Defense Industry Reforms of the Russian Federation

Secretary of the Security Council of Russia Nikolai Patrushev announced 12 March 2019 the upcoming reduction of the state defense order. "In the context of the upcoming reduction of the state defense order, it is necessary that this potential [OPK] should be preserved, and the defense industry enterprises themselves would look confidently into the future, work without downtime, while maintaining financial stability and labor collective," he said at a meeting in Izhevsk. The secretary of the Security Council stressed that the country managed to create a high scientific, technical and production potential of the military-industrial complex.

Patrushev noted the lack of awareness of defense industry enterprises about the demand for civilian products, which was formed in the country and abroad. “There is a weak awareness of defense industry enterprises about domestic and foreign demand for civilian products,” Patrushev emphasized. 'The proper interaction and cooperation of defense industry enterprises with branch ministries that should be interested in civilian products used in medicine, the fuel and energy complex, communications, microelectronics, machine building and machine building, the transport complex," the Security Council Secretary noted.

Russian President Vladimir Putin stated 21 November 2018 that the measures taken to diversify OPK products are not enough. “I must say directly that the system has not yet fully worked out. To achieve the indicators set for 2025 and 2030, the measures taken seem to be not enough,” said the president, opening a meeting with the leadership of the Defense Ministry, government members and representatives of the defense industry on the issue of diversification of production of the military-industrial complex.

The Russian leader focused on the fact that some large companies have noticeably increased the volume of civilian output, and already in 2018 I will reach the indicators taken as a guideline for 2020. “According to the forecast, the share of Rostec’s civilian products will come close to 29%, while in the defense sector as a whole, this share should be 20.7%,” the president said.

Putin recalled that at the meeting, which was held on January 24 in Ufa, he gave instructions on the formation of a regulatory framework that allows defense enterprises to diversify production. “This work must be completed before the end of this year. Special attention should be paid to legislation that will allow determining the nomenclature and the size of the share of civilian products to be purchased by natural monopolies, state corporations, and federal authorities,” the head of state said. He added that it is precisely the structures listed by him that at the initial stage should become consumers of civil products.

Putin also stated that "it is necessary to create a system that allows managing the processes of diversification." At the moment, there is no such management function. "It is a question of clearly, at least for a three-year period broken down by years, to represent how much and what kind of civil products each OPK enterprise will produce and what markets it plans to supply," the Russian leader explained, noting that although the measure appears overly administrative, but without it it’s impossible to speed up the whole process.

"We have talked about this many times: time will pass, the state defense order will be reduced, what will you do?" - Putin asked a rhetorical question, recalling the need to ensure the security and defense capability of the country in the long term, while maintaining the production capacity of defense enterprises.

"Its share [of high-tech civilian and dual-purpose products] in the total production of defense enterprises should reach 17% by 2020, reach 30% by 2025 [year], and 50% by 2030," said the head of the state.

Some large companies have noticeably increased their civilian output, and this year they will achieve excellent results. Thus, in the total amount of revenue of the United Shipbuilding Corporation by the end of this year, the share of "citizen" will be about 16% (since 2015, this figure increased by 2.6 times).

As reported by TASS in the largest Russian state corporation Rostec (it includes about 700 organizations), today the share of civilian products is about 30%, but the task has been set to bring this figure up to 50% by 2025.

Rostec said "Our task is not to repeat the mistakes of the conversion of the 1990s and not to start producing "irons and pans". Therefore, the priority is the creation of high-tech products. We intend to ensure targeted revenue growth through the concentration of resources in the fast-growing global markets for smart products."

Among them - electronics, IT, automation, control systems, medical equipment, new materials, energy, urban environment, transport and others. There are many such examples. Over the past year, a significant increase in civilian products has been shown by several Rostec groups of companies.

JSC "Elektromashina" is known for its electrical equipment for military special equipment. Consumers are offered intelligent housing and street lighting systems, air conditioning systems for rail transport. This company is part of the country's largest machine-building holding company , Uralvagonzavod (UVZ), which produces the famous Armata , T-90 and T-72 tanks of various modifications. The corporation, which is also part of Rostec, in the framework of diversification, develops both traditional areas (manufactures railway and tram cars, road-building equipment), and also masters the production of new products.

“UVZ has already fulfilled the president’s instructions to diversify production for the period from 2020 to 2025,” Alexander Potapov, the corporation’s general director, told TASS. by 2025. At the same time, our main task - the leading defense industry enterprise - is primarily related to the timely and high-quality implementation of the state defense order."

Volchansky Mechanical Plant - rolling stock manufacturer - has mastered the production of furniture. Yurginsky machine-building , specializing in mining equipment, successfully promotes oil press and braziers on the market.

Home "forge" artillery barrels for tanks and self-propelled artillery installations - Ekaterinburg plant number 9 - doubled the production of axles for high-speed electric trains "Lastochka" and is currently solving the issue of the production of other components for railway transport.

Another Rostec concern specializing in the development and serial supply of ammunition for the Russian Armed Forces (its samples are in service with more than 100 armies in the world) - Tehmash - in 2017 increased civilian output by more than 15%. Recently, drilling, refrigeration and agricultural equipment has been introduced to the market. A striking example is the company POZIS , which is part of the concern, its main specialization is medical and domestic refrigerators.

Also the industry leader in terms of diversification is the Kalashnikov concern. In the product line - river vehicles, unmanned aerial vehicles, motorcycles, civilian small arms and much more.

Rostec notes that they also face the fact that not every enterprise is able to achieve the set targets of 50%, because everything depends on the specifics of production. “If we talk about examples, then at RT-Chemcomposite holding the share of civilian products already amounts to almost 40%, and by 2025 it should be about 66%. As for the holding “ High-precision complexes ” , taking into account its specificity ( short-range rocket-gun complexes, naval and anti-tank missile systems - TASS note) the share of civilian products in total revenues by 2025, on the contrary, will be below 50%.

Russian Deputy Prime Minister Yury Borisov spoke about this problem in an interview with RBC 03 December 2018. The standards of 30% and 50% of civilian products of the total production by 2025 and 2030 will not lead all enterprises. By industry and individual production, diversification targets will vary depending on the opportunities to enter the civilian market. For example, an exception will be made for the VKO Almaz-Antey concern and the Tactical Missile Weapons Corporation (KTRV), which, according to Borisov, have no problems with orders, although they are able to produce high-tech civilian products.

However, in the opinion of the President of the Russian Federation, the measures taken to diversify the production of OPK products are not enough. “It is necessary to create a system that allows managing the processes of diversification,” Putin said. At the moment, there is no such management function. "It is a question of clearly, at least for a three-year period broken down by years, to represent how much and what civil products each OPK enterprise will produce and what markets it plans to supply," the head of state explained, noting that although the measure seems excessively administrative, but without it it is impossible to speed up the whole process.

In an interview with RBC, Russian Deputy Prime Minister Yury Borisov said that such a program could be developed by 2023. "It is logical to adopt the state program on diversification of defense industry enterprises together with the new state armaments program in 2023," he said. In his opinion, it is necessary to analyze the real capabilities of enterprises, their production capabilities, assess their competitive advantages or disadvantages, and develop support measures.

Soviet weapons R&D planning was historically been guided by a doctrine calling for military-technical superiority or parity. But Gorbaehev's military doctrine now calls for a “reasonable sufficiency" in armaments.

The Soviet Union built the largest peacetime military establishment in the history of the planet, a force whose size dwarfed any miitary establishment in the West. Only the combined efforts of the collective Western alliance can-approach the Soviets' armament effort. The Soviet Union, in support of its military goals, dedicated a larger share of its resoruces to weapons than has any other country in peacetime - estimates of the Soviet military expenditure run as high as 15% of the gross national product (GNP).

Following the collapse of the Soviet Union the defense industry and military-industrial complex of the Russian Federation suffered greatly. For the duration of the 1990s and early 2000s Russia's capabilities in these fields were crippled by corruption, inadequacy, the inability to transform to a market economy, and a lack of funding. At times the entire defense industry functioned and produced at less than 10 percent of its overall capability, and reports eventually surfaced that anywhere between 25-35 percent of firms and enterprises in operation were bankrupt. Furthermore, to compound the problem, a majority of officials and military experts estimate that approximately 70-80 percent of the Russian armed forces' equipment was out of date and obsolete as of 2005.

Throughout the course of President Vladimir Putin's first two terms in office, however, state revenues continued to increase significantly as energy, arms and munitions, and trade exports soared. As a result of Russia's newly founded wealth and power the economy recovered from its low points in the 1990s and expanded impressively. High oil prices and an increased demand for energy provided Russia and Putin with the opportunity to address important domestic issues such as defense.

Defense had always been an integral element of the Russian economy, but by 2004 the industry had still failed to adapt to a market system in which uncompetitive and unproductive firms were rooted out and their resources re-allocated for more profitable use. In response President Putin introduced a series of reforms intended to restructure and strengthen the industry as a whole. The measures were also designed to increase state control over the sector.

A major reason Russian embarked upon a series of defense reforms was to protect the energy sector, which had developed into a powerful revenue source by the early 2000s. By 2005 officials across the globe were forced to recognize that Russia's energy supplies were developing into an integral element of the world energy market, including that of the United States. In March-April 2006 it was announced that the U.S. market was prepared to import upwards of 10 percent of its liquefied natural gas (LNG) supply from Russia, and numerous experts surmised that the number could eventually climb to 30 percent. Naturally, the security and availability of energy supplies became a major aspect and concern for Russian defense and security establishments. Pressure mounted in Moscow for the government to reform the dilapidated defense sector and the military.

The restructuring of the military-industrial complex was likewise considered an essential element of defense reform. Under the tutelage of Putin and Minister of Defense Sergei Ivanov, the Russians chose to emphasize the creation of vertical integrated holdings in specialized sectors, such as aviation, shipbuilding, tank building, radio electronics, automobile, and information technology. It was hoped that this would not only reorganize and enhance the defense industry, but that it would provide a method to funnel private, including foreign, investments into the defense sector. The birth of these holdings would eventually force western and U.S. companies to treat the new Russian companies as partners or competitors.

As of November 2006 there were 579 state-owned enterprises and 428 shareholding firms (some estimates claim that there were 1,700 firms around this time period). The reforms in the defense industry were more or less intended to promote mergers and acquisitions among these enterprises and firms. The main purpose was for the reforms to serve as a catalyst for desperately needed closures and bankruptcy declarations. Meanwhile, the sector's enterprises that survived the reforms, which experts concluded would approach the range of 46 percent, could consolidate their assets into approximately 40-45 integrated holdings.

The primary state authority charged with overseeing the process of creating holding companies was Rosoboronexport (ROE), which was created through the merger of Promexport and Rosvooruzhenie in November 2000. As of mid-2007 the company remained Russia's main arms-selling agency. In prior years, however, ROE became an industrial powerhouse that monopolized entire sectors of industry on behalf of the state. It also began participating actively in the civilian industry as well. Since 2002 Rosoboronexport had been investing in the domestic sector by creating incentives for specialized holdings.

Rosoboronexport also signed up to play an active role in the Federal program designed to reform the defense industry from 2007-2011. ROE agreed to partake in financing, restructuring, and management of the state's holdings within the sector.

In areas of the defense sector where vertical holdings had not been established it was decided that a governmental body would provide state oversight. In reference to foreign defense orders President Putting approved the decree titled, "On Military and Technical Cooperation between Russia and Foreign States" in September 2005. The Federal Military and Technical Service was granted the authority to appoint managers to administer export contracts. The approval of these contracts was based on collective decisions.

The state also planned to strengthen its control in the sector and liberalize domestic investment opportunities via Public Private Partnership (PPP) principles in rebuilding the state's industry and reforming the defense and security complex. This would be accomplished by combining state funding and business initiatives, which would assist the nation's industry and military-industrial complex.