Business plans and the future of the Russian space industry

The government has approved the Federal Space Program for 2006-15. RosKosmos should get almost a third of its total funding from sources other than the federal budget, and private enterprise will be encouraged to move into the space sector. This could cause as many problems as it solves.

The midterm development strategy for the national military-industrial complex, approved by the government in late January, may well be described as a conversion program: the proportion of civilian products in the military-industrial complex will exceed 70%. This is logical, given that the defense sector has developed and introduced high technologies, advanced hardware, and new materials. Excessive secrecy has obstructed the use of all (or almost all) these fruits of progress in the civilian economy; presumably, this is now being greatly regretted. All the same, let’s look ahead and try to work out the potential threats and advantages in this latest conversion program, and how the defense sector will fit in to Russia’s contemporary economy.

The program includes plans to triple the output of the space-rocket industry by 2015, compared to 2004. The government has also approved the Federal Space Program for 2006-15, which RosKosmos is using in a bid to regain the ground lost in previous years. So far, Russia has regained world leadership in terms of the number of space launches: almost half of last year’s launches were ours (more precisely, 45%).

Anatoly Perminov, head of RosKosmos, says that his agency’s long-term goals include space research, manned space-flight, and the study of deep space. The top priority among short-term goals is establishing or restoring satellite groups for all systems, primarily for communications systems. RosKosmos is currently working on a multi-launch manned spacecraft called the Clipper, with extended payload capabilities; it’s intended to be as reliable as the Soyuz rocket and as comfortable as the Space Shuttle. Russia is also starting work this year on a preparatory experiment for flights to Mars in future.

In Perminov’s view, implementation of these and other plans is constrained by funding shortages. Funding is very modest. The entire Federal Space Program for 2006-15 will get 305 billion rubles from the federal budget, with 23 billion rubles of that allocated for this year. It’s not that much. However, during the government’s discussion of the program, Economic Development Minister Herman Gref proposed looking at this issue from the other side: how much money can the space industry bring in? He cited examples of extremely low productivity, enterprises working at far below their capacity, and consequently very low wages.

The proposed solution is generally known: developing “state-private partnership,” which will bring in money from private companies to fund projects. Profitable projects, preferably. This goes beyond space tourism, of course. Actually, space tourism isn’t all that attractive from the financial standpoint. Some other areas of the space industry are more interesting. Therefore, the space program states that RosKosmos should get almost a third of its total funding from sources other than the federal budget. Basically, this extra-budget financing means international contracts – for work in space and on the ground.

Perminov says, however, that Russian companies should also be involved in financing space programs; what’s more, he also considers it feasible for a private space industry to exist alongside private aviation. Perminov said: “In other countries, private financing helps promote interesting new projects. Here in Russia we also have plenty of wealthy people, successful business owners, and we need to give them some hints on where to invest.”

So how shall Russian companies be encouraged to get involved? The military-industrial complex development strategy includes establishing a new organizational structure for the defense sector, with 10 or 11 horizontally- and vertically-integrated entities, including diversified innovation companies producing the full range of space-rocket technology and offering a broad spectrum of space-launch services. Defense sector leaders have already proposed some restructuring plans. For example, some new holding companies could emerge to join existing space industry holding companies such as the Khrunichev Center, the Progress Bureau, and the holding company established last year on the basis of Reutov Machine-Building. One of these new holding companies will build communications satellites; the plan is to base it on the Applied Mechanics company. Another will be based on the Space Instrumentation Institute. There has also been a proposal to establish a holding company on the basis of EnergoMash, the world leader in rocket engine production. In Perminov’s opinion, this accumulation of resources would make it possible to optimize enterprise operations.

So far, the sector has only seen some initial personnel changes at Russia’s largest space enterprises. For example, the S. Korolev Energiya Space-Rocket Corporation – the leader in manned space flight and source of almost all Russia’s civilian cosmonauts – is now headed by Nikolai Sevastianov, formerly general director of Gazkom. He replaced Academician Yuri Semyonov, 70, who had been Energiya’s leader and chief design engineer for many years. The choice of Sevastianov was supported by the Federal Space Agency. It was emphasized that this was being done in order to improve the Energiya Corporation’s economic situation. Academician Boris Katorgin stepped down as head of EnergoMash. The S.A. Lavochkin enterprise had a change of leadership. In December, Alexander Medvedev lost his job as general director of the Khrunichev Center.

Industry analysts are at a loss to understand the reasons behind these changes. If Energiya’s financial affairs were really in a bad way (although its revenues came to 5.38 billion rubles in 2003 and 5.35 billion rubles in 2004), was it really necessary to appoint a finance specialist as its leader? Sevastianov could have been brought in as a commercial or financial manager to assist Semyonov, who could have stayed on as chief design engineer. Both Katorgin and Medvedev have stayed on as chief design engineers at their respective companies, which only confirms their competence in space technology matters. Besides, they weren’t replaced by finance specialists. The new director of the Khrunichev Center is Vladimir Nesterov, previously head of the Federal Space Agency’s directorate for guidance systems and ground-based infrastructure. Katorgin was replaced by his own senior deputy. What’s more, it was under Medvedev’s leadership that the Khrunichev Center tried out a new financing scheme for designing spacecraft, moving closer to market principles. So perhaps finances weren’t the only reason for the personnel changes?

Presumably, the appointments are only just getting started. As enterprises are transformed into joint-stock companies or even privatized, new people will enter the space sector, capable of solving financial problems and satisfying the demands of design engineers and their far-reaching spaceflight plans. Recently, example, a stake in EnergoMash was purchased by prominent entrepreneur Sergei Nedoroslev, co-owner and chairman of the board at Kaskol Group. Kaskol has another space-sector asset: a stake of about 10% in Energiya Corp. Some papers have reported that this 10% stake was a decisive factor in Academician Semyonov’s dismissal. So Nedoroslev has apparently decided to expand his presence in the space sector. His investment in EnergoMash promises substantial profits, if only due to orders from the United States for engines to be used for purposes including a mission to Pluto. In general, Nedoroslev’s move into the industry seems natural, given that his earlier interests mostly concerned aviation, and he headed Sheremetyevo Airport until recently. Kaskol Group owns 48.9% of Volga-Dnepr Aviation, over 40% of GidroMash (aircraft chassis producer), about 40% of the Sokol Aviation Plant in Nizhniy Novgorod, 100% of NORS (the dealer for Nizhniy Novgorod’s M101 planes), and 25% of AirManagement Group (air taxis).

But here’s the disturbing aspect. Kaskol is known to have sold a 25% stake in Atlant-Soyuz Aviation, a company specializing in cargo and charter flights, although Kaskol only bought those shares a year ago. It also sold a blocking interest in the Ulan-Udinsk Aviation Plant. Kaskol is no longer a shareholder in the Zvezda enterprise (designer and producer of crew support systems for the aerospace industry). Kaskol is in the process of selling 33% of Volga-Dnepr Aviation.

So how serious is Nedoroslev’s move into the space sector? Might his interest fade in the absence of a rapid, significant return on investment? But aerospace requires working with long-term programs. It requires serious, long-term investment. Moreover, the arrival of “outsiders” could cause some entirely new problems: not just in distributing finances or (God forbid) battles over assets, but in choosing development goals for individual entrprises and the sector as a whole.

At the Cabinet meeting that discussed and approved the Space Program to 2015, Herman Gref reproached RosKosmos for lacking ambitious projects capable of conquering the world market.

And this, presumably, is where there will be a clash of interests between scientists and finance specialists, science and profit. There are also bound to be problems concerning almost-forgotten concepts such as commercial confidentiality and state secrets, which permeate the entire space sector. After all, even portfolio investors in space-sector enterprises would get substantial access to top-secret information concerning military strategy, technology, and finances.