Appointed to run the state agency, Ukroboronprom, in July 2014, Roman Romanov is a classic Poroshenko draftee. A businessman who has worked with Mr. Poroshenko in the past, he has already felt the stench of dirt thrown his way because of this. Nor has he been spared a scandal around supposedly unfinished and poor quality equipment delivered to the army, the purchase of certain kinds of weapons abroad, and so on. Still, Mr. Romanov has achieved results as well: in the last month Ukraine’s Armed Forces have seen a serious inflow of weaponry and equipment. The Ukrainian Week took an exclusive interview with Mr. Romanov to get an inside scoop on the weapons industry in Ukraine today.
U.W.: People often say you’re just an amateur, because you’re a physics teacher by training and a businessman by profession, but you never had anything to do with the army. What do you consider your main goal at Ukroboronprom and why did you go there in the first place?
First of all, I was born in a military family, so I was surrounded by soldiers my entire life. I find the state of the army a painful thing. Sure, I’m a physics teacher by education, and proud of it, because of this I discovered a love for the hard sciences. Yes, I’m an entrepreneur by profession, I was chair of the Small Business Council in Kherson, and I was elected to the Kherson City Council and the Kherson Oblast Council. I got my MBA at MIM-Ukraine and did my practicum in Hong Kong and Macau. I’ve organized some 35 companies from the ground up, so I’m a professional manager. This is why the President appointed me to this post. I have real experience working in the real sector of the economy, and that’s what Ukroboronprom is.
As a manager, my main goal is to make money. State assets should be bringing the state profits, not losses. We should be bringing money into the Budget so that hospitals can continue to work, streets to be swept, roads to be built and so on. We are supposed to have a quality business. It’s incredibly annoying that in the army, defense and war, suddenly everybody’s an expert, just like football. And when everybody’s busy criticizing, I have only one thing to say: You don’t like what I’m doing? Come on over and do it yourself. In fact, we have an open competition for resumes on our corporate site, so all of those armchair generals who are so critical are invited to come work for us.
U.W.: Have you switched around management personnel at the companies that are part of your concern and at Ukroboronprom itself? What have you accomplished in your first six months?
For 23 years, Ukroboronprom was falling apart, selling off soviet weapons and that only in certain categories. Whenever it came time to fulfill a contract for some new item, it worked very slowly, spending an average of at least 2-3 years on each contract. Any domestic orders for the army were pathetically small: a few hundred thousand hryvnia at most. Politicians simply had other priorities. Now all of a sudden, we have to do everything for yesterday.
I came here with my own team, as we joke about it, of young nerds in glasses. Hardly a single one of them had any experience in the defense industry before this. My first deputy is slightly over 30, the assistant director for exports is also a young person with an MBA and so on. We kept only a few professional people from the old management team. So far, I’ve replaced 12 managers at over a hundred companies. The vast majority of these companies were losing money. Right now, we have 8 more profitable ones. We lost 12 enterprises in the ATO zone in 5 cities. Another 13 companies are either being restructured or are going through bankruptcy.
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I can say with confidence that the army has gotten more in the last 6 months than in three years of this company’s operations. During the first half of 2014, Ukroboronprom lost UAH 400 million. By the end of this year, we were posting a profit of UAH 150 million. In other words, we stopped losing money and even earned a bit extra, all told half a billion. We also created 2,000 new jobs, and along the way we also managed to pay off UAH 40 million in back wages. On the domestic market, that is, for the Ministry of Defense, for instance, we managed to deliver UAH 1.5 billion more in products during the second half-year than in the first half-year.
How did we manage to do this? Most certainly not because I’m some kind of whiz-bang manager. Firstly, and most importantly, we introduced an electronic trading system that was launched on November 6. Just to give you an idea, as of today, we held several hundred tenders and saved nearly UAH 4 million as a result. For instance, the Kyiv Tank Plant had items that we were able to save up to 60% on. How? KTP ran 17 tenders, because they had to buy metal, plastic, rubber and so on 17 times. Before, these 17 calls to tender would have received exactly 17 bids from companies that belonged to the koumy [godparents of a child], brothers and sons-in-law of the director. This time, there were nearly 2,000 bids. And this way we were able to save an average of 35-36% for the companies in the holding.
Every factory that belongs to the concern is a separate, independent enterprise. We only approve of the plans of each director and have no right to interfere in his commercial operation, that is, we can’t go to him and say, “Buy your parts from these guys.” They also have separate bank accounts. All we deal with is coordination and approvals. We can also remove the director if he doesn’t carry out an order or simply steals.
As to why we only fired 12 general managers, the answer is simpler: there aren’t enough specialists around. Do you think it’s easy right now to find a person who has experience working with armored vehicles or missiles, who knows something about marketing principles and isn’t a total crook… and who is better than the current manager. And the plant can’t stop producing this urgently needed equipment for even a second? We’re looking everywhere we possibly can to find professional managers. For another thing, we stopped the disgusting practice of every factory manager coming to a newly-appointed director of Ukroboronprom so that he could tell them how much to pay to hang onto their seats. Do you honestly think that, after this kind of thing, the boss was in a position to demand anything of them?
U.W.: How capable of arming Ukraine’s Armed Forces are the companies in the country’s military-industrial complex? Which components are they able to provide and which ones aren’t they?
Ukroboronprom manufactures everything possible, I guarantee you that. But when the Defense Ministry suddenly wanted light armored vehicles in the middle of last year, an item that was not produced up until then, there was nowhere to get them initially. But this year, we are delivering our first Dozor-Bs to the army. Prior to that, we covered this need with English Saxons, which someone tried to blow up into a scandal by claiming that it was second-hand junk and so on. Frankly, it’s hard to say just how armor might “age” if you change its engine, replace the treads and the manufacturer offers warranties. If we can buy quality equipment for a tenth of the price and the army desperately needs it, why on earth shouldn’t we buy it? Let me give you some real numbers. In Turkey, a Saxon class vehicle costs EUR 460,000 while the British version cost us less than EUR 50,000, together with all the additional costs. The Dozor-B costs us around USD 200,000 to make. Just so everyone can understand the labor intensiveness of military production, making one such vehicle involves 40 subcontractors. At that point when Ukraine’s manufacturers simply weren’t yet ready to manufacture armored vehicles, the 75 Saxons that we bought were the best option for preserving lives on the front.
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U.W.: There was another serious scandal recently when the president made a ceremonial presentation of tanks for the army and those tanks apparently weren’t battle-ready.
The guilty party in this situation was a certain general, who gave orders to bring out inappropriate machinery. He’s been fired. Those tanks hadn’t gone through a military panel for approval and weren’t fully equipped. Ukroboronprom had not signed off on their transfer to the army, either. That individual decided to put on a show and got the results that he deserved. I can promise you right now that if anyone tries something of that nature at my concern, that person will be kicked out of our system the next day. Ukraine has a multi-phased system for reviewing military equipment. First, the internal technical oversight department, then the military panel, which carries out a full-scale inspection and completely tests any equipment before giving its approval. In this particular incident, neither we nor the panel had approved the equipment.
We’ve actually set up 47 mobile mechanical brigades that service our vehicles on the front. These men heroically remove damaged equipment from under fire in order to repair them. So far, they have managed to restore over 1,000 units directly from the ATO zone.
U.W.: How capable is Ukraine’s MIC of developing completely new equipment, not just to upgrade or modernize old soviet models?
In the last few months, we’ve upgraded more than 700 units and developed some 350 new ones. Plans are to set up our own ammunition manufacturing as the ammunition plant in Luhansk has been lost. But it’s not cause for despair as we have more than enough ammunition in stock. The problem is that the Luhansk plant not only made ammunition for Ukraine’s Armed Forces, but it sold it around the world, which is why the Russians took all of its equipment away. They’re trying to eliminate competitors.
As to modernizing, truthfully the majority of our tanks are T-64s, which were upgraded to Bulats, but that’s actually a different tank, with completely improved specs. Only the body is the same and that’s where we save money. Imagine if we needed to weld new bodies for tanks right now? Capital renovation of a tank is worth about UAH 1 million. By comparison, one new Oplot will cost UAH 80 million. Now you can understand why we are restoring old ones. Of course, the Defense Ministry will choose 80 tanks over one. As for artillery, we’re in the process of setting up a line for large caliber barrels. Earlier, Artozbroyennia, one of our enterprises, made at most 30mm guns for AFVs and worked only two days a week. Right now, they’re operating 7 days a week.
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U.W.: What about cooperation with Russia? Has it been completely stopped and what kinds of losses does that represent for Ukraine’s MIC?
By stopping trade with Russia, our defense industries have lost about UAH 3.3 billion (about USD 200 mn). We were getting some 30,000 items from the Russian Federation, and now our factories are producing nearly 11,000 replacements. That’s 30%. Firstly, you’re talking about aeronautical engineering, where we’ve completely picked up since we stopped working with Russia. We’ve already begun to produce more than 4,000 items. And that’s also how we’re economizing on costs: the cost of an APC was, say, a million, and stayed the same. But the money now stays in Ukraine.
U.W.: How much equipment does Ukroboronprom sell abroad?
Right now, not a single contract or unit of equipment can be sold outside Ukraine without passing through a National Defense and Security Council military technology oversight commission, as decreed by the president. They also have to pass a state auditing service review. But if we have a contract, we do have to fulfill it. For instance, repairing airplane engines. We have a number of high-end plants that can do this. And they have available capacity while there is demand from abroad. So why shouldn’t we make some money for the state? So this is what it looks like: we get an order, we send it to the DM and commission for review, and if they give the green light, that is, they consider that this particular item doesn’t interfere with production of equipment needed for the Armed Forces, we go to work. In the last half year, 20 new foreign partners have shown up, and we’ve signed contracts worth USD 450 million with them. Top on this list is services, but there are also nearly 100 units of finished products and tens of thousands of small arms. We don’t make the call about whether equipment is needed or not, we simply get permission or a ban on selling it. Indeed, there were several cases where the DM could not find an immediate use for some equipment, but it still asked that we hang on to it and not sell it.
U.W.: What about western partners? Who sells to you and what do they sell?
Well, for instance, Ukraine is receiving high-precision sniper rifles, anti-tank technology, and so on. In most cases, our partners meet us more than halfway, in terms of prices and timeframes, as most weapons market contracts tend to have delivery schedules several years into the future. I personally traveled to all the countries where we buy materiel and asked them to give us a break. Our biggest partners are the US, Britain, Lithuania and Poland, all of whom have been truly helpful. We also do business with Serbia and Bulgaria, both of which produce soviet-class ammo. I also stay in touch with a number of ambassadors who have themselves been very helpful, such as Estonia and Latvia. Right now, we’re hoping to engage Lockheed Martin, Airbus, Textron and Boeing, who produce high-end military technology, in order to do some joint production. This would be very interesting indeed, as the Ukrainian army needs to buy modern weapons and if we can manufacture them domestically, that will be really convenient. These corporations, on their part, are interested because we actually have a large number of high-quality arms manufacturers with loads of experience.
At the moment, we’re working with Poland to develop the first Ukrainian-made APC based on NATO standards. That means that, when the time comes to join the Alliance, we will have everything ready as necessary. On the other hand, we could go the way of Sweden, which doesn’t belong to NATO but follows NATO standards for its arms. This is not just a question of being defense-capable, but also of business. We want to open European markets for ourselves, not just Asia and Africa as in the past.
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