Russia says a third of arms firms near bankruptcy

MOSCOW Wed Feb 25, 2009 9:51pm IST

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MOSCOW Feb 25 (Reuters) - One third of Russia's weapons makers are on the verge of bankruptcy and the industry is seeking Western loans because domestic credit is impossibly expensive, a state corporation chief said on Wednesday.

"The financial and economic condition of only 36 percent of strategic organisations in the military industrial complex can be seen as stable," Sergei Chemezov, head of the influential Russian Technologies holding company, told lawmakers.

"About 30 percent of organisations (in the military industrial sector) have signs of bankruptcy," he said, adding that about half of the enterprises in the ammunition and explosives sector were "potentially bankrupt."

"Unfortunately over the past four months the situation has only become worse," he said.

Chemezov rose to become one of Russia's most powerful business figures under former President Vladimir Putin, building a state-owned empire that includes the world's biggest titanium maker, Russia's biggest carmaker and one of the world's biggest arms exporters.

But industrial production is tumbling and the economy is set to contract this year for the first time since 1998, when Russia defaulted on domestic debt and let the rouble tumble against the dollar. The crisis has underlined Russia's excessive reliance on the export of raw materials such as oil.

Russian arms exports hit a record $8.35 billion in 2008, though industry officials have long warned that major investment is needed in research and productive capacity.

Some major clients, such as India, have complained about late deliveries on major orders while Algeria last year returned 15 MIG fighters saying they contained some substandard parts.

Chemezov said interest rates being offered by Russian banks were far too high and that he was in talks with Western banks.

"Credit is the most painful topic. With such high interest rates we are simply unable to develop industry," he said.

"In the end we will have to get these credits in the West and we are holding talks because the cost of credit there is much less, several times less," he said.

A spokesman for Russian Technologies declined to name the Western banks involved or the sums being discussed.

Russian Technologies is a special state corporation which includes the assets of state arms exporter Rosoboronexport and has stakes in carmaker AvtoVAZ (AVAZ.MM) and VSMPO-Avisma (VSMO.MM), the world's largest titanium maker.

Russian Deputy Prime Minister Sergei Ivanov told lawmakers that demand was tumbling by as much as 50 to 70 percent in some sectors. "We can characterise the current industrial situation as a crisis of demand," he said. (Editing by Mark Trevelyan)

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