The government order vanishes in the military fog

06.06.2011 — Analysis

In May, Russian President Dmitry Medvedev punished a large group of directors being in charge of defense enterprises that failed to fulfill the government order in 2010. The head of the state thinks that the performance of the military and industrial complex is poor. In the meantime, experts think that most of the blame for the weapon and equipment supply shortfall lies with the Ministry of Defense and government officials who linger over adoption of urgent management decisions for years. As the "RusBusinessNews" columnist has found it out, with absent order and development strategies for the Russian military and industrial complex, military officials are just guzzling money away.

In 2010, the Russian industry was to supply the military department 30 ground and sea-launched ballistic missiles, 5 Iskander missile systems, about 300 items of state-of-the-art armored vehicles, 30 helicopters, 28 combat aircraft, 3 nuclear submarines and 1 combat vessel of the Corvette Class, 11 space vehicles. In March 2011, speaking to the board of the Ministry of Defense, Dmitry Medvedev stated that "the money had been allocated, but the products had not been supplied". The May "post-flight evaluation" resulted in dismissal of Vladimir Grodetsky (Izhmash, OJSC), Arkady Khokhlovich (the Research Institute for Electrical Engineering, Federal State Unitary Enterprise), Nikolay Platonov (the Poisk Research Institute, Federal State Unitary Enterprise) and Valery Edvabnik (the Research Institute of Electronic Instruments, Federal State Unitary Enterprise). Many managers were given reprimands and curtailed of incentive premiums based on the performance over 2010. Several officials of the Ministry of Defense were also punished.

The experts think that D. Medvedev should advance the main claims to the government of Vladimir Putin rather than to the industrial enterprises: If the focus is not shifted, the government order for 2011 will also end up in failure. At the same meeting the Russian president required that the Ministry of Defense should place orders to the fullest extent by the end of May and transfer advance payment to the sector. This task was not done: for example, in the Sverdlovsk Region only nine out of forty key enterprises of the military and industrial sector signed contracts in due time.

Vladimir Krasnikov, head of the representative office of Rosoboronzakaz (the Federal Service for Defense Contracts) in the Ural Region, confirmed that the process of entering into 2011 contracts is very slow. The Ministry of Defense has gone through structural reforms that changed the procedure for documentation approval and substantially complicated life of enterprises operation in the military and industrial sector. The official believes that by the middle of June all the required papers will have been finalized. Making comments on the wrecking of the government order for 2010, V. Krasnikov noted that only one enterprise out of 12 checked by the representative office was found guilty: Kurganmashzavod, OJSC, which overleapt itself and overestimated the abilities of its suppliers; thus, failed to triple the output of combat vehicles.

The above words leave no doubt that the main disorganizers of the defense sector should be looked for among officials. Alexander Frolov, an expert of the Center for Analysis of Strategies and Technologies (CAST), names several reasons for the government order placement being wrecked: it is lack of agreement on prices for products, mess in the Ministry of Defense and lack of coordination of actions in the government. There can also be the fourth reason: The approval of the government arms program was extremely delayed, while the defense order for 2011 must be tied to it, - probably, officials are afraid of making the wrong decision, so they prefer not to make any decision at all.

Manufacturers do not see themselves as the weakest link in the system of the government order. Valery Kukis, Chief Structural Designer at Uraltransmash, Federal State Unitary Enterprise, made it clear that by no means all of the enterprises of the military and industrial sector are in a "knocked-down" condition: within the last years, the factory has not wrecked any of the government orders and is ready to fulfill the order on time in 2011. Undoubtedly, Uraltransmash have problems, but they are of tactical nature; therefore, they can be solved.

Konstantin Mysik, Deputy General Director of Zavod No. 9 (Factory No. 9), OJSC, informed "RusBusinessNews" that the enterprise depends to a large extent on its exports that amount to 70% of the total output. As for the last year contract, there were no complaints about the time of performance or about the quality of the products. The factory has not received any direct order from the government for 2011 so far. The top manager thinks that the placement of the defense order is delayed due to the absence of the government arms program, which must define what equipment is required by the Russian army. Therefore, taking into account the existing situation, the industrial sector can hardly be blamed for the supply shortfall.

The position taken by directors of armored vehicle manufacturing factories that are dominant in the Urals is supported by representatives of the aviation industry where most of the enterprises failed to fulfill the government order. Alexander Lanshin, head of the sector at the Central Institute of Aviation Motors, which participated in development of nearly all the domestic engines, does not rush into shifting fault for absent new equipment to design developers. He is sure that investment alone is not enough to solve the problems of the aviation and space industry - moreover, substantially increased financing can cause harm. According to his vivid expression, if the horse is not given food for a long time, but right before the race it is given plenty of oats, it will drop dead.

Something of the kind may happen in the aviation. The government has not invested money in the motor-building sector for about 20 years. Only the enterprises that had export contracts were able to make both ends meet: the Ufa Motor-Building Association, the Salyut Research and Production Association, the Saturn Research and Production Association and, to a certain extent, the Moscow Machine-Building Enterprise named after Chernyshev. The orders were placed sporadically, thus interfering with the proper personnel policy.

The sector certainly must be financed; however, it should be done clearheadedly - then, investment will bring the required outcome. In A. Lanshin's opinion, to prevent the aviation industry from squandering the allocated funds there should be a comprehensive strategic program - similar to the program that has been developed for manufacturing of the civil engine, PD-14. The adoption of 16 critical technologies was underpinned by purchasing of the required equipment, training of personnel, staffing of the manufacturing factory, manufacturing of a number of components and accessories required for optimization of the new technologies, etc. The effect was not too long in coming: It took only one year to make a gas generator for PD-14 - the basis for the family of advanced engines. The same pattern should be applied in the defense aircraft building where the process of manufacturing of new generation products has not been established, according to Alexander Lanshin, to the full extent.

Alexander Frolov thinks that the government should be responsible for the development strategy for the military and industrial complex. The industry bears its share of responsibility for the "fog" that has covered the system of government purchases of military equipment; however, the main blame lies with the Russian government, which from year to year discusses methods of establishing prices for defense products, without making any attempt to control prices set by state-owned corporations and natural monopolies.

The position of the government, which for years beats the air, causes only weary annoyance of manufacturers. Mikhail Trapeznikov, Deputy General Director of NPO Avtomatiki (the Research and production Association of Automatics), Federal State Unitary Enterprise, refused to give any comment on supplies of new equipment to the Russian army: "I have a very negative opinion about the situation with the government order. There is politics behind all this. What comments can be expected on idle talk?"

Vladimir Terletsky