"We Don't Try To Survive - We Work"

Interview with Vladimir Korenkov, General Director of State Research and Production Enterprise "Bazalt"

What is the current economic position of State Research and Production Enter­prise "Bazalt"? What difficulties do you face in selling your output?

The financial position of the enterprise is satis­factory. The enterprise more live than dead. Only certain circumstances common to all ex­porters, namely problems related to the proce­dure of levying and reimbursing Value Added Tax, prevent an abso­lutely positive assess­ment. An absolutely unfair prac­tice exists today that we have to prove the very fact of arms exports - a matter controlled by the state in advance - after the fulfillment of the con­tract as a whole when all trains with ammu­nition have left and we have received reports from Ros­oboronexport. Only af­ter a checkup that takes from three months to half a year we can receive confirma­tion that exports did in fact take place and only after that we are entitled to the reimbursement of the VAT.

All throughout the ammunition production pe­riod we pay VAT to state coffers, and if we are short of money to pay the VAT, we have to pay fines and penalties on the unpaid tax. We suffer from this especially badly because we do not re­ceive advance payment, without which we, as a rule, cannot launch the entire production chain. And even after the fact of export and our right to the VAT reimbursement are recognized, the fines and penalties are still not dropped, - the state robs us through tax boards. Though it is known that we manufacture complex goods, the production of which as a rule takes more than six months, the fact of exports is not recognized during all those months even though our export deliveries are made only through the state me­diator. We would like to avoid this, of course. We have already prepared a collective appeal from the managing body supported by the Rus­sian Agency on Ammunition to grant export privileges to our ammunition, namely to recog­nize that the production cycle lasts for more than six months, so that VAT for the received accounts would not be levied on us.

We are also working on an another appeal for the abolition of the nasty practice of granting VAT breaks to companies manufacturing and exporting military products only after the ful­fillment of a given contract because for such ex­porters falsified export transactions are hardly likely or, better to say, impossible because they being mediated by state, must go through a government mediator. And we insist that at the very least laws that have been written and enacted should be ob­served. Under the cur­rent Tax Code after every delivery we have the right to request VAT reimbursement upon producing all docu­ments confirming the receipt of currency re­turns and payments to our counterparts in Russia to the tax board.

Unfortunately, the tax board relies on its internal memoranda which are not available to us and interprets the Tax Code in such a way that we either have to split a contract into parts or fulfill it entirely and then claim VAT reimbursement only afterwards. If a contract is split, there are usually difficul­ties with its fulfillment and it can even be lost completely. If we do not receive an advance and a letter of credit for the entire contract, the supplier can back out at any time. Rosoboron­export and its predecessors Rosvoorouzhenie and Promexport tried to protect the interests of our manufacturers as much as possible and get at least some payment guarantees for very good reasons.

We would like the tax board to be given expla­nations at any level that a company exporting arms should have the right to VAT reimburse­ment within 10 days of producing documents concerning the delivery and payments to suppli­ers without unnecessary procrastination as is prescribed by the Tax Code.

This is what is lacking to make not only us but also the majority of successful companies happy because this practice is absolutely surrealistic. The more successfully a company is capable of trading, the greater the attempts to place it at a disadvantage by such techniques.

Is the situation with government contracts improving? What is the ratio between domes­tic contracts and exports in the overall volume of your deliveries?

Three or four years ago when there were no government contracts whatsoever,  we really had to struggle to survive. At that time the government had no money for the military. I want to emphasize that - there was simply no money for the military. Last year the situation started changing. The government is now mak­ing regular installments on R&D programs that were previously frozen. This has also revital­ized our potential. While in the past we had a 1:7 or 1:8 ratio between government contracts and exports, nowadays it's around 1:4. The general trend is toward the growth in the share of govern­ment orders. This also depends on our initia­tive because we are of­fering new items. We are no longer just trying to survive; we are working, updating products we manufacture and enjoying the support of all our domestic clients. So the situation is tending towards improvement even though the proportion still remains unbal­anced. Foreign armies are in fact feeding our de­fense industry. If you recall the well known principle that he who does not feed his own army in the long run starts feeding a foreign one, it is evident that we may get an advanced version of this scenario where our whole defense industry is being fed by foreign armies. God forbid us all from seeing what may come of this one day.

What countries or parts of the world are the most active importers of the Bazalt output?

Our output is comparable to bread for the entire arms trade system. All arms in service need am­munition. Fortunately, we supply both the ground force and air force. And we deliver our output to practically every country Rosoboron­export has a contract with.

What is the relationship between your enter­prise and Rosoboronexport, the government intermediary in arms exports?

Between us there are spheres of joint operation and exclusive spheres of activity.  Rosoboronex­port is occupied with price policy in accordance with the state monopoly on arms trade. To this end we supply it with industry information re­garding the prices of the products Rosoboronex­port offers to its clients.

We promote our output together with Rosobo­ronexport and on our own at Russian and inter­national exhibitions. We demonstrate the tech­nical parameters of our goods in comparison with our own older models and analogous for­eign equipment. Interested buyers may contact us either through Rosoboronexport or directly, and after that we address commercial matters to the government mediator.

Do you compete with foreign manufacturers of similar goods on the world market?

It has so happened that historically the Soviet Union and Western countries have had their traditional arms buyers. By now we have lost a large por­tion of our traditional markets. These have been occupied by the French, Americans, Germans and British, and we will have to regain them. We have retained markets in the countries where the share of Russian arms deliveries approached 100%.

We are competing with Western manufacturers of comparable products on the markets in the Middle East. In the cost-effectiveness we are usually superior to them. Actual deliveries of our ammunition to that part of the world prove that. Strange as it may seem, even our high tech items such as self-guided combat elements are superior to foreign analogues. We got public confirmation of this from Western manufactur­ers at the international air show in Le Bourget.

Among Western competitors one may name the Swedish SAAB Bofors Dynamics, which manu­factures man portable anti-tank guided missiles and Carl-Gustaf grenade launchers, German companies MBB, Dynamit Nobel, making the Panzerfaust-type anti-tank weapons, French GIAT Industries, Matra Manurhin and others. Half a year ago a consortium was formed by companies from Germany, Britain, Italy and France, each contributing their R&D projects. The output of these companies is not superior to our products in technical parameters. In cost-ef­fectiveness, the Western models are significantly inferior to our output.

Experience has shown that parties in conflict chose the weapons that allow them to best achieve their tasks. Products such as our RPG-7, RPG-18 and RPG-26 grenade- launchers have predominated in local conflicts in third world countries lately.

We recently marked the 40th anniversary of our RPG-7 grenade launcher. We have summed up the results of the development and application of the weapon in this country and abroad. Eve­ryone using our weapon has confirmed that the recent expanded range of ammunition allows for use in all types of close combat tasks: to hit tanks, personnel, any military hardware, build­ings, and to conduct warfare in urban condi­tions. In a word this weapon is a man-portable multi-purpose rocket weapon capable of per­forming any task.

Some former socialist countries are known to manufacture weapons identical to your out­put. How does this affect Bazalt's position on the market today?

On many markets we are competing with our own weapons manufactured in former socialist countries or in CIS countries but designed 20-40 years ago. Naturally, we usually win, if the competition is fair. We suffer primarily from unfair competition when some countries manu­facturing our products - both aircraft bombs and close combat weapons - offer these items, in most cases unlawfully, at dumping prices under our trade names, which is absolutely impermissi­ble. In technical parameters our output is much superior to what is manufactured in other coun­tries allegedly under license.

These are not licensed manufacturers. In Soviet times packages of documents were transferred to some countries by way of cooperation without any agreement with the designers or manufac­turers. To this day our inquiries about whether licenses had been given, who issued them, and what their terms had been remain unanswered. Since then several generations of officials have changed and no relevant documents have been preserved. And one of the tasks that we con­stantly give to government officials is to restore order in the operations of other countries manu­facturing our goods under license. Probably lawsuits will have to be filed and on these grounds the question can be clarified as to whether there had been any license and on what terms.

We as designers of this ammunition have for more than a decade not supported the yearly transferred models. For instance, the last time documents were transferred to Bulgaria was in 1984. After that Bulgarian manufacturers have been trying to obtain from us individual compo­nents for combat elements, explosives, powders and various metals. Unlike us they have not been developing the models transferred to them. The technical parameters of their ammunition remain at what they were 30 years ago. They are capable of penetrating armor with a maxi­mum thickness of 300 mm. This kind of ammu­nition can hit only tank models from the 1960s. The class of tandem and thermobaric ammuni­tion is nonexistent there. In contrast to all this, our current products hit the entire gamut of modern tanks with dynamic protection systems.

They cannot compete with us in technical char­acteristics and that is why they are trying to sell their output at a fraction of our price. It is pleasant to note, however, that former buyers of Bulgarian output are now beginning to switch to arms deliveries from Russia. They are used to the simplicity and convenience of our weapons and interested in receiving up-to-date models from Russia. We are holding talks to this end with NATO countries, among others.

Does your company develop new weapons on its own or at orders from clients?

Yes, of course, we conduct R&D on close com­bat weapons as well as guided air bombs. Their technical parameters are being improved; the applications of these weapons are being ex­panded.

The coordination of a RFP between the client and manufacturer is a creative process.  Some­times it is initiated by the client relying on his experience in combat, but more often by us, the manufacturers, on the basis of analyzing such experience and our own designs. The research and technological potential of Bazalt allows us to forecast the development of the types of ar­maments we manufacture. We annually offer a whole spectrum of new solutions, from modifi­cations of existing models to innovations that depending on the size of budget funding, that are accepted or put off for the future.

We have agreed with Rosoboronexport that we will be offering our foreign partners new test design projects as well. This will help us keep up our research and technical potential. It is possible that fundamentally new models of ar­maments will be developed at request from a foreign customer.

What does the development of nonlethal weapons at Bazalt amount to?

We are offering a whole gamut of nonlethal weapons from personal protection gear to air weapons. Nowadays hostilities are more fre­quently conducted not in open fields with two rows of trenches but in complex conditions, as a rule in towns and populated areas. The adver­sary often involves civilians in hostilities or uses them as a shield. In these circumstances it is impossible for the army to use conventional types of armaments because this may cause mas­sive and unjustified civilian casualties.

Nonlethal weapons allowing to freeze the situa­tion are an effective means of warfare in such complex conditions. For instance, the use of ir­ritant agents makes it possible to put a large mass of people temporarily out of action, to track the adversary and restore a peaceful situa­tion in a given territory without significant damage to the rest of the population. If our army had had the possibility of using police gases to seize the village of Komsomolskoe in Chechnya, two air cassettes with irritant agents would have been enough to neutralize the ad­versary. The operation could have been con­ducted without losses, the use of heavy weap­onry or the destruction of the village. Thus, these are humane weapons in the literal sense of the word. They give the adversary the sense that we have an adequate response to any of his threats and strips him of the illusion of being invulnerable.

At present only Interior Ministry officers and special services are allowed to use nonlethal weapons with special permits. As the army is expanding the spectrum of its operations in which combat tasks have to be carried out out­side of direct contact with the adversary, our main task in the promotion of nonlethal weapons is to obtain the possibility of using these types of weapons on the battlefield in­cluded in army regulations.

The U.S. army used nonlethal weapons for the first time in Somalia in 1993. Judging by re­ports from different sources the results were contradictory but the main achievement was that the American army now has the right to use such weapons.

How do you evaluate the impact of the inter­national campaign to prevent the proliferation of small arms and light weapons on the ex­port prospects of your company?

There is a dual impact. On the one hand, if at­tempts are made to impose any quotas on us, these restrictions will have a negative effect on exports. On the other, if international agree­ments in this sphere will restrict unfair com­peti­tors from manufacturing our ammunition brands under fake licenses and delivering them without any principles to aggressors and ter­rorists, then on the contrary, our export poten­tial will only stand to gain. So this resolution has its pros and cons.

Do you think it is necessary to develop and introduce standard international marking of light weapons and small arms for the purpose of preventing illicit trade?

In my opinion, the national marking is quite sufficient for Russian manufacturers and domes­tic clients. When it comes to the interests of the international community where legal and illegal manufacturers exist, including those imitating Russian markings, then of course, some com­promise may be found between international re­quirements and national standards. From the experience of other industries we know that it is a very lengthy process and as a rule the ques­tion is not resolved in favor of only interna­tional or national standards. As a rule both are permitted. For instance, the existence of ISO standards does not remove the need for the Rus­sian GOST standards. They may be adjusted in technical parameters but at the same time may have narrower or broader interpretations in their own spheres.

At the moment it is difficult to speak of the taste of the fruit without having tasted it or even getting its description. When specific op­tions on international marking are proposed, then it will be possible to analyze them and make economic and political estimates.

What is your assessment of the outcome of the UN Conference on Illicit Trade in Small Arms and Light Weapons in All Its Aspects?

It was only the first step toward the of control the spread of light weapons and small arms. The fairly vague final document that was adopted is traditional for all political decisions. They can­not be concrete at the very beginning. Unfortu­nately, we sometimes suffer from overly con­crete, hastily made decisions. In diplomacy and especially on such a delicate matter as interna­tional agreements there should always be the implied possibility of finalizing positions given the development of a situation. I would like that the Russian side of all negotiations act pragmatically proceeding from the interests of domestic arms manufacturers.