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. Last Updated: 07/27/2016

State Agrees to Halve Arms Industry Firms

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The government has agreed to a sweeping overhaul of the military industrial complex through 2006 that will halve the 1,700 enterprises now operating, Deputy Prime Minister Ilya Klebanov said Friday.

Klebanov told reporters after Friday's Cabinet meeting that those hardware designers and producers that are not phased out over the next five years will be integrated into a few dozen holding companies.

Although many details still need to be worked out and final approval is not expected for a month, Klebanov said, "We are practically starting the implementation [of the plan] as of tomorrow."

He said the goals were to create a more efficient industry that could "perform all tasks set before it by the government and the president," and create next-generation technology.

The plan is similar to the one for aviation reform, he said. That plan, among other consolidations, calls for bringing fighter-jet producer MiG, civil aircraft maker Tupolev and helicopter manufacturer Kamov under one roof, while Sukhoi, Ilyushin and Mil would unite under another.

Klebanov pointed out that Europe and the United States underwent similar reforms that resulted in the formation of the European Aeronautic Defense and Space Co. and the larger Boeing Corp.

Klebanov refused to say how many holding companies would be created, but reports in local media suggested there would be around three dozen. He also did not provide details on how the companies would be created or which of the 1,700 enterprises would survive.

He did say, however, that the overhaul would be completed in two stages: The first stage, expected to be completed in 2004, deals with consolidating the enterprises that make the finished products listed in the armament program; the second stage would fuse the consolidated enterprises into bigger, more integrated companies.

Klebanov said the program stems largely from existing integration processes taking place in the industry.

The breakup of the Soviet Union severed ties between enterprises and turned them into fierce competitors for meager state orders and lucrative export deals.

"Creating this program was preceded by a deep analysis of the integration process now happening in the defense industry," Klebanov said.

An official in the Science and Technology Ministry, which is in charge of drafting the program, said integrating the military industrial complex is difficult because defense companies have various forms of ownership and there is no legislation addressing the discrepancy.

Now the government wants a controlling interest in all the new holdings, which is difficult to achieve because in the early 1990s some strategic enterprises were privatized in a way that left the state with no stake at all.

Intellectual property was another problem that was not addressed during privatization. The Sukhoi design bureau's fighter-jet blueprints, for example, were estimated to be worth nothing.

Klebanov declined to estimate how much the restructuring would cost, but an official at the Economic Development and Trade Ministry, which is in charge of reviewing the program for its economic feasibility, said Friday it would be financed to "the maximum, but not so that it destroys the rest of the economy."

Any private financing necessary will have to be found domestically, since foreign investment in the sector is restricted.

Some analysts were skeptical of the reform effort.

"There was a similar plan in 1997 that was supposed to be completed by 2000, but nothing happened," said Pavel Felgenhauer, an independent defense analyst. "Everyone understands the defense industry is huge and poverty-stricken and hasn't made anything in the past decade — something has to be done," he said, "but producers don't want to merge.

"Consolidation in the West was of a commercial nature. Here, companies are pushed to consolidate and will … squabble [like dogs] over the last bones inherited from the Soviet Union," Felgenhauer said.