Category Archives: Defense Industry

Leader in Combat Aviation?

Videoconference on help to the aviation industry

On May 13, RF President Vladimir Putin conducted a videoconference from his “bunker” in Novo-Ogarevo on support to Russia’s aviation industry in the pandemic and economic crisis. He directed his ministers to shift civilian, and possibly some military, aircraft production “to the left” to give work to struggling enterprises.

In the process, he said:

Domestic aircraft compete on equal terms with foreign analogues, with world market leaders in many of their characteristics, and by the way, in some [characteristics] — in combat aviation — is considerably superior to them.

Putin’s assessment of Russia’s place as the (or a) leader in military aviation spurred Militaryparitet.com to editorialize. The comments are worth a few moments.

Deputy PM Yuriy Borisov used the occasion, Militaryparitet writes, to ask once again for Putin to erase defense industry’s chronic debts. And nothing in Borisov’s plea smells like the competitiveness Putin claims.

The site continues:

This announcement [about Russia’s lead in military aviation] is highly interesting, but it has been repeated like a mantra for two decades already. So where is Russia outpacing its competitors in combat and military aviation?

First, Russia still hasn’t gotten its fifth-generation fighter, the Su-57, into the force. The U.S. long ago jumped ahead with its F-22 and F-35, and even the Chinese claim they have 40 series-produced J-20 fighters.

Second, Russia’s fourth-generation fighters are laggards. Not a single one has an active phased array radar. This is no longer an innovation for the U.S. The French have it. And China also asserts success in putting it on its fighters.

Third, the Indians are unhappy with Russia’s R-77 air-to-air missiles they purchased. New Delhi says they lack the range and effectiveness of U.S. AIM-120 and European Meteor missiles.

Fourth, with respect to strategic bombers, Russia is renewing production of the existing Tu-160 Blackjack. A new design PAK DA will require “remarkable patience” at a minimum and, with a long-term recession looming, it probably won’t happen at all.

Fifth, Russia hasn’t managed to put an active phased array radar on its AEW aircraft because of its almost total lack of commercial electronics and microelectronics industries.

Sixth, for transports, Russia continues to rely on the Il-76 while the U.S. introduced the C-17 with nearly double the cargo capacity in the 1990s.

Seventh, Russian unmanned aviation is a complete bust. There is the single S-70 Okhotnik, but you couldn’t see a Russian analogue to Global Hawk “even with a telescope.”

Militaryparitet sums up:

So what kind of Russian leadership in combat (military) aviation is Putin talking about every time? Russia has long been on the margins of progress in this sector, and there is no hope to get to the cutting edge “by its own efforts.” We are living in a time when you can’t do anything good without cooperation . . . .

But . . . is there all of a sudden an area where Russia is overtaking the entire world in combat aviation? If there is, speak up, please. We’ll celebrate together.

Mass Counterfeiting

Overlooked in recent days was new RF Prosecutor General Igor Krasnov’s announcement about the “mass use” of counterfeit materials and parts in Russia’s OPK.

Igor Krasnov

Krasnov

Interfaks-AVN reported Krasnov told fellow prosecutors at a “broadened collegium” in Moscow:

The mass use of counterfeit materials and parts by OPK enterprises is a cause for special alarm. Considering the strategic character of this problem, it’s necessary to carry all planned oversight measures to their logical end.

We know “logical end” means arrest and convict people, don’t collude with them. 

Krasnov continued:

. . . the condition of legality dictates the need to increase the oversight component in strengthening financial discipline, reducing the indebtedness of OPK enterprises for unmet obligations and increasing the quality of military products.

Krasnov claimed during the past year military prosecutors uncovered more than 44,000 legal violations in the OPK.

TASS reported Krasnov directed military prosecutors to ensure MOD officials responsible for “military acceptance” respect relevant laws and exert control over the fulfillment of GOZ work.

Counterfeiting in Russia’s defense industry isn’t novel. It just doesn’t get much attention. There are likely egregious cases of counterfeit equipment that never surfaced. But a few have:

  • An official in the MOD’s 1st TsNII (Shipbuilding) said in 2018 that counterfeit parts were hampering Russian efforts to build its own ship engines to replace those once bought from Ukraine and Western countries.
  • As late as the first half of the 2010s, torpedo maker Dagdizel was “recycling” parts from old dismantled weapons for “new” torpedoes.
  • Several managers at Zvezdochka were arrested in 2015 for using fake parts in the repair of Indian Kilo subs.
  • An experimental Ka-60 helo crashed in 2010 due to faulty tail rotor parts made by an unauthorized “underground” manufacturer.
  • The MiG-29SMT fighters sold to Algeria and returned in 2008 is just the most famous scandal. Some “new” parts on those planes were stamped in the early 1990s.

Some recent glaring example of counterfeiting in Russia’s OPK must’ve sparked the new Prosecutor General’s comment but we just haven’t learned about it yet.

OPK Write-Off

Yesterday Russia’s Deputy PM Yuriy Borisov was in Kazan to inspect Tupolev’s work on strategic bombers and gave the media details on the plan to deal with defense-industrial complex (OPK) debt.

Borisov (right) with Tatar President Rustam Minnikhanov

Borisov (right) with Tatar President Rustam Minnikhanov

The government arms tsar and former deputy defense minister said the plan will restructure 750 billion rubles ($11 billion) in debt. Actually, 300 billion rubles in non-performing loans will be written off. The other 450 will be restructured into 15-year loans at three percent interest.

For Russia’s defense producers, Borisov concluded:

It’s a very serious measure that will allow them to be free of big payments to bankers and free up resources for their own development.

For anything more specific, however, one would have to read President Putin’s secret ukaz on the issue.

This result is somewhat the reverse of what Borisov wanted. More favorable to enterprises than bankers, he sought a 400-450 billion write-off and restructuring of 300-350 billion for 15 years at two percent with a five-year payment holiday to start.

Before that, he sought a complete write-off but Russia’s big banks flatly refused.

Recall this 750 billion rubles represents only Russia’s most troubled defense industry debt. The total burden on the sector is 2.3 trillion rubles ($34 billion).

Tanks in GPV-2027

According to a February 13 report from Vedomosti’s Ivan Safronov, Russia’s Ground Troops could receive 900 T-14 and T-90M tanks before the current State Armaments Program (GPV) ends in 2027. The article is paywalled, but Bmpd recapped its contents.

Nine hundred — 500 T-14 and 400 T-90M — seems quite an optimistic forecast.

T-90

According to Safronov’s story, a source close to the Russian MOD said there were three contracts between 2017 and 2019 to deliver more than 160 T-90M (Proryv-3) tanks. The first two called for 60 tanks in 2018-2019, of which 10 would be newly built, 50 would be older T-90 tanks modernized to T-90M, and 100 would be T-90A tanks from the inventory improved to T-90M.

However, an industry source said the deliveries slipped because its fire control and target tracking system needed to be finished, and the turret with its dynamic defense — the tank’s main feature — had to be tested.

These issues are supposedly resolved, and the tank is in series production. The MOD should get not less than 15 T-90M tanks in 2020.

A source close to the MOD leadership indicated that President Vladimir Putin wants to renew Russia’s tank inventory over the next five years. Currently, only 50 percent of the Ground Troops’ armored vehicles are “modern” — the lowest indicator of any branch or service of the RF Armed Forces.

Upgrading Russia’s armor will involve both new production and modernization. There may be a contract in 2020 to improve another 100 T-90s to T-90M. Deputy Defense Minister and arms chief Aleksey Krivoruchko has indicated there are 400 T-90s in the Ground Troops that could be upgraded.

State testing of the newest T-14 tank on the Armata chassis is set to begin in 2020. A Vedomosti interlocutor says there could be a state order for 500 T-14s by 2027.

Recall after debuting in 2015, the T-14 was supposed to enter state testing in 2017 but that didn’t happen.

Ground Troops are hoping for 900 T-14 and T-90M tanks to arrive by 2027, but they won’t supplant some 2,000 T-72B3 tanks as the foundation of Russia’s tank inventory, according to military commentator Viktor Murakhovskiy. He adds that the T-72B3 can’t really be considered a “modern” tank without serious modernization.

For those keeping score, the T-72B3 is a 2010 upgrade of the T-72B not really improved since the mid-1980s. The T-72B3M is a 2016 modification adding Relikt reactive armor, a more powerful engine, etc. The T-90 and T-90A are early 1990s upgrades on the T-72B. The T-90M is a 2018 update with the same gun as the T-14, Afganit active protection, Relikt reactive armor, etc.

T-72B3M

Not addressed in the Vedomosti report is what (if anything) the Russian Army plans regarding the future of upgraded T-80BVM tanks. It received an unspecified number in 2017-2019. The Ground Troops often prefer its gas turbine engine over diesel for extreme cold in the Arctic and Eastern MD.

It’s difficult to assess even what happened with tanks in GPV 2011-2020. Putin and the MOD called for 2,300 tanks in 2012 even though Ground Troops procurement wasn’t a priority in that GPV. The naive assumption they’d be new ones soon gave way to realization that all tanks received were ones modernized as described above. Complicating matters further, Russian MOD descriptions of what they actually received typically lump all armor — tanks and armored vehicles — together making it virtually impossible to tell how many upgraded tanks of which type (re-)entered Russia’s forces.

More on the Damage Estimate

Additional thoughts regarding the damage to Admiral Kuznetsov . . . .

The gulf between OSK chief Rakhmanov’s 300 million rubles and 95 billion rubles from Kommersant’s Northern Fleet staff officer source is as wide as it gets. How do we parse what we’ve heard? Whom do we believe?

Admiral Kuznetsov on fire

Interesting that Rakhmanov had something of an estimate, but, at the same time, said, “We simply weren’t allowed on-board for a long time.” He also rejected the possibility of critical damage right after the fire. Can he really know the extent of damage if experts haven’t been on-board?

The same may go for Kommersant’s source. Have he and other naval officers been on-board? Maybe 95 billion was misheard? Doesn’t seem likely though in the case of a quality paper like Kommersant.

We’re in a “he said, she said.”

So let’s try to understand 300 million and 95 billion rubles.

  • A TASS feature in July indicated that a Krylov center design for a 44,000-ton catamaran-hull carrier, the design alone, would cost 3-4 billion rubles.
  • In December, an OPK source told RIAN development and construction of an unspecified new carrier would likely cost Moscow 300-400 billion rubles ($4.7-6.3 billion).
  • Even the “medium repair and limited modernization” of Admiral Kuznetsov, as envisaged in 2018, is likely to cost at least 55 billion rubles ($860 million), per Bmpd.
  • To get your bearings, first-in-class USS Gerald R. Ford (CVN-78) cost $12.8 billion to build with $4.7 billion in R&D costs.

Bottom line: we have to wait and see how much this fire costs the Russian Navy, if we ever find out. We have to watch for Russia’s financial calculus vis-à-vis continuing the repair and modernization of Kuznetsov. But here’s a guess. The fire damage from December 12 will be closer to Kommersant’s number than Rakhmanov’s.

Kuznetsov Damage Estimate

We’re still waiting to learn (and may never know) how much the December 12 fire aboard the aircraft carrier Admiral Kuznetsov will cost the Russian Navy.

According to Interfaks, OSK chief Aleksey Rakhmanov said the bill will exceed 300 million rubles ($4.7 million).

Fire on Admiral Kuznetsov

Rakhmanov told Russian journalists:

. . . there’s no final figure. The commission continues to work. Given that the work of firefighters and law enforcement organs has been gathered up, I think we still require some time to reconcile it. We simply weren’t allowed on-board for a long time.

. . . I don’t want to scare or delight anyone, but there’s definitely no 90 billion [$1.4 billion] there. But I think we won’t get away for 300 million.

Recall the fire took a day to extinguish and two Russian naval personnel — an enlisted contractee and an officer — died, and 14 others were injured.

In the immediate aftermath, Rakhmanov claimed Kuznetsov didn’t sustain critical damage. He rejected a December 19 Kommersant story indicating that the bill for fire repairs could reach 95 billion rubles. The business daily said the estimate came from a Northern Fleet staff officer.

The OSK chief said equipment in the engine room where the blaze occurred was already dismantled. Welding sparks started the fire and it apparently spread to electrical cables.

Completed in the early 1990s, the ill-fated sole Russian carrier is being renovated under an April 2018 contract. The ship was damaged in late October 2018 while floating out of the PD-50 dry dock at Roslyakovo. Kuznetsov was initially set to be finished in 2021, but the date has slipped to 2022.

The carrier reportedly will receive a navalized version of the Pantsir-S1 (SA-22 Greyhound) gun-missile air defense system, new boilers, pumps, flight control and communications systems, as well as repairs to its turbines.

OPK Write-Off

President Vladimir Putin has apparently agreed to a major write-off of Russian defense industry debt. It’s a significant story not receiving much attention.

Putin with VTB chief Kostin in August 2019

Putin with VTB chief Kostin in August 2019

The decision came in a secret presidential ukaz at the end of 2019. VTB chief Andrey Kostin broke the news in a late January interview with Rossiya 24 television at the World Economic Forum in Davos. The most coherent rendering of what Kostin said came from Interfaks-AVN:

Everything’s decided. At the end of last year the President met with all interested parties, the President’s ukaz was received, it’s true it’s secret, therefore I wouldn’t begin to comment on it. [But then he does, at least generally.]

But on the whole the problem’s solved, there is active participation of the [federal] budget and preferential restructuring on the part of leading banks is also provided, but it is so feasible, it is reasonable, it really takes into account, of course, that risk the banks took, therefore on the whole we’re satisfied with this decision. I think the government is too. So the program is being effected. I believe we won’t return to this issue again.

According to Interfaks-AVN in late December, Deputy PM and arms tsar Yuriy Borisov said measures to improve the financial state of key OPK enterprises were worked out and there would be a clearing of loans amounting to 700 billion rubles [$11 billion]. The main troubles, he indicated, were at OAK, OSK, ODK, and Roskosmos.

In early December, Borisov proposed writing off 400-450 billion of the debt and restructuring the remaining 300-350 billion for 15 years with a five-year initial payment holiday and a preferential two percent interest rate, according to a report in Rbc.ru.

Borisov and Russian bankers other than Kostin haven’t commented.

Borisov’s proposal may be the plan contained in Putin’s ukaz, but we don’t know since it’s secret. And it’s most likely secret to keep normally docile Russian citizens from learning that the government is bailing out weapons makers, not them. Russian household debt has increased steadily in recent years with little or no economic growth.

In July, Borisov said Russian defense industry’s large debt load was forcing it to “live hand to mouth, servicing financial institutions that don’t produce anything,” Interfaks-AVN reported. He indicated then that 90 percent of the debt belonged to OAK, OSK, Uralvagonzavod, Almaz-Antey, and Precision Systems (Высокоточные комплексы).

He called for writing off all or part of the debt at that time. But the biggest OPK creditors Sberbank and VTB opposed it.

Yuriy Borisov

Yuriy Borisov

In September, Putin directed then PM Dmitriy Medvedev to investigate problems with the profitability of defense enterprises. This came after the Military-Industrial Commission session in Izhevsk at which Putin blamed “unused capacity during a reduction in order volumes and the requirement to finance development work, the costs of which aren’t included in planning documents.” The president didn’t say anything about contract prices being too low or funding lost to waste or corruption. 

Novaya gazeta reported in July that 700 billion rubles represents non-performing defense industry loans. Total OPK indebtedness, however, is 2.3 trillion rubles ($36 billion). A write-off of 700 billion rubles (or part of this amount) would be a significant hit to the working capital of major Russian banks (and OPK creditors).

Borisov said corporations and enterprises were making only interest payments on the most troubled loans, according to Novgaz. Experts told the paper that more than half of the OPK’s profits are going to debt service leaving most producers with net profits of only 3-4 percent or even losses. Defense enterprises say they are frequently paying 22-23 percent on loans accumulated over many years. Meanwhile, the Russian banking sector is earning record profits.

Based on the recent history of OPK debts, Novgaz concluded the most likely scenario is partial write-off, partial restructuring, and recapitalization of affected banks by the Finance Ministry. Promsvyazbank (PSB) — bankrupt and nationalized in early 2018 — is also being turned into a specialized bank for handling state defense orders and problem loans to the OPK. PSB might insulate healthy parts of the Russian banking sector from bad OPK debt, and possibly from U.S. economic sanctions.

Defense producers say price formation — agreement with the MOD on contract prices — remains a substantial problem, according to the Novgaz report. Its source said:

Everyone is right — both the customer can’t pay a lot, and the contractor can’t operate at a loss. But there’s no arbiter for a compromise, and the customer is always stronger.

This OPK debt write-off is pretty much like earlier ones. It may take care of the most immediate and acute symptoms but it won’t cure the causes of the ailment, including price formation, theft, and cumbersome rules about handling GOZ funds.