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President of Russia Vladimir Putin: Good afternoon, colleagues.

Over the last three months we have held a series of meetings on carrying out the state defence procurement programme through to 2020. We set the priorities for producing promising models of arms and military equipment for each of the different branches of the armed forces, as well as the deadlines and quantities to be delivered.

At this Security Council meeting today, we will sum up the results of these discussions. We will focus primarily on the development issues facing the defence industry and on measures to raise its effectiveness. As you realise, these are systemic and fundamental issues.

Our military modernisation plans are ambitious in scale and the defence industry and its research and design centres must be fully ready to carry out these plans. This concerns above all their ability to develop new generation arms and put them into series production, keeping the long-term perspective in mind.

In essence, the purpose of today’s meeting is to coordinate and set the main lines of focus in the defence industry’s strategic development planning. Our reference objective in all of this work must be to raise the quality standards throughout the entire sector. 

Let me say again that we are investing record amounts of money in the defence procurement and military modernisation programmes, with almost 23 trillion rubles [$750 billion] to be allocated over the course of the decade. We debated this long and hard, and all of the figures were the result of much tortuous and painstaking discussion. Naturally, as I have said before, we will not have more money or more time to carry out this ambitious programme, hence we must ensure that everything works as effectively as possible.

All of this investment must bring an adequate return in terms of strengthening our defence capability and developing our technological, scientific, and economic base.

I draw to your attention that the results of each company and of the defence industry as a whole will be measured not by the amount of money invested and spent, but by the quantity and quality of the products delivered. As the specialists say, we need ‘the goods’, not the figures on paper, showing how much a company has spent. 

Companies’ ability to produce final goods that are competitive and meet the armed forces’ present and future demands – this is the biggest issue. Which priority special and dual purpose technologies the sector will give the country – this is what matters, as is the question of organising training for specialists and industry workers.

By the way, regarding the personnel issue, this is a crucial question at all levels, from workers to engineers and right up to the company heads. Unfortunately, many of our companies are still in the past century, technologically speaking.

We have put a lot of effort into renewing management personnel in the sector over recent years, but if this is not enough, we will continue this process, because only modern people with modern mindsets can organise modern production. 

”Our position is that by creating a modernised and effective defence industry we can ensure a big growth potential for the entire national economy. The bulk of our advanced technology is in the defence industry, and civilian goods account for more than 30 percent of the sector’s total output.“

We have carried out a thorough internal restructuring of the defence industry over these last years, forming 55 integrated organisations that now account for more than 60 percent of the sector’s production.

Furthermore, our position is that by creating a modernised and effective defence industry we can ensure a big growth potential for the entire national economy. The bulk of our advanced technology is in the defence industry, and civilian goods account for more than 30 percent of the sector’s total output. There is steady demand for these goods in the energy, metals, machine-building, communications and other industries. This is not some discovery we have made in this country, but is the way things work all around the world. The defence industry has always been an engine pulling the other manufacturing sectors along behind it.

Of course, a stable and effective defence industry is also crucial for the prosperity and prospects in life for thousands of skilled workers, engineers, and designers. The defence industry brings together 1,353 organisations and companies in 64 regions of the country, and employs more than 2 million people. Just think how many that makes if you add their families and the people working in related sectors and so on. 

Clearly then, we should make maximum use of the existing organisational, financial and legal mechanisms for strengthening the industry’s competitiveness and research and production potential. In this respect, I think we should intensify our efforts in several key areas.

First, we are to move fast to upgrade companies’ capital assets and carry out technological modernisation throughout the industry. As we have already noted, over the last 30 years, for a number of reasons, above all chronic financing shortages, our defence companies have missed out on several modernisation cycles. We now have to make up the gap. I agree that this is a very difficult undertaking, but it is not impossible and we must achieve it. This is essential for our country’s interests.

In short, we will have to modernise the entire defence industry and the way it works, and carry out the same kind of comprehensive and powerful modernisation drive that was achieved in the 1930s. We must develop science-intensive, fundamental and critical technology for producing modern and competitive goods. This will form the foundation for cutting-edge developments that can be put into series production and offer us the needed quantities and quality of modern weapons systems.

”We are investing record amounts of money in the defence procurement and military modernisation programmes, with almost 23 trillion rubles [$750 billion] to be allocated over the course of the decade. All of this investment must bring an adequate return in terms of strengthening our defence capability and developing our technological, scientific, and economic base.“

Second, as we have discussed a lot lately, companies are to make use of the system of long-term contracts to reach an economically justified level of profitability. In other words, they should earn enough to be able to invest in development, pay decent wages, and attract young university graduates and skilled personnel.

By the way, as we mentioned at some of the earlier meetings, in some cases I think it possible to design a system of special grants and incentives for people working in key defence industry areas. There are many modern-thinking and capable young people in the industry, and we have to encourage them, including financially. I ask you to think about this aspect.

I also draw to your attention that companies’ economic wellbeing and high earnings must not be based on unjustified price hikes and squeezing money out of those who place the orders. In this particular case, the customer is the state itself, through the Defence Ministry.

Contract prices should be fair and transparent. The state budget should not have to pay for ineffective work. The entire defence industry therefore has the task of modernising the way production is arranged, raising labour productivity, cutting costs, and introducing energy-saving technology. 

In other words, what is needed is not just to modernise technology in the sector, but to improve all of its economic mechanisms, including its management models. This requires above all completing outside audits and evaluating the performance of each defence industry company and organisation.

The time is also clearly ripe to develop a common price policy for military goods. This is also something we have discussed a lot of recent months, including over the last two months. We have been constantly coming back to this issue. The rules and principles for setting the price types and models, calculating and planning production costs, and calculating the actual price and profitability indices must be approved through government regulations, and the numerous agency methods and instructions, which frequently contradict each other, should be cancelled. 

”We need to simplify the procedure for establishing new companies and defence production ventures with private business participation. We should also create additional incentives for getting civilian companies, universities, and research centres involved in defence procurement work. ‘

I ask the Prime Minister to pay extra close attention to this and personally monitor this work. We have still not reached a common understanding on price formation in the defence industry. We know well what has been done in this area, the contracts signed all were handled and signed on a case-by-case basis, but this is not the kind of systemic approach and systemic work that we need.

The third thing I want to draw to your attention is that we must improve the private-public partnership mechanisms in the sector. We should break down a lot of old stereotypes here, such as that only special state organisations can work in the defence sector. We have successful examples of private companies developing and producing even the most complex, sensitive, and essential defence goods. As you know, just recently the Russian National Award was presented at the Kremlin to the heads of several such companies for developing and building modern radar stations. 

I think we need to simplify the procedure for establishing new companies and defence production ventures with private business participation. We should also create additional incentives for getting civilian companies, universities, and research centres involved in defence procurement work. I meet with people working in these places and they often speak of their interest and readiness to take part in work in this area. We know that they have such capability, and that it is growing.

We often hear that private investors do not understand the defence sector’s needs and cannot calculate the potential returns on their investments. This is true, but one possible solution would be to establish a common data base with information on the defence industry’s needs, and use it to help draw private investment into the sector.

This would also help us to speed up the exchange of scientific and technical information and innovation transfers between the defence industry and civilian sectors. Where this is happening, the results are very good. We have such examples in aviation, in the space sector, and in several other sectors. 

I think it extremely important that all defence industry companies, no matter their ownership status, should have clear guidelines to help them plan their research, production, and personnel development for a full innovation cycle ahead, and I particularly stress the importance of human resources development here. 

Let me say a couple of words about opportunities for working together with foreign partners in this sector. Such cooperation is not only possible but also needed. In cases when our partners agree to work together with us in particular areas, of course we should make use of these opportunities. We should make use of their developments, knowledge and experience. This is nothing to blush about. 

”We cannot take the road of simply setting up assembly facilities to put together foreign defence industry models, using imported components and spare parts. This would be a dead end for the sector. We should develop complete production cycles, from development through to series production and supply of spare parts, here in Russia. This is the guarantee of our national, technological, and defence security.“

But at the same time, we cannot take the road of simply setting up assembly facilities to put together foreign defence industry models, using imported components and spare parts. This would be a dead end for the sector. We should develop complete production cycles, from development through to series production and supply of spare parts, here in Russia. This is the guarantee of our national, technological, and defence security. 

In conclusion, I draw your attention once more to the need to very closely monitor the defence procurement programme’s implementation, including through the Military-Industrial Commission. At a meeting late last year, and again early this year, I asked the relevant bodies to look at establishing an effective monitoring mechanism. I have still not received your proposals. This is all dragging on too long. If this situation continues we will constantly have failures to meet the defence procurement deadlines.

It is essential to constantly monitor development and delivery deadlines. Quality of goods and compliance with technical standards require particular attention.

I am forced to remind you once more that there were serious problems in defence procurement implementation over the last three years. Failures and delays with deadlines for fulfilling contracts meant that some companies were working at only half-capacity and in some cases were standing idle, and then had to put in a mad dash to get things done.

Most of the contracts’ conclusion is guaranteed now, and this gives the sector’s companies the chance to organise a smooth rhythm of work. But we must not relax our attention in this area, just as we must also keep our attention on one of the key areas, that of financing coming as planned and on time.

I know that the agencies have reached a consensus and settled on working procedures. The main thing is to avoid any glitches now between the Finance Ministry, Defence Ministry, and the other ministries and agencies concerned.

Let’s begin work.

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