Russia’s arms export enterprise to become major corporation with 7.5 billion-dollar profit

Since the beginning of this year Rosoboronexport (ROE, the national arms export enterprise), is the only entity in Russia having the right for independent military export. The licences of other big companies (RSK Mig, Almaz-Antei, UralWagonZavod, KBM etc) were terminated. Those who were caught in the middle of the on-going contracts will be able to finish them, but after that only export of spares and services without the mediatory services of ROE will be allowed. However, strengthening of ROE goes not only in this way.

ROE is in the process of conducting internal structural reforms. The enterprise tries to replace the status of a state unitary enterprise with that of a state corporation. Recently the head of ROE, Sergey Chemezov, addressed to the President of Russia suggesting a creation of a state corporation on the basis of ROE. With this status the management of ROE would be accountable only to the top leaders of the nation. It would also be able to decide for itself what to do with the $ 7.5 billion revenues expected in 2007. Today state unitary enterprises (FGUPs) have to coordinate any deal over 5 million rubles. FGUPs share their profits with the state. So far ROE remains a state unitary enterprise, but the discussion regarding the new status is far from being over.

Note: State corporation is a special type of non-commercial organization (NKO). Since 1999, when the law on NKOs got the amendment concerning state corporations there were only two state corporations: the Agency on Restructuring Credit Organizations (dissolved in 2004) and the Agency on Insuring Bank Deposits. Each state corporation is unique. The law provides just common terms .

There are also purely managerial reasons for the attempts to become a state corporation. In the last couple of years ROE grew from a state intermediary in arms trade into a huge industrial holding. For ROE it is difficult to supervise such huge industrial assets. A unitary enterprise must coordinate with the owner any deal over 10% of the authorized capital, as a rule, very small. In a state corporation all important decisions could be taken by the general director. He would have the right to manage the property of the corporation, to invest “temporarily free money”. ROE really has projects to invest in. At Russian Expo Arms-2006 the d eputy head of ROE Igor Sevastyanov said that in many cases ROE acts like a free assistant to the MIC companies. For example, from its own profit ROE has to give no-interest credits due to the drawbacks of the existing legislation. He said “Something is wrong with the system when a defense company cannot take a 100 000$ credit for a million contract, because there is no deposit for such a credit”. Often the advance payments from the customers do not cover the costs of launching the project at Russian manufacturer. That was the case with as big contract as delivering MRLS Smerch systems to India.

Strange, but the main opponent of the idea to give the new status to ROE is the Ministry of Economic Development. The Ministry says… that law on the noncommercial organizations does not assume arms trade. By the way, according to an anonymous opinion poll held among the directors of the defense companies this ministry heads the “list of obstacles to the military business”.

The would-be State Corporation ROE is suggested to have "daughters", including the one dealing with the export of arms, and other, purely industrial assets - "AutoVAZ", “VSMPO-Avisma” etc. In his interviews to the media Mr. Chemezov said that the essence of such a reform is creating 100% state owned managing company with all other enterprises controlled by ROE and the existing FGUP itself as "daughters" of the new corporation. They will be joint-stock companies whose shares could be gradually offered to the investors through IPOs. Today ROE is actively collecting the industrial assets that used to be far from its direct interests. Some experts call this process “collecting the economy”. Usually this phrase is attributed to the government’s efforts aimed at ensuring the state control over principal industries. It looks that ROE is a smaller but far more efficient copy of this.

Today everybody heard of the largest Russian industrial plants like AvtoVAZ and VSMPO-Avisma that ROE took over. However, it is obvious that this is just the beginning of the process. ROE announced its plans to create a holding comprising the domestic manufacturers of electronics. The head of the company Sergey Chemezov officially addressed with this proposal to the First Vice-Premier Sergey Ivanov. According to the information from ROE at the moment the share of the imported electronic components in Russian modern systems reaches 90%, “which creates a threat to the national security”. ROE suggests uniting the manufacturers of super-high-frequency, optic - , photo - and quantum electronics, as well as special microelectronics on the basis of the daughter company Oboronprom. The working name of the new structure is JSC "Electronic Systems". "RusSpecStal ", a holding formed by Rosoboronexport, is supposed to become comparable with the most advanced steel holdings of Russia, according to its head Sergey Nosov, former head of Nizhni Tagil Metkombinat. Similar processes take place in the sectors of aviation engines, helicopters and other.

Not everything goes as smooth. There have been unconfirmed rumours that ROE had the program aimed at establishing the state control over the shipbuilding industry. Allegedly ROE had talks with Mezhprombank (controlling Baltic Shipyard and Severnaya Verf) regarding obtaining these shipbuilding assets. ROE denied any official talks. The other party did not comment more than “the state expresses interest towards Severnaya Verf and Baltic Shipyard”. So this matter can be regarded delayed. For some time…

Yuri Seleznyov

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Author`s name Dmitry Sudakov