Status of Russian Military Industrial Complex (MIC)

Russia’s Kalashnikov Asks Putin To Save Famed Factory

MOSCOW — Mikhail Kalashnikov, the Russian who designed the AK-47 assault rifle, called on President Vladimir Putin on Oct. 30 to halt the decline at the legendary factory where he invented the weapon.

Kalashnikov, 92, and 16 colleagues said in an open letter addressed to Putin that production had fallen to a record low at the Izmash motor and weaponry factory in Izhevsk, the main city in the central Russian region of Udmurtia.

“Respected Vladimir Vladimirmovich, we are forced to turn to you because of the catastrophic situation at what was once a manufacturing giant,” the letter said. “It is bitter and shameful to see how something built by more than one generation is being destroyed. Today the level of production is lower than ever.”

“In the name of the veterans who have spent most of their lives working at Izmash, we ask you to save our factory,” it said.

The letter said that qualified personnel were quitting the company as their salary was no more than 10,000 roubles (320 dollars) a month, a problem that had already sparked protests at the plant. It also blamed the problems on the short term policies of the current management.

“The production of hunting and sport rifles has been halted and export contracts broken,” the letter addressed to Putin said. “It’s already clear that state contracts for firearms production are not going to be realized,” it said.

Izmash, whose history dates back to 1807 in the reign of Tsar Alexander I, is still one of the main producers of Russian weapons including the famed AK-47 (also known as Kalashnikov) and its derivatives.

However like several other specialized Russian industrial enterprises, it has been hit by the drying up of domestic demand after the collapse of the Soviet Union and failure to make up for this with foreign orders.

One of the main components of the radical military reform launched in 2008 was to set up a vertically-integrated holding company to manage the MoD’s repair, maintenance, logistics and other non-core operations. It is no coincidence that the presidential decree to set up OAO Oboronservis, a commercial company controlled by the MoD, was issued on September 15, 2008, just a few weeks before then defense minister Anatoliy Serdyukov announced the “New Look” reform of the Russian Armed Forces.1 It is therefore rather ironic that irregularities during the sell-off of surplus Oboronservis assets uncovered in the autumn of 2012 have been used as a pretext to fire Serdyukov. The future of the company will be an important indicator of the direction the military reform will now take, and of the fate awaiting Serdyukov’s legacy. It cannot be ruled out that Oboronservis will be broken up or liquidated. Although the process of restructuring the holding and turning it into a joint-stock company took almost four years, its assets can still be transferred to newly-created government-run companies and organizations. There is a possibility, however, that the MoD will choose a third option, under which Oboronservis will lose some assets – especially in housing and utilities – but retain others, and keep its current status as a commercial venture and a joint-stock company.

The future of the arms imports projects

The official reason the government gave for setting up Oboronservis was to outsource the functions which have little to do with the core remit of the Armed Forces. This is well in line with long-standing practice in developed countries.2 But there was also another reason, which was not exactly advertized. The MoD and the General Staff wanted to have a mechanism for importing modern Western weaponry (especially ground weaponry) independently from the Russian Technologies state corporation and from Rosoboronexport, the state-owned arms imports and exports intermediary.3 The previous MoD leadership apparently planned that this second, unofficial function of Oboronservis would gradually become more prominent.

We have information about two Oboronservis arms imports programs currently under way. One is the assembly under license of 3,000 Iveco LMV M65 armed vehicles (Russian designation Rys) at the 172nd Central Vehicle Repair Plant, a joint stock company based in Voronezh. The program is worth an estimated 1.5bn dollars. It is expected to run until 2015, and includes local production of the armored frame, which should begin some time before 2015. The second program is to build a training center in Mulino, Nizhniy Novgorod Region, under a 100m dollar contract signed in November 2011 with Rheinmetall Defence. The facility, which should be capable of training 30,000 Army personnel ever year, is to be completed by 2014.4

The second program is very likely to continue exactly as planned. As for the assembly of the Iveco LMV vehicles at the 172nd Plant, it is possible that the size of the order placed by the MoD will be reduced.

There have also been reports about another two relatively large Oboronservis programs to assemble Western or Israeli weaponry in Russia. In May 2012 the company was reported to be negotiating a contract for three types of unmanned aerial vehicles with Israel’s Aeronautics Defense Systems. More specifically, Oboronservis wanted to buy eight units apiece of the Orbiter-2 mini-UAV, the Aerostar tactical UAV, and the Skystar tethered aerostat, worth a total of 53m dollars.5 So far, the contract has not been signed, and if the government decides to liquidate or restructure Oboronservis, the deal may be called off entirely.

Finally, the MoD was negotiating a contract for 50 Eurocopter Ecureil AS 350 and AS 355 helicopters, worth 6.06bn roubles. That deal fell through in the spring of 2012 just before the signing of the contract. Formally, the tender – which Eurocopter was widely expected to win – was called off because that the two Ecureil models did not fully meet the MoD’s requirements. The real reason, however, was lobbying against the deal by Vertolety Rossii (Russian Helicopters) and the office of Deputy Prime Minister Dmitry Rogozin. Nevertheless, five Ecureil helicopters were later brought to Russia for testing. The initial plan was that the AS 350 and AS 355 models would be assembled in Russia by a joint venture. The Russian partner was to be Helivert, a company controlled by Leonid Reyman, a former Russian deputy prime minister, but one of the repair plants owned by Oboronservis was viewed as a possible partner of Eurocopter and Helivert in assembling the helicopters and providing maintenance services for them.

Plans to assemble the Ecureil helicopters in Russia and to buy Israeli UAVs are now in question – but not because the new defense minister, Sergey Shoygu, is opposed to arms imports. On the contrary, he appears supportive of the idea. But these plans may well fall foul of organizational problems posed by the uncertain future of Oboronservis.

The Emergencies Ministry, which Shoygu had led until recently ever since it was created in the 1990s, was actually the first Russian government agency to buy foreign helicopters. Its fleet has long included such Eurocopter models as the Bo-105, BK-117 and EC135. In 2011, when he was still in charge of the Emergencies Ministry, Shoygu said it was unacceptable that the prices of helicopters made by Vertolety Rossii had risen by 300-400 per cent (he was referring to the price of the Mi-17 model, which had spiraled from 3 million dollars to about 12 million). He reiterated that opinion once again during his very first cabinet meeting in his new capacity as defense minister. Addressing Industry Minister Denis Manturov, he threatened to resort to imports. “We need to adopt a universal price-setting mechanism [for aircraft and helicopters supplied to the MoD],” Shoygu said. “As an alternative, we can introduce some competition, including competition from foreign suppliers – although that is something we would prefer not to have to do.”6

Uncertainty over the future of Oboronservis may also affect the ongoing talks on buying small batches of Western armored vehicles for testing in Russia. (Test units of the Centauro armored combat vehicle and of the Freccia APC, both Italian-made, have already been delivered; talks are under way with the makers of Germany’s Boxer APC.)

Outsourcing

Officially, the main reason for the government’s decision to set up Oboronservis was to outsource some of the non-core functions of the armed forces. The company’s director-general, Sergey Khursevich, has made several public statements to that effect. Some understood that to mean that the non-core functions will be farmed out to commercial contractors using long-established Western templates. In the United States, for example, there are large specialized companies, such as KBR, which provide various services to the Pentagon. But the Russian MoD chose a different model. It merely transferred its various housing, utility and retailing operations, as well as some other support functions, to the Oboronservis subsidiaries such as Slavyanka, REU (Repair and Maintenance Directorate) and Voentorg. These subsidiaries were authorized to use private subcontractors – but the only two areas where the outsourcing strategy has been fully implemented is catering and cleaning. In the autumn of 2011 the defense minister signed a resolution ordering a complete transfer to independent commercial contractors of catering, cleaning, electricity supply, central heating and maintenance of housing and training facilities from January 1, 2012.

On the whole, these plans have now been implemented. For the first time in centuries, Russian soldiers do not have to arrange their own catering or laundry. But many problems still remain. Shortly after the sacking of Anatoliy Serdyukov it was reported that the REU holding, a subsidiary of Oboronservis, owes more than 4bn roubles to its fuel suppliers. Some of these suppliers have asked courts to begin bankruptcy proceedings against REU. The MoD was forced to promise that the company would be given extra funds to resolve the matter. Another Oboronservis subsidiary, Voentorg, has run up large debts to catering contractors. Yet another subsidiary, Oboronenergo, which is in charge of electricity supplies, is in a similar situation.7 To make matters worse, the top manager of Slavyanka, Aleksandr Yelkin, has been taken into custody. He is accused of the embezzlement of 53m roubles paid for the refurbishment of a building owned by the MoD; the company to which the money was paid has not done any work on the building. Yelkin is also suspected of siphoning off public funds to pay the bills of senior MoD officials who have now been sacked.8

Slavyanka and other Oboronservis subsidiaries in the housing and utilities sector are the most likely to be split off from the company. The government may well decide to resurrect the old housing and utilities units of the MoD, which will take over the assets of these subsidiaries. The decision in 2008 to transfer housing and utilities operations to Slavyanka was followed by a sharp reduction in the number of military compounds (from 7,500 to 192 base compounds, with another 4,500 compounds categorized as “service quarters”). The Slavyanka managers who have been put in charge of the compounds have no personal interest in keeping them livable. The commanders of the old housing and utilities units may have been corrupt and incompetent – but at least many of them actually lived in those compounds, so they wanted central heating and other utilities to work to decent standards. Slavyanka managers, on the other hand, are interested only in meeting their financial targets, and the problem with corruption has not gone anywhere.

No wonder then that this particular part of the outsourcing strategy has been the main target of criticism following the sacking of Serdyukov. “Outsourcing in the armed forces... has served mainly to maximize some people’s profits,” says Gen. Vasiliy Vorobyev, the former head of the MoD’s main financial directorate. “For example, according to my conservative estimates, government spending on catering has increased more than tenfold following the introduction of the outsourcing strategy.” The general says that in his opinion outsourcing can only be justified if it achieves a reduction in spending of at least 20 per cent, whereas in 2012 spending has actually gone up (he does not cite any precise figures). Another retired general, Sergey Bogatyrev, believes that outsourcing can have an adverse impact on the troops’ combat readiness because outsourcing cannot be relied upon during an actual war. He argues that the army needs its own mobile support units.9 Various shortfalls of the outsourcing strategy have come to light during military exercises in 2011 and 2012, when the troops which rely on outsourcing were deployed away from their bases. The Oboronservis chief, Sergey Khursevich, has admitted that these problems are real. He argues, however, that they can be resolved without major changes to the existing strategy by making the employees of the commercial contractors working for the MoD part of the Russian military reserve, and mobilizing them in the event of military action.10

Financially, the most important part of the Oboronservis business is the former MoD repair plants, which have been consolidated under the Aviaremont and Remvooruzheniye subsidiaries. OAO Aviaremont, which has taken over all of the Air Force’s aircraft repair plants, generated about a quarter of Oboronservis revenues in 2011. It signed about 42bn roubles’ worth of contracts that year; the overall revenue figure for Oboronservis was 160bn roubles.11 To put this into perspective, the 2011 revenue of the Slavyanka subsidiary was 24bn roubles. The MoD has tried to implement the outsourcing strategy for its repair and maintenance operations, although only a few contracts have actually been awarded to commercial suppliers (including KamAZ and other vehicle manufacturers). But in this particular segment the MoD is likely to press ahead with its outsourcing plans. For example, on November 23, 2012 new defense minister Sergey Shoygu said that contracts for deep refurbishment of aircraft and their components should be awarded to the manufacturers of that hardware.

The MoD and the Ministry of Industry and Trade have already set up a working group to look into the possible transfer of several aircraft repair plants to the United Engine Corporation (ODK), which is part of Oboronprom, a Russian Technologies company. ODK is especially interested in such assets as: OAO Aramilskiy Aircraft Repair Plant (town of Aramil, Sverdlovsk Region); OAO 570th Aircraft Repair Plant (town of Yeysk, Krasnodar Territory); OAO 218th Aircraft Repair Plant (town of Gatchina, Leningrad Region); and OAO 712th Aircraft Repair Plant (Chelyabinsk-15).

It is therefore safe to assume that Aviaremont and Remvooruzheniye, both of which have a lot of spare capacity, will not benefit from the change of leadership at the MoD.

1. Oboronservis website, About section // http://www.oboronservice.ru/Forms/Public/ContentForm.aspx?ID=5.

2. Sergey Khursevich: “It is a monstrous waste to use a military officer as a repairman”. Interview with the online version of the Vedomosti newspaper. March 6, 2012 // http://www.vedomosti.ru/library/news/1528048/sergej_hursevich_chudovischno_rastochitelno_ispolzovat#ixzz2CgZojnud.

3. Nikolskiy A. Bypassing Chemezov // Vedomosti, August 29, 2012.

4. Press release by Rheinmetall Defence // http://www.rheinmetall-defence.com/en/rheinmetall_defence/public_relations/news/archive_2011/details_1219.php.

5. Barabanov M. Russian Imports of Israeli UAVs // Moscow Defense Brief, ? 5, 2012.

6. Shoygu advocates a universal price-setting mechanism in the aerospace industry // RIA Novosti, November 23, 2012.

7. Kalinina Y. Serdyukov’s Amazons switch the lights out for the army // Moskovskiy Komsomolets, November 16, 2012.

8. Mashkin S., Rubnikovich O. Anatoliy Serdyukov’s home has become a prison // Kommersant, November 24, 2012.

9. General Bogatyrev: Outsourcing troop support functions can cause problems in a war situation // Interfax-AVN, November 21, 2012.

10. Sergey Khursevich: “It is a monstrous waste to use a military officer as a repairman”. Interview with the online version of the Vedomosti newspaper. March 6, 2012 // http://www.vedomosti.ru/library/news/1528048/sergej_hursevich_chudovischno_rastochitelno_ispolzovat#ixzz2CgZojnud.

11. Interview with OAO Aviaremont chief Irina Krivich // Vzlet, No 3, 2012.

Kalashnikov" buys 51% stake in the group "Synthesis-PD"

The transaction cost of production parts drops by 40%

Concern "Kalashnikov", belongs to the State Corporation Rosteh buys 51% stake in the group of companies "PD synthesis" - the only Russian manufacturer of metal products for MIM-technology using raw domestic producers.

Amount of the transaction, the financing of which concern implement their own and loan funds, is more than 250 million rubles. It is assumed that it will be closed until the end of June 2014.

"Partnering with" PD synthesis "is an important step in the modernization of production enterprise. Now 90% of the parts produced and refined manually. Using old technologies that are serious time and effort. Thanks to the experience of "Synthesis PD" we will be able to halve the time of the manufacture of parts and reduce production costs by more than 40%, as well as improve quality characteristics and increase production, "- commented CEO deal of concern" Kalashnikov "Alexey Krivoruchko.

"Synthesis-PD" specializes in the manufacture of metal products for MIM-technology (from the English. Metal Injection Molding), ie by injection molding.  This technology is used as raw granulated balanced mixture of fine metal powders and polymer binder, which is called feedstock.

With MIM-technology can manufacture parts weighing up to 100 grams in weight term may be increased to 400 g

Attracting new partner will allow the concern to change the approach to the design of new products. Current technology does not allow for sophisticated design details to the extent necessary, it inhibits technological progress and makes it impossible to integrate the production of new engineering developments. Thanks MIM-technology, manufacturing of parts of any complexity takes a minimum of time and gives maximum precision in execution.

http://rostec.ru/news/4513389

SOCHI, May 14. /ITAR-TASS/. All products necessary for the Russian military and defense complex should be produced domestically, President Vladimir Putin said on Wednesday.

“We should do everything to ensure that all products used by the military and defense complex and necessary for it should be produced on our territory so that we do not depend on anyone in any of the areas of the army and fleet rearmament and their transition to new armament systems” Putin told a government meeting on state defense order fulfillment.

This policy will benefit the domestic industry, Putin said, urging readjustments in the work of domestic scientific schools and closer coordination with the Russian Academy of Sciences.
Putin said 20 trillion rubles ($570 billion) had been set aside for the army and fleet rearmament until 2020 and another 3 trillion rubles ($86 billion) for the upgrade of the military and defense sector.

Austin wrote:Just thought would ask this Question , What would be the impact of 3rd round of sanctions on Russian Defence Budget ?

I suspect they will have to prune SAP 2020 .......Although Russia would consider a direct Economic Sanction a very Hostile Act and wont reduce defence spending but social and other spending

magnumcromagnon wrote:

Austin wrote:Just thought would ask this Question , What would be the impact of 3rd round of sanctions on Russian Defence Budget ?

I suspect they will have to prune SAP 2020 .......Although Russia would consider a direct Economic Sanction a very Hostile Act and wont reduce defence spending but social and other spending

Austerity is a bad thing whether it's military or civil related, instead they should nationalize the Russian Central Bank, ban the dollar and have the Russian National Bank issue long term loans worth trillions of Rubles to the Russian Govt. at 0% interest with 50-100 year maturities. Also they should retaliate be enacting a titanium, oil and gas embargo, as well as encourage other countries friendly to Russia to de-Dollarize, and engage in direct trade with their own currencies.

MOSCOW, July 3 /ITAR-TASS/. Russia will spend about $600 billion on its state armaments program by 2020, Deputy Defense Minister Yuri Borisov said on Thursday.

“About 80% of the funds have been set aside for the purchase of modern and promising types of armaments and military hardware,” Borisov said, adding the share of modern weaponry in the Russian Armed Forces would reach 70% by 2020.

The provision of the Russian Armed Forces with modern weapons has prompted the need to reform the system of military hardware repairs, the deputy defense minister said.

“We have taken and are implementing decisions, under which current repairs will be carried out by maintenance and repair bodies, including in field conditions while labor-intensive and major repairs with upgrade will be conducted at defense and industrial enterprises,” the deputy defense minister said, adding the correctness of these decisions had been proved by the recent surprise combat readiness checks of the army and the navy.

With account taken of existing arms arsenals, the Russian Defense Ministry will keep 26 out of 131 repair enterprises while the rest will be transferred to industry, the deputy defense minister said.

Russia’s state-run hi-tech corporation Rostec will receive about 50 such enterprises, while another five will be offered to the United Ship-Building Corporation, he said.

“In the process of its establishment, it already received shipyards that belonged to the Defense Ministry. Today we have five enterprises that have been offered to the United Ship-Building Corporation and we are currently in the negotiating process,” the deputy defense minister said.


Chief of the Russian General Staff, Army General Valery Gerasimov said late last year that the share of modern weaponry and military hardware had reached 62% in the Aerospace Defense Force, 45% in the Strategic Nuclear Forces, 52% in the Navy, 42% in the Air Force and 21% in land troops.

Last year, the Russian Defense Ministry signed additional contracts with industry worth 120 billion rubles ($3.5 billion) on the maintenance of military hardware under serial combat equipment supplies. This figure will continue growing in the future, the deputy defense minister said.

“Now we are implementing four pilot projects under a full lifecycle contract,” he said, adding the Defense Ministry had concluded contracts with the Novosibirsk Aviation Plant, the Ship-Building Corporation, Uralvagonzavod tank manufacturer and KAMAZ truck maker.

sepheronx wrote:Are you high or something?

It states that money is already set aside. In other words, the money is already there. Economy outlook (wich is good) has not much to do with it now other than rise of cost of the goods.

Maybe im reading it wrong, but it is already set aside. The total % of the funds being spent per year for sap2020 is what? 3 - 4% of GDP? Thats almost nothing.

I dont understand you Austin. You seem to be in denial about Russias economy for years for some strange reason.

Other SAP have gone through, even in worst of times. It just means this one is larger.

sepheronx wrote:Are you high or something?

It states that money is already set aside. In other words, the money is already there. Economy outlook (wich is good) has not much to do with it now other than rise of cost of the goods.

Maybe im reading it wrong, but it is already set aside. The total % of the funds being spent per year for sap2020 is what? 3 - 4% of GDP? Thats almost nothing.

I dont understand you Austin. You seem to be in denial about Russias economy for years for some strange reason.

Other SAP have gone through, even in worst of times. It just means this one is larger.

TR1 wrote:MIC is a double edged sword.
The state input to make them produce anything is massive. Unlike civilian economic growth, its effects on the nation can be very limited.
-You need huge investment to make them produce anything. Often time these investments are squandered and are not subject to the same competition as civilian economic projects.
-Exports are nice, but rarely are anything more than a little sugar on top of your internal spending
-Military secrecy- half the crap they develop are classified or have no civilian use. No effect on GDP past wages paid, subcontractor orders, etc.
-Unlike civilian businesses and infrastructure investments, MIC has comparatively little secondary effects on economy growth. Spending money on an extra 200 Su-34s does nothing for economy growth past employing the factory.

Look, no one is saying MIC should be cut off from funds. But to assume MIC spending is what will drive Russia's economy forward, is just silly. No economist would agree with you.
SAP can be cut and critical enterprises can still be preserved. If the only competitive thing Russia has past 2020 is the MIC then we are in crappy straight indeed.

TR1 wrote:MIC is a double edged sword.
The state input to make them produce anything is massive. Unlike civilian economic growth, its effects on the nation can be very limited.
-You need huge investment to make them produce anything. Often time these investments are squandered and are not subject to the same competition as civilian economic projects.
-Exports are nice, but rarely are anything more than a little sugar on top of your internal spending
-Military secrecy- half the crap they develop are classified or have no civilian use. No effect on GDP past wages paid, subcontractor orders, etc.
-Unlike civilian businesses and infrastructure investments, MIC has comparatively little secondary effects on economy growth. Spending money on an extra 200 Su-34s does nothing for economy growth past employing the factory.

Look, no one is saying MIC should be cut off from funds. But to assume MIC spending is what will drive Russia's economy forward, is just silly. No economist would agree with you.
SAP can be cut and critical enterprises can still be preserved. If the only competitive thing Russia has past 2020 is the MIC then we are in crappy straight indeed.

Russia approves main areas of budget policy, budget projections for 2015-2017 - Siluanov (Interfax-july 3rd)