SERGEI CHEMEZOV, GENERAL DIRECTOR OF “ROSOBORONEXPORT”: “NOT EVERY YEAR USSR USED TO GET SUCH AMOUNT OF MONEY IN CURRENCY”

Mr. Sergei Chemezov, General Director of “Rosoboronexport”, tells how Russian armaments conquer third-world countries.

Can arms trade business be transparent? Many military-oriented items of Russian budget, data on new types of armaments, details of export contracts are often classified as state secrets. It was the specific character of the business that made “Rosoboronexport” state company request top officials of the country to cancel privatization plans of this federal state unitary enterprise that for five years has been the exclusive exporter of Russian armaments and military equipment. Mr. Sergei Chemezov, General Director of the “Rosoboronexport”, tells which legal form suits his company the most and what prospects await Russian armaments at the world markets.

“We have $12bln contracts”

— Was the decision to establish a sole state intermediary on export of military equipment a successful one?  

— We made exports volume double – this is the main sign that our efforts are successful. In 2004 the “Rosoboronexport” procured abroad armaments and military equipment in the amount of $5.12 bln. The year 2003 was a bit less productive - $5.075 bln. We started in 2000-2001 from $3bln. Not every year the USSR used to get such amount of money in currency in spite of huge military export volume in that period. In Soviet times military equipment was sold mainly under long-term credits or on a gratis basis. Currency earnings amounted on average to $2-2.5bln per year. Today we can clearly see that those reforms that were carried out in the area of military-technical cooperation have been successful.

— In fact, this year the number of special exporters reduced to three (Design Bureau of Instrument Engineering, Machine-Building Design Bureau, Science and Production Association of Machine-Building). Is it possible that new exporters that have the right to export finished products may appear?

— The way Russian companies can gain the right to export Russian armaments and military equipment is defined in Presidential decree dated September 10, 2005. As for procurement of various finished products it is undoubtedly should be carried out by one state company. Every time the number of such companies acting in the area of military-technical cooperation rose, export volume decreased. This is what our experience proves.

— What is the volume of orders received by the company?

— We have received orders to be executed in 2007-2008 for abound $12bln. This indicator is noted to be stable, which is very encouraging for us. We make contracts for $4-5 bln annually.

— What export volume do you expect this year?

— According to our estimates, in 2005 it will be the same as last year if there are no force-major situations. For now the products are being shipped on schedule. In the short term, in 2006, there may be a slight decline due to a so-called contract imbalance. In other words, fulfillment of contract obligations is somewhat concentrated in the period 2007-2008. Though in fact, we almost reached the limit volume of armaments and military equipment export possible in current situation around military-industrial complex.

— Is there any solution to this problem?

— Fortunately, Russian design bureaus and research institutes are still providing brand-new developments and perspective inventions. To create something new, we need substantial funding into defense industry from both: state (which is more preferable) and commercial entities. Also there is a need for introduction of new cooperation forms, in the first place those connected with leasing. To this end the “Rosoboronexport” established “Oboronpromlizing” company which already has contracts with dozens of enterprises working in defense industry.

— What types of armaments will be the most popular in the near future and how will the export structure change?

— We study new tendencies of world arms market very thoroughly and correct our marketing policy correspondingly. In the near future demand for air defense facilities, electronic warfare, guided antitank weapons, night vision equipment and fire control systems will grow. Results of battle action in Iraq show that demand for army armaments, especially tanks and armored vehicles, multipurpose weapon systems on light chassis, automotive vehicles, small arms and close combat equipment, may increase even today. The demand for multiple launch rocket systems, 155mm artillery systems, antitank missile systems, MANPADs and other portable equipment will not change. It is expected that till 2010 among naval equipment the most demanded will be patrol boats with displacement from 20 up to 200 tons. There is demand for such type of naval equipment at the market of the Middle East, South-East Asia and South America. Large and small assault ships, frigates and corvettes, submarines will remain in demand.

— It is expected that this year exports of aviation equipment will decrease. Do you anticipate that situation will change for the better soon?

— Reduction of demand for military aviation at the market is temporary. Demand for combat and transport rotorcraft, for military-transport aircraft is still high. Contracts for the shipment of Il-76 aircraft to Jordan and China illustrate this. Our export capabilities in this area should increase, once the establishment of helicopter holding under auspices of “Rosoboronexport” is completed. Customer wants to buy reliable, able to work in heavy weather conditions helicopters, and Russia can make a competitive proposal.

— What is your attitude to the issue of licenses for exports of spare parts and maintenance services?

— Positive in general. This is one of reserves for increase of Russian arms exports. The share of spare parts in procurements structure amounts to 15-17%. Unfortunately, there was no sharp increase in sales of spare parts. Russian enterprises, sometimes, lack experience and specialists. Besides, the red tape in the process of receiving documents of title to certain goods is a problem. For example, the Ural or some other distant enterprise (from Moscow) has to organize meetings with heads of many Moscow agencies and departments, to receive there many visas and approvals. Sometimes, it takes months. The recent presidential order concerning military-technical cooperation should contribute to the efficiency of our work.

“We need no control over the capital of defense enterprises”

— The “Rosoboronexport” takes part in share capital and in board of directors of several defense enterprises, for example, the “Oboronprom”, the “Motovilikhin plants”, the Kurgan machine plant. What for do you need these projects?

— We need no control over the capital of defense enterprises. Even in the “Oboronprom” (managing company of the helicopter holding – “Vedomosti”) we have no majority interest. We take part, because we need to know how these enterprises work and whether they are capable of fulfilling export orders. Besides that, in the process of restructuring of defense industry its enterprises should integrate around managing companies. It is these companies that define development strategy taking into account world business climate, long-term military-political projections and finally, long experience of armaments’ marketing. What Russian company does really possess such experience? Only the “Rosoboronexport” does, with its 50-year experience counting from 1953 when the Chief Engineering Department of the USSR Foreign Trade Ministry  was established. Specialists in this area can not be found even in institutions of higher education.

— Do you intend to invest into development of brand-new armaments?

— Not only do we intend, but have been doing such investments in both ways according to our customers’ orders and on our own initiative. This is a very perspective area of out activity. But it is highly classified. It is very sensitive in terms of both security of our country and interests of our partners. We can talk about something that has already happened or about general subject of some works that are underway. For example, the engine for certain foreign aircraft that is being created has been developed. Moreover, we have already signed the contract with a foreign buyer for procurement of two such engines. Our company directly participated in development of demonstration sample of 57mm combat module to be installed on armored vehicles, small ships and motor boats. Also we have intentions of investing in fundamental science because brand-new weapon should be based on new physical principles of operation. 

— Can you influence the state defense order, so that Russian armed forces would be equipped in accordance with global military-technical tendencies?

— It is necessary that the “Rosoboronexport” influences the state defense order. We should be a state customer as for the exported equipment and be entitled to announce tenders among Russian enterprises. Participation of the “Rosoboronexport” in state order management will attract non-budgetary financing and new developments. It is true that there are many problems including the ones connected with regional development. Solution of these problems should be coupled with implementation of programs approved by the president and the government. 

“Neither federal state unitary enterprise nor joint-stock company”

— Is transformation into a joint-stock company still relevant in case of the “Rosoboronexport”?

— It is necessary to change property category as the form of FSUE itself is outdated today, and the government is of the same opinion. We considered the possibility of transformation into a joint-stock company before, but there were more cons than pros. Thus, annually we issue bonds and guarantees in the amount of $200m, which is absolutely necessary for our work. A joint-stock company should have almost the same authorized share capital payable by the state, and it is clear that it is impossible. That is why we should look for some other form of state ownership concerning the “Rosoboronexport” – neither a FSUE nor a joint-stock company.

— What do you mean?

— It should be a state corporation by law vested with authority of an integrated economic entity acting in the area of military-technical cooperation and possessing the rights to make state orders for certain types of exports military production. It is something in between a joint-stock company and a federal state unitary enterprise. Interesting in this sense may be the experience of ARKO [agency for restructuring credit institutions] state corporation. This proposal is offered to the president and he instructed the government to work it through. We held several consultations, one of them – with the Federal Assembly. Deputies did not reject the idea.

“Venezuela will produce Kalashnikov guns”

— Are there any opportunities for cooperation with Western countries at the markets of third-world countries – for example, equipping French submarines to be operated in India with Russian missiles?

— Interstate cooperation is a common thing at the world arms market. It is very difficult to hold positions without it, so we are negotiating the possibility of equipping our aircraft with Western means of destruction. Recently we held relevant meetings with representatives of EADS company. We also negotiate with Italian company “Finmeccanica”.

— What recently made contracts do you believe to be the most important?

— First of all, it is the contract on licensed production of multi-functional Su-30MKI fighters at the facilities of Hindustan Aeronautics Ltd. for Indian Air Forces. The contract was signed in December 2000 and fashioned our further cooperation not only with Indian partners but with the whole South-African region. Such equipment has never been exported by any country of the world before. This year at MAKS air show we signed contract on licensed production of AL-55I engine in India. Russian aviation producers for the first time managed to develop a brand-new engine pursuant to requested specifications. One of the most important in the history of Russian-Indian military-technical cooperation contracts was made last year under a project of the “Admiral Gorshkov” aircraft carrier.

— At the moment military-technical cooperation (MTC) between Russia and Venezuela is developing very quickly. What are the prospects of the cooperation?

— Helicopter contract that was signed with Venezuela this March is a success for Russian aviation industry and MTC as a whole. It is the first deal of that kind in the history of Russian-Venezuelan relations. The contract on procurement of fourth generation Kalashnikov machine guns to Venezuela is equally important. Moreover, Venezuela is planning to establish production of these machine guns and cartridges for them. Fears (that were expressed by Donald Rumsfeld, US Defense Minister – “Vedomosti”) concerning the possibility that these machine guns might be diverted are groundless as it is a long-term contract.

— Does Russia somehow encourage its weaponry buyers?

— Very important are contracts with offset component. Offset implies different forms of financial and economic obligations of arms producer to customer-country: establishment of joint ventures, direct investments to different branches of economy, transfer of technologies, counter purchases, barter transactions, etc.  

In May 2003 a contract on delivery of SU-30MKM aircraft was signed with Malaysia. More than a third of its cost is bound with offset. We will create a service center for our aircraft, help Malaysia in its space programs and will transfer several civil technologies. Upon the whole I can say that experience and expertise that we have, will enable us to strengthen hand at familiar markets and to enter new ones.

ABOUT THE COMPANY

“Rosoboronexport” federal state unitary enterprise is an exclusive intermediary for exports and imports of military production. The enterprise was established pursuant to the Presidential order on November 4, 2000 by merging of two state companies the “Rosvooruzhenie” and the “Promexport”. According to the company’s data, in 2004 it sold armaments and military equipment in the amount of $5.12 bln. The information of income data of the company is confidential. According to Mr. Konstantin Makienko, an expert of Center of Strategies and Technologies Analysis commissions on trades amount 1% to 5% depending on contracts.

PERSONAL FILE

Sergei Victorovich Chemezov was born on the 20 ^th of August in 1952 in Irkutsk region. In 1975 he graduated from Irkutsk Institute for National Economy and Highest courses of Military Academy of Armed Forces General Staff. He worked at the Irkutsk research institute for base and rare metals, then – in “Luch” experimental-industrial association. From 1983 till 1989 he headed “Luch” representation office in GDR. From 1989 till 1996 he worked as Deputy General Director of “Sovintersport” foreign trade association. From 1996 till 1999 – Head of Dvision for Foreign Economic Relations, Administration of the President. From 1999 – as General Director of “Promexport” federal state unitary enterprise and from April 2004 – as General Director of “Rosoboronexport” FSUE.