In eastern Russia, Vostok-2018, the largest military exercise since the 1980s, is coming to an end. Here's some footage published today by the Russian Ministry of Defense.
In the Sea of Okhotsk, a Ka-27PL helicopter took off from the deck of the destroyer Vice Admiral Kulakov in order to conduct a submarine search, using a sonar system. If need be, the helicopter can carry both scanning devices and guided anti-submarine torpedoes. In order to take part in the drills, a Northern Fleet unit left its home station on the Kola Peninsula as early as August 8th and covered over 5,000 nautical miles of the Northeast Passage. In addition, the president's boat recently reached the Zvezda shipyard located in the Far East. where he announced a game-changing phase not just in the post-Soviet but in the entire history of the Russian shipbuilding industry. Russia-24 offers an extended version of the first large interview with the person who not long ago was Deputy Minister of Defense and is now the new Russian Deputy Prime Minister for the Defense Industry.
Meet Yuri Borisov!
– Hello, Mr. Borisov.
– Hello, Mr. Brilyov.
- Russky Island, the Eastern Bosphorus... This is where the Northeast Passage begins. And the Zvezda shipyard that you visited yesterday is located along the Northeast Passage. I wish you could give me some classified information. I'll start by citing the president, who said that the shipyard is of great importance to both the Far East and the rest of Russia. How will the rest of Russia benefit from the Zvezda shipyard?
Yuri Borisov, Russian Deputy Prime Minister for the Defense Industry: The Russian shipbuilding industry has always been mostly focused on building warships. Even during the Soviet era, civilian ships were built by our partners in Germany and Poland.
- Finland built them, too.
- We didn't have a large shipyard in Finland that would be able to produce heavy-lift vessels, the kind of vessels that we really need today. We need them in order to develop the North Shelf and explore the Northeast Passage. We are in need of new types of ships such as increased-capability ice-breakers, container ships, and LNG carriers. Unfortunately, Russia doesn't have much relevant experience. The Zvezda shipyard is a pilot project. It's one of the largest shipbuilding complexes in the world. At the end of the second phase of the project, the shipyard will be able to process about 330,000 tons of metal. Today, there's no other shipyard in Russia that can do this.
- Let's put it into perspective. 330,000 tons of metal... Does a bridge have that much metal in it?
- I don't think so.
- Could you tell us a little about the future ice-breaker Leader?
- Leader is an increased-capability ice-breaker. It has 120 megawatts of power. It can operate in the difficult conditions of ridged ice fields and break ice sheets with a thickness of up to 23 feet.
- Really? That can't be true because ice can't be that thick.
- Yes, it can. Leader can open a wide channel through ice for large vessels and LNG carriers following it to pass the Northeast Passage at a high speed of up to 12 knots. This means saving time, and time is money. This time of the year, there's still ice in the north.
- Does this mean that the Northeast Passage will be accessible year-round?
- That's precisely the goal. The ships will be operational all year round.
- I've been reading about you and your plans and came across a policy which feels like an anti-business measure. Starting from January 1st, 2019, only vessels produced in Russia will be allowed to enter Russia's waters. Is this a well-thought-out idea?
- Let me start by saying that we're not the first to do this. The United States introduced a similar policy in the 1920s…
- Really?
- ...in order to protect domestic manufacturers, domestic ship owners, cabotage, and the traffic in the United States and along its coast. Only vessels that were built in America and carry the American flag can sail there. The Northeast Passage is a route along the Russian coast and we're protecting our ship-building companies.
- So the plan is, once the Chinese and Koreans arrive in Vladivostok, they will have to load their cargo on Russian ships and then those ships will enter the Northeast Passage?
- Yes, most of the time. But I'd like to point out that, following the decision made by the government, some vessels manufactured abroad will still be permitted to make the transit so that this policy doesn't stand in the way of business processes. Clearly, we won't be able to shut the door for all types of vessels right away. That's why this exception has been made. And it will be honored. I don't see any anti-business measures here. We're simply protecting Russian manufacturers. This policy is expected to drive new orders to domestic manufacturers, including Zvezda. Zvezda has a clear plan to complete the first two phases. The enterprise intends to build about 150 vessels by 2035.
- Is there enough labor for such enterprises? This isn't the first time that I've visited the Far East. I've actually visited a few large, Soviet-era industrial plants in this area before and was impressed by their size. The response I got was, "What did you expect? Prisoners used to work here." How did the situation change now that the people are free?
- The Russian president has said more than once that we need to work on the demographic situation in the Far East. The region is underpopulated. In order to motivate a young, active, working-age population to come here and stay, we must create more high-tech enterprises like Zvezda. There're currently many defense contractors in the region. A new university on Russky Island will spark the construction of an entire conglomerate of high-tech enterprises around it. This will ensure an influx of young, healthy, intelligent citizens to the region. And hopefully, the demographic situation in the Far Eastern region will improve year by year. Indeed, there're many factors that play a role here. These include salaries and social services, the quality of which is probably below the national average in the Far East. Issues like this constitute the government's agenda for the foreseeable future. We need to make sure that the residents of the Far East are comfortable with where they're at and don't feel at a disadvantage compared to the residents of the European part of Russia.
- This is your first large television interview since your transfer from the Defense Ministry to the Federal Government. I'd like to use this opportunity to ask you a question not just about ship-building or the sea, but also about federal defense procurement. Everyone expects the growth phase to be over soon. However, since the day the current procurement rates were set the geopolitical situation has changed. Is this really a good time to cut down on federal procurement?
- We're not actually cutting down on federal procurement right now. We did have to make certain adjustments after implementing State Armament Plan 1120 for five years. Since 2005, the Ministry of Industry has invested significant funds in the modernization of major enterprises in the defense industry. It's true that they've undergone many changes. For instance, in the early 2000s, most machine tools were 20 to 30 years old. The situation has fundamentally changed since then. Enterprises have been modernized and equipped with numerically controlled machine tools as well as numerical control systems. Their equipment now fully meets the standards and requirements established by the Ministry of Defense. I agree with you in that we've passed the point of peak demand for a number of products, including aviation technologies. For instance, for every 100 military helicopters that we used to buy, we're now buying only 60. By the end of the current cycle, this figure will drop to 40. This means we have enough. The Ministry of Defense has set a goal for the share of modern, advanced weapons to be 70%. When we reach this figure, federal procurement spending won't be brought down to a minimum. We'll keep buying enough to replace old technology with new machines. In addition, the Russian Army has switched to maintaining technology throughout its life cycle. Repairs and modern maintenance cost money, too.
As for financial indicators defining the current defense procurement cycle and the State Armament Plan, they remain on about the same level as in 2017, although they have been adjusted according to the expected inflation rate which came from the Ministry of Economic Development. However, because demand is slowing down for certain types of arms and is growing for others, companies should seriously consider diversification.
- And you don't mean this in a bad way.
- This is not a distinctive characteristic of the Russian defense industry. All of the major global defense enterprises had to deal with the same problem. For some of them, the changes were painful; others took a smarter approach. The optimum backlog of orders of any enterprise should be about 30% toward federal procurement, 30-40% toward civilian production, and, ideally, exports. That would be smart. I've used this analogy before: a three-legged stool is the most sturdy structure. You can't really sit on a two-legged stool, but three-legs works. There're already a few good examples among leading enterprises: Kalashnikov Concern, Shvabe Holding, and UEC Saturn in Rybinsk. Just about every company should try to adopt this model.
However, keep in mind that the civilian market has its own rules. For instance, the source of funding is different. It may come from extra-budgetary funds, equity capital, loans, or, preferably, stock market funds, which is currently not a common source of funding in Russia. However, dozens of the top defense contractors in the United States are also leaders in the stock market. They easily attract the cheapest funds: stockholders' money. But such enterprises are judged by certain international standards that they have to meet. A developed, innovative share of their production must be dedicated to the civilian market, which generally attracts investors.
- In that case, let me wrap up this interview by suggesting that Zvezda should do the same when it comes to civilian shipbuilding.
- Zvezda is already pursuing a dual strategy.
- So it doesn't only rely on state funds, but also on its own?
- Yes, I think civilian orders will prevail at Zvezda. At the same time, it's one of the main enterprises that is responsible for the construction, repairs, modernization, and maintenance of the ships of the Pacific Fleet, the fleet that fights the most.
- Thank you, Mr. Borisov. I hope to see you again soon in the Far East or in your new office.
- Thank you.
