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RIA Novosti

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Rostekhnologii: defense industry supercorporation

13:45 04/12/2007
MOSCOW. (Nikita Petrov for RIA Novosti) - The Russian president has signed a law establishing a state company Rossiiskiye Tekhnologii (Russian technology).

Sergei Chemezov, former head of Rosoboronexport, the country's weapons export monopolist and a friend and colleague of Vladimir Putin from the time they worked in East Germany, has been appointed general director.

Chemezov said in an interview that he was the main initiator and driving force behind the creation of Rostekhnologii, which apart from Rosoboronexport comprises VSMPO-AVISMA (production of titanium and titanium components), AvtoVAZ (cars), Oboronprom (helicopters), and other industrial and financial companies.

Rostekhnologii is expected to take in the plants producing special steel and armored vehicles in Volgograd, a factory in Arzamas producing armored personnel carriers, the car manufacturer GAZ, and in the future companies producing electronics, aircraft engines and automated battlefield systems, in other words, the main elements of the Russian defense industry.

What has become patently clear is that the new state corporation is trying to take from the Industry Agency the main elements that have not been properly developed so far.

Chemezov and his colleagues will have extremely effective economic leverage. For example, the law establishing Rostekhnologii envisages making the state corporation and its structures, including Rosoboronexport, a joint stock company. Given the fact that today the organization makes its profit by exporting over $5.5 billion a year worth of weapons and that the portfolio of orders is more than $20 billion, it becomes clear what funds will be invested into the state corporation and its development.

It is no secret that the defense industry, along with the oil and gas industry, put Russia on the same level as the world's leading powers. According to the Stockholm International Peace Research Institute (SIPRI), Russia is 1% ahead of the United States in weapons supplies to the world market.

True, one of Russia's main advantages on the market until recently was the relatively low price of its weapons. Russian weapons used to be 25% cheaper than similar foreign models. But a rise in the prices of energy supplies, metals, and often unjustifiably high prices of components and other elements of weapons make it impossible to keep the old prices of Russian military equipment.

Moreover, Rosoboronexport has been facing problems which are not directly related to the market and do not depend on it. It cannot regulate and control cooperation ties between the members of the entire production chain. Often plants with foreign defense contracts fail to fulfill their obligations, to meet the deadlines or even to supply the goods, which causes reclamation and fines. President Putin spoke about this at a recent government meeting on military-technical cooperation.

Chemezov says that since Rossiiskiye Tekhnologii is part of Rosoboronexport it will lead the whole process, control the production and supply chain from research and development to the supply of special equipment abroad. The new company's strategy, he says, calls for creating a metallurgical holding, integrating metallurgical plants, introducing economic mechanisms to reduce the cost of energy supplies, and so on. Incorporating all Rostekhnologii plants and managing them centrally will contribute to that. Thus, the biggest corporation in the country will resemble the ministry of engineering more than a joint stock company.

At first all Rostekhnologii shares, including Rosoboronexport, will belong to the state. But in the future, Chemezov says, the shares may be placed on the stock exchange. The state corporation needs private capital, but this is impossible without giving a right to individuals and companies to invest in such a lucrative business as the production and sale of weapons and military equipment. The founders of Rostekhnologii plan that the controlling interest, 25% plus one share, will belong to the state. The state will not lose control of this high technology industry and military-technical cooperation with other countries.

It is not going to be easy to attract private capital to the defense industry. Russian investors want to get quick returns - in a year or two, but this is not always possible in the defense industry. First, the process of creating modern weapons from research and development to serial production takes from five to ten years depending on the type of weapon. Second, there is always a big risk that the planned performance characteristics are not achieved and the money spent on this work will not be recouped. It will be difficult to find an investor ready to put his money into such a risky venture.

Rostekhnologii is well aware of this. That is why it has promised various privileges to both Russian and foreign investors, such as tax exemptions at the research and development stage and a guaranteed state order and profit from weapon supplies abroad, as this is done at the largest defense companies such as Boeing, Lockheed Martin, and General Motors.

In order to attract private capital to the state corporation and to reduce the manufacturing costs of weapons and military equipment, the bill on Rostekhnologii included a point on the corporation's fulfillment of the government's defense order. The initiators were guided by the fact that today orders for Russian weapons from other countries often exceed those from the Russian army.

For example, India wants to buy over 300 T-90S tanks, while the Russian Defense Ministry plans to get about 50 tanks. To combine the two orders means to sharply reduce the cost of production of every single vehicle. The military thinks it will be put at a disadvantage. A plant will begin to fulfill the foreign currency order and only after that it will take the ruble order, which is much cheaper. But what the army needs is just the opposite.

The government's defense order was not included in the law on Rostekhnologii. The Defense Ministry will keep control only over the Defense Order Agency and will want all companies involved, including those incorporated in Rostekhnologii, to fulfill the state order and to begin work on foreign orders only after that.

Rostekhnologii cannot solve all the problems of the defense industry, but the corporation is necessary. The results of its work will be seen in several years.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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