Procurement: The Wisdom Of The Czar

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July 19, 2011: The Russian military is buying lots of weapons again, and they don't like the prices. So the government has told the military that they could buy foreign weapons and equipment if they found the prices for Russian equipment too high. This is in response to Russian firms believing they could charge whatever they want, secure in the knowledge that they are probably the only Russian supplier for an item, and that the higher price provides cash for bribes (to get procurement officers to sign off on the high price with no questions.) This was the case even with government owned defense companies, largely because of the corruption. The government believes the new policy will curb corruption (as foreign suppliers are less likely to offer bribes), get gear at lower prices and bring in new technology. But there are other reasons for the high prices, like inefficient or incompetent subcontractors and the need for even defense firms to pay bribes to get things done.

Part of this problem was caused, ironically, by a Russian effort to save their defense industries. In the wake of the post-Cold War collapse in Russian military procurement, defense companies were consolidated, with government help. The latest of these efforts puts all Russian helicopter companies into one firm; Russian Helicopters. To accomplish this, the government bought a majority of the stock in these companies. Thus Russian Helicopters now owns 75 percent of Rostvertol, 72 percent of Mil Moscow, 99.8 percent of Kamov, 60 percent of Stupino Machine Production, 75 percent of Ulan-Ude Aviation, 66 percent of Kazan Helicopters, 100 percent of Kumertau Aviation, 81 percent of Reductor-PM and 75 percent of Progress Arsenyev Aviation.

Total annual production of all these companies collapsed to less than a hundred helicopters in the 1990s, mostly for export. Four years ago, annual production passed a hundred, and it continues to grow, but not enough to keep all these firms solvent. Many have been staying alive by producing spare parts and refurbishing older aircraft. Thousands of aircraft produced by these companies are still in service, and they needed spares, upgrades and maintenance services. But now there are more new models coming out, Russian armed forces is buying again, and the export market is booming. But export sales are often made mainly on price (low prices). Thus defense firms see sales to the Russian military as an opportunity to make some profit.

Russia has already consolidated fixed-wing aviation companies. The situation here was, in some ways, even more desperate. Two years ago, it was determined that the company that produces the MiG-29 (and all earlier MiG combat aircraft) was worth less than a nickel (about 3.5 cents, to be more precise). This valuation was calculated by auditors who were ordered to determine the worth of the company prior to a reorganization. MiG, along with Sukhoi, Tupolev, Irkut and others, was merged into one large firm; UAC (United Aviation Corporation). Russia started UAC off on a firm fiscal footing by investing billions of dollars into the new corporation. The government does not want the money wasted, as was the case with RSK MiG (which, as of first of the year, owed $1.5 billion, and lost $363 million). Executives associated with RSK MiG are being prosecuted for corruption. In comparison, Sukhoi's worth was estimated to be $230 million, and the firm has been making money (on brisk sales of its Su-27/30 line of jets). But that was an exception, as the other aviation firms were in bad shape, although none as dire as MiG.

For most of the 70 year Soviet period (1921-91), Russia bought little Western military technology. Before that, the Czars were eager to obtain Western military technology, and were willing to pay for it. For a decade or so after they took over, the Soviets continued that policy. But by the 1930s, the Soviets convinced themselves (with some justification) that they were competitive with the West, and could continue on their own. That was not entirely true, and many Russian defense procurement experts realize that and are enthusiastic to return to the old Czarist ways.

 


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