Threepenny shield of Russia

18.04.2011 — Analysis

The Russian government has ordered to withdraw part of the profit earned in 2010 by state-owned enterprises targeted at national aerospace forces. For experts, this decision came out of the blue. They told the "RusBusinessNews" columnist that the adoption of the Russian new armaments program till 2020 where the nuclear missile sector is given top priority comes into conflict with appropriation of money from manufacturers. No one ever has been able to build a reliable national defense system with "three pennies".

The Federal Space Agency (Roscosmos) compelled the Ekaterinburg NPO Avtomatiki, a federal state unitary enterprise, engaged in design and development of rocket flight control systems to transfer 25% of their net profit to the state treasury, starting from 2011. Previously, the budget "tribute" totaled as low as 1% of the profit - about 300 thousand rubles. The withdrawal of 7.5 million rubles earned last year was a painful blow for the company's management. They say that the research and production association (NPO) needs funds to keep up its programs of technological upgrading and personnel training. The decision of Vladimir Putin's Cabinet actually puts an end to technical re-equipment of NPO Avtomatiki.

Roscosmos' regulation raised questions not only from businesses operating in the military-industrial complex, but also from analysts. Andrei Frolov, an expert of the Center for Analysis of Strategies and Technologies, does not understand why the net profit should be taken from state-owned enterprises at the time when the federal budget has started demonstrating surplus. The expert is skeptical about the assumption that this regulation comes as punishment of Roscosmos' enterprises for unsuccessful launches of satellites during the last six months: the response would be too inadequate.

Roscosmos refused to explain the meaning of the financial noose for NPO Avtomatiki. Alexander Vorobyov, the press-secretary of the Agency, told "RusBusinessNews" the following: "We do not make comment on rumors. Send us the document about profit withdrawal - then we will talk".

However, Vyacheslav Mikotin, Deputy General Director in Economy and Finance at NPO Avtomatiki, confirmed that it was not rumors. According to him, the subject regulation came from the government, and Roscosmos just passed it further. The enterprise is not interested in raising uproar, but tries to fight for its money.

In his turn, Mikhail Delyagin, Director of the Institute of Globalization Problems, reminded the "RusBusinessNews" columnist that the owner of an enterprise (i.e. the government) is entitled to appropriate net profit at its own discretion. In his opinion, it should be withdrawn in some cases: for example, when it is spent on bonus payments to top managers.

The irony of it is that sometimes manufacturers are not able to receive their earned money from the federal budget. The Union of Defense Industry Enterprises of the Sverdlovsk Region writes regular letters to the Russian government concerning the overdue payments for filled government orders. Vladimir Kukarskikh, Executive Director of the Union, informed "RusBusinessNews" about the meeting that was held not long ago between executives of the enterprises and the Russian Deputy Defense Minister Vladimir Popovkin who promised short-term settlement of debts for the last year and of the government order for 2011.

Until recently, the disagreement that existed between the manufacturers and military was caused by prices for the products. During the previous years, the Defense Ministry horrified by steady appreciation of armament and defense equipment suggested that the profitability of enterprises operating within the military-industrial complex should be limited to 15-25%, whereas the deflator coefficient that was used in cost calculation should be equal to 10%. Manufacturers perceived the suggestion as the government's attempt to solve the problem of moving arms costs down at expense of machine builders. Simple calculations can show that industrial inflation cannot remain at 10% when energy prices go up by 15-19% a year. The actual inflation is much higher: for example, the deflator coefficient offered by specialists for the Uralvagonzavod Research and Production Corporation, OJSC, equaled 25% in 2010.

Experts give several reasons that compel the officials to insist on 10% inflation. One of them is shortcomings in the law related to government purchases, which allows "captive" companies of officials to win tenders for arms and military machinery supplies, thus creating the situation when these companies, in pursuit of their profits, start twisting factories' arms, cutting off their rates and factoring in low inflation.

The second reason resulting in Russia's distorted pricing lies in the specific nature of the national economy. Large state-owned monopoly companies are major investors and profit contributors. All of them have accrued numerous subsidiary units where performing of any cost analysis is almost next to impossible. Non-transparency and inefficiency of monopoles results in decreasing competitiveness on foreign markets. For example, today, Gazprom, OJSC, cannot reach agreement for natural gas supplies to South-East Asia - a very important region in geopolitical terms. China is not interested in buying fuel for more than USD 165 for 1 thousand cubic meters, while Gazprom asserts that profitable sales can start only from 220 dollars. Experts believe that eventually the company may make concessions and agree to sell gas at below-cost prices - as it was done by Inter RAO UES, OJSC, selling electric power to China. At the same time, the company passed all its losses to Russian consumers - the pattern that is likely to be followed by Gazprom, which will another time increase prices on the domestic market.

Experts understand that without establishing the monopoly transparency and changing the procedure for government purchases, the government will never be able to curb price appreciation in armaments, while the administered pricing will inevitably cause wrecking of the defense industry. Managers at the most of the enterprises operating within the military-industry complex speak repeatedly about devastating shortage of funds for research and development, which dooms Russia to lagging behind its competitors.

Instead of tuning up the mechanism of investment in advanced developments, the government opts for taking out profits from those who still stay afloat. The puzzle is what funds the Russian military-industry complex is going to use to finance design development and manufacturing of new equipment and machinery expected from it by the Russian army by 2020.

Vladimir Terletsky