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A Lot of Hot Air

EU Planes Want to Fly Over Siberia for Free

May 31, 2008

By Dmitry Suslov, research fellow at the Center for Comprehensive European and International Studies of the State University Higher School of Economics.

EU Planes Want to Fly Over Siberia for Free.

One of the main irritants in Russia-EU relations is the issue of compensatory payments for flights over Siberia that European air carriers pay to Russian airlines, primarily to Aeroflot. The demand that Russia phase out payments for flights over Siberia is a priority on the EU’s agenda.

Despite its technical nature and the relatively small amount of money involved—about $300 million a year—the issue of Siberian overflights has been broached by the European side at each of its summits with Russia, which are held twice a year. The issue is also mentioned in almost every speech by an EU official on relations with Russia. And finally, the EU has declared the fulfillment of this demand to be one of the preconditions for Russia’s accession to the World Trade Organization (WTO), and for the continuation of Russia-EU cooperation in the field of air transportation, which has recently been nearly absent. The dispute over the payments led to the canceling of a Russia-EU aviation summit, which was supposed to be held in Moscow in November 2007.

The EU’s reason for questioning the overflight payments is that they are made directly to Russian airlines rather than the Russian state, thereby giving Russian carriers—and Aeroflot in particular—an unfair advantage over EU-based carriers. This can certainly be an issue relevant to WTO negotiations, since WTO rules prohibit state subsidies for companies operating on the global market and require competition on the market to be fair.

But the Russian side argues that EU-based air carriers do not merely pay for crossing Russian airspace. They actually pay for “frequency”—the ability of a given number of planes to use certain air corridors at a given time. In fact, relations between Russia and the EU in the civil aviation sphere are not regulated by the market, but by bilateral treaties between the Russian government and the governments of individual EU member states. The main principle underlying these agreements is parity in the access to frequencies. Trans-Siberian flights represent just a fraction of these frequencies.

When signing a treaty on a certain frequency, the Russian government and the government of an EU country determine the so-called assigned carrier that receives the right to use—and to lease out—these frequencies. In the case of trans-Siberian flights, the main assigned carrier is Aeroflot, and the second one is the smaller Russian airline, Transaero.

This model, implemented back in the Soviet epoch, is different from the scheme practiced within the EU itself, as well as within other countries with which the EU has open sky agreements, which are arrangements that impose no limitations on flights based on the principle of frequency parity. In open sky agreements, the main principle is at work: fly as much as you can. The airline that can fly more flights dominates and those companies that can’t compete leave the market. Any airline can enter the market, provided that it has enough resources. But trans-Siberian flights are still regulated by the old system, where assigned carriers dominate the market regardless of their capabilities.

This system was quite efficient until the 1970s, when Soviet civil aviation and the civil aviation of EU countries had a roughly equal number of flights. For example, planes departing from Southeast Asia, mostly from Japan and South Korea, landed on Soviet territory, and Aeroflot then carried their passengers the rest of the way to their destinations, mostly in Western Europe. The situation changed when new plane models were introduced in the EU that could fly from Tokyo to Dublin without making stopovers for refueling.

In this situation, letting the market govern the system would have resulted in a loss of revenue for Russian carriers. Therefore, the old system continues to operate, albeit with some adjustments. Today EU and Asian companies rent a part of Aeroflot’s frequencies rather than taking part in “relay flights.”

The Russian side argues against these payments being called “royalties.” According to a special ruling of the Russian government, the Russian part of the frequencies was passed to Aeroflot and Transaero, and thus these companies have the full right to lease them further to EU and Southeast Asian companies, charging them “rent” rather than “royalties.” The terminology is an issue since the EU claims that these payments are royalties charged for transiting Russian territory that violate a 1944 Chicago convention on civil aviation.

Theoretically, the Russian side could agree to change the old system, but only on two conditions. First, the concessions should be mutual, with an open sky model introduced by both Russia and the EU. Secondly, there should be no pressure from the European Commission on this issue, since even bilateral introduction of an open sky model would be a gesture of goodwill on Russia’s behalf, since it would leave the country’s domestic aviation industry in a precarious position. In general, the open sky model is advantageous only when both sides have equally strong and competitive aviation industries. The open sky policy introduced between the EU and the United States this spring may be beneficial for both sides, but for Russia, an open sky with the EU entails the danger that its companies will get squeezed out of the market by stronger EU competitors.

Unfortunately, EU officials pretend not to understand this and have increased the pressure on Russia to end overflight payments since the issue was first raised in 2004. At the initial stage, the EU’s demands, then represented by European Commissioner for External Trade Pascal Lamy, were logical. In a letter written by former Russian Minister of Trade and Economic Development German Gref to Lamy dated May 27, 2005, the sides agreed to modernize the system of compensatory payments, with the possibility of lifting them completely if a new “big” aviation agreement replacing bilateral treaties and introducing an open sky policy between Russia and all of the EU could be formulated. However, the policy of the EU later changed. Instead of pushing for an open sky agreement, EU member states preferred to keep the bilateral agreements.

Instead of empowering the European Commission to sign an open air agreement, in 2006 member countries gave the new European Commissioner for Trade, Jacques Barrot, a mandate to push for the introduction amendments to the old agreements, removing the compensation payments. This mandate actually violated the agreements reached by Gref and Lamy earlier. Instead of modernizing the compensation payments, the new mandate of the European Commission called for their full cancellation.

During the Russia-EU summit in Helsinki in November 2006, commissioner Barrot and Russian Transportation Minister Igor Levitin initiated the Agreed Principles, which included a provision that Russia would be obliged to cede new frequencies on trans-Siberian routes to the EU carriers for free, but failed to give Russia anything in return for changing its position.

Luckily for Russia, these Agreed Principles had to be approved by both the Council of the European Union (CEU) and by the Russian government. The CEU quickly approved them, but the Russian government did not approve the agreement—not by the EU-Russia summit in Samara in the spring of 2007, nor by the summit in Mafra, Portugal that fall. Russia’s refusal to ratify the agreement unleashed a storm of protest in the European Commission. Expecting none other than a quick and positive response from Russia, the commission froze the aviation dialogue with Russia, claiming that this dialogue, including the planned and canceled “aviation summit,” could be possible only after Russia signs the principles.

Russia’s intransigence on the issue of trans-Siberian flights is an important indicator of changes in its policy toward the EU as a whole. The Russian leadership seems to have realized that concessions, including dismantling of the leased frequencies principle, will not help Russia to integrate itself into the global economy on favorable terms. In fact, Moscow let it be understood that it does not want a new detailed Partnership and Cooperation Agreement with the EU, which would force unilateral obligations of economic and political character upon Russia. Instead, Russia would prefer a much shorter document that can be amended in the future by detailed special agreements. In other, broader terms, Russia is refusing to integrate with the EU on the latter’s terms, choosing an equal partnership instead.

The attitude to the Agreed Principles will be a litmus test for President Dmitry Medvedev’s new administration. If these principles are upheld, it will mean that Russia has opted to become a sort of a periphery to the European Union, and not a real global player.

Russia Profile