Serdyukov Year-Ender (Part I)

Serdyukov Watches Troops with President Medvedev

Defense Minister Anatoliy Serdyukov gave a two-part interview to Rossiyskaya gazeta this week.  It covers some contentious issues, but the questions aren’t exactly hard-hitters, and there’s no follow-up on his answers.  Nevertheless, Serdyukov as always puts out a steady and consistent message on what he, the government, and military are trying to accomplish.  Much of the first part of his interview concerned this year’s GOZ problems and the Defense Ministry’s difficulties coming to terms with defense sector enterprises.

Serdyukov says he’s been occupied for two years with reaching agreement on prices, deadlines, and quality for arms and other military equipment.  But, he says, now producers have no reason to complain because they’re receiving 80-100 percent advance payments for their work.  Some contracts for ships, aircraft, and strategic missiles are long-term ones extending to 2017-2020.  He adds:

“The fact is we are completely forecasting the entire future activity of a company for many years to come.  This allows for planning for expenses and receipts, training personnel, introducing new technologies, reequipping the production base.”

Regarding the tussle over OPK prices, Serdyukov says he’s told enterprises to give the Defense Ministry their production cost [себестоимость], and the military department will make production profitable for them.  Producers can have a profit margin of 20-25 or even 30-35 percent, but, he says, component suppliers will be limited to a one-percent mark-up.

Many producers (Sevmash for one) blame their suppliers for their own high costs, but it seems likely that limiting sub-contractors to a 1 percent profit is a formula for failure.

But Serdyukov has one condition for profits of 30-35 percent over the cost of production:

“The difference [10 percent?] has to go toward the technical reequipping of the enterprise, the purchase of new technologies and licenses.  And this will lead to lower costs or improved technical characteristics and combat potential of this or that weapon in the future.”

Later Serdyukov noted the Defense Ministry will compensate producers for annual inflation but production cost and timeframe will remain fixed. 

Then questions turned to the issue of foreign weapons.  Serdyukov said the Defense Ministry can’t buy Russian arms that aren’t up to world standards in price and quality.  Russia, he said, is interested in foreign systems so it can understand where it lags or has already fallen behind.  He described cooperative ties with foreign producers, buying licenses, and organizing joint production of entire systems or components in Russia as a way to get domestic industry up to date.  Serdyukov said foreign characteristics and prices are always part of the discussion of price formation with OPK enterprises.

Serdyukov told RG he doesn’t believe the Russian defense sector’s potential has dissipated despite the economic and financial difficulties of the last 15 years.  But now, with a 10-year GPV in hand, Russia has to restore the volume of defense production to the level of the 1980s.

He said foreign purchases were mainly small numbers of samples for the Defense Ministry to investigate.  It bought Iveco armored vehicles for explosive testing, after which Russia proposed to produce them jointly with Italy in Voronezh.

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