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Federal Defense Order Service (FSOZ)

For the power agencies elite the most convenient assets ares Rosoboronaexport and supervision of the internal Defense Order [oboronny zakaz]. These assets are important because the armament budgets are almost completely non-transparent. The money of Rosoboronoexport and the Federal Defense Order Service are the most convenient for financing political projects of this elite group.

In the early years of the 21st Century the US was selling around $15 billion in weapons to the rest of the world each year, while number two Russia sold an average of around $5.5 billion a year. Most of the Russian sales were aviation technology contracts. But when the new generation of F-35 fighter jets enters the American fleet, the US military would start selling off older planes-F-15s, F-16s, and F/A-18s-at rock-bottom prices, and Russia would lose out to American aviation technology. The same thing could happen with tanks, missile systems, and warships. The Chinese, having caught up with Russian technology, were also getting always from Russian imports as quickly as possible. This meant Russia stood to lose billions of dollars on the world market each year, which had been the only stable basis for developing new weapons. To compensate, the State Defense Order would have to be increased.

The State Committee for Defense Orders under the RF Ministry of defence (Goskomoboronzakaz) was established on 11 March 2003. The committee was given the responsibility of implementing a unified state policy in the areas of development, production, unification, and standardization of armaments and general-purpose military equipment. Former director of the Federal Agency for Government Communications and Information (FAPSI) Vladimir Matyukhin was appointed chairman of the committee with the rank of First Deputy Minister of defence.

On 24 February 2004, Vladimir Putin fired the government of Mikhail Kasyanov. During the reorganization of the government, the Committee on Military and Technical Cooperation [CMTC] was reorganized into the Federal Military and Technical Cooperation Service, and the State Defense Order Committee (Goskomoboronzakaz) into the Federal Defense Order Service; both were under the jurisdiction of the RF Ministry of defence. On 09 April 2004 Russian President Vladimir Putin signed a decree to appoint Andrey Belyaninov the director of the federal defence order service and to relieve him of the post of the director of the Rosoboroneksport federal state enterprise. From 1978-1991 he had worked in the PGU of the KGB. Belyaninov was a close ally of Rosoboronexport's new General Director Sergey Chemezov. This meant that the entire Military-Industrial budget is in the hands of two persons closely cooperating with each other. The total volume of financial flows controlled by the Chemezov-Belyaninov union was approximately 16 billion US Dollars per year.

The system for managing state defense orders included, in addition to the Armed Forces' Weaponry Service that controls 80% of all spending, at least five other various organizations. They are all pursuing their own institutional interests. As a result, state defense orders at best go only 40-50% filled. Over the previous decade, the ministry had not fined a single company or plant for not meeting state order deadlines.

Despite the economic slump in Russia, in the mid-1990s the military-industrial complex remained the most high-tech industrial sector producing competitive goods. In the period from 2000 to 2003, Russia exported more than $17 billion worth of defence products. Arms sales volumes continually increased in all these years, reaching $5 billion in 2003. A drastic change in financing of the military-industrial complex also occurred in these same years. Whereas in the 1990s defence exports were the complex's main source of revenues, today the state is its largest financier.

On 17 January 2002, the government allocated 79 billion rubles for the purchase of military equipment under state defence orders for 2002. This was the start of a sharp increase in state orders, but it did not lead to an increase in equipment purchases from companies of the military-industrial complex. As in previous years, the Ministry of defence announced that most of the funds would go towards modernization of equipment and scientific development.

During Vladimir Putin's first term as president, Russian state defence orders increased 2.5 times in absolute terms, reaching nearly 136 billion rubles ($4.7 billion) in the 2004 budget. In 2005, state defence orders are expected to exceed revenues from defence exports. By controlling both defence exports (94% of arms deliveries abroad went through the state agent Rosoboronexport last year) and the allocation of state defence orders, the state will continue to play a key role in the industry's development.

The Federal Defense Order Service's director Andrey Belyaninov said in early January 2006 that "There are some problems in fulfilling the state order but there are currently no problems with its financing. This year, the sum of the federal defense order has exceeded profits from military hardware sales abroad - $8 billion against $6 billion. Military enterprises ought to be modernized. Otherwise, an increase in the state defense order or the growing number of overseas customers will bring no fruit."

Former director of Rosoboronzakaz Andrei Belyaninov, appointed Director of the Federal Customs Service in May of 2006, said that his agency fulfilled the same functions as the Auditing Chamber. A round-table conference held by the federal state defense order service, concluded, "Military representatives at defense plants receive low pay in comparison with the cost of what they control. Contracts cost millions of roubles. Sometimes they turn a blind eye to faulty products." Representatives of the logistics service and defense plants agreed with him. A part of financing for the internal defense order is used not for purchase of new equipment, but for repairs and upgrading of the old one, and serious money disappears exactly in repair factories.

The priority task facing the Federal Defense Order Service in 2006 was to establish order in pricing and standardization of defense products, according to Sergei Mayev, Director of the Service. In his words an interdepartmental conference held recently has outlined approaches to establishing order in the field of standardization of defense products. This is a challenge because the respect for standards has been lost, whereas the standard is a basis for the quality of products. A lot of hard work lies ahead. Another problem in the customer/contractor relations that needs to be adequately addressed is a pricing policy with regard to new kinds of armaments and military equipment. Mayev thinks that following the renunciation of a state-controlled economy, the issue has been until recently overlooked. I agree that the market dictates its rules, but the players must demonstrate civilized behavior on the market, which unfortunately is not the case in Russia. So a serious work is needed to accommodate differences between the customer and the contractor in defense product pricing. The Defense Order Service is tasked with pricing control, whereas the Federal Service for Rates and some other government structures should define a policy in the area. No serious results have been achieved here to date.

On 11 July 2006 the head of the Federal Defence Order Service, Sergey Mayev, said state defence procurement was set to grow by 20-25 per cent every year. On 31 August 2006 Sergey Ivanov, deputy prime minister and defence minister, said that over R300 billion would be allocated in 2007 for the state defence order by the MOD alone, which is almost 30 per cent more than in 2005. Ivanov says that Russia has actually got down to implementing a new state armament programme for the period to 2015.

In July 2006 Sergei Ivanov, Defense Minister and Deputy Prime Minister, announced that a Federal Agency for placing of orders for production of armament and combat hardware would be formed by 2007. According to Ivanov, the new agency will contract armament and combat hardware in the interests of not only the Defense Ministry but also all security agencies. Before 2001 military orders were placed by dozens of organizations in each Armed Forces branch. Since 2001 the number of these agencies was reduced by two-thirds, the organizations were separated from the Armed Forces branches and subordinated to the Deputy Defense Ministry. The new agency will be formed on the basis of the organizations that are curators of state orders in the Defense Ministry.

Rosoboronzakaz will not be reduced. It will evidently be tasked to control quality and standardization of the products made for army. The new agency will evidently be based on the currently being formed unified center of armament and combat hardware orders. The Defense Ministry established the Joint Supply Center in early 2005. It spent 93% of the budget of the state defense order on food, fuel and lubricants, and other material resources. It was planned to accomplish formation of the new center by September 1, 2006.

But plans to institute a single authority to manage defense contracts suffered from a pitched battle between General Aleksei Moskovsky, Deputy Defense Minister for Armament, and Andrei Belyaninov, Director of the Federal Defense Order Service. Moskovsky's and Belyaninov's empires control nearly $35 billion annually, and there were also other fiefdoms within the MoD which wield substantial influence over defense industry funds.

In 2007, the state defense order grew by 20% to reach 302.7 billion rubles (over $10 billion). Out of this sum, 145 billion rubles (about $5 billion) will be spent on the purchase of new arms and military hardware. This is a 22% increase over this year. Expenses on repairs will be 60 billion rubles ($2.2 billion). They have gone up by 15.7%. R&D will receive[m1] <> 98 billion rubles ($3.5 billion) - a 20% growth. In addition, 14.6 billion rubles ($500 million) will be spent on re-equipping the internal troops and Interior Ministry bodies.

In August 2007 Trade and Industry Chamber together with the Federal Service on the Defense Order signed the agreement providing for joint distribution of the state defense order. Eugeny Primakov and Sergey Maev, the heads of the two organizations respectively, were "sure" that this measure will help to raise the efficiency of the defense order. Eugeny Primakov emphasized that the Defense Order Service has become the first institutions which arranged a comprehensive system of quality control. Earlier the controlling structures refused from up to 60% of the products intended for the delivery to the Armed Forces due to the improper quality. Today the two above mentioned organizations brought it down to just 10-12%. Sergey Mayev noted that the main task of the Defense Order Service is maintaining the quality of the goods delivered to the Armed Forces. According to his estimation this problem is very acute as almost half of the enterprises-suppliers lacked a quality monitoring system or had systems which do not fit the international standards.




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Page last modified: 11-07-2011 15:48:10 ZULU