Giant New Factory, Giant New Scam?

Forensic analysis by Conflict Armament Research of two kamikaze drones brought down over Ukraine shows that rather than being built Iran like previous models, these are Russian-made. As the New York Times reports, this may foreshadow a new supply and a drones bombarding Kyiv on a scale never seen before. But revelations from an unexpected quarter show that the truth may be somewhat different: the threat is not what it appears.

Shahed kamikaze drones from Iran have been one of Russia’s most effective weapons. On August 3^rd President Zelensky stated that Russia had launched almost 2,000 Shaheds at Ukraine, suggesting they may have used most of the 2,400 reportedly acquired from Iran in the original deal. Russia now plans to build the drones itself and in June the White House released pictures of the giant factory site in Russia chosen for the project. Ukrainian intelligence officials reported in July that production had already started. The new CAR report confirms this version has a modified design and some Russian components.

In July, analysts from the Defense Intelligence Agency told reporters that the manufacturing facility would turn out a stockpile of drones “orders of magnitude larger” that the numbers seen to date.

But an investigation into the site by Russian anti-Putin activists suggests that the purpose of the factory is not to manufacture drones, but to milk money from the system in an old-fashioned procurement scam.

Welcome to Alabuga : Low Taxes, Cheap Labor, High Profits

The factory is located in the Alabuga Special Economic Zone in Tatarstan, a remote spot six hundred miles East of Moscow. Companies get big tax breaks for operating in this impoverished region, and before the invasion Alabuga (also Elabuga or Yelabuga) was a thriving hub of high-tech industry with many foreign partners based there including Ford.

Now the foreigners have left, the empty factory space can be used for making drones, and there are already drone makers in the area. And according to supporters, the Russian-made Shahed clones will improve over the original.

“The updated kamikaze drone…should in the near future completely get rid of Iranian components and switch to the domestic element base (engine, GLONASS positioning system, drives, microchips, airframe), which is more advanced and, as a result, the technical characteristics of Geranium [Russian name for Shahed] will increase significantly,” according to a patriotic blogger using the name ‘Russian Assembly.’

The journalists from Russian activist group Protokol and independent media RZVRT are less concerned with munitions production than with human rights and the treatment of workers under an oppressive system. Their investigation into the company involved reveals surprising information.

The Shahed factory was set up under the guise of making boats. The drones are currently assembled manually using kits from Iran. Supposedly in two to three years all the parts will be made in Russia and a high-tech automated assembly line will be turning out Shahed look-alikes by the thousand, but this seems highly unlikely for reasons which we will explore.

A little detective work turned up a press release from Alabuga from January 2023:

“Alexey Florov, a representative of Dolphin-Alabuga LLC, said that the launch of production in the special economic zone is scheduled for April 2023. At the initial stage, 2 thousand boats per year will be produced. Within 15 years, production capacity will be increased to 20 thousand boats per year.”

This is interesting for three reasons. One is that Florov is General Director of Albatross LLC, a drone company which has recently started producing reconnaissance drones for the Russian military in Alabuga. Another is that “2 thousand a year” corresponds to Ukrainian estimates for Russia’s initial Shahed production goal. The third is that “15 years” figure. (As a footnote, the Russian boat industry has been in sharp decline since the start of the war, so the cover was not fooling anyone).

The RZVRT/Protokol report says that while the factory is turning out 70 Shaheds per month, these are not manufactured, but assembled from kit form in a simple but tedious process. This feat is achieved by drafting in unskilled, under-age labor from the local college.

Several hundred students aged 15-17 from the Alabuga Polytechnic College ‘volunteer’ to work 12-hour shifts on the drone assembly line and are paid $300-$400 a month. The college promises that students can earn as they learn, but according to the RZVRT/Protokol report students have no choice about volunteering for drone assembly, as they are expelled if (with a hefty fine) if they refuse.

There is a war on, and perhaps this unorthodox method of staffing the factory was necessary. But you have to question the commitment to quality of a company using exhausted 15-year-olds on its production line. This looks more like a traditional sweatshop, with no capital investment in equipment, using the cheapest available labor to cut costs and maximize profits.

The Perfect Scam

Building drones only designed to fly one way is the perfect scam because, as long as they get into the air, poor manufacturing will never be spotted. Most of the Shaheds will be shot down anyway—at least 80% are intercepted — so who will know if their guidance systems are faulty, their engines unreliable or their warheads fail to detonate? Ukraine is careful not to allow details of damage caused by the drones to leak out. The Russian Ministry of Defence will be the last to know if their Russian-made Shaheds are duds.

But what about the longer-term aim of producing Shaheds locally? The RZVRT/Protokol investigators unearthed a heap of paperwork showing the production contract had been offered to established Russian arms makers, including ZALA Aerospace, the arm of Kalashnikov which produces the successful Lancet kamikaze drone. They all turned down the project, leaving it to the comparatively unknown startup.

Low cost is the Shahed’s main appeal to the Russian military, with an estimated price tag of just $20,000 compared to $1.2 million for a Kalibr cruise missile. That does not leave much margin for profit. And the prospect of build a Shahed clone using Russian-made components rather than cheap foreign imports is a daunting one.

The CAR report notes that the Russian-assembled Shaheds only have three components of identifiably Russian origin. One of these is Kometa satellite navigation module, developed for Russian military systems, which uses the Russian GLONASS rather than the American GPS constellation.

Can the makers find Russian components to replace the other imports? It seems unlikely, because no other Russian drone maker can.

ZALA’s own supposedly ‘Made in Russia’ Lancet costs twice as much as the Shahed and, as a previous CAR report found, has several components from Western manufacturers. These include its ‘brain’, which uses U.S.-made Jetson TX2 chips optimized for AI. Even the Lancet’s engine comes from a Czech manufacturer. And a recently promotional video showing the Lancet production facility inadvertently revealed that the locally-made parts, such as the wings, are made by imported machine tools. These may not be easy to acquire under the current sanctions.

And while it might be possible to smuggle in small batches of components via back-door routes, this is simply not feasible when trying to produce thousands of units a month. No wonder other drone makers turned down the challenge,

Most likely, Florov and his associates have no intention of attempting the impossible.

Florov’s official drone company, Albatross, has supplied a handful of small reconnaissance drones to the Russian military. He promises that he will deliver a thousand a month in fifteen years’ time – the same timeframe as the automated Shahed-clone production line. And he will do this, he says, with the aid of a big investment in modern technology.

Dolphin-Alabuga, the ‘boat’ company, is looking for 80 billion rubles, or about $800 million to get the automated production line started. The Russian Ministry of Defence does not pay in advance but will guarantee orders. This government contract will be used to borrow this money from Russia’s VTB Bank.

Big, empty factory units are useful fronts for scams. On at least a couple of occasions in the U.S., entrepreneurs have bought up factory space for new car factories, persuaded investors they had a foolproof business plan, and disappeared with the money. An empty factory looks good on brochures, visiting officials of investors can see exactly where all the expensive machinery will go. Given the long lead time it will be years before anyone is able to say whether the production line will ever be built…or ask where all that money has really gone.

Russia’s Long Tradition Of Drone Scams

The reason for fingering this as a likely scam is a matter of history. Scams are hardly unusual in the Russian drone business, Samuel Bendett an expert on the Russian drone industry and adviser to both the CNA and CNAS, told Forbes.

“As far as siphoning off funds goes — anything is possible,” says Bendett.

Bendett points to a recent scandal over production of the Altius high-altitude drone, Russia’s answer to the USAF’s RQ-4 Global Hawk. The complex criminal case involved a number senior design staff, and dodges such as buying drone engines from Germany at an inflated price. Simonov Alexander Gomzin, Director General of the design bureau developing the Altius, is accused of embezzling around $9 million. The project has now been turned over to a different maker. Twelve years after it started, Altius is some years behind schedule, and over budget.

Russia’s Dobryna project, a ‘Russian-made’ alternative to the Chinese DJI quadcopters for the military, resulted in humiliation when the end product was criticized savagely by Russian commentators, both for its poor performance and for being a “Chinese-made Nazgul Evoque F5 quadcopter in a Russian frame.” At 130,000 rubles or about $1,350, the government paid about twice as much as the retail price of the Chinese original. No criminal charges were brought.

Similarly, the Orlan-10, Russia’s workhorse reconnaissance drone, was at the center of a procurement scandal when the makers, Elektropribor, undertook to replace the drone’s foreign-made camera with a new Russian one. Instead, they sourced a camera from China, rebranded it and charged the government a huge markup.

It would be interesting to know whether officials at the Russian Ministry of Defence knew the processor in their Lancet loitering munition came from America before CAR pointed it out. Certainly the U.S. military would not allow it: the Pentagon’s Zero Trust policy ensures that every attempt is made to exclude components from possible adversaries and it is doubtful whether Putin was pleased to discover the fact in the middle of a war with an opponent backed by the U.S..

Even Hand-Made War Machines Needs Foreign Parts

Low-paid workers will continue to assemble Shaheds of doubtful quality at Alabuga by hand. They may even each the target of two hundred a month, and this would allow Russia continue attacks at roughly the current level. Fortunately Ukrainian defenses are steadily improving and few will likely get through at this rate. However, like other Russian defence contractors, they may struggle to meet quotas – especially if the flow of smuggled components is choked off.

As the CAR report notes, identifying and cutting off the channels by which Western-made critical components reach Russia is still crucial. Russian still cannot make high-tech parts itself, and that giant factory will not produce anything if the parts are not available.