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. Last Updated: 07/27/2016

Arms Maker Laments Its Losses

ReutersThe inventor of the AK-47, Mikhail Kalashnikov, gesturing during Tuesday's 200th anniversary of the Izmash plant.
IZHEVSK -- The maker of Kalashnikov rifles said it was losing millions of dollars because the ruble is too strong, a sign that the country's defense industry is unhappy with the Central Bank's currency policy.

The bank allows the ruble to appreciate to curb inflation, but this is leading to what economists call Dutch disease, when a strong currency results in a flood of cheap imports and hinders domestic industry, especially exporters.

"For us exporters, the strong ruble policy is causing massive losses, we are losing millions of dollars," said Vladimir Grodetsky, director general of the Izhmash plant in the city of Izhevsk in the republic of Udmurtia.

"We are trying to argue against it and I hope someone will listen. I mentioned this to [Finance Minister Alexei] Kudrin and to [First Deputy Prime Minister Sergei] Ivanov," he added.

Izhmash, founded in 1807, makes 95 percent of all Russian rifles. Its flagship product is the 100th series AK rifle, a more advanced version of the AK-47, the weapon of choice for many armies and guerrilla groups.

"When the Izhmash director complains about the exchange rate, it means we have already caught the Dutch disease," Kudrin said in Izhevsk.

About 90 percent of Izhmash production is exported. Venezuela, for example, recently bought 100,000 Kalashnikovs.

Most contracts, arranged through state arms exporter Rosoboronexport, are priced in dollars.

President Vladimir Putin has set plans for an industrial revival to curb the country's dependence on oil and gas exports. The effort stresses the role of the defense industry, one of the few Russian industries that is competitive on world markets.

The country's arms sales are expected to rise to a record $7.5 billion this year from $6.4 billion in 2006, according to government estimates.

Last year, a powerful industrial lobby asked Putin to stop the ruble appreciation policy to help domestic producers, but after a short break the ruble has resumed its upward march.

The Central Bank argues that the strong ruble allows factories to modernize by buying a lot of equipment cheaply abroad. But analysts say the bank overstates the volume of equipment imports as its statistical methods are flawed and count cars and home appliances as machinery imports.

"This argument totally lacks logic. If I lose say 20 percent in profit because of ruble appreciation I am not going to invest this money in buying equipment," Grodetsky said, adding that only 15 percent of Izhmash's equipment was imported.

Izhmash's factory workers, mostly middle-aged women dressed in blue overalls, assemble rifles by hand from parts made on Soviet-era machinery, labeled with a pentagram, a Soviet mark of quality.

"These machines have been here for as long as I can remember," said one worker.