Will Russia replace T-90 for Abrams?

28.06.2010 — Analysis

Chief designed board of the defence enterprises of Ural Federal District made a proposition to the RF Ministry of Defense to change pricing for the military goods. The manufacturers insist that current technique is vicious at its core and does not allow upgrading enterprises of military-industrial complex (MIC).

Today the prices for the production are established based on the production costs (raw materials, salaries, production time, extra charges etc.) plus small profitability which is determined by the military officials. Rate of profit mostly does not exceed 10-12% although in some cases it is 25%. However nobody is convinced that the price established at the receipt of the order will not be changed after the order completion. The Ministry of Defense may shave the prices upon the pretext that money is scarce and the army has to be re-armed.

Administration of MIC enterprises suggests supplying the production to the army at the same prices as for export. Otherwise it is difficult to explain the enterprise workers why for the same work they earn less when the production is destined for the domestic market. As manufacturers say, in some cases the execution of the State defence order is not profit-bearing at all but they have to stand it not to cut down workers who often can not find work in civilian sector.

Sergei Novoseltsev, General Director of OAO "Radio equipment plant", considers that the cause of MIC enterprises problems lies in deflator coefficients which are established lower than the core inflation by the official establishment and that is why the manufacturers lose up to 5% of their profit. More significant margin is also possible: as explained by Andrey Frolov, the expert of the Centre for Analysis of Strategies and Technologies, the industrial inflation at OAO NPK "Uralvagonzavod" amounts to 25%, while the government considers only 10% in estimations. This difference costs the enterprise 100 million roubles for each T-90 tank.

The official establishment stands on its ground. Vladimir Popovkin, the RF Deputy Defense Secretary, is assured that the manufacturers are ingenious and withhold their actual profit margin. Particularly, in 2009 the manufacturers agreed to depress the order for 40% although before they explained the high prices with high costs that gave just about a negative profitability of production. The general was astonished with "Izhmash" company group which produces very cost-effective weapon using the most advanced equipment and at the same time does not forget to include the expenses for maintaining the empty vast shops in its prime costs. As the result the Izhevsk armorers' production is three times more expensive than the one bought abroad.

Many such examples were exemplified in the June hearings at the RF State Duma. Igor Barinov, the Defense Committee Deputy Chairman could not understand why in the beginning of 2000s the Ministry of Defense bought the sniper rifle for 30,000 roubles and now - for 400, 000. The cost of "Topol-M" complex has increased in 2,5 times for three years. All these figures determined him to make a conclusion that MIC enterprises do not want to cut down expenses, they put incomprehensible prices for their production - somewhere due to corruption, somewhere due to permissiveness.

The RF Accounts Chamber has its own demands to the manufacturers. The audit has established that mobile turrets, radar stations and some components of the surface-to-air missile systems that cost more than 3,6 billion roubles and that were accepted and paid for in 2007 - 2008 have been kept in manufacturer warehouses for almost two years whereas they had to be supplied to the military forces at the expense of the manufacturers.

Vladimir Kukarskikh, the Executive Director of the Union of the Defence sectors of economy of Sverdlovsk Region says that all questions to the manufacturers including also complaints for weapon supply will be disallowed if the fair prices for the military production are managed to be established. According to him high expenses of defence enterprises can not be explained by unwillingness of the directors to cut down the expenses. At the above mentioned "Izhmash" such high prices for the guns are due not to precedent malice of the directors but to the necessity to maintain the mobilization capacities. The government shall decide if it needs the shops "reserved" in case of war. If so then the government shall pay for their maintenance. But the government pretends that this problem does not exist. Similarly, the authorities dissemble when they say that inflation in the industry does not exceed 10% upon price increase for gas and electricity for 15-19%.

Sergey Novoseltsev does not deny that there are enterprises that "inflate" prices and get profitability of 50% and even more. But that does not mean that the order prices for all enterprises indiscriminately shall be reduced. There shall be officials in the Ministry of Defense which have good understanding in economics and are able to understand when the manufacturers dissemble and when they tell the inconvenient truth. But it appears that currently there are few of them in the Ministry of Defense. That is why the generals cut off the costs in block for all. Such approach leads to lack of circulating funds and does not allow upgrading the production.

The other misfortune of the Russian officials is inability to establish priorities and concentrate the funds at the required direction. Until recently there were nine ammunition factories in the Sverdlovsk Region. In difficult ‘90s the authorities began to distribute little funds between all enterprises rather than to keep 2-3 enterprises and re-equip them. As the result every last factories collapsed. The same is observed today. General Popovkin complains about lack of modern Russian sniper rifles without which it is difficult to fight in the localized conflicts, and at the same time the Ministry of Defense affords high expenses for purchase of French helicopter carrier "Mistral".

Sergey Novoseltsev can not call the selected rearmament strategy as reasonable. In his opinion "Mistral" is required only for frightening Georgia and Baltic states. For ambitions of some civil servants the country "blows out" an immense sum which would be over and above for creation of the new kinds of small arms. But the Ministry of Defense is afraid to invest the capital into research scientific works because it does not understand how to evaluate the efficiency of such investments. S. Novoseltsev believes that this fear will lead to the fact that soon Russia will buy 80% of armament abroad. However, if the replacement of Russian cars with the imported ones by Russians has not broken the defensive capacity of the country then replacement of a T-90 with let's say an American Abrams is way too much.

Vladimir Terletskiy