Inflation, GOZ, and GPV

RIA Novosti military commentator Ilya Kramnik has some thoughts on this issue.  Inflation has disrupted Russian rearmament efforts for years, and this year it’s likely to remain in the 9 percent range, or higher.  But, besides inflation, Kramnik notes, the way arms prices are formed and tenders are conducted also create higher prices and complicate the process of obtaining new weapons and equipment.

Kramnik attributes delay in adopting the GPV to the problem of reaching agreement on constantly rising prices for arms and military equipment.  These price increases, he notes, actually outstrip the official inflation rate and devalue the much-touted growth in the military’s budget.

A just-signed law (402-FZ) modifies the budget code and the law on the State Defense Order (GOZ), allowing this year’s GOZ to be financed without an adopted State Program of Armaments (GPV).  The law is also supposed to limit price increases on the OPK’s products.

According to Kramnik, in 2007, the Russian government ordered a 25 percent limit on profits from arms production, based on prices registered with the Federal Tariff Service.  This didn’t work too well.  The T-90 tank’s price tag increased from 42 to more than 70 million rubles, and the cost of the Steregushchiy (proyekt 20380) corvette rose from 1.8 to 5 billion rubles during its construction.

However, increased costs aren’t always attributable to more complex and expensive systems, or to inflation, or to small production runs.  Prices for military equipment are formed through “informal means” or personal ties between those who order and those who produce it.  Kramnik doesn’t utter the word corruption, but that’s what these informal ties lead to. 

At any rate, this is why the Defense Ministry’s been divided into military and civilian parts — to break the link between uniformed buyers and factory directors.  But who’s to say civilians can’t take the military’s place in a corrupt relationship?  To his credit, Kramnik concludes:

“We’ll see soon enough how much this series of measures will slow the growth of prices for military equipment in Russia.”

Kramnik also notes serious problems with GOZ tenders and the government procurement law.  Competitive tenders have to be conducted even when there’s only one supplier, leading to time wasted, and to the rise of middle-man firms that pass orders to sub-contractors who actually do the work.  To fix this, changes in the state purchase law (94-FZ) are needed, but haven’t come in many years.

And the problem of funding multi-year work still hasn’t been solved, and long-term, science-intensive project and RDT&E prices have to be renegotiated annually.

Kramnik sums up:

“All these ‘holes’ lead to budget money too often accumulating in vain in treasury accounts, or else too actively being ‘turned’ and ‘sawed off’ — the ineffective expenditure of state defense order resources in recent times has reached many tens of billions of rubles.  The coming year will become a real test for the reformed Defense Ministry — the degree of effectiveness of military budget expenditure will demonstrate how much Anatoliy Serdyukov and his team have managed to fulfill the tasks set before them.”

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