Recent news reports indicate all is not well in Russia’s defense-industrial complex (OPK). This despite several years of budgetary largesse in the form of an ever-increasing state defense order (GOZ).
Exhibit No. 1
Defense plant OAO Radiopribor in Vladivostok is officially bankrupt, but some remnant will be preserved in an 11th hour deal turning the company into a subsidiary of OAO Dubna Machinebuilding Plant (DMZ) in Moscow Oblast. How effectively DMZ can operate a money-losing business 6,500 km to the east is anyone’s guess.
Local press indicates that labor authorities in Primorskiy Kray are already working to place or retrain some Radiopribor employees (i.e. not all of them have a future at the old plant).
The industrial holding company AFK Sistema and its electronics subsidiary OAO RTI own DMZ. DMZ makes components for military aircraft including external fuel tanks.
Radiopribor’s 1,500 workers hadn’t been paid in eight months, and the enterprise’s wage arrears amounted to 224 million rubles along with general debt of 3.5 billion rubles.
The figures on the salaries are interesting — the average employee may have been making a little more than 18,000 rubles per month. That was probably about two-thirds of average pay in Vladivostok last year.
Exhibit No. 2
Russia’s sole manufacturer of infantry fighting vehicles — BMPs, Kurganmashzavod (KMZ) in the Urals recently defeated a Moscow-based creditor’s attempt to have it declared bankrupt for failing to pay on 41 million rubles of arrears on its leasing contracts.
It defeated the effort because, as a subsidiary of Kontsern Tractor Plants, KMZ is a “strategically important enterprise” and can’t be bankrupt according to a longstanding presidential decree.
KMZ apparently also owes its gas supplier.
It has a state order for 200 BMPs in 2015-17 which should help it some. It’s been a big supplier of civilian heavy equipment in the past, but that must not be going too well either.
Exhibit No. 3
Press from late March described OAO United Instrument-building Corporation’s effort to come up with an “anti-crisis” plan for its enterprises in Tambov Oblast southeast of Moscow. OAO OPK is itself part of Rostekh.
OAO OPK’s Revtrud factory has 1 billion rubles worth of debt. Revtrud’s wage and tax arrears come to about 150 million rubles. It makes communications and electronic warfare systems.
OAO OPK says it plans to amalgamate affiliates Revtrud, Oktyabr, Tambovapparat, and Efir into a single production complex. It will spend 4 billion rubles to recapitalize and reequip these enterprises. Tambovapparat doesn’t seem to be doing too well either. Efir is doing the best; the MOD is buying its Borisoglebsk-2 jamming system.
Exhibit No. 4
On 22 March, TASS quoted Jan Novikov, general director of S-400 maker Almaz-Antey, who indicated he was considering a 30 percent cut in his workforce for economic reasons. A week later, he walked this back saying savings might come through other means, according to a TASS report of an interview he gave Rossiyskaya gazeta. Novikov stated that cost-cutting is needed to pay the bills for financing and starting up production at new plants in Nizhegorod and Kirov. This from what is arguably Russia’s best-performing arms producer.
On top of these reports from various corners of the Russian OPK, we have interesting news from important characters in Moscow. They seem to agree that the GOZ is turning downward, and taking the fortunes of these companies with it.
On 5 March, Deputy Defense Minister Tatyana Shevtsova, who oversees the military’s budget, said its financing would be trimmed by 5 percent this year, but claimed weapons procurement would be untouched.
A week later, Rostekh Chief Sergey Chemezov told The Wall Street Journal that the GOZ could be slashed by 10 percent in 2016.
On 26 March, Deputy Prime Minister Dmitriy Rogozin — tsar of the arms sector — told TASS that Russia needs “patriots of industry” ready to do everything necessary to renew not just the armed forces but industry too. He continued:
“Then we won’t depend on the oil and gas needle, because we’ll rely on industry.”
President Putin’s administration chief Sergey Ivanov traveled to Tula on 29 March to preach about a time when the GOZ will decline and defense enterprises will have to diversify.
On 31 March, the chairman of the Federation Council’s Defense and Security Committee Viktor Ozerov admitted there could be problems financing military procurement in 2017, but insisted the Defense Ministry would not abandon its goal of 70 percent modern weapons and equipment by 2020.
At the outset of the armaments program in 2011, more than one or two wise observers said Russia’s industrial obsolescence and its reliance on hydrocarbon rents needed fixing before making heavy investments in defense industry. Why? Defense industrial investment has a smaller multiplier effect in the overall economy. The time and money to make these changes has been wasted, and now is an inauspicious time for them.
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OAO OPK’s press release today announcing the creation of a unified design bureau for comms and EW in Tambov…http://bit.ly/1VpeeaC.
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Thanks for the report. Certainly contradicts the sunshine music heard on Russia’s major media. In their rendition, Russia’s OPK continues to work triple-shifts, developing ever stronger weapons which have “no analogy on the global market.” Indeed, on Sunday’s summary newscasts, almost all the major TV stations carried a story about how the Syria operation has helped to increase Russia’s global arms exports. See this link for an example:
On a somewhat related note, have you been following the commentary as to the causes of Saturday’s fire at the MoD HQs in Moscow? Rumors suggest that it may not have been accidental and that someone (e.g. Rogozin) may have been trying to destroy evidence.
The Russians are certainly far from 10 feet tall, though some Western media since 2014 have been pretty hysterical. Little attention is given to their myriad shortcomings.
Have not followed the fire much. Arson would always be a suspicion, but if Serdyukov’s corrupt little cabal didn’t have to burn anything down, then one doubts anyone today would bother. Probably just a normal case of negligence.
Not the news that I expected to read. Not at all.
I wonder how much of the downturn in acquisitions is because spending was diverted to cover the costs involved with Ukraine and Syria?
Some 950 of Radiopribor workers will get jobs with DMZ over the course of “four to five months.” Wage debt now claimed to be only 58 million rubles…is the government or DMZ just paying a portion of what Radiopribor owed? http://www.gazeta.ru/social/news/2016/05/19/n_8651513.shtml.
More on OPK’s effort to establish an EW industrial “cluster” in Tambov. http://bit.ly/2chfg5J.
Rogozin has no other plan for Radiopribor than to ask MOD to order stuff from it in 2017 to prop it up. http://bit.ly/2hQlKMK.
Rogozin says Radiopribor will get a three-year contract from MOD. http://bit.ly/2gWPki6.
A court in Vlad has issued a guilty verdict for non-payment of wages against the former general director of Radiopribor. The judge said he had enough funds to pay them. But 1,200 employees remain out of work and haven’t gotten their back pay. http://bit.ly/2j58NBZ.
The wages owed now amount to 460 million rubles. Primorskiy Kray’s government is looking into selling off some Radiopribor assets to pay its 1,200 workers. Or the regional government might pay them in a [possibly vain] effort to keep the enterprise functioning. http://bit.ly/2iBTFIe.
Besieged Radiopribor about to have heat cut to some of its buildings for non-payment of energy debt. http://bit.ly/2mopVUH.
1+ year later, RTI and DMZ still trying to figure out what to do with Radiopribor, which was likely just foisted on them. http://bit.ly/2r4Eagd.