Russian Defence Industry Is Back In Nineties

03.12.2009 — Analysis

The Russian Government's plan to increase the volume of state defence contracts by 30% in 2009 remains unfulfilled. Moreover, due to the untimely transfer of funds many enterprises have cut down the production. In 2010 the situation may worsen since the RF Defence Ministry made the announcement that it will only fund the production of military machines which conform to global standards. Just before the meeting on the problems of the defence industry which Vladimir Putin will hold on 9 December in Nizhniy Tagil the RusBusinessNews observer has studied the state of things.

Sergei Ivanov, the Russian Deputy Prime Minister, said in the beginning of 2009 that defence industry enterprises in the Sverdlovsk Oblast will be awarded state contracts worth 19 billion roubles which is five billion more than in 2008. In November it became clear, however, that only 19 out of the 40 key enterprises of the industry will produce the same quantities as previous year. According to Vladimir Kukarskikh, the Deputy Head of the Union of Defence Industry Enterprises of the Sverdlovsk Oblast, the first contracts for getting money out of the budget were signed in July and the latest tenders were held in September which in itself is nonsense.

More or less stable situation is preserved at enterprises controlled by the State owned corporation Rosatom. Vyacheslav Gorbatenko, the Deputy Director General of OJSC Experimental Design Bureau Novator, claims that all is well with the workload at enterprises engaged in missile equipment manufacturing. State orders for them have been increased by 10% right after the war with Georgia.

The situation is much worse at those enterprises in the Sverdlovsk Oblast which specialize on the production of conventional weapons, electronics, and means of communications. Baranchinskiy Electromechanical Plant, Automobiles and Motors of the Urals (AMUR), Yegorshino Radio Plant are undergoing bankruptcy procedures. Equipment made by these plants is so outdated that it cannot be used even in the non-military sectors of economy.

Yegorshino Plant was managing to survive for a while making electric looms for JSC AvtoVAZ but the economic crisis caused the latter to fall behind with payments and accumulate a serious debt to the defence enterprise. The debt is partially paid by the loan from the State-owned Corporation Vnesheconombank. The AMUR plant tried keeping going by establishing the industrial assembly of Chinese cars but the Russian Government has not granted the company an appropriate official status and the Russian Army does not need as many trucks as it used to. Baranchinskiy Plant, according to Vladimir Kukarskikh, could find customers for their new generators but the protracted argument between the proprietors has turned into delays in wage payments and staff protests.

The Nizhniy Tagil OAO NPK Uralvagonzavod (Open Joint Stock Company Science and Production Corporation Ural Railway Car Plant) is a serious cause for concern. The plant only has military orders thanks to the Venezuelan leader Hugo Chavez who decided to equip two battalions of his army with the Urals tanks. Domestic orders for 2010 are a big question as the Russian Armed Forces are in no hurry to sign contracts for the T-90 tanks. According to Uralvagonzavod employees in all the life time of the new Russia the Army has ordered just 31 tanks and paid only for 13. Eighteen combat machines are parked next to the fence. It is not ruled out that these will be shown to Vladimir Putin.

Experts reckon that the situation with the MIC is unlikely to improve in the nearest future, after the November meeting with industrialists in Ekaterinburg Anatoly Serdyukov, the Russian Defence Minister, made a statement in which he said that his administration will try to load up the capacities of all enterprises as much as possible but that the funding priority will be given to nuclear weapons. Vitaly Smirnov, the Director General of the Union of Defence Industry Enterprises of the Sverdlovsk Oblast, is convinced that far from all the missile developers will be getting money, only those who manage to prove that they are capable to present modernized equipment literally tomorrow requiring little outlay.

In the recent year and a half Russian authorities have cardinally revised their views on the standards of domestic military equipment. It is accepted at the highest levels that the Russian arms are behind foreign because the defence industry lives off the old designs having stopped paying due attention to the experimental design work. Starting 2010 the Defence Ministry decided to order only those models which are as good in terms of military performance as the world's best.

Experts are at a loss. Where would new designs come from if the State does not want to fund design bureaus? According to David Lerner, the First Deputy Director General of OJSC SPE Start, the production of new complexes has dropped eight times compared to the Soviet period as the money from the budget comes in small instalments spread over several years.

It is interesting that when Vladimir Putin became Russian President he declared the course on the aggressive foreign policy while the budget funding of R&D continued declining. During the times of his predecessor Boris Yeltsin the weak funding of design work was explained by the lack of money. The Putin's Government did not lack the money but, paradoxically, the more petrodollars came to the budget the worse was the funding of the State contracts.

The situation became particularly hard three years ago when the RF Ministry of Finance started the establishment of the Investment Fund and the Defence Ministry at the same time extended the payment time terms for the ready products and began regularly revising orders for military products which caused disorganization in the work of defence enterprises.

The State is practically indifferent to the quality of the produced equipment. Acceptance testing of complexes is a mere farce now - instead of full-scale trials the tests are limited to three launches, and the new design is sent to batch production. It was decided not to bench test the Bulava missile at all, the lamentable result is well known. Not a single launch was successful.

Export models have to be modernized, as a rule, by the enterprises without any support and those sparse orders from the Defence Ministry often have no budget to back them. The State, for instance, ordered a naval Grad which has not been made in Russia for twenty years. They suggested that the industry should ask the Ministry of Economy for money for the production capacities upgrade and the revision of the documentation. Managers of enterprises claim that there is no money for the State support for the production of new equipment, that it is all just talk.

The situation has gone worse in the end of 2009, Anatoly Serdyukov, the Russian Defence Minister, suggested that manufacturers should reduce the prices for their products by 15-20% or at least not to raise them in 2010. He did not make promises that tenders will be held in time, meaning in the first quarter of the next year as the budget has not been approved still.

Managers of enterprises, according to Vitaly Smirnov, reminded the military that the plants have not stopped production only because they took out loans. As a result an average enterprise in the Sverdlovsk Oblast having the wages fund of 17 million roubles had to pay out 74 million roubles - 4 months worth of wages - in interest payments. Thus it turns out that the defence budget money is given not to the industry but to bankers.

Defence industry generals also asked Anatoly Serdyukov to influence the monopolies which regularly raise prices for gas, electricity, and other services. This, in their opinion, is just another nonsense - fuel prices rise 36% in a year and the machine builders are asked to drop their prices by 20%. This is also impossible because the metals and chemicals sectors supply their products at market prices.

Since the Defence Minister admitted that he has no influence over GAZPROM, managers of defence enterprises told him to accept the defence prices which are formed by the market. Taking the Russian realities into account it has to be said that the contracts must be entered into for at least 2-3 years, and should account for the interest payments and other costs.

Vitaly Smirnov who worked as a manager of one defence enterprise in the nineties reckons that the Russian MIC has regressed to what it was 14 years ago. In September 1995 the Defence Ministry began retracting from all previous orders without exception. At that time the directors had to spend much of their time in Moscow offering the officials various crisis options, for instance make two units instead of five which were budgeted for and channel the remaining money into "modernization". This is the approach that helped the survival of the defence industry then. It is all happening again today: the directors corps, according to the expert, have to understand that they will have to make much more of an effort to sign contracts than it took a year ago. Getting orders will depend directly on the levels of "modernization" Russian-style.

The regression into the nineties has not surprised the hardened manufacturers, the officials in the Defence Ministry are new and that is why they are stepping on the very same rake. It was offered fifteen years ago to the officials to free the manufacturers of the unneeded mobilization capacities maintaining which costs money which could be used for the development of new equipment.

Nothing changed since - the State still forces the enterprises to maintain idling capacities, the defence industry sector complains about the lack of money for R&D, the Defence Ministry demands equipment matching the world's best. To summarize, the sphere of the State defence contracts, in the precise words of Gennady Muratshin, the Director General of OJSC SPE Start, seems much like a dialogue between a blind and a deaf.

Vladimir Terletski