Russian MRO Industry May Be on Verge of Serious Crisis

Russian MRO industry may be on the verge of a serious crisis due to the plans of the Russian government for a sharp reduction of funding of national aviation, which may result in the suspension of many projects in its MRO segment.

The current situation in the Russian aviation industry remains difficult, due to economic sanctions imposed on the country, as well as the annexation of Crimea, which could cost Russia about RUB 1 trillion (USD $30 billion) during the next several years.

In this regard, the Russian government is considering massive spending cuts, which may affect some strategic investment programs.

One of them is the existing state program “On the development of Russian aviation industry during the period of 2013-2025,” which the total amount of funding is estimated at 991.6 billion rubles (USD $30 billion) of which 714.1 billion rubles are expected to be provided from the state budget. A significant part of this sum is allocated for the development of the country’s MRO industry, mainly through the provision of state subsidies to some national leading MRO service providers.

 

Possible suspension of industry projects

The forthcoming cut of subsidies and the imposed sanctions may result in suspension of a number of important industry projects, including those which involve the participation of foreign investors.

For example, there is a possibility that the current unfavourable business environment in Russia may negatively affect plans of the U.S. AAR company for the implementation of the largest project in the history of the country’s MRO industry, which involves the construction of Russia’s largest MRO center, which is expected to be located in the Ulyanovsk-East special economic zone in the city of Ulyanovsk.

The new center is expected to be commissioned at the beginning of 2015 and will specialize in the provision of MRO services mainly to such aircraft as Boeing 777, Boeing 747, and Airbus 340.

According to Vitaly Dudin, head of AAR Russia, the Russian subsidiary of AAR, the company still hopes to start the project on time and to launch construction works since July 1 of the current year. At the same time, the company has also expressed its fears that the imposition of further sanctions on Russia, as well as imposition of mirror sanctions by the Russian government could seriously complicate the implementation of the project. In addition, this may also result in the revision of plans of Russian expansion by other foreign MRO services providers.

 

Tightening conditions for foreign companies

The situation may be also aggravated by the fact that currently the Russian parliament is designing measures, aimed at tightening conditions of operation in the Russian market for foreign companies, including through the design of a law, which will allow the government to confiscate assets of foreigners in some cases.

The new provocative law is known as “Of confiscation property, assets and accounts of European and U.S. companies, operating in Russia,” while its adoption may negatively affect plans of foreign investors for further expansion in the Russian market.

The design of the law by the Russian Council of Federation and the State Duma is currently underway and there is a possibility that its adoption may take place already in the coming weeks. The adoption of this law is expected to become a response of Russia to the next package of sanctions on the country, which was recently approved by the U.S. Congress on Russia and which are considered by some analysts as the toughest since the times of Cold War.

It is currently difficult to say which foreign assets may become subject to confiscation, but theoretically the Russian government will have a right to seize all kinds of assets of foreign companies, operating in the country.

 

Other sanctions

Among the other sanctions from the Russian government, which may negatively affect both the domestic and foreign MRO service providers are the imposition of customs duties on the supply of components and spare parts for foreign aircraft and in particular Boeing and Airbus, which were abolished in 2011, as well as creation of obstacles in hiring of foreign specialists in the field of MRO by Russian MRO service providers.

Finally, the government may return compulsory licensing on the imports of high-frequency radio equipment and devices to the country, which was abolished in recent years.

The latest measures are expected to be implemented as part of recent statements of Russia’s Deputy Prime-Minister Dmitry Rogozin to reduce import dependence on foreign technologies in the field of aviation and in particular in the MRO segment.

According to an official representative of the Russian Association of Airlines, this may significantly increase the costs of the local providers of MRO services and, in turn, will result in the increase of prices for their services. The increase of costs and associated with them prices will be also due to the fact that at present the share of Boeing and Airbus aircraft in total Russian aviation fleet reaches 83 percent. This is the highest figure in the history of Russian aviation. The market is dominated by narrow-bodied Boeing 737 and Airbus A320 aircraft, which form the basis of the Russian MRO market.

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