Armless Russia

14.09.2011 — Analysis

The Sverdlovsk Region-based companies working for the defense industry demonstrate shrinking percentage of output intended for government orders and increasing export sales. Top managers state that to secure a footing on foreign markets it is necessary to modernize defense factories as soon as possible and to start manufacturing new products. In the meantime, financing earmarked for research is decreasing; beggarly amounts are allocated for technical upgrading. The participants of the Russian Expo Arms - 2011 show told the RusBusinessNews columnist that without technological boom in the near future Russian arms will not be able to compete with foreign products. Therefore, the Russian army will be able to be an equal force only in the battle with its former CIS neighbors.

On the surface, the situation in the national defense and military sector looks very promising: In 2011, the government allocated more than 700 billion rubles for research and development; the record high amount within the last 20 years. By 2013, according to Grigory Stechenya, Deputy Director of the department at the RF Ministry of Economic Development, the total expenses on implementation of the innovation-based development programs will amount to 1.4 trillion rubles. This amount is estimated with consideration for a substantial increase in expenses due to cooperation of defense manufacturers with universities and small business.

On the other hand, according to Gennady Lavrinov, Deputy Director of the 46th Central Research Institute of the RF Ministry of Defense, the amount of funds allocated for R&D is incomparable with the levels of the Soviet times. Furthermore, expenses on research per se are decreasing, with priorities given to experimental design work. The government does not give funds even for the nine primary defense technologies that were approved by the Russian Military and Industry Commission. Financing is provided mainly for design work that will bring actual results in the foreseeable future. In other words, attention will be given to completion of those technologies that have been unattended within the last twenty years. Officials are most likely give no thought where the fifth generation arms are going to come from with such financing policy.

The situation is much worse regarding technological upgrading of the defense enterprises: Only 600 billion rubles will be allocated for modernization out of 20 trillion rubles earmarked for the state armament program till 2020. Due to such neglectful attitude to upgrading, the production economics falls apart.

The management of Concern PVO Almaz-Antey, JSC estimated that the companies - members of the group - consume 1kW energy per every 1,000 rubles in the manufactured products. This gigantic consumption is explained by many factors: The corporation has only 6% of the advanced CNC machine-tools; the production facilities are operating only at 34% of their rated capacity; the personnel structure is inefficient and the value-added productivity is low: 235 thousand rubles per a person in one hour. According to Sergei Ostapenko, Deputy General Director of the Concern, over the last five years the labor efficiency has increased 2.5 times, still being five times lower than European levels. The technological base of Almaz-Antey has also demonstrated a favorable trend within these years, but the process of improvement is still too slow: Foreign companies are not willing to cooperate with enterprises where the percentage of the automated equipment is lower than 20%. To reach the required level Russian manufacturers of air-defense facilities must increase their annual investment in upgrading and advancement of the technological base in 4-5 times. At the present-day modernization rates, Almaz-Antey will be able to manufacture only obsolete arms.

Productive efficiency is an essential element of the armament competitiveness, which is absolutely neglected by Russian policy-makers. The product may have outstanding combat characteristics however, if the manufacturer fails to reach the required specific indicators per unit of output in terms of metal consumption, energy consumption, etc. - it will not be able to survive in the market environment. The past performance of the Russian defense enterprises is a convincing proof.

The Machine-Building Design Bureau, a federal state unitary enterprise, decided, on its own account, to design a short-range man-portable air defense system - Igla. Georgi Kuzyk, head of the Foreign Economic Department, says that they have designed an innovative product, which is in demand in foreign countries. Today, up to 70% of the company's budget is financed through export supplies where Igla accounts for about 60%. However, in the recent years Russian companies have been facing competition from Chinese manufacturers who are trying to oust them from the market, offering less efficient defense systems. The explanation is very simple: The Chinese specific performance is much better, therefore, the products are two times cheaper.

Russian companies try to change their economic performance. The top managers of the Almaz-Antey Concern have arrived at conclusion that there is no sense in manufacturing equipment of the third and fifth generation in the same production facilities, and have embarked on the project of construction of two new factories that will deal with assembly of the ground equipment for all types of missiles. They have foregone the upgrading of older facilities, understanding that it will be 4-5 times more expensive with the former levels of production. The new production facilities are scheduled for completion and commissioning by 2015. Along with the facilities, the concern is going to set up specialized technological centers that will perform specific operations for all the companies - members of the concern: the metallurgy center, the center of printed circuit boards, etc.

The similar approach has been chosen by Oboronprom OPK, JSC, a defense industry enterprise. According to Vladimir Dovgi, Deputy General Director, the situation in the engine-building sector leaves much to be desired; to change the situation dramatically the company decided to set up specialized centers of technological competence and establish the division-based management system. The top manager is sure - if the production situation becomes better, there will be better grounds to expect improved and marketable products.

However, the experts believe that all the plans of the defense and industry complex will fail without sweeping reforms in the work of the RF Ministry of Defense. Gennady Lavrinov states that the military department is not able to handle the know-how flow coming from design institutes and bureaus, let alone commercialization of new models.

The technological backwardness of the defense sector is also the fault of the Ministry of Defense. Technological cycles in the industry change every 20-25 years. They determine purchasing peaks for arms. The next peak is expected in 2020. However, the defense and industry sector is unlikely to have any advancement, as the country does not event make any attempts to embark on extensive modernization of the industry. Instead, the General Staff castigates regularly Russian armored equipment, which does not suit the army, but is still supplied for export.

Experts point out that the focus should be on forward upgrading of the industry to keep up with the next technological cycle. Probably, Russia has reached a critical point when it is still possible to have an industrial revolution without causing damage to the economy and to move to the arms of the fifth generation. However, the development program that is being prepared for the defense industry cannot accomplish this mission, because the policy-makers of the Defense Ministry preferred to channel the funds to "consumption" rather than to development.

Russia's main problem is that very few people understand why funds must be invested in the defense industry complex and why specific enterprises must be supported. Most of those who have access to the military budget aim to reap a profit on government defense orders.

The experts say, Russia has things to do, but if it is going to stick to its practices typical of the last twenty years, it will soon not only lose its foreign markets, but also will have to buy arms for its army from foreign manufacturers.

Vladimir Terletsky