Tag Archives: OPK

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).

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.

Putin on Import Substitution

Putin addresses the VPK

No one in Russia’s defense industries will say Moscow’s program of import substitution isn’t going well. But, while acknowledging some success, the Supreme CINC intimates it could be going better. Izvestiya recapped Putin’s remarks last week as follows [my trans.]:

Russian President Vladimir Putin acknowledged mistakes in planning the import substitution program in the defense-industrial complex (OPK). According to him, they caused movement in the deadlines for several state defense orders in 2018.

“Considering the complexity and interconnection of all our rearmament plans for the army and navy, such failures have to be effectively eliminated,” the head of state said at a session of the Military-Industrial Commission on Thursday, September 19.

Putin also ordered the government and leading departments “to take supplementary measures to guarantee technological independence in the area of military production.” Including those products in the design phase.

The head of state also noted that the process of import substitution in the OPK is ongoing and Russia has achieved technological independence in more than 350 types of armaments.

“The import substitution program began five years ago, over this time we’ve really managed to advance somewhat, at least in a number of significant directions,” TASS cited Putin.

The President noted that in recent years the share of the domestic electronic component base in modern types of armaments has grown substantially and the production of engines for helicopters and Navy (VMF) ships has been arranged.

“Also soon it will be possible to repair engines for An-124 aircraft in Russian enterprises,” he added.

On August 1, 2018, Deputy Prime Minister Yuriy Borisov announced a possible breakdown in the deadline for delivering combat ships to the VMF in 2018. He noted that the state “practically every year” struggles “with systematic violations of the period for supplying ships and boats to the VMF by a number of shipbuilding enterprises.”

Meanwhile in February 2018, Pavel Pechkovskiy, a directorate chief in the Defense Ministry’s Department for Support of the State Defense Order for Ships and Naval Armaments, related that practically all main equipment for VMF ships had been fully shifted to domestic types in the framework of import substitution.

Mr. Putin doesn’t sound particularly pleased, and his praise is faint (“really managed to advance somewhat”). He was likely more frank behind closed doors.

The share of domestic electronics “has grown,” but Putin doesn’t tell us where it stands in absolute terms.

But in May, an economist writing in VPK estimated not more than 15 percent of the “electronic component base” (EKB) is Russian-made, and not less than 70 percent of the OPK is buying foreign EKB in the same volume as always.

The Russians are producing the VK-2500 gas turbine to power their military helicopters. They used to get helicopter engines from Motor Sich in Ukraine.

As Putin noted, Russian industry is updating the D-18T engine for the Ukrainian-made An-124 transport. The modernization of the An-124 is supposed to carry the transport into the 2040s.

Meanwhile, the Antonov Design Bureau in Kyiv claims Moscow lacks many essentials to overhaul the An-124 (e.g. documents, design drawings, test data). And AO UZGA is having difficulties that may be technical or financial in renovating the D-18T. Of course, the updated D-18T isn’t really an import substitute.

Then there are naval gas turbine engines for Russia. They too were formerly made in Ukraine and need replacement. Russian engine-builder ODK asserted earlier in September that its enterprises are now filling all orders for engines once supplied by Motor Sich. But Izvestiya leaves the reader wondering if ships due this year will be late anyway.

Declining Defense Orders

Smaller military budgets and delays in putting GPV 2018-2025 into place will apparently trickle down into reduced orders for Russia’s defense-industrial complex (OPK) in coming years.

According to TASS on June 15, Deputy Chief of the Main Armaments Directorate Boris Nakonechnyy said the MOD can’t fully “load” OPK enterprises with orders during the next GPV.  “As the primary customer for weapons and military equipment, the Defense Ministry can’t fully support the work of enterprises,” he told the news agency.

There may be some reduction in defense orders during the new arms program, Nakonechnyy said.  But he indicated the MOD would still support the scientific work (presumably the RDT&E) of Russian defense-industrial enterprises.

Nakonechnyy said the MOD doesn’t expect global military threats to decline, but it’s not possible to increase substantially the funding needed to counter them.  At the same time, he emphasized it’s important for Russia not to lose the current tempo of development in its OPK, and not to allow itself to lag behind world leaders in military technology.

Welding parts for BMP-3 at Kurganmashzavod

Welding parts for BMP-3 at Kurganmashzavod

TASS provided no context for Nakonechnyy’s comments.  Other media outlets ran the TASS story as is.  Utro.ru, however, provided its own interpretation of his remarks.

While perhaps somewhat alarmist, Utro writer Andrey Sherykhanov puts Nakonechnyy’s statements in the context of the continuing battle between the defense and finance ministries over future military spending.

Sherykhanov recalls the recent Vedomosti report putting likely appropriations for GPV 2018-2025 at 17 trillion rubles, three times less than the original MOD request.  The peak of defense orders, he concludes, is already past.  The military will have no orders for production enterprises, which will close and send their workers on indefinite furlough as they did in the 1990s, he writes.

But maybe, Sherykhanov opines, this won’t be necessary since President Putin has said the OPK’s potential should be harnessed to the needs of cutting-edge, science-intensive sectors like medicine, energy, aviation, space, and information technology.  Last year the Supreme CINC himself said 30 percent of OPK production has to be for the civilian market by 2025, and 50 percent by 2030.  Massive state defense-industrial holding company Rostekh has already announced that half of its output will be civilian by 2025.

Sherykhanov writes that there’s no real concern about this new program of conversion to civilian production at present:

“In the upper echelons of power, they spoke about it just a year and a half ago. There’s a gathering sense that the leaders of Russian defense enterprises aren’t beating their heads with this, concentrating as they are completely on military orders which OPK enterprises are provided until 2020.  That is, they act according to this scheme:  we’ll handle this, and then we’ll see.”

Not OK in the OPK

OAO Radiopribor

OAO Radiopribor

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.

Defense Sector Wages

Interesting item on wages in Russia’s defense industrial sector in NG on November 11.

Alina Terekhova reports average monthly pay in the OPK is 17 percent higher than the country as a whole.  However, defense industry salaries lag employee earnings in other key sectors (i.e. railroads, oil, finance).  Yet they are likely to grow while wages elsewhere will probably begin to fall.

Minpromtorg [rather optimistically] forecasts that the earnings of OPK workers will double over the coming five years.

Defense industry pay grew 13 percent last year [not entirely consistent with the table below] against almost 12 percent in other areas.

Average Pay in the OPK

Average Pay in the OPK

Earlier this year, workers in Russia’s mining industry made nearly 57,000 rubles per month, oil workers 83,000, railroads 41,000, and finance 67,000.  Pay in the defense industries averaged about 38,000 rubles per month during the first half of 2014, according to Rosstat.  Nationwide it was about 32,000.

That 38,000 seems to fit in the context of other salaries (e.g. 30-35,000 for junior officers and contractees).

Rising inflation, Terekhova reports, could reduce real earnings for everyone next year.

She quotes a couple experts, neither of whom expects a decline in OPK wages. Despite the stagnation evident in the economy, the Kremlin will likely continue funding the GOZ generously given increased tensions with the West.  This will keep upward pressure on defense sector salaries.

It’s interesting that the oft-mentioned “cadre famine” in defense industry hasn’t bid wages higher.  But some enterprises report the average age (and presumably the pay grade) of their workers is dropping with the arrival of new and younger employees.