30 March 2017

** Russia: Considering a State Defense Giant's Potential Power Grab


In what could be one of the largest defense sector consolidations in years, the Russian government is considering a proposal for state defense giant Rostec to take over United Aircraft Corporation (UAC). This umbrella company oversees the bulk of Russia's military aircraft production, along with models for civilian and transport use. Last year, for example, UAC delivered 124 military and 37 civilian aircraft. So far, Russian Trade Minister Denis Manturov has said the takeover is under evaluation.

The Russian defense industry has already been consolidated somewhat, largely because the country's ongoing financial crisis has curbed state funding for military production. Late last year alone, the Kremlin had to provide about $12 billion to help ailing defense corporations from going under. UAC is not one of the ailing companies, making some $4.3 billion in profits last year. Yet there are technical reasons that its consolidation makes sense: Rostec already owns Russian Helicopters, whose production overlaps significantly with UAC's.

But there are strategic reasons for the takeover as well. UAC would be a lucrative prize for Rostec CEO Sergei Chemezov. Long one of the strongest elites under Russian President Vladimir Putin's government, Chemezov's initial career wedded a military education with engineering expertise and work for the KGB. This knowledge made him the ideal candidate to eventually run Russia's defense sector. Moreover, he befriended Putin while working for the former Russian intelligence agency in East Germany, and they continued to work together during the 1990s as Putin rose to power.

However, though Putin elevated Chemezov, like many of his subordinates, into the country's elite ranks, the Russian leader has also capped Chemezov's power in the past to prevent Rostec from consolidating the entire defense sector. Currently Rostec oversees about 65 percent of the country's defense industry production (excluding industries related to space and nuclear weapons). Only 10 or so major defense production companies remain out of Rostec's reach. UAC is one of them.

Russia has seen several power grabs for assets in recent years, as the country's economic resources dwindle in recession. The Kremlin cracked down on many grabs, particularly by regional leaders. Still, a few elites have or are attempting to make power grabs beyond Kremlin reproach. Igor Sechin, CEO of state oil giant Rosneft, has reorganized the Federal Security Service's anti-corruption units and taken over oil company Bashneft. Chechen President Ramzan Kadyrov, moreover, has demanded control of his republic's oil assets.

Chemezov's attempt to take UAC could be another case of a grab for power. Starting with the ouster of UAC chief Mikhail Pogosyan, there were several management upheavals in the company in 2015 and 2016. Chemezov replaced Pogosyan with his own loyalist, starting the gradual takeover. It remains to be seen whether the Kremlin, which has sought to prevent entire sectors such as defense from falling under the control of one man, will sanction the takeover.

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