Tag Archives: OAK

OPK Write-Off

Posted on February 8, 2020 | 2 comments

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.

2 Comments

Posted in Defense Industry, Force Modernization, Military Budget

Tagged , , , , , , , , , , , , ,

Air Forces Half Out-of-Order

Posted on November 2, 2013 | 1 comment
"OAK-Service" Initial Corporate Structure (photo: Kommersant)

“OAK-Servis” Initial Corporate Structure (photo: Kommersant)

Kommersant’s Ivan Safronov and Yelena Kiseleva wrote Monday (28 October) on the status of devolving Oboronservis’ Aviaremont into a subsidiary of the United Aircraft Corporation (OAK).  In the process, they indicated less than half of Russia’s combat airplanes are serviceable.

Aviaremont enterprises will become OAK-Servis subholdings.  The factories will repair aircraft for the Defense Ministry, and for other power ministries and agencies.  OAK and the MOD already have an 84-billion-ruble contract for repairs in place.  Meanwhile, Aviaremont owes the MOD 115 billion, which OAK has promised to make good.

OAK-Servis is supposed to provide life-cycle support for MOD (mainly VVS) airplanes.  And it will “correct an unfavorable situation in the condition of the current inventory of the Air Forces, which still aren’t guaranteeing the necessary level of technical combat readiness,” Kommersant writes.

OAK-Servis will establish service centers and 24-7 mobile repair teams, then, in 2015-2018, modernize capital equipment in its repair plants.  It will also grapple with a problem it can’t solve in the short-term, “the cessation of industrial output of components and systems used in the repair of old aircraft models and the rising price of spares and parts.”

But OAK believes it can ensure a profit for plants that once belonged to Aviaremont.  Ruslan Pukhov tells Kommersant less money in the next GPV means less procurement and more repairs and modernization after 2020.

Now for the interesting part . . .

In a sidebar, the authors describe the parlous state of technical readiness in the Air Forces.

All VVS units are supposed to be in “permanent readiness,” with not less than 80 percent of the airplanes in their established composition in a serviceable state.

But Safronov and Kiseleva report only 42 percent of VVS airplanes overall, and 49 percent of its combat airplanes, are serviceable.

The most serious situation with fitness for flying is found in Tu-160 and Tu-22 [Tu-22M3] bombers, the MiG-29 and MiG-25, An-22 transports, L-39 trainers, and others for which serviceability hovers around 20-25 percent.

In 2013, the VVS had 696 airplanes in need of repair, but as (or if) new ones reach the inventory toward 2020, the number in need of repair will reportedly decline to just 49.

The sidebar says, along with repairing MVD, FSB, and MChS platforms, OAK repair plants will also have to maintain and overhaul exported airplanes.

Recall for a moment the MOD’s Action Plan to 2020 . . . the section on equipping the armed forces indicated year-end VVS aircraft serviceability rates will be 55 percent in 2013, 75 percent in 2014, and 80 percent in 2015.

These numbers require pretty fast improvement.

1 Comment

Posted in Air Forces, Defense Industry, Shoygu's Reforms

Tagged , , , , , , , , , , , , ,

Death of Mikoyan

Posted on October 26, 2011 | 6 comments

On October 21, the labor union of the Engineering Center of the Experimental-Design Bureau (OKB) named for A. I. Mikoyan went public with its claim that  well-known aircraft maker RSK MiG is in a catastrophic state.  Metronews.ru published part of the union’s open appeal as well as MiG’s official reaction.  The union’s letter is addressed to the president, prime minister, and heads of political parties, and dated October 11.

Union chairman Yuriy Malakhov says:

“The situation taking shape in our engineering center forced me to write this letter.  We’ve always been the brain of the company, it’s right here that new aircraft models were developed.  For a long time, we’ve had no new orders.  In the past five years, six general directors have been replaced, they all come from the Sukhoy company, and the impression’s created that they are strangling us, they want to close our company.  All the best orders go there [Sukhoy].  For example, we aren’t even allowed to participate in developing unmanned aerial vehicles.  Sukhoy is working on them, but this aircraft company doesn’t have our experience.  They focused on heavy fighters.  The pay of our colleagues is lower than in the trolleybus yard next door.  Lead engineers get 8-10 thousand rubles [per month].  Sometimes with occasional bonuses they get 30 thousand.  Talented young specialists leave for other firms, for example, Boeing, where they get two-three times more.  Now 10 percent of orders come from Russia, the rest from abroad.  In the course of several years we tried to get a response from our leadership, but no one wanted to start negotiations with us.  And the engineering center’s director decided to meet with employees only after this letter.  We are very much hoping for this meeting.  We expect new orders and increased wages.”

 MiG’s press-secretary offered this response:

“The absence of the Gosoboronzakaz in the 1990s was a serious blow to the country’s defense industry, including to RSK MiG.  Only those companies that had large export contracts could develop successfully, for example in that period the Sukhoy company managed to conclude contracts with India and China.  At that moment, MiG had only a contract with Malaysia.  In recent years, RSK MiG’s been headed by directors from Sukhoy corporation – Nikitin, Fedorov, Pogosyan, Korotkov.  From outside this could look like a raider’s seizure of MiG.  But who needs to seize debts and problems?  A positive dynamic began precisely with the arrival of these people – large foreign contracts were signed, the contract with the Defense Ministry to supply MiG-SMT.  Aircraft were supplied against this contract and they’re being successfully employed in the RF VVS.  Presently, a contract with the Defense Ministry to supply the MiG-29K is being discussed.”

“Today RSK MiG’s order portfolio is more than $4 billion, serial production of new aircraft is unfolding. There is a positive dynamic, maybe it’s not as quick and wages not as high as all of us would like.  Some young specialists come and stay, some leave.  But on the whole the company has good prospects.”

A couple points on these claims.  We know raiders take and sell what’s good, and leave “debts and problems” behind.  The Defense Ministry’s acceptance of the Algerian MiG-SMTs was more a financial bailout for the company and face-saving maneuver for Russia writ large than a real contract.  Not mentioned is Aleksandr Sukhorukov’s October 11 statement that MiG-29K procurement won’t come until 2013-2015.

The text of the union’s letter says MiG is simply dying.  It cites many problems and complaints, including a 48-billion-ruble debt, losses and delays in contracts, moving engineers to Zhukovskiy, closing MAPO, etc.  It says crucial pay bonuses can’t always be paid, and MiG is just supplying skilled people to Sukhoy and Irkut.  The letter calls OAK an incomprehensible middle layer blocking competition, but allowing personal lobbying.  Finally, it blames Mikhail Pogosyan for closing MiG’s promising future projects.

Scanning other recent MiG headlines – the Indian tender wasn’t the only blow to the MiG-35, its chances with the Russian Air Forces didn’t look too rosy anyway, and the early September MiG-31 crash indicated again what dire straits that old airframe is in.

Izvestiya’s Ilya Kramnik published recently on the MiG-29’s fate.  He wrote that (unlike the Su-27 or Su-24) the Defense Ministry doesn’t plan to modernize the MiG-29.  His military source says replacement of these worn-out aircraft in the future is deemed more cost-effective.

Kramnik’s source describes production of the generation “4+++” (?!) MiG-35 as an unavoidable but not yet decided step.  He sees the MiG-29 variant line ending since it’s outclassed by updated Su-27s.

Kramnik’s OPK source sees 20 or 24 MiG-35s being produced each year, for about 25 billion, to replace 150 or 160 MiG-29s in Russia’s inventory.

He cites Konstantin Makiyenko who sees the MiG-35 as important not just as a MiG-29 replacement, but also to keep Russia in the light- to medium-, $60-million-range fighter export market and not leave this industry segment to China and its J-10.

But Konstantin Bogdanov tells Kramnik he thinks the MiG-35’s loss in the Indian tender hurt its chances at home because it raises questions about MiG’s ability to support a production program for the Russian Air Forces.

One also wonders how much MiG-35 and MiG-29 will be needed with T-50 / PAK FA, with Su-35, and with Su-27 upgrades out there.

It’s hard to see the MiG story as anything but another chapter in the painful and necessary process of post-Cold War industrial downsizing and restructuring.  After all, the U.S. is down basically to Boeing and Lockheed Martin.  In MiG’s case, one can question whether the selection is really natural and the fittest are truly surviving.  The answer is probably yes.  However they managed it, Sukhoy and Irkut played their post-Soviet hand better, and it shows today.  The Russian aviation sector will be better off with further consolidation.  Still it doesn’t need Sukhoy to be a monopolist.  Managing that outcome will be tricky.

6 Comments

Posted in Air Forces, Arms Sales, Defense Industry, Force Modernization

Tagged , , , , , , , , , , , , , , ,

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.

Leave a comment

Posted in Defense Industry, Force Modernization

Tagged , , , , , , , , , ,

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.

Leave a comment

Posted in Defense Industry, Force Modernization

Tagged , , , , , , , , , , , , , , , ,

5th Generation Engine Delayed?

Posted on April 9, 2010 | Leave a comment

Work at NPO Saturn

Marker.ru yesterday wrote about NPO Saturn, FGUP Salyut, OAK, ODK, the Defense Ministry, and development of a fifth generation engine for Russia’s fighter aircraft.

Salyut believes it has basically defeated Saturn in the Defense Ministry’s tender to produce a fifth generation engine for the PAK FA, but Salyut fears development will be given instead to the newly created ODK, the United Engine-building Corporation.

Meanwhile, in OAK–the United Aircraft-building Corporation, they think the Defense Ministry may be considering not making a new engine for the first PAK FA model, and instead concentrating engineering resources on development of a 5th generation engine for future modifications of the new fighter. 

Salyut believes it decisively beat Saturn in the tender’s first phase, but the Defense Ministry has not announced the second and conclusive phase possibly because, according to Salyut’s Dmitriy Yeliseyev, the issue of creating the fifth generation engine was automatically decided when Saturn joined ODK.  But Salyut will insist on completing the tender process to decide who will be lead designer for the 5th generation fighter’s engines.

Yeliseyev says:

“We understand that general direction of the work to create an engine for PAK FA will be under ODK, but we also believe the tender is needed to even decide who will develop the gas generator for the future engine, and basically decide who will drive work on the engine for PAK FA.”

Salyut is now focused on modernizing the fourth generation AL-31 engine.  But test models of PAK FA have Saturn’s 117 engine, a modification of the AL-31.

OAK representative Konstantin Lantratov says the fifth generation engine has fundamentally new requirements, particularly in the areas of radar and infrared signature reduction.  OAK believes the Defense Ministry is not announcing the conclusive phase of the tender to build PAK FA’s engines because it’s waiting for the aircraft’s test results with its current engines.

Marker.ru asks is it necessary to make a 5th generation engine right now?  Wouldn’t it be better to concentrate work on producing engines for aircraft that will follow the PAK FA?  If a new engine starts development today, it will be ready in 5-7 years, about the time modernized or other variants of the PAK FA will be appearing [of course, this assumes the original PAK FA is successful and operational pretty quickly].

OAK’s Lantratov seems to think the Defense Ministry should decide now, if it wants to pay for new engines, and is willing to risk paying and not getting the right results.

Marker.ru consults CAST’s Konstantin Makiyenko . . . he thinks the Defense Ministry has no reason to hurry.  ‘Deeply modernized’ fourth generation engines from Saturn and Salyut are meeting VVS and PAK FA requirements, at least during the test phase.

He thinks a real 5th generation engine is 10 years away.  The need for more powerful engines will arise as other variants (2-seat, strike, naval, etc.) of the PAK FA appear.  Over their life cycles, aircraft get heavier and thrust has to keep pace, so more powerful engines would need to appear around 2020 anyway.

Leave a comment

Posted in Air Forces, Defense Industry, Force Modernization

Tagged , , , , , , , , , ,