Vladimir Karnozov

Russian technology and defense industry conglomerate Rostec, the country’s largest government-controlled corporation, insists that sanctions the U.S. and European Union imposed against Russia for its annexation of Crimea and support of separatists in Ukraine have not significantly eroded is share of the global market.&nbsp;“Despite the pressure of foreign sanctions, the corporation has managed to strengthen business relationships with Western partners, and so to prove once again that for us, business stays out of politics,” said Rostec general director Sergei Chemezov.

 


Chemezov was speaking at a recent press briefing to summarise the group's financial results for 2014. He would not comment on the status of Rostec's planned partnership to build the Q400 regional airliner with Bombardier. Last October, the<a href="https://www.ainonline.com/aviation-news/2014-10-30/bombardier-shelves-plans-russian-built-q400s"> Canadian manufacturer put said that these plans were on hold </a>because of the difficulties caused by sanctions against Russia, including those imposed by the Canadian goverment.

 


Rostec controls more than 700 companies, most of which belong to 17 large holding structures. Statistics show that the corporation’s overall workforce declined from 475,000 employees in 2013 to 443,000 last year. The company plans further cuts, all involving white collar workers. It considers blue collar workers and engineers in short supply.

 


Rostec does not provide exact figures for its exports to the U.S. However, AIN was informed that these have been stable for the past year. Sanctions effectively banned the Kalashnikov concern from selling firearms, but its sales were relatively low compared with other Russian exporters.

 


During 2014 and the first half of this year, Rostec achieved some success in developing its business with the U.S. by extending agreements for VSMPO-AVISMA to supply titanium to Boeing until 2022 and for the UZGA plant to perform license production of the Bell 427 helicopter. It reaffirmed an old plan for license production of industrial gas turbines with GE. Rostec-controlled Aviacapital-Service leases Boeing 737-800s&nbsp; and is awaiting the reengined 737 Max, whose deliveries are funded from titanium sales to Boeing.

 


“Throughout the past year, we continued with shipments of Mi-17 helicopters to the U.S., and with aircraft components and construction materials to Airbus and Boeing. Sanctions only make us more active in search for new markets and market niches,” declared Vasily Brovko, chief of communications and information.

 


The company managed to initiate just one new partnership with a European company, adding the AW169 helicopter to the list of products for the HeliVert joint venture between Rostec member company Russian Helicopters and the Anglo-Italian manufacturer AgustaWestland.

 


“Our European partners say they are not interested in the sanctions regime to stay long,” Rostec said in a statement. “Those who came to see us recently insisted they want all our co-operation projects to continue, and these do continue. We have had such talks with Finmeccanica, AgustaWestland, Renault-Nissan, Daimler, Snecma, Thales, Sagem and others with whom we are involved in projects that are up and running. In our turn, we, too, hope that our joint work will continue. The majority of our European partners speak very negatively of what is going on in the sphere of politics.

 


“The fact is that Russia has always been selling little to Europe," the statement continued. "We have been more active in establishing joint ventures with European companies and in buying technologies from them. At the same time, we have been exporting to third countries in the developing world. Besides, there has been a considerable amount of export into the United States, because there are some distinct big markets there. The Americans have been buying such key products from us as titanium, rocket engines, helicopters, firearms and so on. Even though Rostec always tried to stay out of politics, it is not always possible.”

 


Rostec had planned a massive initial public offering (IPO) for its member companies, but the recent change in relations with the West made the corporation rethink its plans. The thinking behind its strategy seems to center on keeping foreign partnerships alive until the sanctions regime lifts.

 


“In the new strategy we are likely to postpone IPOs, since the global market situation is now less favorable for the sale of Russian defense companies,” the company stated. “Besides, we need no money, (only) technologies and markets. That is why we are more inclined to consider alliances and partnerships with other world leaders in technologies. Examples include expansion of our joint programs with AgustaWestland, General Electric, Boeing and some Chinese structures.

 


“We have achieved big success with Boeing, and believe that our mutually beneficial cooperation will stay for decades to come,” the company statement added. “In our view, sanctions come and go, while the cooperation in the high-tech sphere has far longer cycles.”

 


Rostec will invest more in information technology, rare metals and other areas, “so as to be competitive and a world leader,” Brovko said. Last year, the company invested 101.4 billion rubles in various programs. “We want to attract more foreign investors who would not just bring their money into Russia, but also share with us their managerial expertise and technologies,” he said. “As such, sales and IPOs are not so important. That is why we are now more inclined to consider joint ventures on the base of Russian high-tech companies.”

 


On July 27, Rostec announced that it will reduce its central office staff as part of a “comprehensive optimization program” to adopt corporate best practices. The company will cut the central staff by 28 percent to 424 workers over the following two months, and to 316 workers by the end of the year.

 


Chemezov said the job reductions “should make the process of taking managerial decisions even more transparent and understandable, (improving) the competitiveness of the corporation.” A close friend of Russian president Vladimir Putin, Chemezov has headed the company since its founding in 2007. He said Rostec’s long-term strategic goal remains to promote the development of Russian industry, especially the machinery and high-tech sectors.

 


Days before that announcement, Rostec presented its annual financial report during a press event in Moscow. Prepared according to Russian accounting standards, the 2014 report revealed that Rostec’s annual income grew by less than one percent from the previous year, reflecting the effect of U.S. and EU sanctions. Consolidated revenue totaled 964.5 billion rubles ($16.9 billion).

 


Largely due to an increase of more than 60 percent in state defense orders, however, Rostec stayed profitable. It reported net profit of 33.9 billion rubles ($570 million), down from 40 billion rubles in 2013.

 


Consolidated debt totaled 600 billion rubles, 30 billion rubles below the level in 2009, when Rostec received the large majority of its assets from the Russian government. Roman Deniskin, chief of strategy, told AIN that he does not consider its debt load a problem, since “the debt burden is relatively small judging by international standards for structures such us ours.”

 


Rostec plans to implement its new growth strategy by year-end. It now considers the current strategy, which the company adopted in 2011, outdated because the economic environment has changed. “We need some corrective action,” Brovko said. “The new strategy is being shaped, its main principles have already been formulated.” It calls for Rostec to increase its revenue three times faster than Russia’s GDP, which economists expected to increase by 2.3 percent next year after declining this year.

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