State defense order of discord

29.02.2012 — Analysis

In February 2012, the Russian Ministry of Defense allocated twice as many funds to the military industrial sector as compared to the funds allocated in the previous year. Some officials have reported dutifully that this year the plan for supply of weapons and military equipment will be completed on schedule. Experts do not share their optimism: In their opinion, the non-transparent pricing and unsteady financing that resulted in wrecking of the state defense order for 2011 continue to persist. As the RusBusinessNews columnist has found it out, the Ministry of Defense goes on pressing manufacturers into onerous contracts.

Dmitry Rogozin, Deputy Chairman of the RF Government, announced during the parliamentary hearings in the Federation Council that by 2020 the Russian defense industry complex will substantially improve its competitiveness. According to him, the economic growth rates of the defense sector exceed considerably the rates observed in the general purpose industrial sector. The smoother financing of state defense orders is one of the contributing factors: If the Ministry of Defense paid in slightly more than 100 billion rubles within the first two months of 2011, it paid twice as much by the middle of this February. The deputy prime minister has no doubt that manufacturers will have no difficulty fulfilling the state order this year.

Vladimir Schelokov, General Director of the Union of Defense Enterprises of the Sverdlovsk Region, told RusBusinessNews that contracts had been signed with 70 enterprises of the region, but only few of them had received their state defense order in full. Here, one should also keep in mind that though many of these companies are suppliers to the Ministry of Defense, they do not represent major defense enterprises of the Sverdlovsk Region. The defense department promises to finalize the order in April.

The situation has improved with money inflow into the industry; however, the Ministry of Defense has failed to perform its obligation to transfer 80% of the total price of the order within five days upon signing the contract. V. Schelokov thinks that approval procedures constitute the main problem. Companies submit their offers for the product price and then have to wait for months until the defense department sends its reply.

Igor Barinov, a member of the Defense Committee at the RF State Duma, thinks that the unsmooth financing of the defense sector and unwillingness of the Ministry of Defense to buy weapons and military equipment at the prices asked by manufacturers resulted from a number of factors. The state has not made investment in the defense sector for a log times; as a result, Russian weapons and military hardware yield substantially to the present-day world models in their performance characteristics.

In addition, companies tend to spend their limited funds rather inefficiently. For example, Kurganmashzavod, OJSC, a member of the Tractor Factories Concern, spent the funds allocated from the budget to meet the top-priority needs of the holding company. As a result, the Kurgan factory did not have enough money for a new combat vehicle long awaited by the army. So, the company encountered problems receiving the state defense order.

Besides, in I. Barinov's opinion, in 2011 the state defense order was not fulfilled due to the uncontrolled pricing in the military industrial sector. He thinks that the situation with the runaway prices for weapon must be straightened out.

Vladimir Gutenev, the advisor to the general director of the Russian Technologies State Corporation, first deputy chairman of the State Duma Committee on Industry, has not noticed that the prices for military products have increased several times during the last years. In his opinion, the trend observed in the industry is totally opposite: The Ministry of Defense is steadfastly cutting the prices down. Gutenev admits that this policy was provoked by the manufacturers who agreed to work at no profit in the crisis year of 2009. However, such practice is absolutely unsound as it leads to non-fulfillment of the state defense order. For example, the United Shipbuilding Corporation failed to maintain reasonable prices and is facing the risk to encounter a "rebellion" of the suppliers who do not want to work at the established prices. In the recent years, the first-tier enterprises had to literally twist the arms of component manufacturers who were not interested in "cheap" state defense orders. Therefore, the expert cannot imagine how the government, relying on low prices, will be able to attract private businesses to working under military contracts - the intention that has been verbalized repeatedly by top officials of the country.

"Defense" manufacturers are also concerned about government subsidies for repayment of interest on the loans that were taken for performing of core business. Manufacturers think that such form of support of the industry has the right to exist, but loans should be made by state-owned banks and the interest should be low and fixed.

Vladimir Gutenev states that in spite of the instructions of Prime Minister Vladimir Putin, the RF Ministry of Defense keeps adhering to the former policy in entering into contracts: the minimum price for the order at the maximum responsibility of enterprises. Manufacturers think that onerous penalties for failure of the supplied hardware as well as unjustifiable requirements to manufacturers are designed to press the industry into unreasonably low prices for weapons and military equipment. Experts are sure that unless the customer and the contractor have equal responsibility as well as fair prices for military products, Russian state defense orders will hang in the balance every year.

Vladimir Terletsky