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National defense at your own risk

National defense at your own risk

05.05.2012 — Analysis

The Russian government wants private capital to pay for the production of military equipment and weapons. Authorities hope that large and medium-sized businesses will accept all of the risks associated with developing new products in order to create a technological breakthrough in the defense industry. But experts interviewed by this columnist for RusBusinessNews claim it is these sizable risks that are slowing investment into the military-industrial complex. They believe that no one will make long-term plans in manufacturing engineering as long as there are no firm and transparent rules in place in Russian politics and economics. 

Russian Deputy Prime Minister Dmitry Rogozin has decided to do away with the division between military and civilian engineering firms. He believes that Russian factories should have equal access to national defense contracts, while still producing the wide range of products demanded by the market. At a meeting with a group of CEOs in Ekaterinburg, the deputy prime minister said that specially selected private companies could have access to classified documents describing the production of individual machinery components and even finished products. Dmitry Rogozin is certain that public-private partnerships will modernize both the country's military and civilian industries.

Experts do not tend to exaggerate the scale of the influx of private capital into the defense industry. According to Igor Korotchenko, the director of the Center for the Analysis of the Global Arms Trade and the editor-in-chief of the journal Natsionalnaya Oborona, entrepreneurs can initially apply for only 5-10% of state defense contracts. However, it is unlikely that anyone will ever order the finished product from them or even begin work under already-established contracts. Exceptions will be made only for companies with promising products - the expert suggests that these will probably be companies that create new fundamental and applied developments that can find a ready civilian market - new types of electronics and so on, for example.

Igor Korotchenko claims that applicants for national defense contracts will face a tough screening process - the companies' level of technology, scientific potential, etc., will be taken into account when the contracts are awarded. In the future those companies will have to accept all the technological and production risks inherent in a contract to supply military equipment. Far from all manufacturers today will be able to pass this test. This expert believes it is possible that Dmitry Rogozin's proposal might not gain traction - it might prove necessary to return to the current system of offering contracts only to insiders.

Ilya Gaffner, a representative in the Sverdlovsk Regional Duma, is confident that commercial businesses will be up to the new challenge because they have already learned to cooperate and work together to produce a final product. This expert does not foresee any complications in the design and implementation of a new product - the product's success will depend on how the production is organized and on the reliability of the financing. He even believes that military orders should make up at least half of a company's total orders.

Aleksandr Khramchikhin, the deputy director of the Institute of Political and Military Analysis, thinks that the success of Dmitry Rogozin's initiative will largely depend on how Russian specialists treat their work. Private companies in the West have a successful work history in the defense industry, and technology has long been transferred from civilian use over to the military sector, instead of the other direction, as previously. But Russia is not the West. The civilian sector here lacks technology, and even satellites manufactured by restricted factories and subjected to vigilant military inspection occasionally fall from the sky because of the use of counterfeit parts. Thus, the primary difficulties faced by investors are corruption and the lack of due process, without which public-private partnerships are unworkable. But this expert claimed that Dmitry Rogozin's idea could help develop the production of component parts. "I don't think that will cause any problems within the military-industrial complex, because the situation there is not so great anyway."

However, the business community is in no hurry to applaud the government's initiatives. Aleksei Sokolovich, the marketing director for Uralmash Oil and Gas Equipment Holding, LLC, said that his company was willing to consider specific proposals for the production of armored vehicles, because a military vehicle is no more difficult to produce than a modern drilling rig. But it is not something they can tackle until the manufacturing engineering industry recovers from the global financial crisis.

Sergei Novoseltsev, the general director of Radio Equipment Plant, OJSC, is convinced that private industry will not undertake research and development work at its own risk. They are unlikely to have forgotten the example of Kurganmashzavod, OJSC which invested hundreds of millions of rubles in the development of new amphibious reconnaissance vehicles for the military, on the promise of the Ministry of Defense to compensate their expenses once the designs went into mass production. But then the military changed its mind, refusing to put the BRDM-4 into service. The business community doesn't want history to repeat itself, and will therefore not begin producing a large order without firm guarantees. According to Sergei Novoseltsev, such a guarantee might be the state's obligation to compensate firms for their R&D expenses, even if the product is not put into mass production. Businessmen are only ready to risk their own capital to resolve highly localized problems.

Lev Belsky, the deputy general director of the Research and Manufacturing Association for Automation Federal State Unitary Enterprise, suggests thinking twice before imitating the way things are done abroad. Russia has not perfected the process of investing in any industry. It's difficult for capital to find its way into either military or civilian manufacturing. Disruptions in national defense contracts can still be explained by budgetary woes, but financial blockages in private business suggest systematic problems. He believes that investment is being hindered by political and economic instability. And if investors aren't putting their money in civilian industries, why would they suddenly take a financial plunge into military enterprises? This senior manager is certain that officials must begin by creating stability in the country, not by making appeals to business - and then the issue of financing can be resolved.

Evgeny Sukhov, the sales director at HMT Group, agreed with the arms manufacturers, "I do not understand what the government is planning to do. I don't even think President-elect Vladimir Putin knows. Lots of ideas are floating around, but none of them have been acted on. We've entered into a long period of instability. Capital is fleeing the country - everyone I know has taken their businesses abroad. So until things settle down, no one is going to make long-term plans, especially in manufacturing engineering."

Vladimir Terletsky

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