Why Russian Aerospace Will Survive Just Fine...

Cemeteries are sad; sadder still is a large field of unmarked graves. After this year's Berlin Air Show (ILA), my Teal colleagues Bill Storey, Joel Johnson, Phil Finnegan and I all trundled off on a road trip to see battlefields in Eastern Germany and Poland. Thanks to Bill's borderline obsessive attention to topographical detail, we walked on pretty fields where, in 1945, tens of thousands of bodies fell along the Kustrin Highway, the Third Reich's last stand.

As our UK pals say, there was a spot of unpleasantness in this region, which historian Timothy Snyder refers to as the Bloodlands. Germany, to its credit, has done what it could over the past 70 years to play nice with the countries it invaded (all the museums we visited had T-34s on display, with no Panthers or Tigers in sight). In the post-Soviet era, it led the way in trying to integrate Eastern aerospace companies with the West. In the '90s, ILA billed itself as the Gateway To The East (or West, from a Russian perspective). Yet when people walked through that gateway they found rusting factories and rusting prototypes. Still, there were all kinds of East-West initiatives; bizarrely, in 1997, the Germans even proposed using a Westernized Antonov An-70 military airlifter instead of Airbus's A400M.

Nice, as the West has discovered, only goes so far. We're living through a weird echo of the Cold War, another example of history repeating itself, the first time as tragedy and the second time as farce. But this year's ILA hadn't gotten the message that times have changed. There was a large hall devoted to Russian and former Soviet (FSU) products and manufacturers. There was a modest Ukraine pavilion right in the middle; I half expected to see burly men in unmarked uniforms making trouble around the espresso machine. As I wandered this giant Cathedral of Futility, I reflected on FSU aerospace and what will likely happen next. There are five areas of interest:

Russian fighters. They have a great market in India, a recurring market in China (as China continues to figure out how to build its own jets), and lots of smaller markets, mostly with vile and despicable regimes. Nothing new here. MiG CEO Sergei Korotkov recently told journalists that the Syrian war was getting in the way of delivering MiG-29s to the Syrian Air Force: "This war is actually our headache; there are problems with handing over the aircraft." Syria has been a humanitarian disaster in many ways, but spare a thought for headache-stricken Russian fighter primes too.

Russian/FSU helicopters. Mi-8/17 series output is still strong, with the type serving as the developing world's rotary winged F150 pickup. Congress may soon eliminate the US-funded Afghanistan Mi-17 contract, but that won't move the output needle much.

Russian space systems. The RD-180 rocket engine and International Space Station hotel management have been two strong pillars of Russia's aerospace industry. As a response to the Western sanctions, Russia has threatened to end Station access in 2020. RD-180 exports to the US look set to end too. That's a blow to Russian aerospace, and since it's driven by national pride, it's a self-inflicted wound.

Russian/FSU components and engineering. FSU component makers never really found their way on Western jetliners, but the new political reality obliterates any hope they may have had. Several Western companies, most notably Boeing, established Moscow design centers to take advantage of low-cost engineers. Since Boeing management is continuing its strategy of adding risk by de-centralizing engineering, this will probably stay in place. But as strategist Ed Luttwak recently pointed out (tinyurl.com/m927a4s; paywall), giving out visas to thousands of top Russian engineers would likely clobber Putin. This time, Russia hasn't built a wall to keep people in, and many of them would love to leave.

Russian/FSU jetliners. This is the biggest single aerospace market, and once a core area for Russia's industry. After decades of building funhouse mirror copies of Western jets, Ilyushin and Tupolev spent the 1990s trying to modernize their airframes with Western components. All these projects failed, as did the original non-Westernized versions. The jetliner industry has been transformed by the unprecedented combination of low interest rates and expensive fuel. Russian jetliners are the big losers from this juxtaposition. Expensive fuel magnifies their fuel burn disadvantage and cheap cash obviates their low price tag since Airbuses and Boeings are available with low-cost finance.

Today, the Italian-Russian Superjet continues to sputter along, despite howls of agony from Finmeccanica. For the future, there's the UAC/Irkut MS-21, built without a Western partner but with Pratt's Geared Turbofan. Since it's a product of a government-owned industry, it will inevitably be uncompetitive. The only question is, how many will local airlines be forced to take? Or, more accurately, how many far better used and new Airbuses and Boeings will local airlines be prevented from taking instead of MS-21s? The experiences of the past few decades suggest the answer to both questions is "not many." Aeroflot got rid of its young fleet of Il-96s as quickly as it could, with the last one retiring in March. They use 777s instead.

My conclusion from all of this is that Russian aerospace will survive just fine, with most of the damage confined to the space segment (although with jetliners continuing on their multi-decade Road to Nowhere). But consider the bigger picture. Russia's economy depends heavily on raw materials. Oil and other commodities are getting less expensive, particularly with hydraulic fracking. Whether or not Western aerospace primes need to re-think their titanium sourcing, additive manufacturing will reduce scrap rates, and therefore titanium demand will fall too. Meanwhile, foreign investment cash is drying up fast. The IMF now says Russia's economy will grow by just 0.2% this year, down from 1.3% in 2013, "with considerable downside risks" due to political events.

The reaction of a loser government to a bleak economic outlook is to turn inward, but also to turn to the only other big authoritarian country, China. The two countries signed a very large energy deal last month (with prices set by two government agencies, making the agreement problematic at best). And on May 20, ITAR-TASS (yes, former stooge news outlet TASS has been reinvented) announced Russian-Chinese plans for a joint 400-seat twin aisle jet. It will be built by two state-owned companies, so this plan guarantees that Russian aerospace, in 20 years, will be in exactly the same box it's in today.

Another thing governments can do to get 70% approval ratings when their economy is weak is to wave the flag of nationalism and militarism. That would be very good for the Russia's military aerospace industry. It might also produce more of those unmarked graves.