The future of Oboronservis

The most recent issue of Moscow Defense Brief has an interesting article (gated) by Vedomosti journalist Aleksey Nikolsky on the future of Oboronservis after Serdyukov’s ouster. Oboronservis was set up in 2008 as an integrated holding  company that would run the Russian military’s non-core operations, including logistics, repairs, and maintenance. It gradually became a major player in the sale of surplus (or ostensibly surplus) military property, and it was allegations of corruption in this area that launched the scandal that was used as a pretext to fire Serdyukov last fall.

The official purpose of Oboronservis was to allow the MOD to outsource non-critical functions. Nikolsky notes that while many thought that these functions would be contracted out to civilian contractors in a manner similar to models used in Western militaries, the Russian MOD chose instead to transfer its non-critical operations to Oboronservis subsidiaries. These subsidiaries then in turn were authorized to use private contractors for their operations, though the only areas where outsourcing was fully implemented were catering and cleaning. However, even in these areas, the subsidiaries have run up large debts to the contractors, at least in part as a result of the embezzlement of allocated funds by employees of Oboronservis or its subsidiaries. Nikolsky believes that the major subsidiaries will most likely be split off from the company or else the MOD will take over their assets and return to the old system. Opponents of outsourcing have claimed that living conditions in compounds run by the subsidiaries have deteriorated, even as spending on outsourced functions such as catering has increased substantially. Other critics note that outsourcing is problematic because it cannot be relied upon in times of war. Since the military would have to rely on its own mobile support units when troops are in the field, it is difficult to generate efficiencies that could be available if such units could be eliminated. The Oboronservis proposal to solve this problem by making commercial contractors part of the Russian military reserve and mobilizing them in the event of military action does not (to me) seem very realistic, given that most of the cooks and servers that provide the catering are middle-aged women and would not have a particularly easy time fitting into the Russian military structure.

The second (and much less publicized) goal of Oboronservis was to provide the MOD with a channel for importing modern Western weaponry independent from Rosoboronexport and Rostekhnologii. According to Nikolsky, this function was to become gradually more prominent. There are two arms import programs currently being run by Oboronservis. The first is the licensed assembly of 3,000 Iveco LMV M65 armored vehicles in Voronezh at a cost of $1.5 billion. The second program is for Rheinmetall to build an army training center in Mulino, Nizhny Novgorod oblast at a cost of $100 million. Nikolsky believes that while the second program is unlikely to be modified by the new regime, the Iveco contract may be reduced. Two other potential deals — for Israeli UAVs and for helicopters from Eurocopter have not gone forward, in part because of lobbying by opponents in the domestic arms industry. Nikolsky believes that Sergei Shoigu, the new defense minister, is largely supportive of the idea of importing military equipment from abroad. The Emergencies Ministry, which Shoigu headed until last spring, was the first Russian government agency to buy foreign helicopters. Shoigu has repeatedly complained about excessively high prices charged by Russian aircraft manufacturers and has suggested that foreign competition may be a way to force them to lower their prices.

Finally, Nikolsky argues that Oboronservis is likely to keep the former MOD repair plants, which have been consolidated under the Aviaremont and Remvooruzheniye subsidiaries. Just the aircraft repair component provided one quarter of the company’s total revenues in 2011. Shoigu has already indicated that outsourcing of repairs and maintenance is likely to continue, with an emphasis on awarding contracts to the original manufacturers whenever possible.

It seems to me that this article implies that the new regime will make only limited changes to the outsourcing model. While changes in logistics services, and especially catering, may be contemplated, I don’t think the military is particularly eager to bring back conscript cooks and the low quality food they used to produce. Most likely, there will be an effort to limit the company’s ability to sell property, as part of an effort to reduce corruption. As usual, this will  result  in a shift in illicit financial flows, rather than their elimination.