Does the defense industry have a future?

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The government is preparing a three-year draft budget for the future. Senior Deputy Prime Minister Sergei Ivanov remarks that he agrees with its parameters in principle. Meanwhile, defense expenditures planned for the period between 2008 and 2020 are not published yet. Only the size of the state defense order for the purchase of armament is named. Thus, in 2010, it is planned to spend 600 billion rubles. Is this too much or too little? For example, the entire state armament program for the period until 2015 costs about 5 trillion rubles. In 2007, budget allocations for the state defense order regarding the purchase of armament amounts to 300 billion rubles or is 50% smaller. Progress thus seems obvious. However, there is no guarantee that 600 billion rubles will be a sufficient amount by 2010. Specialists say this with alarm, since that costs of military products grow faster than inflation.

Lieutenant General Vladimir Mikheev, director of the department of the head of armament of the Armed Forces, mentions the following example: “At the end of 2006, we bought the last tank from Uralvagonzavod for 42 million rubles and in January the same tank was offered to us for 58 million rubles.” The costs of a tank grew almost by one-third.

The wish of defense enterprises to sell their products at higher prices is understandable. On average, the share of the state defense order at enterprises of the military industrial complex amounts to 20%. If we bear in mind orders in the framework of military technological cooperation, this figure will amount to 55%. This is not much if we consider that the problem of diversification of production is one of the most important tasks for defense enterprises. However, it is alarming that authorities wish to conduct this process mostly at the expense of the enterprises themselves. At one of the meetings of the military industrial commission, Ivanov said that in the federal targeted program for reforming the Russian defense industry between 2007 and 2010, and for a period until 2015, ex-budget financing would amount to 201 billion rubles, or 40% of the value of the entire program. This means that the entire program costs about 500 billion rubles. Considering that there are 1,355 enterprises on the aggregate register of organizations of the Russian military industrial complex, we can say that allocations for reforming the military industrial complex are, speaking frankly, not considerable.

Alexander Brindikov, head of the group of advisors of Rosoboronexport, presumes that the technological re-equipment of Russian defense enterprises requires approximately 140 billion rubles of budget money annually, whereas now such allocations amount to approximately 30 billion rubles. Brindikov quite reasonably presumes that by 2010, it is necessary to change the structure of funds allocated for the re-equipment of production facilities radically. According to him, in 2006, money spent on the re-equipment of production facilities of enterprises of the military industrial complex were taken from three sources. The money of companies themselves amounted to 74.8%, financing from the federal budget amounted to 20.2% and attracted funds amounted to 5%. By 2010, this structure should change. Brindikov presumes that money of the federal budget allocated for re-equipment of production facilities should amount to 29.9%, the money of enterprises should amount to 46.7% and attracted money should amount to 23.4%.

The expert evidently took these proportions from the federal targeted program for reforming the defense industry.

Sergei Ivanov spoke about the way in which enterprises of the military industrial complex would be reformed recently as well. According to Ivanov, until 2010 defense enterprises will receive state support. First, it deals with “credits and loans for diversification and modernization of production, as well as for the creation of competitive products for domestic and foreign markets.” Second, “this is system for development of leasing hi-tech products of organizations of the military industrial complex.” Third, is the “broadening of the system of ordering products of the defense industry for state needs, primarily the civil ones, including orders in the framework of national projects, and first of all, orders of medical equipment.” Fourth, “defense enterprises should spend part of their profit from the military technological cooperation with foreign countries on their own re-equipment and fulfillment of the state defense order.”

According to Yury Koptev, director of the department of the military industrial complex of the Ministry of Industry and Energy: “The wear of equipment in the industry on average amounts to 67%. There are sectors where this parameter is even worse. For instance, in the radio electronic industry, the wear of equipment amounts to 74%.” Koptev sees a solution in the subsidizing of interest rates on credits in the form of state support of defense enterprises. Koptev explains: “If, for example, we could provide subsidizing of interest rates on credits to 400 of the largest industrial enterprises, the state expenditures on would amount to about 12 billion rubles. Along with this, we would generate the possibility of attracting additional, ex-budget resources in the scope of 170 billion rubles.” Koptev added that in 2006, the volume of attracted ex-budget investments in the military industrial complex was less than 2 billion rubles.

Thus, the situation at enterprises of the military industrial complex remains difficult. They have not died yet but it is very difficult to call many of workable, either. According to Koptev, in 2006 the aggregate profit of enterprises of the Russian military industrial complex amounted to 26 billion rubles. Along with this, the speed of growth of the military industrial complex amounted to 109.8%. Koptev presumes that profit earned by enterprises of the military industrial complex does not allow for the technical re-equipment of production facilities and defense enterprises cannot do without the powerful support of the state. The state needs only to provide such support. However, the state is for some reason in no rush to do this.

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