Revamping Russia’s Space Industry: For Better or Worse?

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According to the statistics from the Russian federal space agency, Roscosmos, the country’s share of global launches is about 40 percent, and it manufactures about 20 percent of all spacecraft in the world. However, at the same time, Russia’s participation in international space-related business is disproportionately small — just 3 percent. Apparently, the level of Roscosmos’ business with foreign companies is far below the potential. Also, productivity of many Russian space businesses has been a subject of criticism.

What needs to be done to make national enterprises more competitive internationally and more efficient domestically? “Revolutionary restructuring of the entire space sector” is the answer that has dominated Roscosmos for the past six years.

However, newly appointed Roscosmos Director Vladimir Popovkin and his predecessor, Anatoly Perminov, have different concepts of restructuring the space business. And the current situation — in which Popovkin has not developed a clear vision of the changes, but has already started dismantling what Perminov had built — has put Russian space companies in a state of suspense and disorientation, the effect completely opposite to the intended.

Perminov first voiced his space industry reorganization plan in 2006 when he proposed, as an initial step, to create eight to 10 large corporations by 2010. The next step would be to bundle those large corporations (“integrated structures,” as they are called in the official documents) into six holding companies by 2015. Each of the holding companies would be an undisputable leader in manufacturing selected types of products. For instance, the Strategic Rocket Weapons Corp. would unite all enterprises engaged in manufacturing heavy missiles, and all the companies involved in manufacturing satellites and their control systems would be under the Automated Space Systems Corp.

Despite spoiled relationships with many key figures in the Russian government, Perminov managed to retain his position as the head of Roscosmos for a long time mainly because he was overseeing the development of the Glonass navigation system (like the U.S. GPS), which is of significant importance to Prime Minister and former President Vladimir Putin. Also, the first stage of the mergers into holding companies was supposed to be completed in 2011-2012, another reason the government kept Perminov in his position even after he turned 65, which is the maximum legal age for holding government posts.

However, the loss of the three Glonass-M satellites in December, which put the project significantly behind schedule, in addition to Perminov’s inappropriate offensive reaction to criticism, and the way Roscosmos insured the crashed satellites, pushed the government to dismiss the Roscosmos director. Alleged inefficient management of the state funds allocated for the Glonass program added to the government’s displeasure in Perminov’s performance.

Popovkin’s first move after replacing Perminov in late April was putting his predecessor’s plan of reorganizing the space industry on hold. He immediately recalled the documentation package pertaining to industry restructuring that Perminov submitted to the government last spring. The new director’s revised concept of industry reorganization was stated as follows:

“At least two holding companies will be created in each area. They’ll complement each other and compete with each other likewise. … We’ll view integration from the angle of the purposes that will be implemented in manned space flights in the short term and also in more distant a future.”

What Popovkin is suggesting resembles the organizational structure that existed during Soviet times, when the idea of competition between lead developers was encouraged, rather than the idea of creating monopolies. For instance, the Moscow Institute of Thermal Technology and the Makeyev State Rocket Center currently compete in manufacturing ICBMs. Under Perminov’s scenario, these two enterprises would have become parts of one holding company. Popovkin prefers to see them independent and competing.

Bringing private funds into Roscosmos programs is another objective of the planned structural changes. “We cannot do without private investors in such areas as telecommunication, Earth probing and developing navigation instruments. Currently, governments make two-thirds of all the investments into space programs. And our task is to make our space industry attractive for private investors with respect to the organization of business and structure of the industrial sector as a whole. We believe that the measures that we are taking now — restructuring, reorganization, and mergers of companies — will eventually attract private investments,” Popovkin said in a June speech.

It is too soon to predict whether or not Popovkin’s endeavor will be more fruitful than his predecessor’s. Merging enterprises into larger holding companies under Perminov had some success stories. In 2007, the Khrunichev enterprise was granted control over four smaller manufacturers of space-related hardware and technologies. This merger had a positive effect on those four enterprises, which were operating below their production capacity and therefore experiencing financial difficulties.

At the same time, not all the mergers were moving along smoothly. For instance, after the rocket engine manufacturer Energomash merged with the Energia company as part of the consolidation of the latter, Energomash successfully appealed in court the superior managerial authority that Energia acquired after the merger. Moreover, right after Energia acquired managerial control over Energomash, it immediately started a dispute with the Khrunichev company over the prices for the Energomash-produced engines. Khrunichev needs Energomash for various projects, including building the KSLV rocket for South Korea — the project that was slowed down by the dispute. After Perminov started building “vertically integrated structures,” both Russian rocket-manufacturing giants, Energia and Khrunichev, started competing to acquire Energomash. These days, Popovkin prefers to see engine-manufacturing companies as a separate space industry subsector and not part of the competing rocket-building conglomerates. As of today, Popovkin has put on hold creating the Energia-based holding company, and instead is considering starting two holding companies that would “complement each other and compete with each other.”

It looks like the new Roscosmos chief’s main emphasis is on creating competing companies in hopes that competition will become a strong incentive for innovations and result in higher quality of products and services. However, it is not quite clear where the element of competitiveness will come from, considering that the government is the principal “customer” for space-related technologies, hardware and services, and that almost all of the funding for the space industry comes from the state budget. Also, subdividing the space industry into small research and production groups will create companies with rather narrow areas of expertise, which will undoubtedly complement one another, but not compete. Under such circumstances, the only competition among newly created holding companies will be for state funding.

Currently, Popovkin and his aides are at the stage of collecting and debating ideas. Companies of the Russian space sector are meanwhile left on standby mode guessing their future and waiting for the new Roscosmos managers to finally formulate a clear concept for revamping the industry.

 

Victor Zaborskiy is founder of Special Trade Operations Consulting in Atlanta.