Russia's overtures to EADS highlight a key problems facing the European giant. Do its best prospects lie East or West?

Five years ago the idea that a Kremlin-controlled bank would make a serious bid to win a seat on the board of Europe's biggest aerospace and defence company would have been as far-fetched as the prospect of Russia's clunking Soviet-era industry reinventing itself to respond to the market rather than directives passed down from Moscow. Or for that matter, an unknown billionaire from a far-flung region of Russia taking over one of England's top soccer teams.

Three years ago, Roman Abramovich began transforming Chelsea's fortunes, turning underachievers into arguably the world's most glamorous and best-resourced football club. Will Vneshtorgbank's (VTB) overtures to EADS similarly end up altering the landscape of Europe's aerospace industry?

The bank's move to acquire its 5.05% stake - by purchasing shares traded on European stock exchanges - had been rumoured for a while. But a statement from the Kremlin last week that Russia wants to influence the way EADS is run seems to have caught senior management on the hop and forced its joint chairmen to issue an unprecedented joint statement insisting the company would not contemplate a Russian in its boardroom.

EADS's gameplan was the other way round. The company has been eyeing the Russian market for several years. It has opened a Moscow office and last December bought a 10% stake in Irkut, Russia's most Western-oriented aerospace company and one of the entities which will merge to form the country's proposed aerospace champion, United Aircraft (OAK). Russia's ageing fleet of home-built airliners is ready for replacement EADS wants Airbus to be the brand of choice. There is also a burgeoning market for everything from business aircraft to helicopters, and, down the line, even opportunities for co-operation on defence and space programmes. To say EADS saw itself as the new colonial power in a restructured Russian aerospace sector would be overstating it, but it certainly wanted to be an early adopter.

That is why Moscow's audacious move is so remarkable. According to the script, Western aerospace giants were meant to move into the old Communist block, marrying their marketing expertise, management prowess and technology with the East's skilled but cheaper workforce, access to new markets and manufacturing infrastructure.

But the world is changing. The same soaring fuel price that has piled misery on airlines trying to pull themselves out of the post-9/11 malaise has generated new wealth in oil- and gas-producing countries - wealth that investors are now keen to pour into long-term businesses. In this issue, we look at how Arabia has become the dominant global powerhouse in aviation, with its young, ambitious carriers fast moving up the airline rankings, its financiers providing the lifeblood for struggling general aviation start-ups, and now Dubai Aerospace Enterprise aiming to become a major player in airliner leasing and maintenance, aviation training and airport development.

Oil and gas fortunes have also turned Russia - which on one hand is still struggling to transform itself into a late 20th century economy - into one of the world's biggest investors. Through its state-owned bank, Moscow sees EADS as a perfect vehicle with which to help it make the jump into the global aerospace age.

EADS's rapid rebuttal of Moscow's advances probably has a lot to do with its other obsession - strengthening its position in the US defence and homeland security markets. It has enjoyed some success with the latter, but little with the former. With the US Air Force tanker contest due to be reopened any time now, and the Airbus-Boeing subsidies row still raging, the last thing EADS needs to do is get on the wrong side of Washington, particularly populist members of Congress who will use any stick to beat those from Europe who would dare compete with home-grown manufacturers for US taxpayers' dollars.

EADS is caught at a crossroads. With its board facing daunting decisions over funding for future Airbus programmes, it may also have to decide whether its best prospects outside its home markets lie over the Atlantic or over the Urals, in Russia's vast hinterland and China. These are markets which, according to one scenario, could eclipse North America over the next 30 years, or, according to another, lead EADS stumbling into a quagmire from which it could take decades to emerge.

Source: Flight International