Transcript of the beginning of the meeting:

Vladimir Putin: Colleagues, good afternoon. I have joined you here today to agree the final parameters of the federal programme for the development of the national defence sector to 2020. I must also say that we have been delaying this decision – I am mainly referring to my colleagues in the government – and that we should have addressed this issue sooner. All of us understand this: planned government spending until 2020 for the state defence order totals 20 trillion; but how can we fulfil that order and make cutting edge military equipment using old machinery? This means we should start with defence industries, which require new equipment and technology.

We have just visited the Sukhoi plant and saw how these programmes are being implemented. I won’t go into detail now, but on the whole the plant makes a good impression: labour productivity is on the rise, wages are growing appropriately, and there are clear, good prospects for the next few years. This situation should be common.

In the coming decade, as you also know, we must fully… well, if not fully, we should for the most part re-equip the army and navy, so that advanced weapons account for 70% of total armaments. We must be fully aware of the huge responsibility we are facing. In this regard, I would like to focus on the state customers as well as the contractors for state orders.

Let me start with the state customers. But before I do, I should point out something (and I have mentioned this on multiple occasions because this concerns everyone): We have allocated the 20 trillion and nearly 3 trillion (2.8 trillion, maybe more) to revamp the defence sector. But our task is not just to spend the financial resources, millions and billions – trillions in fact – but to achieve the desired result. The result we need is new weapons, which is why it is no use reporting how many billions we spent; we need to know how many pieces of advanced equipment were supplied to the armed forced. In addition, powerful research capacity should be built for the further development of advanced weapon systems. The work of hundreds of companies, design bureaus, research centres and testing ranges will have to be reorganised, and qualified engineers and workers should be trained for the defence and related industries.

The national defence sector certainly has vast potential and resources, but there are problems too. We know where these problems stem from – from insufficient financing over the course of many years. However, there have been improvements lately, and we already have something to start with. I have already mentioned this striking example: according to our plan, by 2015, new, highly efficient machinery and equipment will reduce work intensity to a quarter of its 2009 level. Right, Mr Pogosyan? Is it a quarter?

Mikhail Pogosyan (president of the United Aircraft Corporation): Yes.

Vladimir Putin: Can you see how good this is, and much high labour productivity will grow?

I must note of course that what I am saying about productivity in fact concerns every industry, but the defence sector is certainly no exception. Each and every company needs to be audited thoroughly to evaluate its efficiency. The government will certainly provide comprehensive support to industrial plants and research companies alike. We will focus additional financial and administrative resources on this, and any other kind of resources we can marshal, including preferences, if they are needed.

Now let us look at the state customer. What’s important is to ensure smooth interaction, which was not the case until recently, between the Defence Ministry and companies that fulfil the state order – the producers of weapons. The Military-Industrial Commission under the Russian Government should play a greater role. We have had meetings and discussions on this issue. I ask Mr Rogozin (Dmitry Rogozin, deputy prime minister for the defence sector) to get more actively involved in this. We need to establish very thorough supervision of the fulfilment of state orders, with detailed schedules for each segment. There are contract obligations, of course, but in some cases this is not enough.

We must realise that the huge resources we have allocated, the 23 trillion roubles – we will not be able to afford any comparable spending on the defence sector in the near future. As it is, this is an enormous burden on the economy. That is why contract obligations alone are not enough. Contracts are good, but the government should develop a clear and effective control procedure for each important segment of the state defence order. We need to know at any moment where we stand with regard to each specific contract and how much progress has been made in fulfilling contractual obligations.

I would also ask the Defence Ministry to minimise or, if possible, eliminate all requests to re-channel financing from one priority to another. I know that this is not easy, but we must improve this discipline. Suppose we move the money from one priority to another today in the hope of restoring the balance tomorrow, or a year from now. But when that time comes, new priorities emerge, and the money may end up in unrelated projects. And if we fail to scrap more, we convince ourselves that it is no longer a priority and was not that important anyway.

We must also fight the practices of constantly reformulating the tasks, giving vague requirements for military equipment, and delaying the signing of contracts. There should be no hitches in awarding state contracts. There should be no violations of supply deadlines without good reason. We have agreed with the Defence Ministry that they will sign long-term supply contracts, for three or five years, thus granting producers’ request. I think some contracts are even for seven years, right, Mr Serdyukov (Defence Minister Anatoly Serdyukov)?

Anatoly Serdyukov: Right, until 2020.

Vladimir Putin: Until 2020. You see, this is a serious endeavour that calls for significant resources that are currently being transferred to enterprises almost on the basis of trust, so that you can have sufficient funds to get started without having to make your products more expensive through loans on which you will have to pay inordinate amounts of interest to banks. That way you will also be able to plan your work, which is important.

The state armaments programme clearly outlines the number of items that need to be supplied to the Army. The programme must be fulfilled. The quantity and quality should be maintained. Any attempts to make unsubstantiated price increases – I’m talking about contractors now, not the Defence Ministry – or unleash so-called price wars or skirmishes, which I have witnessed on several occasions recently, must be neutralised using both administrative mechanisms and economic levers, including fines and other financial sanctions.

Allow me to repeat: prices for military equipment cannot be chosen out of thin air. However, they should be based on reasonable profit margins for defence enterprises, so that they can have the resources for future development and are able to pay competitive wages to their employees. Our goal is to significantly increase the prestige, social status and income of the industry’s employees, both workers and engineers. We are operating based on the belief that the efficiency of the enterprise should be at least 13%-15%, or even 20%.

The next important issue has to do with increasing economic transparency and transparency of defence enterprises themselves, as well as eradicating all kinds of obscure schemes involved in the distribution of orders and revenue, with profits ending up in the pockets of intermediaries or affiliated contractors.

Here is a preliminary overview of the situation: parts and services account for 65% to 95% of the production costs incurred by general contractors, as they themselves put it. Up to 95%! What’s the role of these contractors then? Do they just add the final 5%? Profitability, as defined by the existing recommendations issued by the Federal Tariff Service, leads to a disproportionate distribution of revenue as compared with the input of each contractor, and to a significant overstatement of such revenue. Therefore, the Federal Tariff Service should carefully re-consider these issues. I have asked them to do so on many occasions, but I have yet to see the results.

Next. There are certain things that need to be kept secret. Of course, there are many areas within the defence industry that are off-limits, but in all other instances the government contracting system shall be made as open and transparent as possible. Such an approach will be beneficial for establishing fair competition in the industry.

I have already mentioned that we need to break stereotypes and engage civilian enterprises, private businesses, civilian universities and higher educational institutions in general in implementing the state defence order. Not only the defence industry, but the entire Russian economy should be engaged in retrofitting the Army and Navy. Significant resources allocated to state defence programmes should promote qualitative economic growth in our country, stimulate demand for innovations and create tens of thousands of new and modern jobs.

In closing, I would like to say a few words about imports. This should not come as a scare or a shock to anyone. Purchasing certain technological processes or models abroad is a standard international practice, and there’s nothing criminal about it. We need them mainly to gain access to advanced technologies. There are no plans to make mass purchases: this would be foolish, and no one is going to do it. However, I would like to emphasise that funds allocated for the defence order should be used wisely. Certainly, these funds will work within the country, for the benefit of our economy. The state armaments programme will certainly focus on Russian manufacturers. However, the Russian defence industry should be prepared to operate at full capacity. We will assess the results of your work based on the quality of the products supplied to the Army and Navy, and their ability to improve Russia’s defence capability. Let’s get to work. Mr Rogozin, please go ahead.

Dmitry Rogozin: Thank you, Mr Putin. I would like to begin by talking about your article that ran in today’s issue of Rossiyskaya Gazeta, where you outlined priorities for the development of the Russian Armed Forces and the defence industry. The article looks more like a programme, a doctrine, and I would like to say that each point in this article will be addressed and a corresponding decision will be made on each item. First of all, I would like to confirm that we are about to submit the draft federal targeted programme entitled “The Development of the Defence Industrial Complex” for consideration by the Government Presidium on February 22. We have completed this work. Mr Manturov will speak about it in detail. We are about to submit a new revision of the draft law On the State Defence Order for consideration by the Government Presidium on February 22 as well.

There are two important issues that I would like to discuss. The first one concerns the fulfilment of your instruction to exercise rigorous control over the placement of the state defence order. The second has to do with restoring the capabilities of our defence industrial complex and establishing a strong industrial, scientific and technological base. In all, there are currently 1,353 organisations that feature in the consolidated register of defence enterprises. They are located in 64 Russian regions. In all, about 2 million people are employed by defence enterprises in Russia.

As far as the implementation of the state defence order, the information about its placement that is provided by state customers to the Military Industrial Commission on a weekly basis is indicative of certain improvements in the placement of orders and the transfer of funds to contractors, primarily as compared with 2011. In terms of figures, that accounts for over 200 billion roubles, which is twice as much as in the same period last year. Certainly, we have intense arguments now and then as we try to pin down prices and deadlines. This is natural, but we strongly believe that these arguments should be kept within the confines of the professional environment, namely, the Military Industrial Commission, so as to not damage our export potential. The defence industry and the military are two parts of a single defence complex in a broad sense of the term, where the Armed Forces are not just a walk-in customer and the defence industry is not an abstract manufacturer. Everything they do should be done with the ultimate goal in mind. It’s all one single mechanism, and the main goal is to manufacture the necessary armament systems by 2020.

We need to establish fundamental order in this sphere – we discussed this issue with you, Mr Putin, and you gave the green light to establish a situation centre at the Military Industrial Commission. We are currently working on this. We will have direct access to all enterprises and will work in real-time with all enterprises in order to eliminate any and all bottlenecks in case we run into pricing difficulties or any other problems.

Mr Putin, I would like to inform you that all defence enterprises are expected to provide information about the banks they are working with during the implementation of the state defence order to the Military Industrial Commission by March 1. We realised that we had never had access to this information before, but we believe that providing access to major state-owned banks should be based on objective criteria, and they should work with enterprises on implementing the state order. We also believe that the government should have access to information about these funds as they go through accounts of these state-owned banks, because it is exactly the government whose role it is to oversee the targeted use of these funds for defence purposes.

Vladimir Putin: When dealing with banks, we need to know... I am fully aware of what I’m about to say: no matter how complicated it may be, we need to know the contractors used by manufacturers of finished products. There are tens of thousands of contractors, and we need to know who they are in order to make sure that a) these enterprises are capable of dealing with the tasks at hand; b) we understand their profitability levels; c) the distribution of profits is fair and transparent. If we don’t see the entire chain of these contractors, it will be practically impossible for the Defence Ministry to figure out what the final price consists of. On top of that, these contractors often cause setbacks, at least that’s what we hear often. That means that the government should get involved and help enterprises and help even these… I’m referring to manufacturers of finished products. Subcontractors should receive help as well, if need be. In other words, there should be a living mechanism for ongoing interaction and support, but this mechanism has to be transparent.

Dmitry Rogozin: This is exactly why we want the state banks to act as our partners during the implementation of the state defence order, because they have actual access to the money and can follow its movement.

I would also like to address the criticism of those who started talking about inordinate amounts of military spending after your article was released today. On the contrary, today we have placed an emphasis on increasing the number of dual-purpose products, developing new competitive models and materials. The government is orienting production parallel to the manufacture of civilian commodities. We have seen this here, in Komsomolsk-on-Amur, and during my trips to Novosibirsk and the Moscow Region. I travelled there with the defence minister and we visited our enterprise in Zelenograd. Defence production leads to the development of civilian industries everywhere. In the United States and other leading military powers the ratio between civilian and military products is well-balanced – about fifty-fifty. This allows their enterprisers to use military technology in civilian industries and gain supremacy at the world markets, and to survive when there are no military orders by working for the civilian sector while awaiting military contracts.

Mr Putin, I’d especially like to point out the importance of involving private companies in modernising the military-industrial complex. There are cases in which private companies come to work in the defence sector not just to gain profits but also out of normal patriotic sentiments, a desire to help their homeland. We see nothing bad in this attitude and will encourage it in every possible way. We already have some lines of modern production, for instance, small arms, ammunition, optical instruments, means of communication, new composite materials and alloys. These new lines have been produced by private enterprises. I can cite an example for you. A new production line of sniper rifles has been opened in Moscow. Its design bureau was founded on the basis of private funds only. We are planning to launch an all-purpose small arms plant at one of the major enterprises in Tula using private funds as well.

Facts and figures point to a general upsurge in production and a flow of young specialists into the defence sector. We will resolve many problems once we have long-term contracts and have learned to see beyond the horizon and develop stable production. But the devil is in the details. Let’s take, for instance, the average age in the military-industrial complex, which is 46 years. But, a closer look reveals that this is akin to finding “the average temperature in a hospital.” There are 20 year-olds (they have really started working in this sphere) and seasoned workers who are over 60, but there are no 46 year-olds. This age group has been eliminated in the military-industrial complex. No matter what kind of money we invest in the defence industry, we will not make any progress unless people can consider their perspective and find value in their work. Material incentives and social benefits are very important, but no less important are such motives as patriotism, loyalty to one’s profession and commitment to the traditions of the domestic defence industry. At its conference next Sunday, the voluntary movement to support the army, the navy and the defence industry, which operates under the auspices of the Popular Front, will discuss ways of reviving the faith of our people in our defence industry and the power of our armed forces. Several thousand representatives of our leading defence enterprises will attend this conference. It is clear that the discussion will revolve around the ideas that you voiced in today’s article in Rossiiskaya Gazeta.

As Tula weapon-makers said in the Tale of Lefty: “The English nation is not stupid either, but tolerably cunning.” Today, we are not embarrassed to study the methods of programme and target planning of the armed forces development and technical equipment in the more advanced NATO countries. At the same time we are also conducting a detailed analysis of the Soviet experience, which could be very helpful now.

Modern conflicts are becoming increasingly short-term and are based on the broad use of modern technology. In many regions NATO is demonstrating mostly contact-free methods of armed fighting and we must take this into account. When it comes to such major tasks as the development of air and space defence, deep radio-electronic warfare and the development of the strategic nuclear forces, we must be able to look beyond the horizon and draw up a road map. With this aim in mind, the Military Industrial Commission is planning to determine so-called system integrators and designer ideologists that will be able not only to develop certain types of arms and military hardware in design bureaus but also to create the architecture of sophisticated security systems. We had this same system in the Soviet Union – designer Sergei Korolyov was an ideologist of the entire area rather than some particular bureau. Now we need people like him in order to resolve major global defence tasks to match the analysis of national threats formulated by our political leaders.

Another important task is the programme organisation of fundamental and research work. It must be oriented towards the proactive development of scientific and technical ideas. It is now pointless to blindly copy foreign weapons or military hardware. It is important to predict future requirements. Having grasped the direction of technical progress, military hardware and arms, we must try to cut the corner and take the shortest route to our goals.

We conducted a brainstorming session at the recent meeting of the Presidium of the Siberian Branch of the Russian Academy of Sciences. We met with rectors of the leading technical universities and discussed this issue at the Military-Industrial Commission and its Scientific and Technical Council. As a result, we have come to a conclusion that confirms the government’s decision to set up a structure that you described in your article, that in addition to doing routine R&D and design and experimental work, would promptly hone in on breakthrough research. The draft law on establishing a special fund for ordering and conducting such R&D in the interests of our defence and national security has already been submitted to the Military-Industrial Commission. We are going to present it for consideration to the State Duma as soon as possible.

Now, Mr Putin, please allow me to switch to the classified part of my speech.

Vladimir Putin: Yes, but look… Before you do that I'd like to say that a huge amount of funds is involved here: 20 trillion roubles for the state defence order and almost three trillion roubles for the defence industry. We plan to allocate this money for the period until 2020 but I already see… For the time being, everything is all right but if we postpone this for a month, a month and a half, two months, we will have it not by 2020 but by 2021, 2022 or 2023. And this will make production more expensive. We understand this as well but we don’t have extra money. This is what makes this a serious point, and it is why I am constantly talking about it. Serious investment in the defence industry, army and navy will have an indirect effect on the economy – this is beyond doubt. This has always been the case and it is the case with us. This is a good thing but this indirect effect is not what we need. In this case the funds must be used efficiently for the goals for which they are being allocated. Let’s continue.