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Central Research Institute Cyclone is part of Rostekhnologii State Corporation and focuses on the design and production of optical electronics.

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President of Russia Vladimir Putin: Good afternoon, colleagues,

Today we will analyse the results of one of our biggest state corporations, Rostekhnologii. We will discuss the development plans, above all in the context of our strategic economic modernisation objectives, and the efforts to strengthen our country’s industrial and defence capabilities.

These were among the top priorities we set when the corporation was established. We had to concentrate resources and consolidate assets in order to develop our economy’s high-technology sectors. Let me remind you that we did not nationalise anything, but simply brought together state assets that were in various places and situations, generally lamentable situations, in order to consolidate them and get them back into the needed condition. As for what to do with them from here, I will speak about this later.

We had to make real advances in the critically important areas that guarantee the foundations of our country’s technological independence. This was why we decided to bring these assets under one roof, as I said, unite strategic assets within Rostekhnologii: state-owned industrial and research and development companies working in a broad range of fields, and carry out a thorough inventory of our high-tech and industrial assets.

Overall, these tasks have been fulfilled. We fell far short of completing everything that was planned, and there has been criticism from the expert community, justified criticism, I might add, but we have accomplished much nevertheless.

A total of 25 holdings were established within the state corporation, including 19 in the defence industry. Of the holdings created, 4 are in the aviation industry, 5 in ammunition and special chemicals, 4 in conventional weapons, 6 in radio-electronics, and 6 in civilian sectors.

The companies of the corporation employ a total of around 800,000 people. In terms of its workforce and the number of enterprises involved, the corporation can be likened to an entire production sector.

Let me add that the decision to establish this powerful corporation proved its effectiveness during the crisis period. Working together with the authorities, the corporation managed to ensure that stable work continued at its enterprises, keep their workforces together, and continue development programmes, which is very important. In this respect, I note your work in the automotive industry on modernising the sector’s key enterprises such as AvtoVAZ and KamAZ.

”The decision to establish this powerful corporation proved its effectiveness during the crisis period. Working together with the authorities, the corporation managed to ensure that stable work continued at its enterprises, keep their workforces together, and continue development programmes.“

I would like to draw particular attention to a few issues to be addressed today. First, it is imperative to increase the efficacy and practical output of the corporation’s innovative development programme. This is a common requirement for all companies of this kind, especially since significant funds are channelled toward these goals. In 2011 alone, the financing for the Rostekhnologii corporation’s innovation programme was some 56 billion rubles [about 1.8 billion dollars].

The goal is to make R&D advances in breakthrough fields, and subsequently to substantially increase the share of the high-tech products in the overall volume of production, as is the case here [Central Research Institute Cyclone]. Naturally, I was very impressed when Sergei Chemezov, CEO of the Rostekhnologii State Corporation, told me that more than one third of the corporation’s personnel hold PhD or Doctor of Science degrees and that high-tech production is growing from year to year, reaching new levels almost constantly. This is a very good example of how we should evolve.

We strengthen our positions on the domestic and international markets. For the company we visit today, the goal is to attain five percent of the global market. Five percent – how much would that be?

Reply: Two billion dollars.

Vladimir Putin: Two billion dollars for a company employing 300 people is probably quite good. Other companies and corporations must do the same, striving toward the same objectives.

Second, right now, the corporation has identified its top priority projects: in aviation, metallurgy, medicine, instrument and machine manufacturing, and other strategically important sectors. I would like to ask that you actively engage Russian research centres and universities in these projects and cooperate with private innovation companies, including small and medium-sized businesses. In implementing large-scale technological programmes, the full-scale effect on related industries and the economy overall is important to us.

Certainly, we should make broader use of opportunities for technological alliances with leading global manufacturers. Especially since Rostekhnologii already has examples of promising partnerships. I am referring, for example, to the Russian-French navigation systems production company, as well as the company launching assembly of Italian helicopters in Russia.

A joint project has been launched with the General Electric corporation of the US to produce and provide maintenance service for high-tech medical equipment. An agreement was also signed on expanding cooperation with the Boeing company.

At the same time, I want to stress that it is important for the entire manufacturing chain to be formed in Russia, from the engineering centres to mass production. A high degree of localisation means access to technologies and the creation of high-quality, modern new jobs.

There is one more area I would like to address separately.

Right now, the corporation includes almost 600 companies. Among them, about 60 percent are part of the military-industrial complex. Thus, Rostekhnologii is one of the main national contractors for state defence procurements. Thus, you have a special responsibility for this area.

In 2011, the corporation’s companies fulfilled state defence contracts totalling 138.5 billion rubles. This year, the figure will reach 150 billion rubles [$5 billion].

You know about our large-scale plans to re-equip the army and the navy. For that, mass production of modern military equipment should increase multi-fold, and these products must be as good as, or even surpass, similar foreign products, including those just developed at the moment.

”It is important for the entire manufacturing chain to be formed in Russia, from the engineering centres to mass production. A high degree of localisation means access to technologies and the creation of high-quality, modern new jobs.“

To fulfil this task, we are to radically upgrade the military-industrial complex itself, modernise existing companies and build new ones, introduce modern management models that will allow us to lower costs and increase manufacturing efficacy and quality.

Rostekhnologii should become a leader in these processes, including through actively maintaining the counter-flow of new technologies between defence and civil companies, the defence and civil manufacturing sectors.

Besides, I would like you to give heightened attention to training and recruiting highly-qualified personnel, first and foremost engineers, process managers, and highly professional workers – and not just Russian ones, but from abroad as well. There are examples of foreign specialists being employed by your companies (indeed, good examples). We must actively involve the regions, organisations within the educational system, since a strong talent pool is the foundation for competitiveness in high-tech production.

In conclusion (last but not least – perhaps this point is the most important), when we created Rostekhnologii – I had said at the time and I’m sure you remember it, as I said at the beginning – we gathered the scattered assets that still remained in the hands of the state with the goal of restoring production and reinstating expertise, but we agreed from the very beginning that this would remain fluid. We should bring these companies to order, turn them into joint stock companies, transform them into state enterprises where necessary, for example, and in other cases, to offer their shares to the market and privatise them where possible. I want Rostekhnologii executives to submit a corresponding plan in this regard.

In terms of accumulating the assets, a great deal of work has been done, but I have yet to see suggestions on continued work, on the development of the corporation. And I will ask the Government of the Russian Federation, which will be fully formed next week, as well as the Presidential Executive Office, to assist you in this work.

We cannot sit on these assets; the state was not going to hold on to them indefinitely. Definitely, it should be done carefully, ensuring that it is beneficial for the state, including fiscally, financially beneficial, but we are to launch sustainable production operations, holdings, production chains and so on. Overall, you understand what I mean. Please draw up suggestions over the next three to four weeks and present them to me.

(Addressing Sergei Chemezov): You have the floor.

CEO of the Russian Technologies (Rostekhnologii) State Corporation Sergei Chemezov: Thank you, Mr President.

Colleagues, let me remind you that our corporation will be five years old this year. It was established following your order in November of 2007, Mr President, but regrettably, the transfer of assets began only in 2009, and so, of these five years, we have really only been working for three.

We received 442 companies during the first phase. Unfortunately, this coincided with the global economic crisis. As you just noted, the companies that we received were certainly not in the best financial situation. Of these 442 companies, 148 were in a pre-crisis or crisis situation, 28 of them were bankrupt, 17 were completely inactive, and 27 had either lost part of their assets or were at considerable risk of losing them.

As for their financial state, it is enough to quote the following figures. These companies’ overall financial results at that time revealed total losses of 60 billion rubles. There was no profit to speak of. They were making losses.

Vladimir Putin: Which year are you referring to?

Sergei Chemezov: 2009. The companies’ sales revenue came to 516 billion rubles, tax payments to the budgets at various levels came to 62 billion rubles, and production per employee came to less than one million rubles.

As far as converting these organisations into joint-stock companies is concerned, we received 185 federal unitary enterprises, and the rest were joint-stock companies. So far, we have reorganised 115 enterprises into joint-stock companies, and I think that by the end of this year or by the first quarter of 2013 at the latest, we will complete this process. 

As for the problems we have encountered, first of all, most of the federal unitary enterprises did not have any legal documents establishing their ownership rights to land, facilities, workshops, premises and so on. What’s more, these companies did not even have the money to carry out the valuation of assets. Taking care of all this has required time and effort. We received the Economic Development Ministry’s support in this work, and I’d like to say a separate thank you to the minister, Ms Nabiullina, for this support.

As for other problems we encountered, there were problems of a criminal nature…

Vladimir Putin: You opened 92 criminal cases?

Sergei Chemezov: Yes, at our request, a working group was set up, headed by the deputy heads of the Prosecutor General’s Office, the Investigative Committee, the Interior Ministry, and the Federal Security Service. My deputy also joined this group. We passed on to them information on 138 cases. Ninety-two criminal cases were opened, and 10 directors were found guilty in the courts. Assets worth more than 1 billion rubles were returned.

We divided up all of these enterprises between the different holdings. The figures that you have are a little outdated now. We currently have 11 defence industry holdings because we merged five holdings into one, primarily in the ammunition-manufacturing sector, and so there are now fewer holdings today, though the number of companies within them remains the same. We have five civilian-sector holdings and 22 directly managed enterprises: AvtoVAZ, KamAZ, VSVPO-AVISMA, and so on, in other words, all big companies of strategic importance.

We analysed these companies’ financial and economic activity and assessed their prospects for continued activity and their importance for the holdings’ work. The companies that in our opinion were not essential were placed in a separate group, thus establishing a programme for selling off non-core assets.

Our supervisory board approved this programme. The estimated total we hope to gain from selling these assets comes to around 34 billion rubles. This money will flow back into the corporation of course: 15 percent of it will go into the financial recovery fund for the companies that we have kept, and 75 percent will go to the Innovative Development Fund. 

Our corporation and our various companies are actively involved in the federal targeted programmes and the amount of work they do within these programmes is growing. The volume of this work increased by 1.68 percent in 2011, compared to 2009, and was worth 27 billion rubles. Our companies performed reconstruction and technical upgrading work within these programmes for a total value of 8.6 billion rubles. 

We received a lot of money from the budget. In 2009, at the height of the crisis, we received almost 104 billion, which was spent on completing construction of medical centres, consolidating shares with VSVPO-AVISMA, anti-crisis support for our companies, support for AvtoVAZ and so on. As you know, 2009 was a crisis year, and so most of this money was spent on financial support for these companies. 

Vladimir Putin: Yes, 75 billion rubles were spent on AvtoVAZ alone.

Sergei Chemezov: That’s right.

In 2011, after all this work was done, total earnings came to 817 billion, which is 1.5 times more than the results for 2009. In 2010, we had a profit of 15 billion, and in 2011 we had a profit of 46 billion. In other words, there is a clear growth trend. Of course, taxes are growing too. In 2011, we paid a little more than 100 billion rubles for earnings of 817 billion. In 2009, earnings came to 516 billion. Wages have also risen of course, as has the production per employee. Compared to 2009, the production per employee has almost doubled, and the average wage has risen by 40 percent and now comes to more than 23,000 rubles. 

Our corporation was one of the first to draw up and defend an innovative development programme encompassing more than 400 technologies of fundamental and critical importance. Total financing for this programme comes to more than 1 trillion rubles, of which around 400 billion comes from our own funds.

Of course, the corporation also plays an important social role. We are a socially responsible company that currently employs around 900,000 people. One of the areas in which we have particular responsibility is in the single-industry towns and their major employers. We have 21 such enterprises. I can cite the town of Togliatti as an example. You know what the situation there was like. In 2008 and 2009 we were forced to lay off more than 40,000 people, but there was no conflict, no social explosion. 

The reason for this was that we worked together with the local and regional officials and the city took measures to find new work for the people laid off, established techno-parks and provided training for workers, taught them new skills so that they could find jobs at other businesses in the town and in the region. Incidentally, I think that if we had been talking about a joint-stock company the situation might have been different, because such companies’ primary objective is to make a profit after all, and I am not sure they would have put such effort into social protection measures as we did.

As for carrying out the state defence procurement programme, the amount of defence procurement orders has increased considerably since 2009, although this does not extend to all companies, but primarily concerns companies producing helicopters and aviation spare parts. Companies producing ammunition and firearms have few or no state defence procurement orders. They are therefore in a very difficult situation and we do not see any prospects ahead for now. There are no plans for serious purchases for these enterprises before 2015.

Military technical cooperation is one of our most important areas of work. We have seen steady growth over 2007–2011. We now have $10.7 billion in sales, and an orders portfolio of $38.1 billion, which shows the clear growth trend. Although people often criticise us, saying that our orders are falling, I do not see any fall, but, on the contrary, see that the figures are growing with every year.

But there are people who say that we should perhaps give most of the companies the right to sell their goods independently. They say this would boost our sales volumes. I think that we already went through this in the 1990s, when sales did not get any boost, but were far lower. Before Rosoboronexport was established as the sole exporter, sales volumes came to less than $3 billion, but today, Rosoboronexport has sales of more than $10 billion, and our total sales come to more than $12 billion for Russia overall.

The drop in defence procurement orders in the companies I mentioned forces us to think about other ways to keep these enterprises busy, and so we have planned and are implementing measures to diversify production and are currently working hard on developing modern new medical equipment, for example. We have 35 companies active today in this area.

Incidentally, the incubator you saw here is one of the goods we produce. We developed this incubator, which is twice cheaper than the German-made incubators that hospitals were buying previously. Now, most of our perinatal centres are buying our incubators. 

Vladimir Putin: Where are they being manufactured?

Sergei Chemezov: It’s the Urals Optical and Mechanical Plant that is making them.

We are also working actively on developing products to replace imported goods in the energy sector. We have signed contracts with most of the big companies such as Rosneft, Transneft, FSK, MRSK, InterRAO, RusHydro, and Gazprom. In short, we have signed contracts with practically all of the energy sector companies to produce the equipment they need, various sorts of pumps and pressure equipment, for example.

For instance, we invested on a fifty-fifty basis with Transneft to develop a new oil pump. They used to buy these pumps in Germany, but our pumps are just as good as the German ones, and are cheaper, what’s more. In this way we keep our companies busy with orders, especially the companies in the ammunition-manufacturing sector, which is in a difficult situation. 

We sold goods worth more than 12.3 billion rubles to the energy sector in 2011. This is precisely what you spoke about: the goal of establishing holding companies, getting them into shape, creating products that will attract investors and get the interest of investors both here and abroad.

Our main objective is to increase capitalisation and find effective owners. We already have examples here, AvtoVAZ, for one, which we have got into shape and have now reached an agreement in principle with Renault-Nissan on acquiring the controlling stake and so on. 

Over the next 3–5 years we plan to get our holding, Russian Helicopters, ready for an IPO. We will follow on with Russian Electronics, and the Optical Systems and Technologies, our aviation sector instrument-manufacturing holding, and the Radio-Electronic Technologies. In other words, we do not intend to keep everything in state ownership. On the contrary, we will put these companies on the market and sell as much as possible to investors — to strategic investors in the first place — that will give us opportunities to develop further and not simply remain at the point we have already reached.

Vladimir Putin: Mr Chemezov, you need to plan the work in this area and draw up this programme together with the Government…

Sergei Chemezov: We also had the task as part of the Priority National Healthcare Project of building high-tech medical centres. We will complete this work this year. There were plans to build 14 of these centres. The Healthcare Ministry had already built two of them, but, unfortunately, one centre ended up being unusable. We are currently completing works on the others. Ten centres have already been completed and are ready for use, and we still have three to finish now. I think this work will be complete in the third quarter, and we will be able to hand over all of the centres to the Healthcare Ministry. 

We are actively pursuing our international work, making contacts with leading manufacturers in various areas. We have already established 9 joint ventures with leading companies such as Boeing, General Electric, Daimler, Renault-Nissan, Safran, Finmeccanica and others. We will continue this work and plan to establish another 20 joint ventures over the coming period.

We work actively through our representative offices in 50 different countries. These representative offices work mostly through Russia’s diplomatic missions – through embassies or trade delegations. Of course, these representative offices are a big help in our work, in the search for strategic investors, and in military technical cooperation, too. 

As for our work with universities, our companies in the various regions have signed cooperation agreements with 214 universities and have set up 258 basic departments that are training specialists for our companies. The corporation has signed agreements with all of Russia’s top universities, and MGIMO [Moscow State Institute of International Relations] and the Plekhanov Academy [of Economics] have opened their departments with us and are training specialists for our companies. 

We sign a contract with each person who enters our departments and joins our Masters programmes. Under these contracts, we pay the tuition costs, but the specialists must then work for us for five years. If they leave earlier they have to pay the full tuition costs. 

Finally, the corporation’s reorganisation is on the agenda today. There are various proposals here, including turning it into a joint-stock company. But we need to look at the consequences such decisions would imply. Above all, this would mean that we could no longer have our representative offices in diplomatic missions abroad, because under the Vienna Convention, diplomatic missions cannot represent the interests of commercial organisations.

Another big issue to consider in this respect is that, as a state organisation, we can guarantee the return of advance payments made to Rosoboronexport. If we were a commercial organisation our guarantees on their own would not suffice and we would need to get bank guarantees, which would add to the costs. 

These are the two main things that could affect the corporation’s future if it is reorganised as a joint-stock company. I know that the Economic Development Ministry drew up a new proposal and that the first point on the timetable you approved was to amend the law so as to introduce the organisational and legal concept of a legal entity of public law. This is not our invention, but is a concept that exists abroad, in Germany, Switzerland, France and a number of other countries. I think even the USA has this concept and makes quite active use of it. It could be applied to other big state-owned companies too. These state companies are no doubt a Russian invention, but the idea of giving them the legal form of a legal entity of public law is something I think we could use.

Vladimir Putin: Work on it together with the Government.

Sergei Chemezov: We will. That is all I wanted to say.

Vladimir Putin: Thank you.

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