The Wall Street Journal: COMMENTARY: The Power Broker

By PIERRE BRIANÇON
September 22, 2006

The picture has become much clearer over the last few days. The massive power play is now for all to see. Once again, Russia has not chosen subtlety to make its point.

Its acquisition of a 5% stake in Airbus parent company EADS has the stated goal of enlisting the pan-European aeronautics and defense company in the industrial modernization campaign President Vladimir Putin has launched. At stake are big markets for a troubled company. Moscow’s order for 22 of Airbus’s new A350 midsize airplanes has been left dangling in the wind for all to see. Give us a seat on the EADS board, the Russians are saying, or else.

This gambit is another example of the Kremlin’s brutal approach to doing business with the West, which was on full display this week when Russia suddenly canceled Royal Dutch Shell’s $20 billion Sakhalin-2 oil project on dubious environmental grounds and yesterday clamped down on Exxon Mobil’s Sakhalin-1 development.

Like those maneuvers, the way the EADS shares have been bought — and demands presented — show that Mr. Putin is more at ease with intimidation than with cooperation. A state-owned Russian bank, Vneshtorgbank, bought shares on the sly until it reached the threshold where it had to declare its holding to the company. The stake may have grown since then. Say this for the Russians: They know how to spot a good investment, as the shares were bought after EADS’s stock lost half its value last spring on delays for Airbus’s A380 superjumbo jet and the subsequent management overhaul.

Adding to the impression of creepiness is the fact that, according to Russian press reports, Vneshbank has been buying the shares for United Aircraft Corporation, an entity Mr. Putin decided to create from scattered aeronautics assets that had survived the Soviet meltdown. For years the Soviet Union could sell its infamous Tupolevs only by forcing them down the throats of communist countries not afforded the option to refuse. Mr. Putin now wants a strong Russian aircraft industry, and who could blame him considering the rate of Russian civilian airplane accidents — reported and unreported? So he has chosen a shortcut, via the stock market, to try to force EADS to share its technology. Russia’s stake in EADS is now as big as Spain’s, which is part of the pact linking the French state, French media group Lagardère and Germany’s Daimler Chrysler. These shareholders together control 51% of the company.

The question of what the West, and Europe in particular, should do when faced with the flow of capital coming from oil-rich Russia is certainly not a simple one. But the case for refusing Mr. Putin’s demands on EADS is clear cut.

First, EADS is not just simply an airplane maker. Although Airbus accounts for more than 60% of its revenues and 80% of its profits, EADS has a growing defense activity as well. It makes helicopters, military aircraft components, reconnaissance systems, missiles and defense electronics. Its customers include most European armies. It is seeking more business with the Pentagon, and a more active presence on the U.S. market. Will those customers be happy to buy from a company whose board includes a country chummy with the likes of Iran or Syria? A Russian board member will clearly end up hurting EADS’s business.

Second, there is no reason to accept Russia’s postulate that a board member will facilitate industrial cooperation and possible technology transfers. The Russian market is certainly not to be overlooked.But EADS should decide freely which type of cooperation it wants to initiate with its major customers and not under the double blackmail of a 5% stake and possible major contracts down the road. Board members have access to sensitive and strategic information.

Third, putting Russia on EADS’s board would be a severe regression for the company. It would take it back to the days when governments ruled the defense industry. With the alliance between Lagardère and DaimlerChrysler trying to wrest the company from the self-interested ploys of the French government, it doesn’t need the Kremlin on its board. The company’s governance is already hindered by its two co-chairmen and two co-executives — in each case one French, one German. Will Russia ask to appoint a third chairman, and a third executive?

Arnaud Lagardère and Manfred Bischoff, who both chair EADS, have rightly rejected Russia’s request to renegotiate the company’s shareholders pact. But Mr. Putin is widely expected to renew the demands when he meets French President Jacques Chirac and German Chancellor Angela Merkel for a three-way summit this weekend. And rumor has it that the French president would be ready to accommodate Mr. Putin.

The usual arguments will be put forward in favor of “engaging” Russia instead of antagonizing it. Soviet and Russian rulers have often played the “engagement” card, whispering into the ears of their Western partners: Help us under our terms or you will give fodder to the darker, anti-Western factions of Russian society. Moscow could generally count on finding the useful Western idiot or two who would echo that sentiment. Ms. Merkel’s predecessor, Gerhard Schröder, was one of the advocates of engaging Russia whatever the cost. Little attention was paid to a the speech the then-chancellor made at the solemn launch of the A380 program in January 2005. EADS, he said at the time, should welcome new partners, first of all Russia. Mr. Schröder is now CEO of a Gazprom subsidiary.

Mr. Putin is not expected to offer Mr. Chirac a job for after he leaves office next May. But in any case, the French president should realize that he has no reason to appease Russia in the name of “cooperation.” If that’s what Russia wants, it can be achieved without giving Moscow a key to EADS.

Mr. Briançon is the Paris correspondent for Breakingviews.com.