The Russian Military-Industrial Sector is Getting Out of the Shadow

In June, the Ministry of Trade and Industry of the Russian Federation published officially for the first time on its site the list of entities included in the consolidated register of entities of the military-industrial sector (MIS). As compared to the first version (February 2013), the total number of entities included in the latest version of the register increased within 16 months by one entity to 1341, though in October 2013 it fell to 1330, while in April 2014 it rose again to 1339.


The large fluctuations in the size of the register were caused by a merger of existing entities (for example, a transformation of OKB Sukhoi, V.P. Chkalov Novosibirsk Aircraft Industrial Association and Yu.A. Gagarin Komsomolsk-on-Amur Aircraft Industrial Association into branches of the Sukhoi Holding), change in the type of activities and abandonment of military production (for example, the Kazan Engine-Building Industrial Association and the Kovrov Mechanical Plant) with exclusion fr om the register and inclusion in the register in autumn 2013 of 18 entities of the light industry which fulfilled orders of the Ministry of Defense. In addition to the above, significant quality changes in the register were related to continued transformation into joint-stock companies of federal state unitary enterprises (FSUE) whose number in the period under review decreased by 19, while that of open-end joint-stock companies rose by 10 and mergers, but this time without exclusion of branches fr om the register (for example, preservation of six branches of the Shvabe Holding in the April version of the register).


As a result, by the type of incorporation entities of the Russian military-industrial sector are distributed as shown in Fig.1 It is to be noted that it is impossible to determine the share of state participation in the MIS on the basis of the data of the consolidated register.


Territorial concentration of entities of the MIS did not change radically. Almost a half of those entities (591entities or 44.1%) is situated in the Central Federal District where leaders are Moscow (307 or 22.9%) and the Moscow Region (114 or 8.5%). The second place and the third place are shared by the Privolzhsky Federal District (239 or 17.7%) and the North-Western Federal District (220 or 16.4%), respectively, wh ere the leading positions are held by the Nizhny Novgorod Region (55 or 4.1%) and St. Petersburg (166 or 12.4%). In other federal regions, traditional leaders are the Sverdlov Region (42 or 3.1%) and the Novosibirsk Region (35 or 2.6%).


From February 2013, the largest growth in the number of entities of the MIS was registered in the Central Federal District (by 5 entities) mainly due to the Moscow Region; it is to be noted that the minimum growth was observed in the Voronezh Region, the Ivanov Region, the Kaluga Region, the Orel Region, the Ryazan Region, the Tver Region and the Yaroslavl Region. The situation in Crimea remained unchanged: as in February 2013 in the register there are still Ship Repair Plant No.1020 and the Building Office of the Black Sea Fleet based in Sevastopol.


In assessing the very fact of official publication by the Ministry of Industry and Trade of the Russian Federation of the consolidated register of the MIS entities, it is to be noted that the above authority has made (though with a delay) an important step to withdraw the domestic MIS out of the shadow and virtually fulfilled the instructions of the President of the Russian Federation to create transparent economies of the military-industrial sector. The next step in that direction requires joint efforts from all the responsible departments and agencies as regards preparing and publication on a regular basis of the official statistical data on orders of military products and prices on such products and disclosure of the budget data on allocations and actual federal budget expenditures on the state defense order and the results of inspections of the MIS by the Rosoboronzakaz and the Accounts Chamber of the Russian Federation.


Without achieving that, it will be impossible to use effectively funds allocated on defense and eliminate corruption. Certainly, inclusion of an entity in the register is in no way a guarantee that it operates in good faith. So, for instance, in 2012 in purchasing of Rb 23bn worth of 712,000 tons of oil products in accordance with the mandatory sale quotas Rosneft, the only oil company which was included in the consolidated register ineffectively used budget funds (Rb 1.23bn) due to the overrun of the average market purchasing price.


Unfortunately, in present day conditions despite the fact that joint inspection commissions with participation of the prosecutor's office and investigation authorities have been established and a particular attention to that issue was attached by the Presidential Administration, to say nothing about the efforts taken by the Military-Industrial Commission under the Government of the Russian Federation, inclusion in the consolidated register of MIS entities is regarded by some managers of those entities as the right to breach the state discipline. In the Russian military-industrial sector, the following violations have become of a system nature:

- fraudulent pricing;
- illegal receipt and utilization of an advance payment wh ere funds received from the state are neither transferred to subcontractors, nor utilized for payment of jobs;
- violation of product requirements;
- violation of the rules of separate accounting of costs and complete neglect of those rules by one entity in ten;
- refusal by managers of entities to provide the required documents.


Taking into account the above, no wonder, that from year to year the armed forces do not receive "one unit of ordered products in ten", that is, 20% of federal budget expenditures on the state defense order are just thrown away.


Vassily Zatsepin, PhD (Military Science), Head of the Economics of the Military-Industrial Sector Department