Good afternoon, esteemed colleagues,

Esteemed members of the Security Council,

Esteemed members of the Presidium of the State Council,

Today we are for the first time holding a joint working meeting. The need has been dictated by the very theme of our discussion today - "The State of and Ways for Developing the Defense Industrial Complex of the Country."

A host of issues are intersected in this problem: national security, foreign policy, the economy, social stability in the country and its individual regions. Therefore our actions in this sphere must be considered and balanced with maximum accuracy.

In February this year the State Council Presidium already considered problems relating to the reformation of the defense industrial complex. Discussion revealed a number of discussion themes, above all - in ensuring the economic and social interests of the regions of the Russian Federation. Joint activity within the State Council Presidium working group helped to work out and agree a common position. It is embodied in the prepared policy guidelines with respect to the sector for the period till 2010, and for subsequent years, submitted to you for discussion.

The defense industrial complex always played a key, I would say, a system-forming role in the economy of our state and in the life of whole regions of the country. That had both its own "pluses" and its own "minuses."

In our days, when market relations in Russia have gathered full momentum, we must once more think how to use the advantages of the market economy for a breakthrough development of the defense industrial complex. For the development of an industry where rigid directive management and state paternalism traditionally prevailed. Recent years have been difficult for the defense complex of the country. And it was not only the reduction of military expenditure. The process of structural reforms in the complex as distinct from many other branches of the economy went slowly and contradictorily. Many still nurtured the illusion that, as before, there would be government demand for the morally and technologically obsolescent products. And that the plants of the defense industrial complex could go on existing outside such economic categories as efficiency and competition.

The complex's structure, unfortunately, is still archaic, does not live up to the contemporary military-political tasks of the state. It should not be forgotten that today we are being confronted with new threats, living and working in conditions which make different, higher requirements to the reliability of national defense than previously.

It is obvious that the state has to make a detailed inventory of this industry and clearly formulate both its own interests and its priorities in the sector.

I will list the most important tasks requiring immediate action. First, it is the creation of modern effective mechanisms of management and control in the complex, elaboration of real instruments for the protection of the interests of both the state and the developers and the manufacturers of defense products. (I mean, among other things, the legal protection of intellectual property.)

Second, it is the urgent task to internally consolidate the defense industrial complex, to get rid of its structural excessiveness. The average rate of utilization of the capacities as of now does not exceed 20 percent. And the backbone of the complex exists for the most past thanks to the high export potential of a very limited number of plants.

There also persists the largely bloated structure of mobilization capacities. This hinders raising the operational efficiency of plants and having them technologically retooled.

In the meantime, the productive assets and the research base of the specialized plants of the complex are growing obsolescent at a quickening pace.

At the last meeting with senior Defense Industry officials we already spoke about the need to seriously reorient the resources towards scientific research work. Otherwise we risk being left without so necessary technological developments. And this will inevitably tell on the quality and competitiveness not only of advanced arms, but also of civil technologies as well.

It is not only technologies that grow obsolescent. We're also beginning to lose a continuity in personnel, and so I think that the problem of personnel training for the complex should become a separate theme of discussion.

The third problem is the still inefficient management in the plants of the sector themselves and the related low return on state assets used. Ludicrous at first glance, but it has to be said that dividends on state-owned shares still do not exceed rent payments for the property of these organizations.

Traditional references here to the non-market character of the defense industrial complex sound unconvincing. All over the world, and in our country too, as I've just said, the production of arms and defense technologies has long since been a highly profitable and successful business. Fierce competition has not been going on in this field and in this market for nothing.

Therefore we need a justified program to integrate the defense industrial complex into the market infrastructure, and the raising of the economic attractiveness of the sector. This will help attract non-state investment, including foreign, strange as it might seem at first glance. Of course, with regard for all the requirements made to national security issues.

All this does not exclude organizational changes either. Here one of the most important instruments may be the creation of integrated research-industrial complexes combining various forms of ownership. There are positive examples here, including in aircraft manufacturing.

I think that such structures can precisely become the core of a renewing defense industrial complex of Russia. This will enable using the available resources with maximum efficiency and doing away with ineffective costs.

I want in conclusion to once again stress that a breakthrough development of the defense industrial complex and the qualitative improvement of its efficiency and competitiveness today is only possible on the basis of a consistent and skillful introduction of market instruments. There is no alternative here. Herein lie the interests of national security and the interests of the economic development of the country as a whole.

Let us proceed directly to discussing the prepared documents. Ilya Klebanov will read a communication. Let us thank the press for the joint work.

Thank you.


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