The end of an era of adventurism for the Russian military industrial complex

20.02.2013 — Analysis

In February 2013 the Russian Ministry of Defense signed state contracts for the manufacture of 50% more military equipment and weapons than the year before. Representatives of the military-industrial complex are declaring victory over "adventuristic" contracts, which were usually signed in the fall instead of at the beginning of the year, thus making them obviously impossible to fulfill and a waste of budget. However, as the columnist for RusBusinessNews has determined, there won't be any more money to rearm the Russian army: the authorities are so far unable to block the main channels through which financial resources are being misappropriated.

Vladimir Gutenev, the first deputy chairman of the RF State Duma's Industry Committee, reported that in early February three-fourths of the budget for supplying arms and military equipment in 2013 had been distributed to companies in the military-industrial complex. As of this date in 2012, 56% fewer state contracts had been concluded. Industrialists see this as a victory: they had endeavored for many years to sign contracts at the beginning of the year. The turning point came only with the departure of Anatoly Serdyukov from the post of defense minister.

The main reason for the slowdown in placing orders had been disagreement about the cost of weapons and military equipment. The Defense Ministry was annoyed by the repeated price increases of recent years and unilaterally decided to review the price rates for defense equipment. The manufacturers felt that unfair prices were being forced upon them and they began a confrontation with military officials. These disputes meant that contracts were concluded much later than usual - sometimes not until the end of the year, making them impossible to fulfill, in either a physical or organizational sense. The armaments program that had been adopted for years to come began to fall apart at the seams.

Experts attempting to analyze the situation focused not only on the price disputes, but also on the erratic financing for government orders, the lengthy process to finalize documents, the draconian penalties for breaking a contract, and the Defense Ministry's unjustifiable requirements for the quality and performance of weapons, given the lack of budgetary funding to modernize manufacturing and R&D.

On closer inspection it turned out that behind the haphazard actions of the officials from the military department, there was a clear policy of setting obstacles in the way of the military-industrial complex. By not allocating money for modernization and R&D, but presenting impossible demands for quality, capabilities, and manufacturing deadlines for weapons and military equipment, the Ministry of Defense was literally forcing companies to enter into "adventuristic" contracts that were doomed from the start to fail and draw penalties.

Typically, these agreements were concluded with businesses that already had one foot in the grave and were thus amenable to any conditions. All parties to the transaction were fully aware that the state order had no chance of success, but each side got what it needed: the Ministry of Defense got its kickbacks, and the businesses received at least some funds, thus allowing them to drag out the agony of their death a bit longer.

Some companies managed to avoid this trap. Vladimir Maslyuk, the deputy general director of MKB Compas, OJSC, claims that Compas was not offered any "adventuristic" contracts - possibly because the company refuses to play these games: if it can't meet a state order, it declines. In order to avoid complaints from the Defense Ministry about the cost of products, Compas did not wait for money to modernize its production, but plowed ahead and cut costs using targeted federal programs. With new equipment, the company significantly increased its profitability: since 2009, output has risen by 5 times with only an 8-10% increase in staffing, while its energy costs have dropped in two and a half times.

But there are few such companies in Russia. For example, Sergei Ostapenko, the deputy general director of Concern PVO Almaz-Antey, OJSC, says that his company is conducting an audit and drafting a product data sheet at the instruction of the Russian government, but that the firm's managers are not yet able to say what the effect will be. There is still the nagging problem of how to boost profitability and labor productivity, which lag far behind that of Western firms. Those issues will not be resolved in one fell swoop.

Perhaps that is precisely why the state has decided to curb the Defense Ministry's appetite. The department's policy has seen a shift with the appointment of the new minister, Sergei Shoigu. According to Sergei Novoseltsev, the general director of Radio Equipment Plant, OJSC, there is no significant pressure from military officials - only if there is an increase in price they do insist that it should be based on a price deflator. Financing has also been sorted out: advances of up to 80% are available for some items. "You won't find any scandals anymore," claims S. Novoseltsev, “Unless the director himself fouls up."

After three years of price pressures from the military, the defense industry is still not very profitable - it can survive but not expand. Federal programs can be fairly obtuse, which is why far from all defense contractors are able to get the funds they need from them to modernize. Plus, bureaucracy flourishes in Russia: documents get piled up in offices because officials who have been spooked by what happened to A. Serdyukov are afraid to sign the papers.

Meanwhile, the military prosecutor's office of the Central Military District discovered that Uraltransmash, OJSC had exaggerated the amount of work it had performed by 95 million rubles. The deputy head of the Russian Defense Ministry's military delegation at the plant, Albert Zubairov, overlooked this "error" and signed the documents for the repairs that were allegedly completed on military equipment. However, the prosecutor's office did not believe that the lieutenant colonel had made an honest mistake and brought criminal charges against him. But he is only being charged with negligence resulting in a loss of budget money. No charges have been filed against the factory's managers.

This story makes experts question the effectiveness of the military delegations that are accredited at defense-industry businesses. Clearly one cannot install a second inspector to watch over every inspector already in place, and adding to the paperwork will only fan the flames of bureaucracy.

The main problem faced by the Russian military-industrial complex is the overly casual attitude toward budget money held by both the managers of defense-industry companies, as well as officials in the Ministry of Defense. Consequently, the Russian army will not be getting modern, effective weapons until the engineers and officials develop a new mindset and attitude toward government funds.

Vladimir Terletsky