Business Update: Aeroflot - Alitalia (Looking more confusing)

The situation surrounding the auctioning of a 49.9% stake in Alitalia by the Italian government is becoming more and more puzzling. The auction process, for which Russia's state-owned airline Aeroflot is a leading contender, may not even happen after all.

Out of several contenders for the stake in the Italian carrier, only two remained at the end of May, after a US-based consortium including private equity giant TPG left the bidding sying it was "too complex". The remaining two bidders, Aeroflot (supported by Italian bank Unicredit) and AirOne (Italy's second biggest airline) began complaining in the past week about the unsatisfactory conditions of the auction.

Aeroflot's management stated that it would not buy the stake in Alitalia "at any price" due to unsuitable conditions set by the Italian government. AirOne complained that it was being denied crucial financial information of Alitalia necessary to establish a proper bidding strategy.

So while originally Aeroflot was cited by many as being an outsider to the bidding process, due to the Italian government's requirements to keep an "Italian image" for the airline under a new owner, the Italian government may now have to pursue any chance it has to get the ailing airline off its hands. Selling it to Russian Aeroflot may not be that bad of an idea anymore.

Alitalia has been having very serious trouble, and has been forced to drop its government ownership due to EU regulations limiting the amount of cash a government can infuse into its own companies. Alitalia has reported losses for six of the past seven years, has been aggressively turning around management, and has suffered from very strict labor unions.

Why would Aeroflot want the sickly airline? For one, it would give the Russian airline a sizable stake in the EU airline industry, and for the Russian government it would give a bigger market for which to sell its newer regional jets. Russia's other airline AirUnion has already purchased Hungarian airline Malev earlier this year.

The Italian government is now facing a situation where it can simply create a monopoly if it sells its stake to AirOne in an auction where only one bidder is present (if Aeroflot withdraws from the bidding, which Alitalia has denied). It may have to restart the auctioning process from scratch, or convince the remaining bidders, which today have been joined by Matlin Patterson Global Advisors LLC (part of the TPG-led consortium which dropped out in May), that it may be more flexible in the sell-off. The bidders have until July 2 to decide on their course of action.

Foreign Policy Issues for the Coming Months

The key issues that will dominate Russia's foreign relations agenda are the approaching EU-Russia summit and the continuing negotiations on Kosovo's independence. Both issues appear to be in various degrees of gridlock.

Russia continues to oppose the plan of Marti Ahtisaari that virtually does not account for the opinion of Serbia on the issue of independence of its province, Kosovo. Russia insists that resolution 1244 regarding Kosovo, in particular the guarantees it must provide to the Serbian minority such as an opportunity to safely return to their homes, has not been implemented fully. In recent Security Council hearings, the majority of the Western partners have supported the notion that resolution 1244 has been satisfied and the situation in Kosovo has improved. Yet, Russia has go as far as saying any attempts by the US to force a vote on Kosovo's independence in the Security Council will see a Russian veto, a sign that negotiations will drag longer. The UN Security Council has sent a commission into Kosovo to investigate in detail the situation. The outlook for a successful resolution of the Kosovo issue in the near months is unlikely.

With regard to the EU, Kommersant reports that:

EU Trade Commissioner Peter Mandelson set a grim tone three days before the talks in Luxembourg by saying that EU-Russia relations were at their lowest point since the Cold War. Russian Foreign Minister Sergey Lavrov and his counterparts in the EU had to play down this pessimistic rhetoric.

European Union officials said on Monday they hoped to resolve a dispute holding up a partnership agreement with Russia before a summit next month.

After new talks with in Luxembourg, Russia stressed its desire to conclude the new pact to cover energy, trade, economic cooperation and human rights.

EU foreign policy chief Javier Solana said after the talks that the parties had reached some progress in settling the dispute, but there was still a lot to be done.

Why Kosovo breakup is a bad idea

So it is significant that Mr Holbrooke adds what many suspect: if Russia blocks a new resolution, Kosovo will declare independence anyway—and the Americans will “probably” recognise it. Many Muslim countries will follow, though Mr Holbrooke thinks most EU countries may not. Without a new UN resolution, diplomats say the choice is not independence or not; it is between “controlled” and “uncontrolled” independence.

Economist

One of the few times that I will have to strongly disagree with the Economist, and so will be forced to write a counter-argument.

First of all, it is without doubt that Russia is using this issue to drive further diplomatic wedges into the EU and into the relations between the EU and the US. The longer the disagreement carries out the more influence Russia will have on the resolution on the issue. A similar strategy is being pursued on Iran.

But, unfortunately for some Kremlin critics, this is only Russia's supplementary benefit from pursuing such a policy. Granting Kosovo's independence on a unilateral basis, with harsh opposition from Serbia itself, will undoubtedly boost the moral of EU's foreign influence. But what message will it send? That the EU unilaterally has the mandate to establish borders in Europe? In my opinion, this will bring even more disagreements into the Balkans, where most countries are not members of the EU and NATO. Would the EU as a result of its policy like to see nationalistic governments pop-up in both Serbia and new-Kosovo? And for some strange reason no journalist attempts to remember the Helsinki accords of 1975, the dominant clause of which was the "territorial integrity of states" (referring to Europe at the time). Since then Europe has seen the voluntary breakup of the Soviet Union, Czechoslovakia, uniting of Germany. The breakup plan that is being put forward to Serbia should have no force, even if it is approved by all governing bodies of the world; unless Serbia gives a green light, Kosovo should not be granted independence.

Of course for Russia there is another aspect in the issue. What is Russia? A country where Russians represent more than 70% of the population. The others are ethnic minorities, mostly living in tightly-linked "autonomous republics" as provided for in the constitution. Some, like the Tatars, living in Tatarstan, a predominantly Muslim republic inside Russia, that is very rich in oil-resources is dwelling on independence status at least once a day. It has been given so many rights by the Russian government, just to put a lid on its independence hopes. In total, there are close to ten of such minority regions in Russia, most of them with natural resources, and the ability to sustain themselves as an independent country. When things go sour in Russia, and they surely will some day, they will be knocking on the independence door. The Russian government is of course completely paranoid with such a scenario: the removal of election of regional heads, the increasing shift of funding distribution rights to the center, and other reforms all served that purpose. Having a precedent of Kosovo will put those republics in the problem radar, it will put Chechnya in the radar as well.