Formation of Holdings Won't Impinge Upon the Interests of Russian Regions

Interview with Alexander Nozdrachev,

General Director of the Russian Agency for Conventional Armaments

Wat do you think of the performance of the companies supervised by your agency in 2001? Which conventional weapons manu­facturers led in production volumes?

Despite the overall complexity of the situation in the Russian defense industry, the companies of the Russian Agency for Conventional Arma­ments (RAV) demonstrated production growth in 2001. The average rise was 10.8% against 2000, with civilian output going up 14%. Civil­ian output was worth 27.1 billion rubles (about $875 mln - ed.) and more than half of the agency's companies continue to boost produc­tion.

The most striking growth indicators were regis­tered in the automotive, railway and tractor, and farm machinery sectors - 67%, 50% and 24% respectively. The production of equipment for the energy sector also rose noticeably - by over 12%.

The untaxed profits of industrial facilities in 2001 remained at the 2000 level. The profit­ability rate was 13%. Returns on sales in 2001 grew 12.3%. The growth of investments from all sources of financing in fixed capital amounted to 6.7% in 2001, in comparable prices against 2000. Capital investments in the RAV sector as a whole in 2001 amounted to 9.5% from com­pany resources and 1% from other sources.

The volume of R&D in terms of money in 2001 increased 35.8% compared to 2000. A total of 132 R&D projects were completed and imple­mented, including projects aimed at the devel­opment of the production technology of new materials and special equipment, the develop­ment and introduction of new technologies, the advancement of optics and optical instrument-making, the development and advancement of the production of new types of medical equip­ment and means of rehabilitation for the handi­capped and the production of equipment for the energy sector.

However, one cannot overlook a number of problematic questions. The main difficulties stem from the critical state of production facili­ties. In the sector of conventional armaments, over 75% of main production assets are obsolete. Four fifths of the technological equipment is over 10 years old and half over 20 years old! In these conditions, one can hardly speak of im­proving quality or introducing the production of the latest models of weaponry, to put it mildly.

Unfortunately the speed of replacing equipment has gone down badly in the past few years: no more than 1% of equipment is replaced annu­ally, instead of the necessary 6-7%. The compa­nies themselves clearly lack the resources to overcome the critical situation. At the same time, compared to previous years, there has been growth in capital investment from the govern­ment budget – largely a result of the growing government attention to defense-industry prob­lems.

The situation with the personnel is also very alarming. At present, over one third of the per­sonnel working in the RAV sector is over 50 years old. The agency is developing incentives for graduates of leading colleges and universi­ties, but such measures cannot produce immedi­ate results.

As for the leading companies in commodity out­put in 2001, these included, first of all, FSUE Uralvagonzavod - largely thanks to its contract for the delivery of T-90S tanks to India, sec­ondly, Izhmash and, thirdly, the JSC Kirov Plant - the manufacturer of a wide spectrum of metallurgical and mechanical products. How­ever, if we speak of labor productivity of the personnel, the positions of leaders are different. Productivity was highest at the Kirov Plant, where it amounted to 500,400 rubles (about $16, 000 - ed.) per employee a year. JSC Nytva was second with 293,400 rubles (about $9,500 - ed.), Izhmash took the third place with 246,400 rubles (about $8,000 - ed.), and Uralvagon­zavod the fourth with 231,800 rubles (about$7,500 - ed.).

What was the share of RAV output in overall Russian arms exports in 2001? What countries are the main importers of RAV companies?

The share of RAV in overall Russian arms ex­ports amounted to some 7.5% in 2001. The main importers of products of the Russian Agency for Conventional Armaments were India, China and the United Arab Emirates. The combined share of these countries in RAV exports was 73%.

Several major defense industry holdings are to be formed in keeping with the program of re­structuring the Russian defense industry. What holdings will be set up on the basis of RAV companies? Won't their formation tram­ple on the interests of Russia's regions as far as tax-collection is concerned?

Two specialized holdings - the Armored Vehicles Holding and High Precision Arms - will be formed in the sector of conventional armaments in 2002; and in 2005 there will be nine such en­tities. The spheres of their operations will de­pend on types of armaments and imply primarily the technological interconnection between en­terprises. Therefore, they will include not only RAV facilities, but also other companies manu­facturing similar goods.

In the process of forming the holdings, the in­terests of territories will not be trampled upon in any way. The companies included in the holdings will remain legal entities and pay all of their taxes to their regions. Holdings will be led primarily by core companies. The formation of the holdings will help prevent overlapping in production, concentrate defense contracts at a minimal number of facilities and strengthen the vertical of managing a sector that manufactures about 15% of Russia's arms and military hard­ware.

Most of the licenses for the manufacture of armaments and military hardware given to for­eign countries back in Soviet times were for RAV output – armored vehicles, artillery sys­tems and small arms. We know cases when foreign countries manufactured Soviet-de­signed armaments even after the expiration of license agreements. Is the agency or any other federal body working to protect intellectual property transferred to foreign countries in Soviet times? Are past mistakes now taken into account in the production of technology transfers?

In 1981-1990 technical documentation for the production of armored vehicles – namely for T-55 and T-72 tanks, BMP-2 and BTR-80 combat vehicles, RPG-2 grenade launchers, small arms of 7.62 and 5.45 calibers and ammunition for them – was transferred to countries of the for­mer Warsaw Treaty Organization and several Asian and African states under corresponding intergovernmental agreements.

We closely monitor information about foreign trade deals in military-use goods manufactured by foreign companies under licenses earlier is­sued by Russian enterprises. And we can say that the models manufactured by offender com­panies have lower technical and operational pa­rameters than Russian-made armaments. In ad­dition, such products are mainly sold at dump­ing prices because usually the Russian does not get a commission. These activities seriously hamper the position of Russian manufacturers of similar military-use goods in foreign markets and they have to significantly cut prices to re­main competitive.

Thus, the protection of intellectual property rights of the Russian Federation transferred to foreign countries before 1991 remains a topical task to this day.

In late January 2002, a mixed commission was set up to restore Russian Federation intellectual property rights transferred to foreign countries in the process of organizing the licensed produc­tion of armaments and military hardware de­signed in the USSR. The commission was tasked with the development of a single government policy on restoring and exercising Russia's intel­lectual property rights in the sphere of military-technical cooperation. RAV is also actively in­volved in the work of the commission.

Additionally, in March 2002, the Agency for Conventional Armaments signed an agreement with the Federal Agency for the Legal Protec­tion of Intellectual Property of Military-, Spe­cial- and Dual-Use Goods under the Russian Justice Ministry. The agreement is aimed at en­suring more effective legal protection of gov­ernment interests in the use and transfer of in­tellectual property rights to corresponding pro­duction, the rights to which belong to Russia.

The dire need for such an agreement had been growing for a long time. I hope that the joint application of the experience accumulated by our agencies in securing intellectual property rights will permit RAV and the federal agency to bring significant economic and political divi­dends to Russia.

A worldwide campaign is under way to tighten export control, in particular, to develop a uni­versal code of conduct in arms trade, and to restrict the spread of small arms and light weapons etc. Several international documents have been adopted which Russia has signed. Do different executive bodies and arms manu­facturers coordinate their efforts to formulate Russia's approach to the issues?

RAV is actively involved in work to tighten ef­forts against the illicit turnover of arms and make stricter requirements for marking, storage and production accounting. The agency also co­ordinates its work with the Russian Interior Ministry and the Federal Security Service by conducting regular inspections at arms produc­tion facilities.