PILARSKI SAYS… Crimea’s annexation will impact aviation

PILARSKI SAYS…

Crimea’s annexation will impact aviation

Adam Pilarski, Senior Vice President at Avitas, on the fallout of events in Russia and Crimea.

As featured in Airfinance Journal Column PILARSKI SAYS

What is happening in Ukraine represents one of the most significant geo-political events in recent memory. Some are comparing it to the precursor of World War II. They argue that Russia’s actions are simply nationalistic. They compare Crimea to the occupation first of Austria (the Anschluss) and then of Sudetenland in 1938 under the pretext of protecting the ethnic German people living there. Incidentally, the 97% vote for Russian annexation in Crimea compares with the 97.32% vote in December 1938 in Sudetenland for the Nazis, and pales with the 99.7561% who voted for Anschluss in April 1938. The events in 1938, of course, were followed by further invasion and ultimately a global war with tens of millions killed. A more benign assessment of Russian president Vladimir Putin’s adventure stresses his weaknesses as a base for the present actions. That interpretation is related to a much older historical concept, namely the Roman panem et circenses, which points out that for a ruler to stay in power two things have to be provided for the common folk: bread (panem) and circuses (circenses, or games/entertainment since TV was not invented yet). Instead of providing good service the ruler can provide basic sustenance and also create some event that unifies the common people to take their mind off the inadequacies of their life. Winter Olympics (Sochi) and military action fits that bill perfectly, as do perceived threats by the rest of the world or a minority group. With high oil prices Russia has been increasing the standard of living of its population. However many Russian voters were fed up with what is perceived to be a corrupt, and increasingly authoritarian, administration. Putin’s popularity was dropping and serious protests were threatening his tenure. A military adventure restoring Russia’s greatness appeals to the common people, stirs nationalistic fervour and equates protests against the existing regime with treason. Hence, that view emphasizes a defence of the status quo as motivator for action, not a genuine desire for world domination. My view is in the second camp, and I do not fear an imminent World War III. Putin’s adventure seems not to be perfectly well thought out. True, the West will not challenge Russia militarily in Crimea, so he will get away with the annexation. In the long run it will prove to be very costly. The Soviet Union saw huge transfers of money from Russia to the other republics and subsidizing Crimea will be expensive. The whole concept is also fraught with danger. The world as a whole does not support border changes, even if they involve reuniting ethnic people. Will Russia support the desire for independence of the Chechen people as a consequence of its new-found ideology? Many countries in Africa and in the Middle East have borders drawn by previous colonial powers without regard to the ethnic mix of the local population. Nobody wants to revisit these old issues. If the new Russian ideology were to be accepted we could see the dissolution of most African states – the same with the Middle East, China and so on. The US administration is being careful not to provoke military action, but there will be unintended consequences of the Russian policies in economics and business. Interestingly, the US is taking a more aggressive policy versus Russia in terms of sanctions than the EU, whose members should be genuinely afraid of the Russian military. This is surprising given that it is Europe which potentially could be facing these Russian tanks. The EU (mainly Germany) instead seems to be more interested in appeasement, mediating between the US and Russia. So, how will all this affect aviation? First, the slowdown in military spending planned in the US will eventually be reversed, helping manufacturers such as Boeing. Tourism will be affected. Russians have had huge growth in tourism, and that will slow down. Russian traffic finally surpassed the old levels experienced during the times of the Evil Empire but will not grow that much now. Less traffic means less demand for aircraft. Also affected will be industrial cooperation, buying titanium for aircraft and the like. The Russian Sukhoi aircraft will face a much harder prospect of sales in the West, and the future of the MS21 will be cloudier. Russia has a fleet of almost 700 western aircraft valued at more than $14 billion, of which foreign lessors provide a significant part. Sanctions work both ways and will affect the western financiers and lessors. Bombardier has been very successful in placing CRJs in Russia, and that progress will likely stop. The airframer’s recent ambitions to sell up to 100 Q400s and establish an assembly line in the country are now delayed after Canada imposed financial sanctions and travel bans on Russian officials. The developments in Russia, though not as catastrophic as some seem to think, will undoubtedly have a profound negative impact on the aviation sector.

As featured in Airfinance Journal Column PILARSKI SAYS