Colonel Christopher Langton, head of the Defence Analysis Department at the International Institute of Strategic Studies (IISS), told ISN Security Watch this week that given Russia's growing aerospace industry, Russia needed cutting edge technology and "EADS presents Moscow an opportunity."
According to Langton, Vneshtorgbank saw the opportunity to buy EADS stakes last summer, when their value declined after the crisis caused by the delay in delivery of the Airbus A-380.
“The whole question must be put in the broader context of Russo-European strategic relations, which entail not only EADS and defense, but also energy security and supplies," he said.
"Mr [Russian President Vladimir] Putin knows that Europeans are particularly sensitive to energy matters after last year's Ukraine gas crisis, and thus a grand bargain between Moscow and its Western European counterparts would be welcomed by Paris and Berlin.”
Russia's largely state-owned Vneshtorgbank has become the single largest outside investor in EADS, and observers are concerned that Moscow is seeking a seat on the board of the European defense giant.
By Federico Bordonaro for ISN Security Watch (04/10/06)
Recent key events regarding the European Aeronautic Defence and Space company (EADS) are raising political and security concerns in France and Germany, with two important financial developments in particular raising eyebrows in Paris in Berlin.
First, in early September, Vneshtorgbank - 99.9 percent owned by the Russian state - purchased 5.02 percent of EADS stakes. The move was interpreted by many in Western Europe as the beginning of a Russian assault on the EU's most successful defense corporation, and the issue gained center stage at the 22 September Franco-Russo-German meeting in Paris.
European and trans-Atlantic security experts seem to share the sentiment that Vneshtorgbank will soon try to augment its stakes in EADS in order to win a place on the board for Russia - a move that Sergei Prikhodko, a Russian foreign policy presidential aide, predicted last month when he said Russia would “insist on at least a blocking stake.” However, Russian officials later denied that was the goal.
French observers have expressed anxiety over the development, as EADS is considered to be one of France's most strategic firms. EADS also holds a 46 percent stake in another top French defense group, Dassault.
Furthermore, EADS shareholders likely would not be willing to accept a strong Russian role in the corporation, as it would violate the group's charter, which explicitly forbids any seat being taken on its board without the permission of its main stakeholders, DaimlerChrysler, Lagardere, Sepi and Sogeade.
A second financial development in late September also had observers on edge. The German group DaimlerChrysler announced it would diminish its stakes in EADS from 22.5 percent to 15 percent. Immediately following the announcement, sources said the German government would soon take a stake in EADS in order to rebalance the Franco-German equilibrium, both financially and politically.
EADS has in fact a complex management and shareholder architecture. It is a Franco-German giant with significant Spanish and British (in Airbus) participation, whereby Paris and Berlin have always been careful to maintain the same economic and strategic weight. DaimlerChrysler's decision will mean fewer German stakes and will likely trigger a counter-move by Berlin's decision-makers, especially in light of Russia's growing interest in the company.
An official 1 October statement by the German government ruled out the possibility that Berlin, which has consistently worked to avoid any state involvement in EADS, may step in any time soon. Still, observers were left wondering about Germany's future intentions.
After a turbulent year - during which EADS was involved in a financial scandal (the Clearstream affair) and sharply criticized for its delay in the production of the civilian aircraft Airbus A-380 - the European defense corporation is now the center of attention for political and strategic analysts. The fundamental question is whether a deeper industrial cooperation between Russia and the EU giant would help Moscow gain a significant strategic influence over the future orientation of Europe's main aerospace player.
Russian courtship, European diffidence
Russia's interests in deepening its industrial cooperation with EADS are easy to understand.
Colonel Christopher Langton, head of the Defence Analysis Department at the International Institute of Strategic Studies (IISS), told ISN Security Watch this week that given Russia's growing aerospace industry, Russia needed cutting edge technology and "EADS presents Moscow an opportunity."
According to Langton, Vneshtorgbank saw the opportunity to buy EADS stakes last summer, when their value declined after the crisis caused by the delay in delivery of the Airbus A-380.
“The whole question must be put in the broader context of Russo-European strategic relations, which entail not only EADS and defense, but also energy security and supplies," he said.
"Mr [Russian President Vladimir] Putin knows that Europeans are particularly sensitive to energy matters after last year's Ukraine gas crisis, and thus a grand bargain between Moscow and its Western European counterparts would be welcomed by Paris and Berlin.”
However, in mid-September, EADS co-chairmen Arnaud Lagardère and Manfred Bischoff said Vneshtorgbank's acquisition of 5 percent stakes would not lead to a Russian seat on the EADS board, since it “would not be in the interest of the company.”
In the official statement, they said they welcomed “any investment in our share base as a manifestation of interest and confidence in the long running success of EADS.” However, they made it clear that “the majority rights held by the controlling shareholders may not be circumvented by individual ownership positions within the free float of EADS.”
Nevertheless, Colonel Langton said it was "difficult to gage the real power of such official declarations” because, he stressed, “if the Russians, through Vneshtorgbank, will get more than 10 percent of the stakes, there will be no way to keep them out of the board.”
"My understanding is that they will try to raise their share sooner or later. We have to bear in mind that Russia aims at the EADS board as part of a national, political - not market - strategy.”
Jean-Pierre Maulny, a specialist in European defense with the Paris-based Institute of International and Strategic Relations (IRIS), told ISN Security Watch this week that “EADS rules protect the company and its shareholders from sudden maneuvers.”
The company, he said, “is obviously interested in a stronger partnership with the Russian aeronautic industry,” but would not let Moscow “take the lead.”
Furthermore, Maulny said: “The Franco-German-Russian cooperation will continue on a very pragmatic basis. There is no room for a structural enhanced strategic cooperation like someone predicted during the 2003 Iraqi crisis, as Paris, Berlin and Moscow aligned diplomatically against the US-led Iraqi war. The partnership will be limited to specific issues in industrial and technological sectors.”
Reassurances from Putin
Before, during and after the September meeting in Paris with French President Jacques Chirac and German Chancellor Angela Merkel, Putin has tried to reassure his Western partners that Russia's interest in EADS was in no way aggressive.
However, Putin's explanations contradict what Prikhodko said earlier in September: “If we are ever in a position to determine our joint economic interests, then we will insist on at least a blocking stake.”
Prikhodko added: “If we deem closer liaison with EADS to be economically feasible and in our interests, that means the interests of the Russian aircraft industry, then the state should have a hand in decision-making, and decisions are made when at least a blocking stake is held.”
That statement was just enough to cause concern among EADS management and shareholders as well as Western governments.
EADS has sensitive defense contracts with many subjects worldwide in which its board members would not like to see Russian involvement. Furthermore, Western governments view Russia's Gazprom gas giant as using gas to politically blackmail its former Soviet satellite clients.
With this in mind, Putin's approach has been predicated upon being reassuring. He called the Vneshtorgbank purchase “a game of the financial markets,” driven by the opportunity opened by the delays in the A-380 schedule and management troubles.
During the September meeting in Paris, the Russian president said Vneshtorgbank would not try to change anything in the EADS constitution, and that it might also hand its EADS shares to the United Aircraft Building Corporation (UABC), a so-called umbrella company for Russia's aircraft industry, but “only if EADS agrees.”
Putin also proposed to launch a “working group with France and Germany on Russia's role in EADS.”
These assurances notwithstanding, the potential strategic implications of closer cooperation between EADS and Russia have raised concerns in Europe and in the US.
Colonel Langton told ISN Security Watch that two key issues would need to be carefully monitored in the near future. First of all, the colonel said the military technology transfer from EADS to Russia, whose volume and significance was very difficult to assess now, would need to be monitored, though he said “we can be sure that such a transfer will be part of the deal.”
Secondly, the said: “If you take the already improving Russian civilian aircraft industry and you add it to EADS capabilities, you obtain a stronger competitor for Boeing, and in its own market places.”
Certainly, the recent developments have produced one concrete and highly significant fact: Vneshtorgbank is now the single largest outside investor in EADS, and the possibility of an ulterior stakes acquisition by the Russian bank remains the key variable in the medium term.
Federico Bordonaro, based in Italy, is an analyst of international relations and geopolitics with the Power and Interest News Report (PINR) and Strategic-Road.com. He is an expert on the new structure of the international system after the Cold War, the European integration process, security and defense issues and political realism.
