Russian Sanctions Avoid Direct Hit on Civil Aerospace

 - September 19, 2014, 11:58 AM
The Superjet 100 airliner built by Russia's Sukhoi is not subject to new European Union sanctions against parent company United Aircraft Corp., but restrictions on access to capital markets have squeezed the wider Russian aerospace sector. (Photo: Superjet International)

The latest round of economic sanctions imposed against Russia by the U.S. and European Union (EU) did not directly target the civil aerospace and air transport sectors, but they might yet inflict collateral damage on those industries. The U.S. sanctions, announced on September 12, included the Rostec defense group, which harbors ambitions in the civil sector, such as its planned joint venture with Canada’s Bombardier to build Q400 regional airliners in Russia.

On the same day, the latest wave of EU sanctions specifically named United Aircraft Corporation (UAC), the state-backed conglomerate that encompasses most of Russia’s military and civil aviation ventures. However, in both cases, the small print in the complex sanctions documentation indicates that the bans on exporting technology to those ventures do not relate to non-defense-related programs, such as the SSJ-100 airliner marketed by the Superjet International joint venture between UAC subsidiary Sukhoi and Italy’s Alenia Aermacchi group.

We don’t see any effects on the civil aviation sector,” said a Superjet spokesperson. “As a consequence, this will not affect Superjet International’s activities. For the time being, we have not suffered any particular restrictions.”

A Bombardier spokeswoman pointed out that Rostec does not appear on the list of Russian companies covered by existing Canadian government sanctions. However, she acknowledged that the company recognizes the implications of the increasingly strained political atmosphere between Russia and Western countries over the military crisis in Ukraine, even as it continues discussions aimed at agreeing plans for a Q400 assembly line in Russia. “We are meeting with [Rostec] on an ongoing basis, and we remain optimistic that we’ll be able to conclude [negotiations] in 2014,” she told AIN. “However, considering all of the developments of late, we’re now being realistic in that the timeline could shift.” So despite the immediate absence of Canadian sanctions targeting Rostec, Bombardier must contend with what the spokeswoman referred to as “other barriers in the way” and “ongoing sensitivities we need to be mindful of.”

What seems clearer is that sanctions are significantly affecting the ability of leading Russian banks to raise new capital in U.S. and EU markets, raising great concern within Russian industry, including aerospace. UAC president Mikhail Pogosyan told Russian news agencies this week that the squeeze on credit is constraining the group. “It is not easy,” he commented. “On one side, there are not any catastrophic consequences that may stop everything tomorrow. On the other, the cost of borrowed money is rising and lending mechanisms have become notably more complicated.” UAC often acts as the guarantor of loans to fund developments by subsidiaries such as Sukhoi and Irkut.

At the same time, Russia’s rouble has collapsed in value on currency markets, last week dropping to a low point against the dollar not seen since the country’s banking crisis in 1998. If the situation continues, it will weaken the buying power of Russia’s aerospace industry for importing Western equipment. Meanwhile, the domestic economy is clearly suffering, potentially manifesting itself with weakened demand for air transport.

It remains unclear whether or not U.S. and EU authorities purposely avoided the direct targeting of civil aerospace with their sanctions, mindful of their potentially negative effects on leading airframe makers Boeing and Airbus and their many suppliers. By contrast, the sanctions directly targeted the oil and gas industries. So far, Russia has not followed through on its threat to ban European airlines from using its airspace for flights to and from the Asia-Pacific region in retaliation.