion rubles (about $2.5 billion) could be spent on the three programs. This would make the Roskosmos budget comparable to that of the European Space Agency (ESA) and larger than the funding available to the national space organizations in China, India, Israel or Japan.

Efforts continued last year to merge separate Russian space and rocketry specialists into large integrated structures.

Two such structures have been built by now, one around the Khrunichev Space Center and the other with the NPO

Mashinostroyeniya Corporation at its center. The TsSKB-Progress Samara Space Center might shortly become the core of yet another holding company. It is too early to tell whether these consolidation activities will prove successful, but in any case they can bring an immediate positive result in the form of infrastructure modernization. Retooling has already started at the Omsk-based Polyot and Perm-based Proton-PM subsidiaries of the newly-founded Khrunichev holding company.

Russia's space industry is increasingly moving towards international cooperation in civil space exploration projects. At times this process slows down separate programs and causes the country to overlook national priorities.

For example the International Space Station program, while providing the crucial lifeline to the industry all these years, has simultaneously been eating up significant funds that could otherwise have been spent on the creation of Russia’s own scientific spacecraft.

On the other hand, international cooperation gives Russia access to cutting-edge Western technology. The NPO-PM company last year signed an agreement with Thales Alenia Space on the joint development of the Express4000 telecom satellite platform. In late 2008, Russia's political leadership increased efforts to promote domestic space technology to overseas markets.

A number of space cooperation deals, mainly involving the Glonass system, were struck during President Dmitriy Medvedev's visits to India and Latin American countries (Brazil, Venezuela and Cuba). India, in particular, will be granted access to Glonass, and will use its launch vehicles to deploy some Glonass satellites. Syria is also planning to join Glonass.

Several space-related projects got a boost last year, including the construction of the Vostochny cosmodrome in Amur Region. A Roskosmos commis-

Sergey Sergeev

For the first time in several years, a space launch was conducted in 2008 from the Kapustin Yar cosmodrome in Southern Russia

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sion inspected the prospective construction site in late November, giving a goahead for the design and survey phase that should begin in the near future and continue through 2010. The cosmodrome complex will comprise about 50 facilities, including launch pads for manned and unmanned missions.

Khrunichev, TsSKB-Progress and the Energia Corporation have each commenced research and development work on a new launch vehicle design. In a separate effort, Energia has revealed a newgeneration manned spacecraft project it plans to co-develop with the ESA. Although Energia’s design was not unconditionally supported at a meeting of ESA ministers in late November, Roskosmos has repeatedly stated that work on the project will continue whether or not the European agency joins it.

What next?

Russia's space industry is expected to continue developing dynamically through 2009. Roskosmos’ launch schedule for this year envisages 39 space launches from the Baikonur and Plesetsk cosmodromes. A total of 43 spacecraft should be deployed, including four manned Soyuz vehicles and six scientific craft.

On the other hand, the global economic crisis may amend plans over the longer term. The Russian Defense Ministry recently announced its intention to reduce the number of military satellite launches. This move reportedly will not affect the overall number of satellites scheduled for launch in 2009.

In fact, more Glonass craft might eventually get into orbit this year than originally planned. The Defense Ministry has suggested that the 2009 space launch targets are attainable through a more rational use of Roskosmos' capacities, sea-based launch sites and cluster launches.

Roskosmos head Anatoliy Perminov remains optimistic, saying Russia is not planning at this point to abandon or delay a single national space program because of the financial crisis. Nevertheless, Perminov admits that "this could happen if the crisis gets worse".

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