Undeclared war - Russian generals go to war with manufacturers

12.09.2011 — Analysis

Russia intends to complete the army rearmament by 2020. During the next few years the lion's share of the Defense Ministry budget funds will be channeled to purchasing of arms and military hardware. Officials announced that the priority will be given to brand-new models with upgraded combat characteristics. However, the participants of the Russian Expo Arms-2011 show, which took place in Nizhny Tagil, assured the RusBusinessNews columnist that the armed forces of the country will stay unchanged until the government revises the legislation and lays down strict rules for economic games.

The government's commitment regarding the defense order for 2011 is scandalously lingering: Eight months have passed, but some enterprises are still waiting for contracts for military equipment and armament supplies. Tank factories are likely to be left without any orders. The RF Minister of Defense, Anatoly Serdyukov has stated repeatedly that he does not want and will not purchase the yesterday arms - especially at skyrocketing prices. Industrial generals strongly disagree with him, saying that army men do not understand that they are fortunate.

At the Russian Expo Arms-2011 exhibition, Valery Kashin, General Director of the Machine-Building Design Bureau (KBM), a federal state unitary enterprise, relentlessly kept on bringing general to his display, trying to talk them into buying the upgraded system of active defense - Arena-E. However, they could not make it clear whether the new design effort is going to be accepted for the service, though it was granted the required status.

Georgi Kuzyk, head of the KBM Foreign Economic Department, informed RusBusinessNews that it took years to design Arena. The enterprise reached the completion stage in tests before the dissolution of the Soviet Union. For ten year the system was buried in oblivion as there were no funds. In the early 2000s, when the company came into some money, the management decided to turn back to the abandoned product. However, the Russian defense industry had been damaged severely by that time; life was forging ahead; so, the company had to start from scratch. The Ministry of Defense refused to give funds for the product upgrading. The KBM company, using its own funds, designed and manufactured pilot models of the new system and installed them in the BMP-3 infantry combat vehicle and the T-80 tank. G.Kuzyk says the company is ready to supply Arena to the army almost immediately - if the army men desire so.

The experts suspect that "office" generals will be completely satisfied with two pilot models. Some time back the military department find to find use for the tank support fighting vehicle (BMPT) designed and manufactured by Uralvagonzavod, having bought only two vehicles, thus forcing the company into export supplies. The same destiny awaits Arena: The T-80 tanks are no longer manufactured, while Kurganmashzavod, the BMP-manufacturer, takes great pains to receive a government order, and no one knows whether new combat vehicles will be shipped to the military this year. The upgrades ordered by the government for "older" T-72s do not include their equipment with active protection.

The Kurganmashzavod representatives told the RusBusinessNews columnist that they failed to agree on the price with the Defense Ministry: The military insisted on cutting the price for vehicles by 20%. The company representatives see this demand as economically unjustified. Their colleagues share this opinion, stating that they cannot reduce the production cost of the product.

Georgi Kuzyk says that, in theory, the production cost can be decreased: For example, through the holding structure that allows reduction in tax and in-house costs. However, establishment of this type of structure involves a lot of problems, as component suppliers operate in many sectors; therefore, they either do not want to join the new holding or they already belong to some corporation. The KBM company cannot organize a production chain for its Iskander system. Its missiles are manufactured at the Votkinsk Machine-Building Factory, which is focused on manufacturing of strategic missiles and, therefore, is not interested in cooperation with KBM. Launchers are made by the Barrikady Production Association (Volgograd) - it has already joined another holding company. Thus, KBM cannot count on low "kin" prices.

Sergei Ostapenko, Deputy General Director of the Almaz-Antey Concern, states that even the holding structure cannot offer reduction in costs. Within the last years, the concern has been able to decrease its fixed costs from 35 to 23% through shrinking its wage pool and due to a number of other actions; however, it had no effect on the production costs due to increased rates for energy and prices for components from private suppliers. The top manager points out that it is wrong to accuse manufacturers of high production costs typical of military products: There are external factors beyond the control of defense enterprises.

Anton Koroteyev, head of the Marketing Department at Kovrov Electromechanical Factory, also cannot agree with the policy chosen by the Ministry of Defense. According to him, the factory is in continuous process of upgrading by purchasing new equipment and improving products: "We have to increase labor efficiency and decrease the labor-hour cost, as prices for components are going up, and the military customer allows us to increase our prices only by the factor approved by the Ministry of Finance".

The manufacturers, however, are much more aggrieved by accusations of backwardness of the Russian defense industry rather than with the price wars. Georgi Kuzyk assures that Arena has no comparables: "Although we "stalled" during ten years, no foreign company has overtaken us so far, including such countries as the USA, Germany and Israel, which at present are giving their closest attention to this area".

The manufacturers are at one thinking that the unwillingness of the Defense Ministry to notice and finance promising projects strongly discredits the military and industrial policy pursued by the Russian government authorities.

Vladimir Terletsky