Kalashnikov is one of the few large private companies operating in the Russian defense industry, the requirements for which have increased sharply against the background of the ongoing military operation in Ukraine. Alan Lushnikov, the main owner and president of Kalashnikov Group, told Kommersant about how sanctions affected the group's activities, the production of drones and precision weapons, as well as the launch of new business lines.
— How do you assess the situation in the group that has come under your control, how well have you settled in?
— Changing the industry is always stressful. But as soon as you start to understand a new topic, you realize that the decision—making and regulation mechanisms in different areas are similar and sometimes even the same. For example, the regulation of pricing in the state defense order is very similar to the mechanisms that are used in tariff regulation, which I have dealt with before.
If we are talking about challenges, then the scale of the tasks is similar to what I saw in the civil service. The industry I came to is not as big as the railway (Alan Lushnikov supervised it in the Ministry of Transport.— "Kommersant"), but still a big one. In fact, Kalashnikov is equal to the country's rifle industry: we produce 95% of combat small arms and 50% of civilian weapons, taking into account civilian imports. It turns out that the company is responsible for the entire industry as a whole.
If we talk about the state of the company, now everything that we did and planned until February 24 has changed, we are rebuilding. Against the background of unprecedented sanctions, we are forced to simultaneously fill the gaps in production supplies and solve breakthrough tasks to improve our products and improve their operational characteristics. Plus, no one removed the task of developing new products.
— You came to Kalashnikov at a time when the holding was primarily an important industrial asset and the primary task was to increase its efficiency as a business. Now you are faced with the task, first of all, to create a more effective and deadly technique. How do you feel about this?
— Oddly enough, the task of increasing efficiency and diversification has not just not faded into the background, but has become more prominent. We are faced with the task of ensuring the technological sovereignty of the country. And this is not an empty phrase in a situation when all supply chains are being torn and the entire economy of the world is moving from a global state to clustering — this is the strongest challenge for the country as a whole, and for any company, especially such as ours. And we, as part of the country's security system — military, civil and industrial — cannot but respond to the challenge. And we are talking not only about simple things that we understand, like machine tools or the production of tools, but also about more complex high-tech stories, such as, for example, microelectronics and everything related to it.
We have a new project — a bottom station for 3D seismic exploration on the shelf. This is an example of how a specific team that solved special tasks for controlling robotics suddenly realized itself in another field of technology with an excellent solution.
— It's clear about the team, but how do you feel as a manager in this regard?
— I believe that my task is to develop opportunities. All that we have healthy, creative in development and research is to pull out, encourage and give people the opportunity to interact with customers, both military and civilian.
— What is the financial situation of the group now?
— The projected budget revenue for 2022 is about 40 billion rubles. In 2021, there were 36 billion rubles for the group, the debt burden amounted to 3.8 EBITDA. This year we definitely planned to grow both in revenue and EBITDA. We have increased the small arms production program by 40%. But the situation in the export markets is making its own adjustments, because everything has changed since the beginning of the special operation. And now we are rebuilding on the move. But very decent volumes on the state defense order are stable, and we are successfully fulfilling them.
— Has the order increased since the beginning of the special operation?
— Yes, but I can't tell you more about it.
— How has the share of defense orders changed?
— Currently, 79% of the group's revenue is military products, 21% is civilian. And this is a plus or minus stable indicator from year to year. At the same time, we also include the export of military weapons in military products, not only the state defense order.
— How did the sanctions affect the company's activities?
— Influenced. There are problems, we are solving them.
— But you didn't stop production?
— No, everything works smoothly.
— Have you experienced difficulties finding alternative chip suppliers? This is a common problem for both civilian and military drones...
— I will not answer this question. In fact, you want me to hint to you about the composition of a military product. You can't do that.
— Well, how do you find chips for civilian equipment now?
— There are no problems in the citizen, there are no problems at all, because it is impossible to close the component base from us by 100%.
In general, it is impossible to isolate Russia from the entire electronic component base in the world, this is utopia.
— Is the group's debt burden decreasing? Kalashnikov's creditors remain the same: PSB, VTB, Sberbank and Novikombank?
— The external debt in 2020 amounted to 31.7 billion rubles, in 2021 — 24.5 billion rubles. Creditors, yes, basically remained the same, although someone reduced their portfolio, new ones appeared. In addition, our bonds were included in the pawnshop list of the Central Bank — it was a good anti-crisis decision on the part of the regulator, an invaluable help to the industry. Plus, we have improved our credit rating, there has been a recovery, and lenders, I think, are happy, although it is necessary, of course, to ask them.
— Will the goal of the strategy adopted in 2020 — sales growth by 60% over five years — be adjusted? What is the planned sales volume for 2022?
— The strategy, of course, is being adjusted, because now the reality has changed. We are specifying the range of our military products: we decide what exactly we are doing and where we are going. And civilian products are an absolutely new challenge, connected, I repeat, with the need to ensure the technological sovereignty of the country. Now the question stands exactly like this. There are no exact indicators in the strategy yet, I emphasize: there is too much uncertainty.
— Who are you first of all: manufacturers of civilian, military weapons or medical equipment? Are you thinking about other areas and businesses? How do you see the synergy between different productions?
— We are a diversified diversified company, growing in areas where we see our competence and synergy with our core business. For example, tool production: now it is 90% focused on meeting its own needs, 10% have started selling to the market. And if we see the demand for a particular tool range, we will prepare an investment project and expand the line. And the government supported us in this, because, to put it mildly, there is not much of such a level of instrument.
Or, for example, machines. There is a traditional line that Izhmash has been producing for more than 60 years — it was not in demand for some time in the past, now there is demand. We started to slowly release it to the foreign market and every year we grow by 70-80%: yes, due to a low base, but still. We understand that we have to give a new quality, improve the accuracy class in order to increase the volume of production, and now we are doing this.
When you understand a certain principle of work in your industry well, then applying it to another is a matter of entrepreneurial outlook, as well as the degree of understanding of the problems and the request of the industry customer. For example, in the case of bottom stations, we were lucky, we have excellent relations with Rosgeology. And they have set very professional and competent requirements for solving the task they need. A good customer is half the battle: you don't arbitrarily invent something yourself, but work in partnership with him. We adhere to the same principles in terms of armament: for example, we make guided missiles "Whirlwind". We are not developers, we are a serial factory, but having started to understand the market of precision weapons, we realized that these are enormous prospects. I won't disclose the details yet, but we are doing this tightly and seriously. Good groundwork for technologies and competencies has already been formed: the product has already begun to be tested and work confidentially with the customer on implementation. That is, we are actively developing existing competencies where we are already present, both in the military and in the civilian segment.
— What is the fate of the previously loudly announced electric car and electric motorcycle?
— A very serious reserve has been formed in this part — this time. This reserve was formed because a task was set by a special customer (Moscow Department of Transport.— "Kommersant"), — two. This task was completed — three. To what extent these projects can be successful in civilian mass production is an open question, we currently have no answer to it.
— Do you admit that one day you will return to automotive projects?
— I'm not ruling anything out.
— Has the sensational news story about the registration of trademarks for ventilators and vaccines by Kalashnikov been developed? Were there any real production intentions behind this?
— Regarding ventilators and vaccines, the procedure for distributing the trademark to a certain field of application was simply launched. It was a standard solution to protect the brand from such a thing as squatting, that is, from being used in an unprotected area, by analogy with how companies sometimes register sites of the same name in various domains, .su or .io, so that no one takes their names. In short, it was the usual brand protection from squatting according to popular nomenclature.
— So there were thoughts about launching it? But Rostec already has its own ventilators.
— Rostec has ventilators, we have never had them.
"And it's not supposed to?"
- no. We still have pacemakers in the medical line. We continue to produce them in Izhevsk, but there are a number of questions about the feasibility of further production, we need to decide on a strategy.
— But in the wake of import substitution, medical equipment is now becoming one of the most popular and probably profitable segments.
— There are a lot of such directions now, but, you know, we have to do what we are good at or what we are good at. For example, since we have a good understanding of highly specialized microelectronics, various controllers, control systems, and so on, it made sense to focus on this. It's just a complicated engineering part of a big engineering solution. For example, a controller for a climate system. Climate systems are not our business, but various industrial partners are turning to us, who now need to replace certain technological solutions very quickly due to the disruption of supply chains and interruptions in logistics. And that's what we're doing right now. Now niches are being freed up very quickly, because some companies will no longer supply any household microelectronics to Russia. I think that by the end of the year we will be able to talk about specific implemented projects.
— And what is among these projects, besides controllers for air conditioners?
— The rest of the projects are too sensitive stories until we disclose them.
— What non-core assets were sold last year and are there plans for further optimization and reduction of areas?
— We have a program, in particular, for Izhmeh: the reduction of production areas is still relevant, because reconfiguration and optimization of capacities are still important. Everything is on sale there, and these plans have not changed. It is clear that the market situation itself has changed, and the industry as a whole is in severe turbulence.
— In this regard, perhaps now you will need this property yourself?
— We are not ruling anything out. And it's a matter of price. But for now, a specific plot in Izhmeh is on sale, and we will try to implement it. Plans to reduce the area of "Izhmekh" by a third are in force.
— A year ago, Kalashnikov announced the idea of machine tool sharing, joint rental of production facilities. Has it been possible to find customers and has demand increased since the beginning of sanctions? Have representatives of the civil aviation industry contacted you?
— Sharing is relevant for the owner when there is free equipment that is not loaded with the main production program. We have no such problem at all in 2022. We are fully loaded, and, conversely, there is a need to increase the program. On a national scale, such sharing is certainly possible and very relevant, since the load, I think, is relatively uneven. But this is a matter for reflection for large associations of industrial companies and for the industry regulator. Because we are now more like our colleagues from the aviation industry, in search of additional capacity.
— International military experts wrote that the Turkish "Bayraktars" in Ukraine have changed the attitude to the tools of modern warfare. How do you like this assessment and how do you assess the effectiveness of your Lancet and CUBE drones during the special operation in Ukraine? What conclusions were drawn?
— The Lancet and the CUBE, as we believe, show themselves, of course, from the best side, but the customer who uses them should speak out with assessments (the Ministry of Defense.— "Kommersant"). If we talk about our approach to the development and implementation of technical solutions, then together with the customer we analyze threats and offer tactics to combat them. We evaluate the tasks and calculate what technical means and competencies the customer should increase so that he can effectively solve his tasks. Next comes the issue of training specialists.
Yes, you can give the most modern weapons, but you have to train people to use them, otherwise it's just a pile of iron.
Therefore, we pay serious attention to this.
— But do you take into account the changes in tactics that have taken place?
— Of course, when assessing threats, we understand that at the global level, the tactics of modern armed conflicts have radically changed. And this is a systemic issue, and not the merit of Bayraktar. If 50 years ago the intelligence and targeting system was built on a paper map, compass and radio station, now it's all different: the combination of distributed information sources, artificial intelligence and digital networks has already changed global trade and is now also changing the military sector. The future of military operations is likely to be associated with the confrontation of systems that use physical, digital and electronic means of warfare.
In this regard, we, in turn, believe that we should develop the niche that we have already occupied in the tactical link: barrage ammunition, reconnaissance drones.
— Do you have ambitions to create large shock drones?
— Airfield—based drones are not our segment, colleagues from UZGA, Kronstadt are successfully engaged in them, a huge amount of effort has been invested there both from the customer and from the industry, and we do not plan to go there yet, to get fifth in line. We want to be number one in our niche.
— How often have updates of your drones been released over the past six months?
— We are constantly upgrading the operation of all our facilities and are in direct contact with the customer on this issue. And we definitely draw conclusions.
— Bayraktar is praised for the ability to control almost from a smartphone at a relatively low cost compared to analogues, about $ 1 million ...
— In fact, if we are talking about a complex with a ground control center, a communication system, weapons, its price is definitely not less than $ 7 million.
Firstly, it is not controlled from a smartphone, it is not. There's a lot of interesting stuff there, yes, and it's not even a management issue: this is the connection of all participants in the process with everyone, a huge number of consumers of information and the ability to transfer intelligence not just from one point to another point, but to anyone — on request. Targeting — to any user. This is a really good engineering system.
— When will you have a comparable level?
— And there is nothing to compare here, the comparison is incorrect. This is a car of a completely different purpose. The CUBE is a plane packed with explosives, which must arrive exactly on target.
— The weak point of the CUBE and the Lancet is called the limited ability to work on moving targets. Is it supposed to work on this flaw?
— The CUBE is not designed to work on moving targets at all. The target coordinate is entered into it, by GPS / GLONASS, and the ammunition arrives there by satellite. Accordingly, when the target has left, it has shifted — he will fly to the place she left, to a point on the map. You probably saw in the media that the "Lancet" is a system that is guided by an operator. The complex is more effectively used for stationary targets, and not for moving ones, which is due to the technical features of its operation. And this is not a disadvantage, but a feature of the application. No need to fire a rifle at the tank. That's not what it's designed for. Just as here, guidance systems are designed to defeat a certain type of targets.
— So you don't plan to get involved in the work on moving targets?
— All over the world, they are working on algorithms for autonomous targeting in the image of a target. There are Fire-and-forget firing systems (hitting the target without further support from the firing platform or the shooter after pointing and launching.— "Kommersant"), a huge number of different modifications — the future is behind them. There is a guided helicopter missile "Whirlwind", it is released, flies, is guided along a laser path, the operator must aim, hover and aim. While it is hanging, even if it is seconds, it is vulnerable to air defense. And how Spike works: a carrier — a helicopter or a UAV — takes off, releases ammunition and sits down. The ammunition flies in the picture and therefore can be aimed at a moving target. This is where we are going and what we are working on, but I can't reveal the details yet.
— Who is your main competitor among military UAV manufacturers?
— Of course, this is Uvision (Israeli developer of kamikaze Hero drones.- "Kommersant") and Rafael (Israeli developer of ATGM and Spike drones.— "Kommersant").
— According to various estimates, Ukraine has received more than a hundred Turkish drones since 2019 and, according to the latest Pentagon statements, more than 700 Switchblades. How many drones have you produced? The interlocutors of Kommersant call the number of drones in the special operation from the Russian side "homeopathic", is this a fair statement? Why are there so few of them?
— This is a question for the customer. We don't know if it's a lot or a little. We cannot disclose the details of the state defense order.
— How import-substituted are your drones?
— I can say one thing: we strive for 100% localization.
— Which countries are buying your drones and has there been any interest over the past six months?
— It has been preserved, but only Rosoboronexport can voice the rest.
— How is the project on unmanned video surveillance in Moscow progressing? How many of your drones are operated in the system of law enforcement agencies of the Russian Federation? Rosgvardiya had to order drones...
— I should, but I don't have to. (Laughs.)
— Is there a personnel shortage in the production of flight systems?
— This is an industry-wide problem, although our equipment is much simpler than, say, UAC or UZGA. There are always not enough qualified engineers, we are in constant search.
— Do not attract your salaries? How much do engineers earn on average in the perimeter of the group?
— This is not a money problem, this is a training problem. Take high-grade workers. We regularly offer vacancies for six- to five-rankers. I told my colleagues that you need to forget about their search in the market, this is an almost impossible task. It is impossible to attract such specialists from the outside, they need to be raised by themselves, trained and retained. They need to instill the values of the company and make sure that they consider you the best employer in the city and the country.
— And yet the salaries of the best employer in the country should be higher than the regional average?
— I will say this, we are one of the leaders in Izhevsk. But the average salary for an enterprise is like the average temperature in a hospital, there is no point in commenting on it. When in August last year it turned out that we needed to increase the production program by 40% due to the huge demand, the production workers told me that they needed to hire several hundred new employees. When we counted it, it turned out that the more we start to hire new specialists and produce, the greater the loss. They realized that something was wrong. In addition, we need, conditionally, a thousand people, but we will not recruit them, because the salary at that time was low. I proposed to raise it — after all, it has not been indexed for two years — but to increase it in proportion to the development of the bonus system. And productivity has grown very significantly without the involvement of a conditional thousand people. People turned out to be ready to do more, faster and more efficiently for the same eight-hour shift for the sake of bonuses. We started introducing this system from the weapons division, then the others asked to extend the mechanism to everyone. The balance between the efficiency of the enterprise and the income of its employees is very dependent on labor productivity.
— What are the actual deadlines for the launch of the Kalashnikov assault rifle production plant in Venezuela and what exactly complicates logistics?
— This is a very difficult project from a technological point of view. It is led by Rosoboronexport, which is responsible both to the customer and the country's leadership for its implementation. Our obligations are clearly formulated, extremely clear, and we fulfill them.
— Production of the AK-203 in India was supposed to begin in early 2022. When does it start?
— The joint venture has already started working (Indo-Russian Rifles Private Limited.— Kommersant). In this joint venture, we represent Russia together with Rosoboronexport.
— Is there any change in demand on the Russian market of civilian small arms?
— Of course, it is changing, because the legislation is changing very much. And those recent decisions, amendments that came into force at the end of June, should, of course, affect the market. For example, until the expiration of the first two years of possession of civilian firearms, long-barreled weapons are no longer allowed to purchase semi-automatic weapons. Now we are very closely monitoring changes in demand. The results may be unpredictable, but so far, on average, we are growing by 5% annually in the civilian market.
— Do you expect that due to the tightening of the law, the demand for civilian weapons will decrease?
— Yes, we believe that demand will decrease due to the tightening of gun legislation, as some of the most popular products — semi-automatic machines, as well as products with a Lancaster and Paradox barrel, which occupied a significant share in the total sales of civilian weapons in the Russian Federation, were limited.
— Does the news agenda, jokes or global conflicts affect domestic demand?
- no. But jokes are a terrible story. Each such situation is terrible when other people suffer because of the actions of a specific inadequate armed person and a general attitude is formed towards a person with a weapon as a potential inadequate killer. A person must own a weapon responsibly. That's our motto. And our buyer is very responsible, there are many hunters, athletes among them, these are adequate people.
— How is the "smart" gun with the option of connecting from a smartphone coming along, what are the successes?
— You know, in general, in my life I prefer to do it first, then tell about it. Unfortunately, that's not what happened with this gun. The gun is at the stage of working out technological solutions, because in fact, the technical solution that was proposed is unique, no one has done this yet. And how to make sure that household—level electronics does not fail after a hundred shots, although it would seem that there is nothing complicated here - this is a non-standard and difficult engineering task. The difficulties associated with the supply of electronic components are imposed on top, everything needs to be reconfigured. Therefore, there is some delay, but we are working on this project. I really like this gun myself, but it so happened that we first announced it, and then it turns out that we need to finalize it. This is an example of how not to do in marketing and promotion.
— At the last "Army-2021", the concern showed a new AKV-521 carbine, which was presented as the "Kalashnikov of the future". It was stated that the civilian development was also interested in the military. But there is also no automatic mode, and it is heavier than the Ministry of Defense requires, that is, it does not pass for the role of a combat product, by weight. Who orders a "fundamentally new kalash"?
— This carbine is not being produced for military needs now. This is really a very interesting technological solution, we see great prospects in it, but we are not discussing it for military needs yet.
— Will it be in demand in the civilian segment?
— It's too early to talk about it. From development to production in a series — a huge distance. This is a very interesting development, but its production in a series should be preceded by very high-quality marketing, research, determination of the target audience, sales volumes. And now we are at the stage of evaluating this project.
— Do you have a weapon?
— Yes, I got a license. After I joined the concern. Purchased a TR9 Paradox carbine.
— Rostec's share in Kalashnikov Group decreased from 51% to 25% back in 2018, nevertheless, experts still talk about the significant impact of the State Corporation on your business. What is Rostec's involvement in the Kalashnikov business today?
— Yes, they still have a roadblock. And yes, Rostec is our very important partner, of course. Of course, the Corporation as a whole, and Sergey Viktorovich (Chemezov.— "Kommersant") personally, and Vladimir Vladimirovich (Artyakov.— "Kommersant"), Igor Nikolaevich (Zavyalov.— Kommersant) and our chairman of the Board of Directors (Bekhan Ozdoev.— Kommersant) are directly involved in strategic decision-making. But it seems to me that Kalashnikov is still a very good example of public-private partnership, because, on the one hand, we enjoy the strategic support of the State Corporation, together with it we make decisions and implement plans. But at the same time, we have a very serious share of flexibility that is inherent in private business.
Therefore, of course, Kalashnikov is about business, but my task, if you want, the challenge is to make a private company successful in the state defense order.
This is not an easy task, because we have a very serious customer and we are obliged to satisfy him. But I think it's possible.
— Are you not afraid of falling under personal sanctions?
— A month ago I read an article in Reuters that asked why these respected people from the Russian defense industry, there are 15 of them, are still not under sanctions? And I was number one on the list there. Therefore, let's say the sun is shining outside, but the clouds are already gathering, and I have prepared an umbrella. I have no real estate abroad, no accounts, my family is here, so my whole life is connected with Russia. I'm not afraid.
— But when you bought the company, did you lay down sanctions risks?
— When I bought the company, the sanctions risk was assessed not as a probability, but as an inevitable consequence that should come, it's only a matter of time.
— From the moment when it became known that you were buying GC, and until now, when discussing your arrival, there is a stable version that you are the nominal owner. How would you comment on this?
— I read a huge number of versions, they were all very different — ridiculous, funny and at the same time mutually exclusive. Unrelated to reality. So I do not know how to answer. Such an almost anecdotal question: "Have you stopped drinking cognac in the morning?" How to answer this? I really like the expression: for an entrepreneur, it doesn't matter how much money he has in his pocket, the size of the loan approved to him is important. What matters is the size, quality of the loan and the very possibility of access to borrowed funds. I emphasize that the instruments used were borrowed.
— Have you managed to pay off your creditors?
— The state of affairs of the company satisfies our creditors today. That's all I can say.
— Who are your creditors of the transaction, are you ready to name them?
— No, of course not.
— When you left the government, the media quoted your statements about plans to focus on music. Since then, four Ctrl Band singles have remained on streaming platforms. Not enough time?
— I'll start from the end: not enough. When the pandemic started and the concerts stopped, our most talented drummer left for Kazan. The rest of the guys stayed in Moscow, and we never had time to return to rehearsals. And then work began in the concern (in November 2020.— "Kommersant"), and it turned out to be very difficult to combine. Because a new business requires a three hundred percent return. And in the end, there is a family, one of the most important things in life. And when you choose between family and music, you have to choose family.
And going back to the beginning of the question: I did not leave to study music. I just quit my last job.
— How does rock's audacity combine with the strict military discipline required in the state defense order?
— In order to be successful in development, the audacity of rock is mandatory.
