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Meeting with CEO of Rostec State Corporation Sergei Chemezov

June 19, 2014, The Kremlin, Moscow

Sergei Chemezov reported to the President on the state corporation's performance in 2013.

The CEO of Rostec also informed the President about the corporation’s reorganisation, which has been in progress since 2009. According to him, arms exports increased from $3 billion in 2009 to $13.2 billion in 2013. The share of high-tech civilian products today is nearly 40 percent and should reach at least 50 percent by 2020.

Other matters touched upon during the discussion included personnel training for the corporation, cooperation with foreign companies and approaches to social issues.

* * *

President of Russia Vladimir Putin: Good afternoon, Mr Chemezov.

Do you have an annual report ready?

CEO of Rostec State Corporation Sergei Chemezov: Yes, we had a Board of Directors meeting yesterday that approved the corporation’s annual report. In accordance with the law on state corporations, I must report to you on the results of our work.

Vladimir Putin: Please, go ahead.

Sergei Chemezov: A few background facts. In 2009 we acquired 443 businesses. Most of those companies were in dire financial straits, with a complicated ownership structure. Many businesses were being controlled by various criminal groups.

Vladimir Putin: There’s no need to frighten me.

Sergei Chemezov: There were some cases like that.

The total losses for 2009 amounted to 61 billion rubles [about $1.8 billion]. In the years since then, we did an enormous amount of work, first and foremost by corporatising state unitary enterprises and created an effective governance system. Today, instead of 443 enterprises, we have 663, and all these enterprises are divided among 14 holding companies. Nine of the holding companies are part of the military industrial complex, while the remaining five operate in civilian industrial sectors. Currently, all of them are working effectively. Proceeds have grown significantly: in 2009, that figure was just over 500 billion, whereas in 2013, we reached over one trillion rubles.

We already have large profits: 40 billion rubles, compared to losses of 61 billion. Our average salary is significantly higher than the national average; currently, it is 31,200 rubles per month, whereas the national average is between 27,000 and 29,000 rubles. In 2009, it was only 17,000. In other words, the volume and numbers already show that the creation of the corporation was justified. The results are clear.

Our arms exports are growing significantly as well. Rosoboronexport is our subsidiary company. If we compare to 2009, when we were just creating the entire military technical cooperation system with your direct involvement – at that time, the volume was just over $3 billion. Currently, Rosoboronexport alone shipped $13.2 billion worth of military products last year.

Our corporation is exporting over 350 billion rubles worth of goods it manufactures itself, including both military and civilian products. This is a very large figure.

Key importance is given within the corporation to fulfilling the state defence order. In 2013, 209 of our corporation’s organisations participated in fulfilling the state defence order, and all these enterprises fulfilled the state defence order 100%. Compared to 2012, the state defence order volume grew by nearly 40%.

We understand that re-equipment of the army will be complete at some point. The rearmament programme is planned through 2020. Of course, we probably will not have such volumes any more, so we set the objective for all the holdings – first and foremost, of course, the defence holdings – to ensure that the share of civilian products makes up at least 50% by 2020, and at most – well, of course, the more the better.

Vladimir Putin: What is it today?

Sergei Chemezov: Today it is around 40%. Our enterprises are not like in the 1990s, when they simply made teapots and frying pans; today, they are producing high-tech civilian products, first and foremost medical products and medical equipment.

For example, we have the Shvabe optical holding producing infant incubators for perinatal centres, which we even supply abroad, to Switzerland and Germany. Today, we are building perinatal centres and will install our incubators there. They have proven to be of very high quality and they are significantly less expensive than imported products.

We are giving a great deal of attention to international cooperation as well. Nearly all our holdings have fairly close contacts with leading foreign partners such as General Electric, Finmeccanica, Siemens, Daimler, Boeing, Pirelli, Airbus, Renault-Nissan, and others. Currently, we have created 23 joint ventures with leading foreign companies. This provides the opportunity, first and foremost, to obtain joint technology; and with the help of our companies, we are bringing about the transfer of such technologies and educate our experts. Before opening a company here, we send staff members abroad; they train and then come back here and organise production with a solid knowledge foundation.

We have many examples of such cooperation, but bringing up the VSMPO-AVISMA Corporation as one, we have created a joint venture with Boeing to develop and release finished titanium products. Before, we mainly supplied packaging, slabs and presswork, but today, we are already sending finished goods directly to Seattle.

There is another joint venture with Boeing: it is an engineering company that works on creating new, modern alloys. We have already created three alloys that have no equivalents in the world today.

VSMPO-AVISMA is one of the biggest titanium producers in the world. Currently, they are producing one third of the world’s titanium. Boeing buys around 40% of all the titanium it consumes, its titanium products, from us; Airbus buys more than 60% from us, and Embraer buys all 100%.

Vladimir Putin: These are percentages of their own consumption?

Sergei Chemezov: Yes, of their own consumption. In other words, the volumes are high.

Right now, we are actively working in small aircraft production. Unfortunately, today, we are not building such aircraft here in Russia. The last was the An-2. Today, we are working with Diamond, a small Austrian company, to create a joint venture, and we will build small aircraft with a capacity of nine to 19 seats.

Vladimir Putin: When will they begin to fly?

Sergei Chemezov: I hope that we will launch the first planes in a couple of years. We are already creating two to four-seat planes with them in the Urals, but the nine to nineteen-seat planes will come a little later.

We are holding talks with Bombardier on producing Q400 aircraft. This is also a midsize airplane with a capacity of about 50 seats. Its key feature is that it can be operated at negative temperatures up to minus 50 degrees. This is a very convenient plane for our Siberian territories and the North. And it can land on nearly any landing strip, including unpaved.

I do not need to talk about AvtoVAZ; you know very well for yourself. There was a very difficult period in 2008–2009, the real crisis years, but nevertheless, the enterprise survived with support from the government. Today, this is one of the most cutting-edge enterprises in the auto sector. It can certainly compete with any similar foreign company. Today we are producing three different car makes there: Lada, Nissan and Renault.

Vladimir Putin: What’s happening with sales?

Sergei Chemezov: Unfortunately, sales are declining; the market is falling overall, and naturally, this affects AvtoVAZ as well. I expect we will be forced to make a small reduction in the workforce, but we hope that we will be able to help employ those people elsewhere. If we compare it to what was happening in 2008–2009, we reduced nearly 40,000 people there at the time and there was no social unrest. We did a great deal of educational work jointly with the regional administration so that people trained in new specialisations – construction and many others – and we found them new jobs, so people were employed.

Vladimir Putin: We need to ensure that people do not lose their skills; we must help them find jobs fitting their knowledge and skills.

Sergei Chemezov: Of course. Today, we do not have enough experts in Naberezhnye Chelny. We will work to make some of the experts move to Naberezhnye Chelny.

Vladimir Putin: There is a workforce deficit there?

Sergei Chemezov: Yes, there is a workforce deficit there.

Vladimir Putin: At KamAZ?

Sergei Chemezov: Yes, we do not have enough at KamAZ. In general, the unemployment there is zero, or even negative. We will offer our workers who are currently employed at AvtoVAZ to move and, perhaps, temporarily work at KamAZ.

Vladimir Putin: Very well.

Mr Chemezov, and with resolving social issues, first and foremost pertaining to laying off workers, these issues must certainly be dealt with as thoroughly as possible together with trade unions and local governments. And all this needs to be done in order for people to be employed in accordance with their qualifications.

Sergei Chemezov: We will certainly coordinate all of this with the local trade unions and local government. We will soon have a programme ready in accordance with which everyone laid off from, for example, AvtoVAZ will be re-employed.

If we are talking about KamAZ, this is one of our well-known brands, a global brand; they won the Dakar Rally for the 12th time. Today, we have created a modern automobile with Daimler. We have modern companies with American Cummins, which builds motors, German ZTF, which builds transmissions, and German Knorr-Bremse, a brake system manufacturer. We have extensive international cooperation. Foreign companies are currently participating in the production of our automobiles.

We have our first example of participation in a public-private partnership. We offered private investors to participate in the creation of Kalashnikov automatic rifles. Sold a 49-percent stake.

Vladimir Putin: Private investors?

Sergei Chemezov: Private investors – Russian ones. And in a short period of time, our company has significantly reduced costs and we are breaking even. I hope that by the end of the year, the enterprise will be profitable. When a person spends his own money, he naturally has a different attitude. One of the investors became a director of the Kalashnikov Concern company.

Vladimir Putin: And what does it produce?

Sergei Chemezov: Kalashnikov automatic rifles, small arms, sporting rifles, hunting rifles, guns. Right now, we are holding talks with foreign companies that are also ready to participate in developing modern small arms. These are German and Austrian companies, and the Italian Beretta company. The enterprise is completely different today; it has been revived and, I hope, will yield a profit.

As far as social responsibility is concerned, we have just under one million workers, and if we take family members into account, that makes 3 million. Twenty-one of the enterprises are the main employers in their towns. These are the most complex enterprises, because they are usually located in distant places and are related, first and foremost, to the defence and armament sectors. Historically, all ammunition companies were built somewhere in the taiga, far away. Most people living in those towns are working at those enterprises.

Just until 2010, our defence order for ammunition was zero. I recall how many times we discussed this issue. Right now, the situation has changed in a positive way, volume is growing, but unfortunately, we are not always capable of fulfilling the defence order we are offered. Enterprises simply refuse because they cannot fulfil it, since they no longer have the capacity or the people – the personnel was cut, and people have gone elsewhere. So now, we are trying to somehow revive these enterprises in order for people to be able to work effectively and for companies to be able to fulfil the orders they are given. Exports has always helped and supported us.

As for training workers, we have signed contracts with over 200 various higher education institutions. Major companies such as VSMPO-AVISMA, AvtoVAZ and KamAZ have their own vocational schools, where they train people for blue-collar trade jobs. In Moscow, we have two departments at MGIMO (Moscow State Institute of International Relations) and the Plekhanov Russian University of Economics. But this does not mean they are only training students with bachelor degrees from those schools: we have agreements with these universities that ten out of 20 people there are selected from the university, while ten others come from various other schools, such as Bauman Moscow State Technical University, the National Research Nuclear University (MEPhI) and the Moscow Institute of Physics and Technology. The reason we based the programmes at those two universities is that, in MGIMO’s case, they have a good level of training in foreign languages. Since the corporation here is mainly aimed toward exports, knowing different languages is imperative.

Vladimir Putin: How do your relations currently stand with foreign partners?

Sergei Chemezov: As I already said, we have 23 modern joint ventures with foreign companies. So far, we have not had any serious problems with sanctions. Nevertheless, we continue to develop our capabilities. We have created our own VK-2500 engine, which is a replacement for the Ukrainian engine. Currently, we are producing about 50 units per year, which is not enough. We need around 300–350 unites.

Vladimir Putin: A second factory should be operating in 2015.

Sergei Chemezov: Yes, we are launching a second plant at the end of 2015. I think that in 2016, we will already reach the projected capacity of 300–350 engines per year. This will fully cover our state defence order and our export needs.


June 19, 2014, The Kremlin, Moscow