Russia is spinning the wheel of its RUR 20 trillion armament program

During the year 2012 Russia is to fine tune its new system of state defence procurement. Without that work it would be difficult to fulfil the state program worth RUR 20 trillion. The hopes are based on the introduction of long term contracts as well as consensus based pricing system. All disputes between the industry and the military will be resolved by a special military-industrial committee chaired by the new deputy prime minister Dmitry Rogozin. Until recently he served as Russia's representative in the NATO.

The program has never been published in full, but the leadership of the Ministry of Defense and representatives of the military-industrial complex have anounced a few figures. For example, the Ministry of Defense is planning to acquire a minimum of 600 new military aircarft, 1200 helicopters, over 50 battle ships of main classes, 8 strategic nuclear-powered missle carriers, 10 multi-purpose nucrear submarines, 1500 tanks, 56 divisions of S-400 anti-aircraft systems, 10 divisions of the new surface-to-airmissile systems S-500 and some others. Besides the acquisitions of new weapons the program includes a wide range of upgrade programs for several types of weapons and technical means. That includes hundreds of aircarft and helicopters, thousand units of armored vehicles, majority of the naval ships and submarines. The fulfillment of these ambitious plans largely depends on how well the military and the industry can work together.

The situation that by the end of 2011 took shape with the state defense procurement in Russia could only be qualified as a deadlock. The Ministry of Defense sought to buy new military equipment of adequate quality at minimal price while the producers wanted to not only cover their production costs, but also get financing for “future development”, “modernization” and also for “just in case”. The resulting disputes and scandals between them often times had to be resolved by the country’s top leadership.

Both President Dmitry Medvedev and prime minister Vladimir Putin both said it would be unacceptable to break the deadlines on the state defence procurement contracts. Both leaders personally supervised the negotiations on the most significant contracts – with the United Shipbuilding Corporation (USC), United Aircraftbuilding Corporation (UAC) as well as the Moscow Institute of Thermal Technology (MITT).

The issues of the financing of the defence procurement orders caused serious debates inside the Government itself. In particular, many experts believe that Finance Minister's disagreement with such increase in military spending was one of the key reasons of Alexey Kudrin's resignation last year.

Neither the Ministry of Defence, nor the industry or politicians seek to relive the experience of 2011.  Everybody agrees that the problem needs to be solved, otherwise the RUR 20-trillion State Armaments Program (SAP) would be under threat. According to the 10-year SAP Russian Armed Forces are to radically upgrade their arsenal of military equipment – by 70% on average, including complete upgrade of some equipment. In particular, Strategic Rocket Forces are to get a 100%  equipment upgrade.

According to the deputy director of the Center of Analysis of Strategies and Technologies Constantine Makienko: «In 2012 it is planned to streamline the procurement process of the Ministry of Defence itself. It now consists of three stages: the department of pricing, the legal department and main commands of various services of the Armed Forces. Besides that within the new system of price setting it is planned to fine-tune the relationship between the defence industry and the Ministry of Defence. Nobody will be forced to work harder, which will take its toll, while there are still no efficient methods of price setting worked out”, says Makienko.

However, the defence industry enterprises have had no choice but to constantly raise prices faster than the inflation rate warrants. Lack of funds for plant upgrade, problems with suppliers and small production runs – these are all the factors that don’t contribute to price decrease.

There are several ways to give more room for maneuver to the managers of defence enterprises. First of all it is the reorganization of the industry management system, which has been underway for several years via holding formation process. Secondly, the planning horizon can be extended via introduction of long-term contracts (launched wide scale last year).  And thirdly, improved access to financing via increased acceess to the State Defence Orders as well as other sources of financing. Such sources of financing are funds allocated within the targeted federal program for the upgrade of the defence industry complex enterprises, as well as loans issued by banks against state guarantees. All these measures are to help the enterprises to move away from the “present day” mentality – unlike the birds in the Bible, modern industrial enterprises need to see their perspective not just for years to come, but for decades ahead.

There will be no such acute crisis as in 2011, believes Constantine Makienko. However, a number of problems are too deeply rooted to be resolved easily. If we talk about the real problems, the situation with the military transport aviation can be characterized as very acute if not critical, where the delays in completion of the majority of projects have grown out of proportion. At the same time there are areas where the development is quite successful. Specifically, it concerns the supply of helicopters – the «Helicopters of Russia» group have managed to launch production of high volume series, have built partnerships with suppliers, largely upgraded their production facilities, and thus are producing with competitive equipment. That also includes battle aircraft of the Sukhoi Construction Bureau – their production rates are increasing, and even if they do fall behind, it won’t be critical”, thinks Constantine Makienko.

The key issue of 2012 will be the role of the Military-industrial Committee formed by the Russian Government. With its new leader – deputy prime-minister Dmitry Rogozin and with the mission to “actively participate” in the resolution of conflicts and the building of cooperation between the military and the industry, the Committee is to become that very entity where consensus decisions acceptable to both the military and the industry will be made. “Acting by force doesn’t work any more” – this rule is valid for both sides. As Russian experience shows, disproportional influence of the military or the industry lobby does not lead to any positive results. Time will show whether this upgraded Committee can help balance the influences and interests.

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