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Vladimir Putin: Good afternoon!

Opening this meeting, I would like to thank all the industry workers for their efforts in the past year 1999. For the first time in all the years of reform the industry has registered a positive trend.

The total output in the defence industry amounted to 130% compared with the 1998 level. Your work is a guarantee of the country’s strength.

I would like to emphasize that in the 21st century any country, even one as rich in raw materials as our country, will be doomed to be in a dependent and subordinate position unless it has a developed economy and powerful Armed Forces.

But as we all know very well, the development of the defence industry is not an end in itself. The results of our past achievements are also well known. They overstrained the military potentials of the two blocs and the two main powers which headed these blocs, resulted in wasteful use of resources and excessive stockpiling of weapons. By the way, this is true not only of us, but of our former adversaries. The difference is that they emerged from this situation in a different state than we did.

It is not only in terms of the military potential that we have to compete with other countries. There are other forms of international rivalry: economic, financial, political and diplomatic. And another very important, perhaps, the most important area, is information.

It is in this area that we have still, since the end of the Cold War, been lagging far behind many countries. And if we are lagging behind in several areas at once, sooner or later we will start lagging behind in everything.

Today we should pay attention to all these areas. We urgently need to develop a long-term strategy in order to direct the development of the defence industry into a channel that best serves the interests of the economy and national security. In this respect, the role of military science is hard to overestimate. It should not confine itself to the theory of armed combat alone.

Developing a military strategy is a challenge on a national, not a departmental scale. The Supreme Commander-in-Chief and the Security Council should receive proposals of a truly systemic character.

The Military Academy of the General Staff of the Russian Armed Forces has a role to play in revising the subject matter of military science. And the General Staff should become the coordinating agency for preparing proposals in the military-political, military-economic, military-ideological, military-information and military-diplomatic areas.

It is only on this basis that targets for the optimal development of the defence industry can be set.

It has to be noted that in spite of all the losses during the transition period the country still possesses a huge scientific-technical and industrial potential. It is quite sufficient for maintaining a high degree of military capability of the military equipment currently in use and for providing the Russian Army with the latest types of weapons which do not yet have analogues in the world.

But I do not have to tell you that the Russian defence industry still has heavy shackles on its feet.

First, a huge excess of purely defence production capacity.

Second, the government debts.

Third, underfinancing of mobilization capacities.

Fourth, lack of proper Government support for conversion of the military industry to civilian uses.

The Government does not have the wherewithal to finance all this. And there is no way we can raise money for everything. Even if the money were available there wouldn’t be much gain if it was to be used in this way.

Unfortunately, the economic management at many defence enterprises makes them unprepared for full-scale participation in the market.

The money allocated is often used ineffectively, sometimes to support outdated projects. In that sense many enterprises have sad stories to tell.

But you should not interpret my words to mean that the Government is refusing to pay up its debts. On the contrary, we will continue and follow that work through. I think the Government’s plans to the effect are known to many of those present.

But let me note that the accounts payable of many defence industry enterprises, even without fines, are several times greater than the debts of the government budget.

So, enterprises, production and research units cannot be made viable by just defraying the debts to them. What is needed is our joint painstaking work which requires relevant skills in economics, financial analysis, marketing and so on. The Government will help you in this work, but we can only succeed if we do it together.

The Russian Government and the Bank of Russia will take measures to stimulate the crediting of investment projects and investments in basic assets, while simultaneously helping the Russian defence industry to break into new markets.

Today, defence industry enterprises are complex systems not only in terms of production, but also in terms of organization. Unfortunately, the overall picture looks as follows. All the debts and losses are accumulated at the main, usually government-owned enterprise, while all the profitable businesses are transferred to subsidiary legal entities and sometimes to some totally unknown structures. This is characteristic not only of the defence sphere.

As people who are committed to the interests of the state you will understand that this is not right, to put it mildly. In effect, outside organisations are using government money and property in their own interests. I think we should together take another long hard look at what is happening there and put things in order.

The Government must interact with the defence industry enterprises not only economically and financially, but comprehensively. That is a major, large-scale task. And there are many outstanding issues. Which ones should be singled out?

First. The mechanism of the government defence order has to be improved. There should be no duplication in the activities of agencies that act as Government customers. At present these include the Defence Ministry, the Interior Ministry, the Federal Border Service, Federal Agency for Governmental Communications and Information (FAPSI), FSB, the Ministry for Emergency Situations and so on and so forth. The Russian Defence Ministry’s share in the order is about 88%.

We need a single Government customer. It is not only because it will make things easier for the enterprises. The key element lies elsewhere. Very soon we will face the problem of standardizing arms and military equipment, in fact we are already facing that problem. And that would be practically impossible given the multitude of government agencies that place orders.

But being personally familiar with many of those present and being familiar with the production facilities and the enterprise managers, having visited many enterprises, I am sure that many will agree with me on the issue of standardization. It is impossible to move forward without standardizing requirements. As it is, we are simply wasting government resources. Such situations do not exist anywhere else in the world.

They were possible in the context of the Soviet Union. On the one hand, there is something to be said for such diversity. Obviously, it releases internal resources and potential, stimulates competition and so on. But if we overdo it, we won’t have any economy to speak of.

Second. It is necessary to complete the inventory of defence industry enterprises. We should start by identifying those that have the potential to fulfill defence orders that meet the country’s needs and use high technologies of the future, and then we should determine an effective mechanism of Government support for such enterprises.

Third. Armaments and military equipment have to be discarded sooner or later. We still do not have an effective system for managing this process. No wonder we are constantly prodded to launch standardization.

Today we were making the rounds of exhibitions and other facilities and we have heard several proposals on how to dispose of military hardware, materials and equipment. And the same happens everywhere.

We believe that at the research and development stage not only the weapons, but the technologies of eventual disposal of these weapons have to be designed. It would be much cheaper and more effective.

Fourth. The defence industry faces the challenge of shortening the time lag in the introduction of new technologies in civilian production. That brings us to the issue of conversion. The defence industry is an important reserve of demand not only for joint stock companies, but also for state-owned enterprises.

Fifth. This is a very important point. I would like to remind the defence industry managers that shortage or total lack of government financing is no grounds for the drain of science-intensive technologies. You know what I am talking about. It is a delicate issue, as everybody understands. Now the budget meets its commitments. So it will be a lot less tolerant of leakage of technologies. In fact it is not only about fulfillment of budgetary commitments, far from it. I am not going to pursue that topic, we all know what I am talking about.

Sixth. We have to admit that the mobilization preparedness of enterprises has greatly diminished mainly because the basic assets of defence enterprises are run down. For example, machine-tools have been in service for 25–30 years instead of 10–15 years. About 300 arms manufacturing technologies in the industry have been irretrievably lost.

So, it is necessary to develop a plan of practical measures to retool the key plants which have strategic significance for Russia’s national security and to mobilize all the necessary resources for that.

Seventh. Since 1996 the average age of defence industry employees has grown from 47 to 58. In three or five years there will be no one to man these enterprises. The huge scientific and technological potential we mention is dwindling. It is known that it takes at least three or four years to train a competent engineer, designer or technologist. So, a task that needs to be tackled immediately is to create conditions for attracting young professionals into the defence industry. Obviously, the Government has a great role to play in this as your ally. I agree with the possible criticism that much of what needed to be done to retain the personnel and train new personnel has not been done.

Next. How and according to what criteria are the currency earnings of the defence enterprises spent?

If you look at the finances of the Russian arms and military equipment exporters and the enterprises that meet domestic needs, the difference is not great. How much is spent to modernize production, how much is spent to introduce new technologies, how much is spent on personnel training and on tackling the other problems mentioned? To be honest, nobody has a clear answer to these questions. And if we probe deeper we shall see that often the money is used ineffectively, irrationally and not for the main purpose.

Next problem. We do not have a coherent system of managing the quality of products. Nobody is responsible for the end product. That is why malfunctions, accidents and disasters due to production defects are so frequent. “The responsibility of the warranty does not exist.” I am quoting the Defence Minister. As we were coming to this meeting we were discussing the main theses of my address, I was seeking his advice and telling him some of the things I am telling you now. Igor Dmitrievich agreed with me.

And the tenth point. Bankruptcy of defence industries is a long, festering problem. Current legislation does not provide legal regulation of these issues. Cases are opened under the standard civilian procedure. There is no efficient control of how government property of the defence enterprises is managed.

This gap in legislation must be closed. Defence industry enterprises should have reliable protection against dishonest commercial agencies seeking to gain control of their activities or getting a share of the most liquid assets. I know that perhaps 100% of defence industry enterprises’ heads share that position. In fact many of them have been raising the issue for some time. Unfortunately, it has still not been addressed. For the most part it is a problem for the Government. And I pledge that we will come to grips with it.

Amendments need to be introduced into the Law on Bankruptcy. I stress, what is needed is amendments and not a separate law on insolvency of defence industry organizations. Otherwise, before we know it we will have similar laws for other sectors of the economy and our legislation will turn into a grab bag of muddled pieces of legislation.

Let me make it clear that special legislation for this sphere is only relevant if it applies to totally government-owned and financed and managed enterprises. But it should not apply to the production of dual, triple and other technologies. The Government should protect itself only with respect to a very small group of enterprises, a small group even within the defence industry.

I have mentioned the main areas of our joint work. The challenge now is to coordinate and carry out the right tactical moves. This is the purpose of our meeting today.

We expect that the executives of the industry gathered here will express their opinions in a frank, hands-on manner and that our meeting will be useful for everyone – the Government, the industry as a whole and individual enterprises.

Thank you.