Tag Archives: GOZ

Serdyukov and Baranets

Posted on October 7, 2011 | Leave a comment

Anatoliy Serdyukov (photo: Vladimir Belengurin)

Komsomolskaya pravda’s Viktor Baranets got to prompt Defense Minister Anatoliy Serdyukov for a few statements on various topics in today’s paper.  It doesn’t seem like he really got to ask questions.

Serdyukov claims all but about 3% of GOZ-2011 has been placed, and 100% advances to the defense sector for 2012 will make for a smooth year of orders and production.  He “dodges the bullet” on not ordering Kalashnikovs.  He returns to the possibility of giving serving officers and contractees money to rent their own apartments, but this never worked well in the past.

Serdyukov says the first phase of military reform involved changing the Armed Forces’ org-shtat (TO&E) structure.  Now, he says, the second phase has begun, and it’s connected with rearming the troops.

On the state defense order (GOZ), Serdyukov says:

“During the formation of the Gosoboronzakaz, we had two issues with the defense sector — the price and quality of armaments.  We got them to open up their production “cost history.”  That is, they showed us everything transparently.  We needed to understand what they were getting and from where.  After long arguments, a compromise was found in the end.  We settled on quality criteria.  The Gosoboronzakaz is almost completely placed.  Of 580 billion rubles a little more than 20 billion was left ‘to settle.’  But we’ve also drawn conclusions from the lessons of this year.  Now the next Gosoboronzakaz will be formed in the Defense Ministry before December with such calculation that they will begin to fulfill it in January.  At the same time, we’re trying to make the Gosoboronzakaz 100% paid in advance to the defense sector.  Not another country in the world has such comfortable conditions for its VPK.”

Serdyukov says the Defense Ministry is still working on MPs, their regs, missions, training, structure, and size.  They’ll be responsible for discipline and order in garrisons and investigations.

The Defense Minister opines that Russia’s Israeli UAVs aren’t bad, but they are looking at Italian ones while domestic development continues.

Serdyukov confirmed that two new factories for producing the S-400 system will be built.  They are designed, and, he hopes, will begin production by 2015.

On tanks, the Defense Minister says they’ve taken the position that they can modernize T-72s to the level of a T-90 or better for 38 million rubles.  He believes it’s cost effective.

On the AK-74, Serdyukov claims they aren’t rejecting it, but they have depots overflowing with 17 million automatic rifles.  He says they’ll be used or modernized, some will be sold, and others transferred to other power ministries.

Serdyukov believes the draft military pay law now in the Duma will raise pensions by 50 or 60 percent.  Active military pay will be as advertised:  a lieutenant is supposed to get 50,000 or more rubles a month.  Contract enlisted will start at 25,000 or more depending on their duties.

Serdyukov hopes the problem of housing for retired servicemen will be concluded in 2013.  Then he can focus on service housing for contractees.  He proposes paying contractees to rent apartments while the Defense Ministry acquires or builds service housing.  “Apartment money” is a possibility but it has to be thought out.

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Russian Military Power

Posted on October 1, 2011 | Leave a comment

Finland’s National Defense University has published a study entitled Russian Politico-Military Development and Finland.  If the media reporting is accurate, it may read a little like a latter-day Soviet Military Power.

Now few have read the document since there’s only a two-page English precis to go with press accounts of its contents.  Perhaps the entire thing will appear in English soon.

But here’s the gist. 

NATO and other Western countries believe war is an outdated idea, and U.S. power and interest in Europe are waning.  Russia, meanwhile, is seeking to revise the verdict of the Cold War, restore its great power status, and regain the Soviet sphere of influence.

It’s modernizing its crumbling armed forces with increasing investments [i.e. the 19-trillion-ruble State Program of Armaments or GPV 2011-2020].  The formation of the Unified Strategic Command (OSK) West (aka the new Western MD) has shifted the Russian Army’s center of gravity from Western Europe to the Northwest [at Finland].  And:

“The Russian armed forces are being improved by forming high-readiness forces with a capability of achieving operational results directly from peacetime employment.”

Finally, the study’s authors seem to see a Russian military resurgence that needs to be met by reinvigorating Finland’s territorial defense system:

“A large military reserve force is an indication of the will to defend the country, and has a major preventative value.”

It’s worth challenging three central propositions here.

Russia’s “increasing investments” in its military.  The Finnish report is reacting a priori to plans for large outlays for defense procurement that may or may not happen.  They authors are concerned about Russia’s intention to modernize, and what its forces might look like after modernization.  The current GPV could go the way of its predecessors; the first annual state defense order (GOZ) to fulfill the GPV isn’t exactly proceeding smoothly.  It’s important also to consider what’s being modernized.  In many cases, Moscow plans to replace arms and equipment from the 1980s and earlier, and not everything will be a world-class fourth- or fifth-generation weapons system.  Lots of the “new” models will be based on late Soviet-era designs.  

The shift to the Northwest.  To some extent, there may be an effort to get forces closer to their likely theater of operations.  But hysterical assertions of vastly increased Russian forces shouldn’t be taken seriously.  It’s largely the same forces organized differently, and certainly not all opposite Finland.  The creation of OSK West or the Western MD was also an attempt to cut redundant command and staff echelons and get the Ground Troops out of the expensive environs of Moscow and Moscow Oblast.  One could easily argue the Defense Ministry’s placed a higher priority on forces in the Southern or Eastern MDs. 

The formation of high readiness units.  The report’s authors are quoted as saying Russia’s high readiness forces will be ready to leave garrison, and begin offensive operations in an hour, according to Vzglyad’s interpretation of a Russian-language media outlet in Estonia.  In reality, the forces are now more highly ready to depart the garrison and get combat orders.  No one can say what those orders will say.  Any combat missions will have to be carried out by troops who generally have less than six months in the army, and they’ll be lucky to execute a successful defensive operation.  Also, let’s hope the Finnish study says that this high readiness was really more about getting rid of useless, hollow, low readiness cadre units.

But, as Newsru cites a former deputy commander of the OGV(s) in the North Caucasus, it’s hardly possible to talk about Russian efforts to encircle anyone “in the condition which we’re in, and with those obvious army problems which we have.”

No one should misunderstand.  The Finns are to be admired for their perspicacity when it comes to Moscow.  They’re keen observers of what’s happening in Russia.  They have to be. 

But there’s obviously a huge issue of perspective.  Things look very different from Helsinki, Washington, Paris, London, and Berlin.  Russia’s capabilities are somewhat hyped in a public debate about what level of forces and readiness Finland needs to deter Russia.

But, all in all, it doesn’t help anyone in the long-term to inflate [re-inflate?] a Soviet-style military threat.  A realistic assessment of Russian capabilities and intentions will lead to practical, affordable measures to counter them.

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GOZ War Winding Down?

Posted on September 17, 2011 | 3 comments

Vedomosti’s Aleksey Nikolskiy sees a possible end to the conflict between the Defense Ministry and industry over the production of strategic nuclear systems.  His OSK source claims a multiyear Defense Ministry contract with Sevmash for proyekt 955 Borey-class SSBNs will be concluded in the coming week.  This would reportedly leave OSK with just one contract remaining to be completed.

Conclusion of a 40-billion-ruble contract for three proyekt 11356M frigates was announced Wednesday.

Vedomosti’s source said the Defense Ministry and OSK also finished a deal for proyekt 885 Yasen-class SSNs several days ago.  The paper once again cites Konstantin Makiyenko’s 500 billion ruble price tag for the new SSBNs and SSNs.

An industry source tells Vedomosti that all MIT’s ballistic missile contracts are complete.

While deals for renovating Russia’s strategic forces are apparently done at last, not all contracts for conventional armaments are finished, particularly those involving Rostekhnologii and its enterprises, according to the director of one of them.

What’s this mean?

The conclusion of submarine / SLBM / ICBM production contracts would be a relief to both sides since their absence has been the biggest GOZ news story.  If all this is done, or almost done, one would expect a major government or Defense Ministry press announcement soon.

If the submarine deals are worth 500 billion rubles, that is, once again, apparently closer to Defense Minister Serdyukov’s price than to OSK’s.

The proyekt 11356M frigates are updated Krivaks (or Talwars for India), and they aren’t exactly cheap.

The issue of incomplete contracts with Rostekhnologii’s enterprises is significant given the size and breadth of their work on weapons and military equipment.  People will ask which enterprises and systems are in question.  It also contradicts Serdyukov’s recent claims that only OSK deals needed to be inked, and implies there are lingering problems and issues in areas other than shipbuilding.

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The GOZ This Week

Posted on September 7, 2011 | Leave a comment

Putin at the Conference (photo: RIA Novosti / Aleksey Nikolskiy)

At United Russia’s interregional conference in Cherepovets on Monday, Prime Minister Putin reported on the Defense Ministry’s failure to conclude all its GOZ contracts by his most recent September 1 deadline.  Putin said, despite Defense Minister Serdyukov’s assurances that only OSK contracts need to be finished, agreements with MIT and OAK are still not finalized.

According to RIA Novosti and the stenogram, Putin told the United Russia audience:

“Unfortunately, full agreement between the Defense Ministry and producers by 1 September didn’t happen, as we arranged.  Disagreements continue there in several areas.”

“I want to direct the attention of all sides to this process:  firstly, we have a colossal amount of money being allocated for strengthening the country’s defense capability.  We’ve generally never allocated such money, well, in Soviet times, when they threw everything at the defense sector, there were comparable figures, but in recent history never, — 20 trillion to 2020.  We are constrained in other places – very many – either to stop or cut our expenditures, but we need to do this to guarantee our defense capability.  But we don’t need to absorb these billions and trillions, we need to provide items quantitatively and qualitatively.”

“At the same time, of course, the profitability of enterprises should also be guaranteed.  The obvious fact is a minimum of 15 percent.  It’s necessary to get this profitability so there are resources for development, for worthy wages for the workers.  I hope that soon, in the course of a week, this process will be concluded in shipbuilding, in missiles, and in aviation.”

“In 2012, orders, advances and other payments should be sent in full measure to enterprises not later than March.  I’m counting on this very much.”

Vedomosti’s source close to the Defense Ministry admitted a week won’t be enough to close contracts worth 500 billion rubles with Sevmash and tens of billions with MIT.

Kommersant’s source familiar with the course of negotiations with MIT confirmed that the process isn’t complete.  Another source said a contract for Yak-130 trainers is almost complete, but one for MiG-29K fighters isn’t.  Konstantin Makiyenko told Vedomosti the MiG-29K doesn’t matter since the Kuznetsov aircraft carrier is headed for repairs.

Most striking is Putin’s call, a plea almost, not to “absorb” the GPV’s 20 trillion rubles without supplying the new weapons and equipment the army needs.  He’s well aware the situation could be like water in sand.

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The GOZ Last Week (Part II)

Posted on September 6, 2011 | Leave a comment

We looked at last week’s news.  What’s it mean?  There wasn’t a lot of commentary about it, but there were two very good pieces.

To backtrack a little, if it looks like Defense Minister Anatoliy Serdyukov might be (just might be)  getting an upper hand on forcing defense producers to his prices instead of vice versa, then the commentaries give insight into what is happening (or may happen) if Serdyukov succeeds in driving hard bargains with the OPK.

Moskovskiy komsomolets’ Olga Bozhyeva asked a general who worked on the GOZ to comment on this year’s situation:

“The Defense Ministry now lacks an organ with responsibility for contracting work, beginning with formation of initial prices and ending with accepting the results.  In the past, the chief of armament’s apparatus performed these functions, currently it’s been transformed into a department with unintelligible functions.  Tax organ officials who’ve come into the Defense Ministry’s key financial posts can’t connect the price of a product with the characteristics of the model being produced and its contribution to the country’s security.  In the Defense Ministry in recent years, three basic methods of calculating the cost of a product have been introduced, but not one of them factors in the substantive part of the work.  They are all built on the principle:  I have a certain amount of money, I want to give you this much of it.  But putting it to concrete use no longer interests anyone.  And it turns out that the methods of calculating prices in the Defense Ministry and in VPK enterprises are different.  The people speak different languages . . . .”

Bozhyeva concludes:

“In a market economy, you have to survive somehow.  Here is not America, where work for the Pentagon brings a good profit.  With us, it only allows you to survive.  And that is if they allow it.  But they don’t let everyone.”

“Here not long ago the Defense Minister got indignant, for example, that shipbuilders [Sevmash] had become so brazen that they also put the cost of kindergartens and other “social benefits” into the price of a missile-carrier [SSBN].”

“I’m not a taxman, evidently, since I don’t understand:  but where can they put it?  Let’s take Severodvinsk here.  It is completely dependent on “Sevmashpredpriyatiye.”  Like it or not, the kindergartens, schools, hospitals, clinics, housing – the factory has to maintain all of it.  And, naturally, they put the upkeep into their production cost.  How can it be otherwise?  If there aren’t kindergartens – there aren’t missile-carriers.”

Editorializing in Nezavisimaya gazeta, Viktor Litovkin writes:

“What are the causes of such an ‘inability to agree?’  In the fact, in my view, that it’s impossible to marry purely administrative approaches to the imposition of concrete military department prices on defense enterprises with largely market relationships which exist for the defense sector today.  With achieving that degree of Gosoboronzakaz profitability in which enterprises have the chance not just to survive, but also develop.  Several defense NII and factory directors, undoubtedly following the example of MIT General Designer Yuriy Solomonov, have already even stopped ‘fearing’ to publicize their disagreements with the Defense Ministry in front of journalists.  General Director of NII Instrument-building named for Tikhomirov, Yuriy Belyy told me ‘in the ordering structures of the military department people have come, who, to put it mildly, don’t understand anything about production and price formation’ (this, by the way, also means Anatoliy Serdyukov. – ‘NVO’ No. 25).  ‘Still they always demand the reduction of invoiced expenditures, reduction of profits, of labor input.  And often arbitrarily disregard prices on final goods.’  This, in his words, is happening all over the defense sector.”

“’If we had the GOZ alone, the enterprise would have died long ago,’ Yuriy Belyy told me.  ‘There are practically no resources remaining for development after GOZ fulfillment.  It isn’t understood that wages take according to some kind of averaging principle.  Invoicing expenses also.  So goes the practical strangulation of the defense sector.  In the country’s leadership they say that the OPK’s profitability is the locomotive of industry, should be not less than 15%, but in fact it’s not more than 5-7%.  And, the main thing, not understood, is with whom to talk in the Defense Ministry.  Completely incompetent people have arrived.  Their mission is not the development of industry, not increasing the country’s defense capability, their mission is to save money by any means.’”

“An enterprise producing a final product, like ‘Dolgorukiy,’ which buys metals, nuclear reactors, various components at market prices from the monopoly producers of these products, can’t give away the good created by its workers lower or a little, one-two percent, higher than its own cost, or lower than its profitability level.  It can’t buy new machine tools, technology, reequip its production line, train and select new highly-qualified personnel, provide them housing . . . .  It can’t not think about tomorrow.”

“And from the other side, if it’s possible to pay the French one and a half billion Euros for ‘Mistrals’ we need or don’t need, then why does ‘Sevmash’ have to give away a strategic submarine extremely essential to the Navy and Russia for free?!”

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The GOZ Last Week (Part I)

Posted on September 4, 2011 | Leave a comment

Let’s start with the news.  In short, Defense Minister Serdyukov told the press all GOZ-2011 contracts, except ones with OSK, were signed.  But most news outlets concluded he failed to meet Prime Minister Putin’s August 31 deadline for finishing the contracting process.

ITAR-TASS reported the Defense Ministry signed its fourth contract with OSK on August 29.  It was with Baltic Shipbuilding Factory “Yantar” for three Proyekt 11356M frigates.  Kommersant reported others are with Admiralty for three Proyekt 636 diesel-electric submarines and with Zvezda Shipyard in the Far East for nuclear submarine (probably OSCAR II-class) repairs and modernization.

But the largest and most important contracts with Sevmash for Proyekt 955 Borey-class SSBN and Proyekt 885 Yasen-class SSN production are still not signed.  The contract is supposed to cover two of the former and one of the latter that are already (or almost) complete.  Kommersant says the contracting delay means a fourth 955 and second 885 won’t be laid down until sometime in 2012.

ITAR-TASS concluded there are still differences over pricing although there is progress in the negotiations.  The wire service writes that Sevmash refuses to make concessions taking below a minimum profitability level, while the Defense Ministry calls price increases unjustifiable, and says it will only pay for concrete items regardless of the producer’s profitability.

On September 1, ITAR-TASS reported Serdyukov’s announcement that, on the whole, the Prime Minister’s order to conclude all GOZ contracts had been fulfilled.  It provided some choppy, weaseling quotes from Serdyukov:

“We are reprogramming for other requirements – precision weapons mainly, aviation, air defense . . . some suppliers because of some obstacles can’t provide their products.  . . . now we’re making changes – on the order of 30 billion [rubles].  . . . in essence, this is a formality  . . . .  Essentially, we’ve been through the entire agreed part.  The signing itself occurred yesterday-day before yesterday.  Only the United Shipbuilding Corporation contract remains.  Perhaps that’s all.”

Kommersant added Serdyukov’s comment that:

“We, unfortunately, can’t accept the figures which industry gives us.  For the most part, they are simply unjustified.”

Kommersant’s sources maintain, in addition to OSK, contracting with OAK and MIT remains incomplete, and no one’s willing to guess when this still-difficult process will end.

On September 2, Kommersant’s source said part of MIT’s contracts are done, but it would be premature to say the process is complete.

ITAR-TASS added that Sevmash’s contract is now supposed to be signed in mid-September.  The factory reportedly will agree to current prices for its submarines in exchange for some kind of “coefficient” to offset their rising costs starting in 2013.  The wire service also claimed there are now 6 of 13 OSK contracts signed.  And it put the cost of a Borey-class SSBN at a somewhat hard-to-believe 23 billion rubles.  OAK and MIT sources also told ITAR-TASS their contracts aren’t complete.

Vedomosti cited Konstantin Makiyenko on long-term submarine production costing 500 billion rubles.  If that’s eight Borey– and eight Yasen-class boats, it’s a $17 billion contract, basically $1 billion per submarine.  Thirty billion rubles a boat is a lot closer to 23 billion than the 47 or 112 billion that Serdyukov complained about in July.

Despite indications to the contrary, one has to wonder if Serdyukov isn’t very slowly winning his battle with the OPK.  But ultimately, it’s hard to say before we see what gets delivered, when, and how good it is.

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Serdyukov’s New First Deputy

Posted on September 1, 2011 | 2 comments

Aleksandr Sukhorukov

As rumored in mid-summer, President Medvedev announced today former KGB and FSB officer Aleksandr Sukhorukov, most recently Director of the Federal Service for the Defense Order (Rosoboronzakaz), will be First Deputy Minister of Defense.

According to ITAR-TASS, Defense Minister Serdyukov introduced the 55-year-old Sukhorukov during a working meeting with Medvedev in Stavropol.

Medvedev and Serdyukov noted Sukhorukov will be responsible for arms procurement and the beleaguered state defense order.

He’ll be sitting in the hot seat right away.  Medvedev told him:

“. . . this is a very delicate process:  on one side, you need to understand the realm of the Armed Forces, the field of modern military technology, on the other, you need to build relationships with suppliers correctly.  But it’s not always simple to do, the current history of concluding contracts shows this.” 

RIA Novosti elaborated:

“Last night, RF Prime Minister Vladimir Putin’s deadline for concluding all Gosoboronzakaz-2011 contracts expired.  On Thursday, the media reported that this task was not completed.”

Sukhorukov takes the post vacated by Vladimir Popovkin, who took over the Russian space agency Roskosmos.

Sukhorukov was with Serdyukov at the Federal Tax Service.  He followed the Serdyukov team to the Defense Ministry, becoming Deputy Director of Rosoboronzakaz in mid-2008, and Director a year later.  But he kept a low public profile at that agency.

He was born November 11, 1955 in Kasli, Chelyabinsk Oblast.  He graduated from the Chelyabinsk Higher Tank Command School in 1977, and later a KGB Higher School.  He apparently worked for the KGB in the Armed Forces, retiring as an FSB lieutenant colonel in 1996.   

From 1996 to 2004, he was deputy director, then director for the Finance Ministry’s northwest regional center for hard currency and export control.  He was a deputy director and director of a territorial directorate (probably northwest again) of the Federal Service for Finance-Budget Oversight in 2004-2006. 

In 2006-2007, he worked for then-Federal Tax Service Director Anatoliy Serdyukov as Chief of the Organizational-Inspectors Directorate.

In 2007, Sukhorukov followed Serdyukov to the Defense Ministry as an advisor.  He became Chief (not surprisingly) of its Organizational-Inspectors Directorate.  Serdyukov made reference to this directorate in his 2010 year-ender when he described how he checks on implementation of his policies. 

But, in late 2007, Sukhorukov jumped ship to the government, becoming assistant to then-Prime Minister (and Serdyukov’s father-in-law) Viktor Zubkov, and then Director, Department for Control and Verification of Fulfillment of RF Government Decisions.

In mid-2008, he arrived at Rosoboronzakaz.

You can find bio data here, here, and here.

In the Russian context, Sukhorukov seems like someone who knows how to find out if people are getting things done, and presumably what to do to them if they’re not (shoot them, send them to work in the fresh air, or fire them).  He seems very much a Putin man, an archetypal silovik.

He doesn’t, however, seem like someone who can help people figure out how to get things done.  Perhaps the Defense Ministry could have used someone with not just investigative, accounting, or legal experience, but maybe with an engineering, industrial, scientific, or technical background in the OPK.

It’d be interesting to know what Sukhorukov did in the army / KGB / FSB . . . he might have been a run-of-the-mill osobist, a “special section” guy monitoring some unit’s reliability and loyalty, or helping secure its secrets.  But he might have served in a defense plant, or been detailed to work in anti-corruption efforts.

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Latest on GOZ Woes (Part II)

Posted on August 28, 2011 | Leave a comment

To review this week . . . Prime Minister Putin’s current deadline for completing GOZ contracts is August 31, but it’s unlikely to be met, even by loyal Deputy PM and OSK Board Chairman Igor Sechin.  Deputy Finance Minister Siluanov said Defense Ministry contracts are being made on credits and government-backed financing rather than cash.  Putin said the price tag for GOZ-2011 is 750 billion rubles, but 30 percent of projected procurement still isn’t covered by contracts as the final third of the year begins.

How did the government, Defense Ministry, and OPK arrive at an August 31 deadline that’s unlikely to be met?

The latest round of this year’s GOZ woes started in early July when MIT General Designer Yuriy Solomonov told Kommersant that GOZ-2011 was already broken, and Russia’s strategic missile inventory is not being renewed as necessary.  He said there’s no contract for the RS-24 / Yars ICBM, and the late arrival of money makes it impossible to salvage 2011.

President Dmitriy Medvedev responded by calling Defense Minister Anatoliy Serdyukov on the carpet.  According to RIA Novosti, he told him:

“Sort out the situation.  If there’s information that the state defense order is broken, it’s true, organizational conclusions are needed in connection with those who are responsible for this, regardless of position or rank.”

“If the situation is otherwise, we need to look into those who are sowing panic.  You know how according to law in wartime they dealt with panickers — they shot them.  I’m allowing you to dismiss them, do you hear me?”

RIA Novosti reported Serdyukov’s opinion on the “wild growth” in the price of military products, especially from MIT and Sevmash.  He said MIT is asking 3.9 billion and 5.6 billion rubles respectively for Topol-M and Yars ICBMs.  Serdyukov put GOZ-2011 at 581 billion rubles [different from Putin’s figure!], and added that only 108 billion, or 18.5 percent, was not yet under contract.  He said everything would be done in 10 days.

At virtually the same time, Deputy PM and VPK Chairman, Sergey Ivanov told ITAR-TASS 230 billion rubles were not yet contracted out.  OSK piled on Serdyukov, claiming contracts for 40 percent of the Navy’s share of the GOZ weren’t finalized.

In late July, it looked like Northern Wharf (which reportedly produces 75 percent of Russia’s surface ships, and is not part of OSK) might be made into an example for other “GOZ breakers.”  While prosecutors talked vaguely about the misuse of GOZ money, the shipbuilder’s representatives apparently mounted a vigorous defense, asserting that the enterprise has been right on time, even though it’s underfinanced by the Defense Ministry.

Main Military Prosecutor Sergey Fridinskiy said prosecutors uncovered 1,500 GOZ-related legal violations during the preceding 18 months.  He indicated there were 30 criminal convictions, and state losses amounted to millions of rubles in these cases.  The most egregious example  was the theft of over 260 million rubles given to OSK’s Zvezdochka shipyard to repair Kirov-class CGN Petr Velikiy.  Fridinskiy indicated the enterprise director and his close associates apparently had 40 million of the money in their own names.  Recall Fridinskiy earlier said 20 percent of defense procurement funding is stolen.

According to Rossiyskaya gazeta, Defense Minister Serdyukov claimed he was on the verge of signing contracts with MIT for Topol-M and Yars production.  Once again, he said all contracting would be finished in two weeks.

In mid-August, OSK enterprises Sevmash, Admiralty Wharves, and Zvezdochka said they would soon be forced to cease work unless the Defense Ministry signed contracts with them.  Putin, Sechin, and Serdyukov met and launched a special interdepartmental commission to set prices for the Navy’s remaining 40 billion rubles in GOZ contracts.  And, according to Kommersant, everyone was once again reassured that all contracts would be completed in two weeks.

And it’s not just all ICBMs, ships, and submarines . . . Kommersant wrote that the Defense Ministry eschewed contracts for 24 or more MiG-29K and more than 60 Yak-130 trainers at MAKS-2011.

So what does the mid-year GOZ picture look like? 

The president and prime minister have fumed and set a series of deadlines, not met thus far.  And the defense minister and deputy prime ministers have assured them they would meet each deadline in turn. 

More interesting, and somewhat unnoticed, is the fact that the prime minister and defense minister (among others) seem to be consistently working from different sets of numbers on the size of the GOZ, and how much has been placed under contract.  The GOZ hasn’t captured this kind of leadership attention at any time in the past 20 years.

Producers are being honest when they say late state contracts mean they can’t do anything (or at least what the Defense Ministry wants them to) in what remains of the year.

Picking up the pieces of GOZ-2011, and trying to put GOZ-2012 on a better footing will occupy the rest of this year.

Lost in everything is what will the Russian military get eventually by way of new hardware, and when will they get it?  And how good will it be?

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Latest on GOZ Woes (Part I)

Posted on August 26, 2011 | 1 comment

So much has swirled around the state defense order (Gosoboronzakaz or GOZ) this year that it makes one avoid the topic.  But here’s a shot at making amends for neglecting it. 

Perhaps this information will just precede the next wave of GOZ news, likely to break before the end of August.  The current deadline for putting out GOZ contracts is August 31 (who knows when the weapons and other military equipment being bought will actually be delivered?).

You may recall Prime Minister Vladimir Putin set August 31 as the most recent “last deadline” for placing all GOZ-2011 contracts back in late July.  At that time, Putin pretty much put all blame on the Defense Ministry.  Defense Minister Serdyukov said he would complete the contracting, and report to the President and Prime Minister by the deadline.  The report is supposed to be a joint one reflecting the positions of all players involved in the GOZ.

This very day, BFM.ru reports that Deputy PM Igor Sechin says he’ll be two more weeks negotiating OSK shipbuilding contracts with the Defense Ministry.  He claims three of 13 remaining contracts are being signed today.  Prices for the remaining ten will apparently be specified and agreed over the next 14 days.

According to ITAR-TASS, a VPK source indicated the Defense Ministry still needs to contract with Sevmash for delivery of one Proyekt 885 (Yasen-class) and two Proyekt 955 (Borey-class) submarines this year.  The source said work continues despite the lack of a signed contract.

ARMS-TASS, however, provided the best insight into the current state of play on the GOZ.  The news agency cited Deputy Finance Minister Anton Siluanov on a Putin-led government conference on the GOZ early this week.  Siluanov concluded the Defense Ministry will soon sign its contracts and send out advance payments.  Additionally, he criticized the delays for “breaking budgetary discipline,” and added that defense contracts are being signed on credit schemes and state guarantee mechanisms [i.e. not cash].

ARMS-TASS also quoted Putin at length:

“Naturally, the priority in buying equipment, armaments is, of course, domestic equipment, but it should still be modern, wanted, promising and acceptable to the customer, to the Defense Ministry, but taking account of prices for the state.”

“An unprecedented amount of monetary resources — 750 billion rubles — has been allocated for the purchase and modernization of equipment and armaments, for RDT&E on defense subjects.”

“In modern Russia such money has never been allocated so that in a year there’s 750 billion rubles — this is not some kind of percentage, this is half again as much as in 2010.”

“The government is counting on all this enormous money being effectively used to improve the quality of the work of defense industry and state customers.”

“Meanwhile, according to data which I have, more than 30 percent of the total volume of the GOZ still doesn’t have contracts.”

There’s quite a lot in those statements.  Probably as much substantive as Putin’s said publicly about GOZ problems.

Tomorrow we’ll do Part II on the latest woes.  Then maybe we’ll look at 2011 — the year of the GOZ.  And possibly even a look at the GOZ since 2000 or so.

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Severodvinsk Trials and GOZ Tribulations

Posted on July 14, 2011 | 1 comment

Severodvinsk (photo: RIA Novosti / Vladimir Rodionov)

Your typical good news, bad news story . . . happily for the Russian Navy, the Severodvinsk is nearing its first at-sea testing, but the new submarine has also been held up as a prime example of outrageous price increases in this year’s state defense order.  Final delivery of this SSN, as well as the first two Borey-class SSBNs, represents a big part of troubled GOZ-2011.

RIA Novosti reports new fourth generation Yasen-class (proyekt 885) SSN Severodvinsk will soon head into the White Sea for two months of underway testing, according to Malakhit Design Bureau General Director Vladimir Pyalov.  He added that, after this at-sea period, the final phase of state testing will take place.  

A very precise Mr. Pyalov says Severodvinsk is currently 98.9 percent complete.  He thinks the Navy will accept the new boat before year’s end and, in all, six of these multipurpose submarines will be built.  The second proyekt 885 Kazan is slated for delivery in 2015. 

RIA Novosti says proyekt 885 is a double-hulled, single-shaft boat with a reduced acoustic signature.  The conning tower has a streamlined, oval shape.  The boat is divided into ten compartments. 

For the first time, according to RIA Novosti, Russian designers put the submarine’s torpedo tubes amidships to allow for a new bow-mounted sonar system.  Proyekt 885 has eight vertical launch tubes for supersonic cruise missiles.  It has new communications and navigation systems as well as a fundamentally new nuclear power plant, according to the news agency’s report.  The new submarine is said to be first in noise reduction and stealth among attack submarines worldwide.

But the Severodvinsk couldn’t evade detection in the furor over breakdowns in the state defense order.

Earlier this month, RIA Novosti reported on disputes between the United Shipbuilding Corporation (OSK), submarine-builder Sevmash, and the Defense Ministry over naval construction in this year’s GOZ.  In particular, the military accuses the builder of doubling its prices for proyekt 955 Yuriy Dolgorukiy and proyekt 885 Severodvinsk.

An OSK spokesman defended Sevmash saying the cost of its work on Severodvinsk is only 30 percent of the total price, with the balance being the cost of armaments and components supplied by several dozen enterprises.  He blamed inflation in the industrial sector and the economy more generally.

Summarizing his discussion of submarines with OSK, RIA Novosti reports, Defense Minister Serdyukov said:

“They are giving us an increase in prices on new orders, and, naturally, we don’t agree with this.”

But, he added he’s convinced the Defense Ministry will persuade the producer to lower its prices.

Izvestiya mentioned that Severodvinsk was originally intended for a production run of 30 submarines, now reduced to six more than 20 years later.  As recently as March, the Navy still publicly hoped for ten.

Serdyukov told the paper:

“. . . it’s incomprehensible what the price of the ship [sic] consists of, if the cost of the lead boat was 47 billion rubles ($1.7 billion), but the next, exactly the same is now 112 billion ($4 billion).”

“Of course, the price will grow if, in the cost of one ship [sic], they include all accompanying expenditures on other enterprise projects in no way connected with it, like maintaining kindergartens, infrastructure, etc.”

“We’re prepared to pay, but on the condition that the price formation process will be transparent.  As practice shows, if all articles in the contracts are “decoded,” then it seems it’s possible with confidence to deduct up to 30% from the final cost of a finished product.”

These must be bitter words for an enterprise that went many, many years without completing its trademark product — a nuclear-powered submarine.

A Sevmash source says the cost of submarine construction is directly related to higher prices for materials, energy, and integration:

“The entire range of equipment for a submarine is supplied by monopolistic companies trying to dictate their prices.”

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