Russia opens up about bizav reform

 - May 16, 2011, 11:00 PM

Business aviation companies eager to tap Russian private and corporate wealth could be in luck here in Geneva this week because the country’s economy is bouncing back and Russians are once again shopping for aircraft. Russia’s economy is seeing growth rates as high as 10 percent–a figure that puts most of Western Europe in the shade. This prosperity is being driven in no small part by the elevated price of oil, which indirectly lines Russian pockets with petrodollars.

More good news comes from the fact that over the past two years the Kremlin has eased import duties for foreign-made business jets. Now such aircraft with a maximum zero fuel weight of between two and 20 metric tons (that is, up to just over 44,000 pounds) can be imported at no charge. Since the Gulfstream G450 is largest aircraft meeting these criteria, most of the revived Russian interest lies with smaller or similarly sized aircraft. Larger models are still subject to import duty so many Russian buyers would still avoid legally importing them into Russia by using one of several offshore registers.

In terms of frequency of business aircraft movements, Russia has come back to levels last seen before the global financial crisis, having passed the low point in 2009. The summer of 2010 saw almost the same traffic figures as 2008.

Traffic Increase Foreseen

So what comes next? Leonid Koshelev, chairman of the Russian United Business Aviation Association (RUBAA), gave AIN an optimistic outlook in an interview ahead of the EBACE show. He said that the early months of 2011 showed further growth, and he predicted that the coming summer is expected to bring about a 10-percent increase in traffic.

RUBAA is continuing its campaigns to make business aviation in Russia safer and more professional and recent legislative improvements have made these tasks easier. The association has been pressing Russian officials and politicians to accept that if they make Russia a more user-friendly environment for aircraft owners, it will encourage Russian owners to register their aircraft at home instead of opting for offshore registration, which results in less local control.

While admitting that Russia’s aircraft registry is growing slowly, Koshelev said new amendments to the law are coming and will soon make Russia a better place for local owners to register their aircraft than most of Europe, where financial conditions have been tightened up recently. RUBAA is also pressing for more flexibility in Russia’s tax regime.

In the past couple of years the main driving force behind the improvements has been the Russian government, and Koshelev believes that more progress could result from next year’s presidential elections. In simple terms, Russian politicians have come under increasing pressure, especially from supporters in the local business community, to improve the country’s reputation as a place to do business.

“Most of the business community in this country continues using foreign-registered aircraft for their air travel and is not much concerned doing this,” said Koshelev. “But the owners are getting more and more interested in registering their assets in Russia if this promises lower expenses and easier operations.”

Rationalizing the Rules

The issue of cabotage–for example, market access for charter operations–also is being addressed. “The center of this problem is a peculiar understanding of what cabotage is in this country,” Koshelev explained. Today, the Russian law considers any flight–commercial or private–of a foreign-registered aircraft between two airfields in Russia as cabotage. In the past the Russian government was not much concerned with this discrepancy. But now, in an effort to align its legal structures more closely with those of the West, the Kremlin appears to be ready to rationalize rules, which in practice have not actually been applied in a coherent way.

RUBAA is urging the Russian government to accept all aspects of the Stockholm Convention on customs rules in a way that facilitates temporary admission into Russia of foreign-registered assets, including aircraft. This would effectively eliminate the cabotage issue that has been darkening the reputation of Russia and its business aviation practices for decades. It would also avoid ridiculous situations in which aircraft with technical issues can be trapped on the ground for days simply because a part cannot readily be imported.

“In the past the [Russian] officials were suspicious if someone came and offered changes to the legislative base in the belief that the person concerned was soliciting the interests of certain groups,” Koshelev told AIN. “To overcome this sort of suspicion, RUBAA explained its initiatives with presentations on Western laws and industry documents, which have been used successfully in Europe or U.S. and proved their worth over years. The government accepts this sort of explanation.” However, this has required a lot of effort on the part of RUBAA, including translation of documents since most Russian officials still do not speak any foreign languages.

Government Aircraft

Another positive factor for Russian business aviation has been the recent acquisition of European-made business jets by Russia’s Special Air Detachment, the government’s flight department. A couple of French-made Dassault Falcon 7X jets were acquired last year and President Dmitry Medvedev sometimes opts to use one of these rather than one of the Russian Ilyushin-96s or Tupolev-134s available to him. Indeed, last month, after having been on board government flights subject to technical problems Medvedev was quoted in the French press complaining about the quality of Russian aircraft.

In February 2011 the government openly declared its intent to purchase two VIP-configured Airbus A319s. “We feel a real change in the attitude of government officials to business aviation: they used to see it as a pure luxury, and now they try to think of it as a means of transportation,” said Koshelev.

As recently as five years ago, when RUBAA leaders were asking for removal of import tax on Western business jets, they were often criticized by the officials. Koshelev remembers Russia’s former Minister of Economics and Trade German Gref telling him that it would be politically unacceptable to reduce tariffs on “luxury” goods at a time when politicians were railing against a widening gap between rich and poor. Since then, Gref has become president of Russia’s Sperbank and has apparently allowed himself to be unburdened from his puritanical objections to private aircraft.

The need to help business aviation development is now often seen from the viewpoint of improving access to this vast country. “[At] a conference recently a top-ranking official was making a speech in support of business and general aviation development. He was using many arguments from RUBAA papers,” said Koshelev. “I could not believe my ears; it was a fantastic feeling that after so many years they began speaking same language as us.” 

And yet it is too premature to speak about Russia having made it into the club of countries most friendly to business aviation. While local airlines have largely been reformed into competitive businesses, most of the local airports and aircraft manufacturers have not. These reforms are necessary and unavoidable, RUBAA believes. Making them happen will require a lot of effort, including that of RUBAA leaders, to explain the merits of adopting world’s best practices and global thinking.