Tag Archives: OSK

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.

Will Rosneft Boost Russian Naval Construction?

Russian state-controlled oil giant Rosneft is turning Shipbuilding Complex (SSK) Zvezda into the country’s first large tonnage shipyard. TASS recently published a backgrounder that detailed what’s been happening there.

Located in Bolshoy Kamen near Vladivostok, SSK Zvezda is supposed to produce the ships and equipment Rosneft needs to explore and exploit offshore oil and gas. However, it also has potential to boost Russia’s naval ship and submarine construction and repair in the Far East.

Rosneft took over Zvezda in late 2015 in consortium with government holding company Rosneftegaz and Gazprombank. The effort to expand its civilian shipbuilding capacity began in 2009 as a partnership between state-owned United Shipbuilding Corporation (OSK) and South Korea’s Daewoo. The latter quit the project in 2012.

Having displaced OSK, Rosneft became principal holder of Far East Plant (DVZ) Zvezda and some small affiliated shipyards. DVZ Zvezda is the only Russian shipyard in the Far East capable of repairing and modernizing nuclear-powered submarines and ships up to 13,500 tons displacement. It began modernizing two project 949A Oscar II-class nuclear-powered guided missile submarines in 2013.

Zvezda complex in Bolshoy Kamen

Zvezda complex in Bolshoy Kamen

This image shows the naval shipyard at top with its grayish roof, launch basin in front, and a submarine in drydock alongside if you look carefully. The SSK Zvezda facility is pretty much everything else — the reddish roof of the monstrous production building and the whitish buildingway with its yellow cranes visible.

SSK Zvezda will produce a range of medium and large tonnage vessels, up to 350,000-tons displacement, and other sea-going equipment to support offshore hydrocarbon development in the Pacific and Arctic Oceans. It includes LNG carriers, tankers, drilling platforms, and transport, supply, and seismic survey ships.

The shipyard currently has one 1,200-ton gantry crane made in China, two 320-ton gantry cranes, and four 100-ton tower cranes on its open buildingway. In July, the shipyard took delivery of a 40,000-ton transport-transfer dock built by the Qingdao Beihai Shipbuilding Heavy Industry Company. Rosneft expects SSK Zvezda’s development to cost $2.4 billion.

Capture

It reportedly will begin construction of medium-sized ships in 2019 with a workforce of 1,500 employees. By 2024, it expects to have a large-ship drydock and full-cycle fabrication facilities in operation with 7,500 workers. The shipyard’s order book already includes ten 80,000- to 120,000-ton tankers, ten shuttle tankers, and supply vessels. Leveraging DVZ Zvezda’s nuclear expertise, SSK Zvezda will also build three Lider-class nuclear-powered icebreakers, according to a September 14 announcement by Russian Deputy Prime Minister Yury Borisov.

President Vladimir Putin visited the shipyard on September 10 to lay the keel of a tanker. In 2017, he inaugurated the buildingway and transfer dock for medium-sized ships and participated in the keel-laying for four multipurpose ice-class supply ships. The Russian president personally commissioned a module production building in 2016.

The development of SSK Zvezda may increase Russia’s capabilities for naval ship and submarine construction and repair in the Far East. DVZ Zvezda has struggled for years without modernization funding. However, it may be able to leverage the flow of Rosneft investment and Chinese shipbuilding technology, equipment, and experience into SSK Zvezda to improve its own production capabilities. A steady stream of large civilian projects next door may increase of quantity and quality of personnel available to DVZ Zvezda, and moderate the boom or bust cycle of shipbuilding that makes it difficult for Russian workers to stay in the Far East.

Thinking Twice

Is the Russian MOD having second thoughts about modernizing Kirov-class CGN Petr Velikiy?  Or its sole aircraft carrier Admiral Kuznetsov?  What about Kirov-class CGN Admiral Nakhimov already in the modernization process at Sevmash?

Kirov-class CGN Petr Velikiy

Kirov-class CGN Petr Velikiy

OSK President Aleksey Rakhmanov himself raised the issue in a recent interview, according to a recap by Militaryparitet.com.

Militaryparitet cites Vpk-news.ru (currently launching a Trojan called Web Attack: Venom Activity 3 blocked by Norton thankfully).

Vpk-news referred to TASS, which itself indicated Rakhmanov’s statements came on Ekho Moskvy.  In any event, the original transcript of his remarks has eluded your author.

OSK President Aleksey Rakhmanov

OSK President Aleksey Rakhmanov

As Militaryparitet puts it, the efficacy of repairing old, large surface ships like Petr Velikiy and Kuznetsov isn’t obvious.

The web resource quotes Rakhmanov:

“For us the existing approach toward the repair of large-tonnage ships — Admiral Kuznetsov, Petr Velikiy — isn’t quite straightforward and optimal for one simple reason — the scale of expenditures for the repair of ships which are already 30-35 years old approaches the cost of building a new ship, and their service lives are much shorter than that of a newly constructed ship.”

And, according to Rakhmanov, this is “being openly discussed with the MOD.”

He continues:

“And is it necessary to do this, and if it is, then under what conditions?  It’s a question of the general life cycle concept — if a ship’s service life is 30 years, then is it necessary to extend its life?  For us the question of repairing particularly large, technically complex ships isn’t obvious.  Therefore, before talking about where to do this, we need to ask why we are doing it.”

“There are exceptions, but even one-of-a-kind ships, for example, Kuznetsov, have limits to their lives.  There is metal and equipment fatigue.”

According to Vpk-news.ru, Rakhmanov feels contemporary approaches toward shipbuilding should take into account “economically justifiable” repairs and use of each ship and vessel.

Of course, OSK and its enterprises make money off repairs, modernization, and construction, but the conglomerate makes more off — and is therefore more interested in — building new ships.  For its part, MOD wonders if it can fund expensive construction projects, and whether OSK and Russia’s shipbuilding industry can actually deliver the new ships.

It’s interesting that there isn’t the same level of angst when it comes to modernizing older nuclear-powered submarines and not as much — although clearly a certain amount — in the case of building new ones. The real worry sets in when major surface forces are considered.

But it all comes down to this:  building and maintaining a navy is an expensive proposition.

Big Consequences of Small Steps

Defense Minister Shoygu

Defense Minister Shoygu

A couple weeks ago, Aleksandr Golts wrote in Ogonek about the situation in which Defense Minister Shoygu finds himself.  Golts has two main points.  First,  small policy changes can lead to big ones which unravel former Defense Minister Serdyukov’s positive reforms.  Second, Shoygu in uniform is a setback to real civilian political control of Russia’s Armed Forces.

Golts says that, although officers had their pay raised 2-3 times and tens of thousands received apartments thanks to former Defense Minister Serdyukov, the military still clamored immediately for Shoygu to change every decision made by his predecessor.  Chairman of the Duma Defense Committee, KPRF member, ex-admiral Vladimir Komoyedov called for lengthening the conscript service term.  Generals associated with retired Marshal Dmitriy Yazov demanded an expert review of the results of Serdyukov’s tenure.

However, Golts notes both President Putin and Prime Minister Medvedev gave Serdyukov’s painful reforms high marks (Smirnov in Gazeta made the same observation).  So, concludes Golts, it was a signal to Shoygu that no fundamental review of them is needed.  This left Shoygu in a complicated situation.

So Shoygu has taken some minor decisions to placate those seeking the pre-Serdyukov status quo.  But these small steps, writes Golts, can have big consequences.  Reestablishing the Main Directorate for Combat Training (GUBP or ГУБП), for example, will ultimately undercut the authority of the main commands of the services and branches as well as (and more importantly) of the four new MD / OSK commanders.

Reversing Serdyukov’s significant cuts in the Russian military educational establishment will put unneeded officers in the ranks to reanimate cadre units and the mass mobilization system.

Lastly, Golts is critical of the president for deciding to “return” the rank (and uniform) of Army General to the Defense Minister.  Observers commented this was done to give Shoygu “authority” within the military which his predecessor sorely lacked.  But Golts says the army has a way of ensnaring a Defense Minister, drawing him into the military “clan” or “corporation.”

The Defense Minister’s civilian status, Golts continues, was the very first step in establishing if not civilian, then at least political control over the military.  But establishment of civilian control takes more than one civilian minister.  It takes civilians who formulate decisions for military men to execute.  He points to Serdyukov’s attempt to separate civilian and military functions and competencies in the Defense Ministry.

But now Serdyukov’s “skirt battalion,” which so irritated military men, is gone.  Golts concludes:

“Now the generals will return to their places, and the minister himself will be doomed to make not political, but purely technical decisions and bear responsibility for them.  In essence, he is returning to be the hostage of the military who prepares these decisions…”

One has to agree that Shoygu’s three-month tenure consists of little more than examining and questioning every decision made by Serdyukov. 

Shoygu’s status as civilian or military is more interesting. 

He passed through the general’s ranks to four stars between the early 1990s and early 2000s.  More unclear is how or why he got the first star.  He had been a strictly civilian and party figure.  Many readers may not realize Shoygu’s MChS is a “military” (militarized or paramilitary) ministry where servicemen and officers with ranks serve like in the Armed Forces, MVD, or FSB.  So, at some level, it may not be fair to claim anyone “returned” his rank, or forced him to wear a uniform. 

The question is does an MChS rank carry any weight or “authority” in the Defense Ministry?  Recall Sergey Ivanov never wore his SVR or FSB General-Colonel’s uniform as Defense Minister. 

Shoygu remains an inherently civilian and political figure whom President Putin turned to in a pinch and trusts to keep the lid on at the Defense Ministry.  Russians joked in November that the old Minister of Emergency Situations was clearly the right guy for the job when the Oboronservis scandal broke and Serdyukov had to go.

One shouldn’t worry about Shoygu and civilian and political control of the military.  The slippery slope of undoing Serdyukov’s positive efforts, on the other hand, is concerning.

Defense News

Some Russian defense news from June 27, 28, and 29 . . .

A few stories from Technologies in Machinebuilding — 2012 now playing at Zhukovskiy.

A senior VVKO general said a long-range missile for the S-400 is being tested and will reach units soon, RIA Novosti reports.

An Almaz-Antey rep said the fifth S-400 “regimental set” will ready for delivery in September.  He also said the company will show the system to the Chinese this fall.

VVS CINC General-Major Viktor Bondarev told the press the first S-500 could reach the forces in 2013.

RIA Novosti quoted First Deputy Defense Minister Sukhorukov on Russia fielding its first strike UAV in 2014.  St. Petersburg firm Tranzas will test and deliver it in the same year.

Militaryparitet picked up Arms-Tass about Salyut’s presentation of a modernized AL-31F engine, the AL-31F M2.  The new engine is intended for       Su-27 variants.

Also at Zhukovskiy, RIA Novosti quoted Deputy PM Rogozin about declaring war on OPK monopolists.  Good luck with that.

RIA Novosti reports outgoing OSK head Roman Trotsenko cited conflict with the Defense Minister as his reason for leaving, and he blasted Serdyukov for unwise, unreasonable use of procurement money.  Sevmash chief Andrey Dyachkov is taking over OSK.

President Putin greeted and feted top graduates of Russia’s military academies.  He told assembled officers the Armed Forces’ combat capability and application of new equipment depends on them.  He emphasized resolution of military housing problems and improved living conditions for military families.

According to RG, Putin basically called for reestablishment of voyenpredy in defense plants while answering questions from Federation Council members.  Defense Minister Serdyukov has essentially dismantled the old military acceptance system.