Russia: No Idea What To Do With "Surplus" Tank Plant

01.09.2009 — Analysis

In 2009 the registered capital of OAO NPK Uralvagonzavod (Open Joint Stock Company Science and Production Corporation Ural Railway Car Plant) will be increased by 4.4 billion roubles. The corporation will also get the state guarantees for the obtaining of 10 billion roubles worth of loans. The money will be spent on the support for the plant whose twelve thousand employees are on forced leave due to the lack of orders for non-military products. Experts do not exclude the possibility that the economic crisis might affect the structure of the corporation being established since the existing orders are far form enough to keep the entire capacity of the holding busy.

The Uralvagonzavod (UVZ) Corporation is the world's largest integrated manufacturing complex specialising in the production of the T-90 tanks. During the hardships of the nineties, when there were no state funded defence contracts, the venture had been surviving through sales of railway carriages and road building machinery. In two thousands there was a very timely contract for the supply of a large shipment of tanks to India. UVZ's main competitor, the T-80 producer FSUE Omsktransmash, had gone bankrupt by then having had accumulated billions worth of debt, and had been stopped.

The Sverdlovsk Oblast authorities, having lobbied the establishment of a single armoured trucks and tanks holding in Russia, had managed to achieve the establishment of a Science and Production Corporation on the basis of Uralvagonzavod which incorporated "the brains" of Omsktransmash, the Design Bureau of Transport Machinery (KBTM). The production facilities of the Omsk venture had been put up for sale.

In 2007 the military capacities had been transferred to KBTM on the Omsk Oblast Administration's initiative. Areas where non-military products used to be made had been rented out to ChTZ-Uraltrac Ltd. Uralvagonzavod owns 17% of shares of this company. Chelyabinsk tractor builders who make engines for the T-90 decided to start the production of wheeled machinery and, in the future, to build a joint metallurgic venture in Omsk.

In January 2009 the non-military property had been sold to the Chelyabinsk plant for 300 million roubles. The Omsk Oblast Court of Arbitration, however, had nullified the deal. The local branch of the Sberbank of Russia, being an Omsktransmash creditor, had filed a suit claiming that the procedure had been carried out incorrectly: the notification was published in wrong media, the envelopes were opened at a wrong place etc. The bankers decided that these violations had limited the number of buyers thus having led to the property having been sold at the price too low.

Serghey Vozyanskiy, the Head of the Committee on Property Projects of ChTZ-Uraltrac Ltd., clarified for RusBusinessNews that the limited number of those wishing to buy the production capacities in Omsk can be explained by the fact that the competition was of a closed type, i.e. only enterprises which have licenses for the production of armoured trucks and tanks had been allowed to take part. So, the first court decision has been appealed against and this appeal will be considered in September.

It is obvious that the debate around the property of Omsktransmash is in no way connected to the procedural violations at the time of sale. Evgheniy Kosintsev, the Head of the Defence Industry and Communications Department of the Ministry for Industry of the Omsk Oblast, thinks that the sale of a part of the property complex to Uraltrac will lead to the breakdown of the structure of Omsktransmash and make the management of the venture more difficult. Regional authorities appealed to the Government of the Federation with the request to allocate the money to buy the non-military capacities for the Design Bureau of Transport Machinery. The Omsk Oblast Administration officials told media many times of their desire to organise the full cycle of the armoured trucks and tanks production at the plant once again. At the same time KBTM's future is completely coordinated with the development of Uralvagonzavod. According to Evgheniy Kosintsev the merger of the plants will help to survive the crisis most painlessly.

The problem is that Russia today might not have enough work to load the capacities of two tank plants. Experts from the Centre for Analysis of Strategies and Technologies claim that Uralvagonzavod will ship 62 tanks to the Russian army and 60 - to the Indian armed forces in 2009. It is quite possible that there will be more orders through the Cyprus contract, on which there is very little data. In any case, a hundred and fifty tanks will not provide a good living even for one plant with 30,000 employees, to say nothing about the corporation.

In contrast to the nineties, non-military products are not of much help to Uralvagonzavod, there are no orders for railway carriages and road construction machinery. In this situation competing for the production capacities of Omsktransmash loses poignancy somewhat.

Boris Mineyev, the Press Secretary of Uralvagonzavod, informed RusBusinessNews that wheeled machines will no longer be made in Omsk, and that regarding the future plans for the production areas it is best to enquire at ChTZ-Uraltrac Ltd.

Valery Platonov, the Director General of ChTZ-Uraltrac Ltd., told us, through his secretary, that RusBusinessNews should talk to his subordinates as he personally does not have any additional information. Andrey Skladskikh, the Deputy Director of ChTZ-Uraltrac Ltd., said, in regard to the non-military production at the Omsktransmash sites, that this information is a trade secret.

The reason for this secrecy became clear after talking to other ChTZ-Uraltrac Ltd. managers. They say that two years ago the company had started renting capacities of Omsktransmash because it could not fulfil the orders at own premises. Some goods were made for own needs, some - for Uralvagonzavod. It was planned that in the future the railway car production will develop. Today, however, these plans are meaningless due to the rapid drop in the demand for machine building products. Uraltrac is managing rather well on own premises.

The tractor plant specialists admit that there is certain logic in all the production facilities of Omsktransmash going to KBTM just because both the defence and non-military parts of the plant are interconnected technologically and cannot exist without one another. But even this obvious circumstance has not made Igor Shumakov, the Head of KBTM, admit that the bureau is the most feasible buyer of the Omsk plant's property. "Look for further comments to what I told you in the fact that we will compete for the property", he said to the RusBusinessNews observer.

It is easy to see that there is a contradiction between the official position of ChTZ-Uraltrac Ltd. management continuing to compete for the property complex of Omsktransmash and unofficial comments which actually show that the Chelyabinsk guys are not interested in buying more capacity. The specialists explain this by the fact that Uralvagonzavod, which, as the main venture of the corporation, in the end will have to decide on the fate of the problem asset, still has not decided what kind of products it will make in Omsk.

The experts point out that it is virtually impossible to make this choice in today's conditions as starting up a non-military production financed by bank loans at the current interest rates will doom any project. The position of Sberbank that is essentially trying to carry out a new sale of the disputed assets of Omsktransmash at a higher price, just confirms that yet again.

Uralvagonzavod still does pin its hopes on orders from JSC Russian Railways and JSC Freight One. The corporation promised to publish the production volumes in September. Still, considering the state the Russian economy is in, it is possible to assume that these orders will hardly be enough to load up either the production capacities in Nizhniy Tagil or in Omsk. The future of NPK Uralvagonzavod today is even less clear than it was two years back when the establishment of the corporation had just been announced.

Vladimir Terletski