Category Archives: Defense Industry

Russians in the Top 100

Defense News has released its list of the world’s Top 100 defense companies for 2015.  By its methodology, it put seven Russian firms on the list for 2015.  They include:

Almaz-Antey held its 11th position from 2014 with nearly $7 billion in defense revenue.  But that amount represented a 25 percent decline against 2014.

Four firms dropped in the rankings with earnings down between 20 and 34 percent: Helicopters of Russia, OAK, RTI, and Uralvagonzavod.  The tank maker’s military revenue fell more than 34%.

Tactical missile maker KTRV held pretty steady.

KRET broke into the rankings in 48th place with nearly $1.7 billion in earnings. With Moscow’s emphasis on EW during the past year, it wasn’t hard to guess KRET would get paid.

Interesting that government aircraft manufacturing holding company OAK stays on the list, but Sukhoy and Irkut have fallen out.  Generally though, Russian aircraft producers still fare pretty well.

Early warning radar maker RTI manages to stay on the list each year.

Has anyone seen OSK — the government shipbuilding holding company?

Engine-building holding company ODK fell out of the list likely because of its inability to get components and parts from Ukraine (or make its own successfully yet).

Tough Times at UVZ

Maybe Russia’s economy is muddling through its downturn.  But for some major enterprises, the situation seems somewhat worse.  Tank and railcar maker Uralvagonzavod (UVZ) is a case in point.

Uralvagonzavod

Uralvagonzavod

In early August, RBK reported that Gazprombank is prepared to refinance UVZ’s 200-billion-ruble ($3 billion) debt.  The Russian government may kick in nearly 15 billion rubles ($230 million) of loan guarantees.

The 100-percent state-owned UVZ would use state guarantees to refinance part (most, all?) of 21 billion rubles ($325 million) in bank credits due this year.  Alfa-Bank, Sberbank, Gazprombank, and Svyaz-Bank are its primary creditors.

In June, Alfa-Bank went to court to have the tank producer declared bankrupt over 9 billion ($140 million) of a 16-billion-ruble debt.  The case was to be heard on 8 August, but UVZ needed to stop the bankruptcy case – by reaching agreement with Alfa-Bank – to receive the state loan guarantees.  With the guarantees, Gazprombank decided to refinance UVZ’s debts on 9 June.

Now Alfa-Bank denies it ever filed a bankruptcy suit against UVZ.  But a Minpromtorg official told RBK that the bank and tank maker reached “certain agreements,” and the former will soon lift its case against the latter.

According to RBK, UVZ reported record losses in 2015, mainly due to reduced sales of railcars and higher interest rates.  The corporation indicated that 58 percent of earnings came from military sales and 15 percent from civilian sales, with the balance from freight handling operations.

UVZ Deputy General Director Aleksey Zharich said the state cut the advance payment for its GOZ deliveries, forcing the company to turn to the banks.  It also needed to import equipment which doubled in price thanks to the weak ruble.

Overall, the Minpromtorg official said, “Indicators like these [for UVZ] haven’t been seen since the 1990s, the economic crisis has brought a fall in the volume of rail transport.”  But UVZ is hopeful for improved results in 2016.

The New York Times covered UVZ’s situation in February when it reported that the plant’s railcar workers had their wages cut by one-third while its military side was still “humming” on full pay.  One employee said then that workers on the civilian side had been showing up, getting paid, but actually doing little work for a year.  In June, RBK reported that UVZ furloughed 3,000 workers from railcar production.

What does UVZ’s situation mean for Russian defense?

In the short run, it means the T-14 Armata tank is likely to come out of UVZ slowly.  UVZ sent 20 tanks to the army for “troop testing” in the spring.  General Director Oleg Siyenko said in June that UVZ will deliver 100 tanks to the MOD in 2017 and 2018.  That’s a far cry from the 2,300 Armata tanks expected under GPV 2011-2020.

T-14 Armata

T-14 Armata

Meanwhile, Siyenko has been asking the Russian government for much larger loan guarantees – 60 billion rubles ($940 million) – to repay bank credits coming due in 2017 and 2018, according to RBK.  Some portion of this may be needed to retool the lines for serial Armata production.

It’s entirely possible UVZ might require a full-scale Kremlin-ordered bailout to be in position to produce Armata tanks by the hundreds.

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.

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.

What’s It Cost? (Part III)

48N6E2

48N6E2

We might never be done with this topic, and that’s OK.

On 17 March, TASS reported that Russia will sell China two “regimental sets” of S-400 Triumf surface-to-air missiles in a deal reportedly worth $3 billion.

The first will be delivered in December 2017-January 2018 and the second in May-June 2019, according to the news agency’s “military-diplomatic source.”

Moscow and Beijing signed the S-400 contract in September 2014.

Each “set” has two battalions of four S-400 launchers.  Or a total of 16 launch vehicles.  Or 64 missiles and an unreported number of reloads.

Recall that previous reports claimed China was after no less than six S-400 battalions for that same $3 billion price.

The September 2014 deal includes training for Chinese personnel beginning in the last quarter of 2017, according to TASS.

Its source also stated that the first “regiment” will have the same missiles as the S-300PMU-2 SAM systems China already has.  The 48N6E2 with its 200-km range.

The second will have missiles “with improved characteristics.”  Presumably, the newer 400-km 40N6E.

But it’s not clear that the 40N6 (or export-version 40N6E) missile is fully out of testing, if some press reporting is accurate.

China is, of course, the first foreign customer, but India will apparently be the second.  According to RIA Novosti, India is negotiating for five S-400 battalions for a reported $5.8 billion.

However, it seems unlikely New Delhi would pay that kind of premium for a fifth battalion, even with all 40N6E missiles.

But We Make Rockets

Yes, Russia is making rockets now.

Vladimir Putin came to power on the eve of the 21st century promising (among other things) to remake Russian military power.  But progress was slow.  The economy struggled to emerge from the default and devaluation of 1998.  A poor, unready army found itself mired for several years in the Second Chechen War.

Not until after an uneven military performance in the August 2008 five-day war with Georgia — and not until after the 2009 economic crisis, perhaps in 2012 or 2013 — did the funding necessary for significant improvements in combat readiness and larger procurement of weapons and equipment reach the Russian Armed Forces.

Then came war in Crimea and eastern Ukraine and Syria.  Blowback from Syria could make Central Asia or the North Caucasus Russia’s next front. But questions about recent Kremlin bellicosity already bear close to home — on Russia’s domestic political and economic circumstances.

Consider a Gazeta.ru editorial from October 26.

“But we make rockets”

“Can the army and navy replace everything else for citizens”

RS-24 Yars ICBMs on Parade (photo: AP / Ivan Sekretarev)

RS-24 Yars ICBMs on Parade (photo: AP / Ivan Sekretarev)

“Often it’s easier for people to accept growing financial hopelessness to the sound of bold military marches.  Not for the first time in Russian history the army is beginning to replace the nation’s economy, life, general human values, and becoming the new old national idea and practically the only effective state institution.”

“Not everywhere in Russian industry are orders shrinking and demand falling.  There is production that is very much in demand.  In the ‘Tactical Missile Weapons’ corporation, for example, they’ve gone to three shifts of missile production for the Syrian front, a source in the defense-industrial complex has told the publication ‘Kommersant-Vlast.’  Against this backdrop, an article appeared in The Independent newspaper about how in Russia, after the events in Crimea and Syria, the army is again becoming the ‘departure point of Russian ideology’ — that very national idea for which they searched so long and unsuccessfully in post-Perestroika Russia and here now, finally, have found.”

“‘Russia has only two reliable allies — the army and navy.’  These famous words of Emperor Aleksandr III (who, incidentally, went down in history we would say now under the nickname Peacemaker) have once again in our history acquired a literal meaning. Other reliable allies of whom Russia was evidently sure over the last year-and-a-half or two years clearly no longer remain with us.”

“In a time of economic crisis, the temptation among Russian authorities to make the army one of the leading state institutions grows even greater.  The remaining institutions are emasculated or work as badly as ever.  In the end, to do this is sometimes simply useless:  the impoverished voter will say — why are your institutions here, is my life improving?  The expenditures are great, but the effect will be, probably, negative.”

“How much better the army is:  there is discipline, and pay, and achievements, and a plan of development.  The share of military expenditures in the budget is growing, but a cut in its absolute size has affected it to a lesser degree than civilian sectors like education and health care.”

“All hope is now on defense — as in ‘peace time’ we placed hope on oil and gas.”

“The army again is a lovely testing ground for demonstrating one more innovation — import substitution.  Not all Russians can understand why it’s necessary to burn up high quality foreign goods. But hardly anyone would object that Russia didn’t buy any aircraft, tanks or missiles abroad.  The president at a session of the Commission on Military-Technical Cooperation Issues announced that thanks to import substitution the country’s defense industrial enterprises are ‘becoming more independent of foreign component supplies.’”

“In general, we found by experience that we didn’t quite succeed in finding any other nation-binding idea over 25 years of not very consistent attempts to draw close to the Western world.  The simple national idea ‘state for the sake of man’ didn’t take root, including, alas, because man somehow didn’t value it very much; attempts to raise free citizens and form a civic nation, bound by common human values, failed.  There were neither citizens, nor values…”

“Being that there wasn’t demand for a free citizen not only above, but even below.  It is precisely therefore that we don’t have normal trade unions, strong nongovernmental organizations, and independent civil initiatives.  It’s not just the state that doesn’t need ‘all this.’  It’s society too.”

“Therefore one year before State Duma elections there isn’t even opposition in political parties to the openly military-oriented budget.”

“Distinct from this is that America which we love to accuse of aggressiveness, but in which military expenditures and their share in the budget are steadily falling in recent years.  In fact, legislative control over the military budget is one of the main forms of civilian society’s control over the army in the USA.  Though in America there were times when the military tried to decide both for society and for politicians.  Considerable force and time was required to put the military under control, but the States succeeded in this.”

“In Russia the easiest and quickest means of unifying the nation turned out to be the bloodless victory in Crimea and the somewhat bloody events in the Donbass.  The idea of abstract imperial power, and the image of ‘the country rising from its knees’ were substantiated, as the man in the street perceived it, and they were near and comprehensible to him.  Like, we lead a miserable life ourselves (when was it otherwise?), but we are a ‘great power’ again.”

“Polite green people, capable quickly without noise and dust of ‘deciding questions,’ create in the multimillion-person army in front of the television an illusion of their own significance.”

“It’s not only the missile corporation that’s working ‘in three shifts’ now, but also the factory of national pride, based exclusively on military victories.”

“Firstly, we are proud of past victories, in which, besides the live heroes of that war, there is no one alive today who isn’t, in essence, a participant:  St. George’s banners and inscriptions on foreign-made cars ‘To Berlin!,’ ‘Thanks granddad for Victory,’ ‘Descendant of a Victor’ flash at every step.  Secondly, they actively urge us to pride in new military victories.”

“Meanwhile the war in distant Syria works for such military-patriotic PR even better than the war in Ukraine.  And further from the borders, pictures of Russian aircraft bombing terrorists a world away inspire the people more than the sullen ‘militiamen’ of which the masses have had enough already.”

“What’s fashionable in war and militancy also enters official political discourse.  Defense Minister Sergey Shoygu has firmly become the second most popular politician and most successful top-manager in the country.  And the president not without some internal pride calls himself the ‘dove with iron wings,’ telling foreign guests directly at a Valday Club session that he was still in the Leningrad courtyard when he learned to ‘strike first’ if a fight is inevitable.”

“And it’s still necessary to remember:  even a war far from the borders, if it’s protracted, requires not  only military, but also great financial resources.”

“So if the economic collapse in Russia continues, pride in the army still cannot fully make up for people the absence of conditions for a normal life.  But for now — in a situation where the authorities live by tactics and not by strategy, — the army and military mobilization of the nation really look like a national idea, and a panacea for the crisis, and a means of supporting a high rating.”

“Polite green people are already capable of becoming not simply a symbol of the Crimean operation, but a symbol of an entire epoch. But they usually don’t solve all the accumulated social, economic, and human problems of a large country.”

More S-400s

On 2 September, TASS reported Almaz-Antey delivered its ninth “regimental set” of S-400 / Triumf SAMs “ahead of schedule.”  The agency cited General Director Jan Novikov who claimed his company will send two more “sets” to the military before next year.  They will be numbers ten and eleven.

But those late year deliveries have a way of sliding to the right.

S-400s on Display (photo: ITAR-TASS / Sergey Bobylev)

S-400s on Display (photo: ITAR-TASS / Sergey Bobylev)

Novikov said the most recent “set” wasn’t due until November under the delivery plan.  He indicated the S-400s and associated equipment were sent to the “test range” — Kapustin Yar — where all “delivery-handover tests” were conducted successfully.

Writing for RG, Yuriy Gavrilov reports that, to meet the demand for the S-400 and S-500, Almaz-Antey has a robotic microelectronics production line for SAMs in Omsk.  This week the firm is also supposed to open a robotic lathe and milling line at the same facility.  Novikov reportedly said it will increase productivity in priority areas by a factor of 12.

Gavrilov writes that the new “set” is bound for Moscow.  It will make a fifth red pin in a blob of four currently around the capital.  Twelve “sets” are supposed to defend the skies of the “central administrative and industrial region” by 2020.

Russia's S-400 Deployments

Russia’s S-400 Deployments

That count of nine S-400 “regimental sets” is intriguing.  

By last year’s information, this should be ten, with the delivery to Kamchatka being the ninth.  But apparently not.  So which of the nine red pins is wrong (if any)?  It might be Novocherkassk, but some recent sources place this “regimental set” at Novorossiysk. Which begs its own question:  will the Defense Ministry shift them to Sevastopol eventually?

Also, there’s no indication yet of where “sets” ten and eleven (or eleven and twelve?) could go.

How do the overall numbers look?  If the fifth “set” for Moscow is actually the ninth overall, we’d expect a total of 19 regimental sets (based on General-Major Demin’s September 2014 statement that 12 more would be deployed).  If it’s actually the tenth, then a total of 20.

Both possibilities get close to the 56 S-400 battalions projected under the GPV. If all “sets” after Kamchatka have three battalions, they might get between 50 and 52 battalions.