Rostec's 2023 Annual Report: A+

CEO Sergey Chemezov's report to Putin

Note the book in front of Putin, the specially published “big annual report.”

Readers who have followed the Gym and my prior VK articles will know of the vital importance I place on Rostec for its revitalizing Russian industry and it being the primary reason why Russian military production is so efficient and of such high quality. For those unacquainted with Rostec, here’s the link to its history in English, which isn’t a long read at all.

Some of Rostec’s many products.

The most important point is that Rostec is a 100% public corporation, ie., state-owned, and it rapidly became a rather large conglomerate as it took over ownership of many failing Russian companies. 16-17 years after that somewhat unsteady beginning, Rostec next to Russia’s energy complex is Russia’s most important industrial entity as you’ll soon discover as you read CEO Chemezov’s report, which is pretty much a monologue:

Vladimir Putin: I'm Listening, Sergey Viktorovich.

Sergey : Good afternoon, Vladimir Vladimirovich!

Vladimir Putin: Good afternoon!

Sergey Chemezov: We have summed up the results of our enterprises ' work for 2023, and traditionally I would like to present you our big annual report.

Rostec continues to participate in solving national tasks to strengthen the security and defense capabilities of our country and the industrial independence of our state.

A few figures that I would like to show you and tell you about. First of all, this is the consolidated revenue of the corporation, which today has increased by almost 34 percent and amounted to 2,840 billion. We hope that this year, in 2024, we will cross the threshold of three trillion rubles [About $35 Billion]. Our net profit also increased to $ 60,100 million. Unfortunately, this is still not a very high profit for the revenue that we show today, but this primarily indicates that we have a large volume of contracts for the state defense order.

Unfortunately, today's profitability is not very high, amounting to about two percent. And, in addition, not all overhead costs are accepted by military acceptance today, so these two percentages are sometimes not enough to cover all the expenses that our enterprises incur in fulfilling the state defense order.

Of course, we do not forget your order to increase the share of civilian products, and we are working on it.

Vladimir Putin: What is the current average?

Sergey Chemezov: Today, in absolute terms, the volume of civilian production has increased by 5.5 percent and now stands at almost a trillion, or more precisely, 993 billion.

Vladimir Putin: By 5.5 percent compared to what period?

Sergey Chemezov: Happy 2022.

Vladimir Putin: In general, what time is it now?

Sergey Chemezov: In absolute terms, 993 billion.

Vladimir Putin: No. If you take everything for 100 percent, how much is the percentage of civilian products?

Sergey Chemezov: Unfortunately, we have fallen in relative terms. In 2022, we had 44.5 percent, in 2023-35 percent. But, I repeat once again, it has increased in absolute terms, while it has fallen in relative terms.

This suggests that the volume of state defense orders has increased significantly, at times. Therefore, in percentage terms, civilian products have fallen.

Vladimir Putin: It's clear.

Sergey Chemezov: The volume of investments in 2023 increased and amounted to 527 billion rubles. This is a record amount compared to all previous years. For example, in 2022 there were only 292 billion. This means that today we are forced to expand production, modernize the production of military equipment, weapons, ammunition, and so on. Therefore, the main part of the investment goes to the modernization and expansion of production facilities.

The main theme of this year's report is "Rostec-a reliable support for the country", and is revealed in four sub-themes.

The first sub-theme is the protection of State sovereignty. As in previous years, Rostec traditionally has a high percentage of state defense order fulfillment, amounting to 99.5 percent. At the same time, for the samples that are particularly in demand in the SVO zone, the execution is one hundred percent, we did not break a single contract. 80 percent of all the equipment that is currently involved in a special military operation is produced at our enterprises. In 2023, we delivered new production Su-34, Su-57, Su-35, Il-76, Yak-130 aircraft, Mi-28, Ka-52 helicopters, and T-90M Proryv tanks to the main customer, i.e. the Ministry of Defense. In general, this is all a new technique, and deeply modernized. And compared to 2022, the volume of production and major repairs of light armored vehicles tripled, and tanks-3.5 times. The number of shots fired for tanks and infantry fighting vehicles has increased almost nine-fold. But also in comparison with 2022, in 2023, the volume of production of self-propelled artillery increased tenfold and the production of ammunition increased tenfold.

In 2023, state – owned enterprises-powder factories-were transferred to us, but the situation there is very difficult, so it is necessary to carry out major modernization, repair of these enterprises, technical re-equipment, and a lot of money, tens of billions, has been allocated for this. Deputy Prime Minister Marat Khusnullin is helping us a lot, he is in charge of the construction process, all this is happening under his control, and many thanks to him for this.

In addition to the direct production of defense products, our employees are actively involved in the repair of equipment that is located in the zones of the Free Defense Zone and sometimes even on the battlefield. Today we have 250 brigades involved there, and the number is about 1,000 people.

Traditionally, the annual report highlights several key products. Among them are already proven new equipment, as well as deeply modernized samples. All of them meet the new challenges that time and military tactics pose to us.

I want to give you some examples.

In 2023, Rostec shipped the first batch of 152-mm Mallow self-propelled artillery pieces to the troops. This latest artillery system is mobile and can automatically fire all types of ammunition.

Also an unmanned aerial vehicle "Cube". This is a high-precision strike system, it is designed to hit remote ground targets. Advantages of this complex: hidden start-up, high accuracy and noiselessness, including ease of handling. In 2022, we completed the development of this complex, and in 2023, mass production and delivery were already fully underway.

We continue to work on adapting standard aviation ammunition, such as the already well-known FAB-500. They are already being produced here and adapted to the planning and correction module. In 2023, we restored the production of FAB-1500 and FAB-3000, because at one time this production was suspended, but now we have restored it. And already this year, in 2024, they adapted it to the planning and correction module, and the first adapted bombs are already being used on the front line today.

The Superkam UAV is also a new modern version, it is produced both in the reconnaissance version and in the kamikaze version. In just five months, we launched the production of these UAVs, created a workshop with an area of more than 30 thousand square meters, and today these UAVs are actively produced there, and they are now very well used in the free defense zone.

The second sub – theme of the annual report is health protection. As part of the expansion of civilian products, we are actively working on the production of medical equipment. Today, more than 150 types of such equipment are produced at our enterprises for various fields of medicine: for cardiology, ophthalmology, gynecology, equipment for perinatal centers, and so on.

Medical instrumentation is a strategic industry for us. We plan to increase our share in this area, and annually expand the range of this equipment.

And here are some examples of this technique I can give.

This is a respiratory support device for newborns. It is called "Reanimon", produced by our holding company "Shvabe". It allows you to perform respiratory therapy for newborns, as well as short-term ventilation of the lungs in intensive care units, both in maternity hospitals and in perinatal centers. We have already received a registration certificate, and now we are preparing for mass production.

The second example is the Mobivent Oxy ventilator. The device is intended for the treatment of self-breathing patients (adults and children) in a hospital setting. We are currently undergoing certification, and then we will start mass production.

The previous generation of these devices-Aventa ventilators-were delivered to medical institutions, and they proved especially well during the COVID period. More than 15 thousand devices were produced and used to treat 1.5 million patients.

In addition, it is important to mention that we produce not only medical equipment, but also pharmaceutical production. In particular, the NGO "Microgen", which is part of our holding" Natsimbio", is the only Russian manufacturer of allergens and allergoids – these are medicines for the treatment of allergies.

The company's portfolio includes 64 therapeutic and diagnostic drugs, 36 of them for allergen-specific immunotherapy by subcutaneous method, including preparations for the treatment of allergies from birch pollen, ragweed, house dust, as well as many unique allergens of wormwood and quinoa, which are in demand in many regions. This method of allergen-specific immunotherapy is used not only to treat, but also to relieve the severity of an allergic reaction. The substance that causes allergies is introduced under the skin, gradually increasing the dose and thereby teaching the patient's immune system to respond correctly to these allergens.

In 2023, we continued to supply vaccines for the national calendar of preventive vaccinations, and under a centralized state order, the holding company delivered more than 106 million doses of medicines to the regions of Russia. And the delivery list includes 18 vaccines against nine infections: tetanus, pertussis, diphtheria, hepatitis B, tuberculosis, measles, rubella, mumps and flu. We have completed all deliveries in 2023 in full. This year we carry out deliveries as planned.

Our holding company "Natsimbio" uses domestic raw materials and its own developments. In other words, the work is organized using full-cycle technology.

Also in 2023, Microgen received a certificate from the Ministry of Health on registration of a drug against hepatitis B. The drug was named "Antihep-Neo". Clinical studies have confirmed its good tolerability and safety. The drug has now become the first Russian intravenous specific immunoglobulin for the prevention of hepatitis B in both children and adults.

The third section of our report is the topic of technological sovereignty. At the start, when we were assessing the scale of sanctions and the scope of the technological partnership that we have been building with our Western partners for many years, buying a large number of components, we hoped that our cooperation would continue forever, but, unfortunately, this did not happen. When we were faced with the task of doing a lot of work on import substitution, to be honest, I didn't really believe that we would be able to do it. As they say, the eyes are afraid, but the hands do.

We have already replaced tens of thousands of imported components and products across the entire Rostec circuit.

A vivid example is KAMAZ. We have replaced thousands of components at KAMAZ and are now successfully meeting the needs of cargo, special vehicles, passenger vehicles, and so on.

A few examples. The KAMAZ-54901 truck tractor is the flagship of a new generation of K5 trucks, which we once created together with Daimler. Since 2023, these tractors have already been produced with import substitution.

Also, the KAMAZ-6595 is the first K5 dump truck, including for mining operations, and in November 2023 we also started mass-producing an import-substituted version.

And the latest novelty of "KAMAZ" - "KAMAZ-54902", this is a tractor for transporting large trucks. This is a low-floor cabin with one berth, that is, there is room for one driver, who can, when necessary, rest and then continue on his way. This year, in 2024, we will start mass-producing these import-substituted vehicles.

In addition to civilian vehicles, we have made serious progress in import substitution and the creation of new models of special vehicles, and a number of models have been replaced with imported components for domestic ones. This also applied to cases made of armored steel, bumpers, bullet-resistant tanks, tires, as well as armored windows.

Our company Remdiesel has already completed the development of a special vehicle for the safe transportation of military personnel called Akhmat within 25 days in 2023. At one time, you asked us to create such a car at the request of Ramzan Kadyrov. We made such a car. We gave the first ten vehicles to Chechen fighters ' units. And today, more than a thousand pieces have already been released, and they have proven themselves very well today.

In 2023, completely new developments were presented – the Nerussa special transport vehicle, an armored truck for transporting special and dangerous goods. Serial production has already started.

In order to reduce human losses, a fully remote-controlled robotic wheeled vehicle has been developed for the delivery of ammunition, for the transportation of wounded, for the transportation of quadrocopters – in general, everything that is necessary. Now there is an approbation in the army. Based on the results of testing, we will start mass production.

Machine tool industry: our holding company "Stan" has developed and started producing a robotic processing grinding center – a multifunctional grinding machine with numerical control. Designed for diamond grinding of hard-alloy cutting plates – for tool manufacturing.

In addition, there is a hybrid milling and surfacing machining center that can quickly and economically produce and restore parts of any geometric shape, using a combination of direct laser fusion technology and CNC machines.

As for the engine industry, we have already started mass-producing the large GTD-110 turbine for thermal power plants. The first ones were already working in a pilot mode at the Ivanovo station, and they have already worked there for almost three years. Everything is in order, and now we are already mass-installing the Udarnaya TPP in the Krasnodar Territory, in Taman, we are building this TPP and will soon launch this GTD-110 turbine.

Traditionally, those turbines that were purchased from the American "General Electric" and the German "Siemens" are always somewhere between 120-130 megawatts. That is why we have made a new model that can replace foreign ones.

The fourth important sub-topic is the social protection of our employees and their families. Rostec is one of the largest employers, employing more than 660,000 people. In 2023, we employed 70,000 more people, and in 2024, we will need to employ about the same number of employees.

The average salary in our country increased by 22 percent, today it amounted to 88.3 thousand [About $1000/mo].

In 2023, the volume of social spending also increased by 23 percent and amounted to 18 billion rubles. The social package includes: voluntary medical support, non-state pension provision, health resort support, housing program and relocation program.

As for the housing program, we need, of course, to retain our highly qualified young professionals, whom we train, so we pay great attention to the housing program. We called it Rostec's Square Meters. This program has already covered 17 regions and eight holdings. In the near future, we will launch three projects in Perm, Rybinsk and Arsenyev, Primorsky Krai, where the helicopter manufacturing enterprise is located. We are currently working on 17 projects.

Industrial Medicine Project: a specialized medical program will be launched in 2023. It is aimed at reducing the level of diseases of employees of the corporation, which are associated with professional activities. As part of the project, 40 Rostec health centers and mini-clinics have been opened and upgraded in 13 regions of Russia. Medical services are provided directly on the territory of these enterprises.

The most important strategic direction of the corporation is personnel training. In total, together with universities and specialized secondary educational institutions, we implement 400 basic and additional general education programs. Together with universities, we train 2.7 thousand people in the specialties that are directly necessary for our enterprises. In 2023, as part of the implementation of the federal project "Advanced Engineering School", universities and our corporate organizations jointly participated in the development and creation of 15 such advanced engineering schools.

Currently, 36 educational and industrial clusters have been created in 23 regions with the participation of the corporation's organizations, and over the past two years the corporation has allocated more than 470 million rubles for these purposes.

Students do their practical training on the premises of our enterprises, and we build training on a dual principle, that is, 70 percent is directly practical, the guys work on machines, and 30 percent is theory. In production and training centers, each student receives five specialties, that is, we get a multifunctional worker at once, who can be used on various machines.

Vladimir Putin: Good. [My Emphasis]

Right at the top is the reason for Russian MIC efficiency—no in-built level of profit with additional room for massive cost overruns as with all NATO MICs. A 2% profit level after investment upgrades for expansion is all a public corporation ought to expect. But of course, as with all Russian industries, they contribute to social welfare in many ways, some of which are of a direct benefit; but if they’re public companies, then who does that actually benefit—the company or the public? Odd the term “forced” is used related to production expansion. IMO, any company would like to be “forced” in such a manner, although it is for war and not for peace. It would appear a slip occurred with the divulgence of “250 brigades” involved in the SMO/SVO. I would say that further expansion of medical equipment production goes along with Russia’s continual expansion of its healthcare centers all of which relied on foreign products until now. IMO, unlike Western BigPharma, Rostec doesn’t go out to create new drugs to supply an as yet vacant market, meaning the market is manufactured by BigPharma to support its profits. Again, Rostec doesn’t need to generate high profit margins to satisfy greedy shareholders and thus Russia’s healthcare system is both less costly and more efficient.

It’s clear Rostec understands what its most important capital asset is—its employees, its Human Capital—and along with Team Putin recognizes the importance of training, retraining, and retaining. And given the breadth of Rostec’s subsidiaries involvement in the overall economy and national life, it will be involved in far more educational facilities than engineering. And it must be noted that Rostec’s behavior isn’t unique—it’s the norm. In a year from now, I expect to read a similar annual Rostec report. As its history shows, it just keeps building upon itself, while also spinning-off subsidiaries capable of standing on their own. As commented upon by those paying attention, the illegal sanctions regime placed onto Russia was akin to it erecting very high tariff barriers so its own industries and agriculture could develop into the highly productive and efficient economic engine that was always Russia’s potential that until now was never fulfilled. If the Soviet Union had managed itself the way Putin has Russia, the Soviet Union would still be alive today and collectively stronger than Russia, CIS, and EAEU combined—and there would be no war in Ukraine or unrest in the Caucasus.

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