Understanding the Defence Industry in Russia and the Former Soviet Union

From the INTERNET DJ picks out a special report about the arms industry in the former Soviet Union

At the height of the Cold War the Soviet Union's defence industry was engaged in a massive arms race with the United States. Thousands of combat aircraft, armoured vehicles, warships and nuclear missiles were built every year by a network of more than 1,700 research institutes, design centres and manufacturing plants. The Russians called this monolith their "defence-industrial complex".

Over the past decade, Russia's defence industry has undergone tremendous upheavals as it attempts to adjust to the introduction of the western style free market economic system and a cash based economy.

The structure of Russia's defence industry is very confusing to westerners and even to many observers within the country itself. Russia's defence industry differs fundamentally from any western model because of old Communist heritage. Defence companies and prime contractors, who compete for and manage defence contracts, do not yet exist in Russia. There is for example no such thing as the Sukhoi company, that designs, builds and sells Su series aircraft. There is a design bureau that is responsible for producing the designs and prototypes of the Su series aircraft but they can be made by a number of factories.

The Soviet Defence Industry

This confused state of affairs is a result of the collapse of the old Soviet way of doing business. Until the early 1990s the Soviet state was at the centre of the defence industry, providing direction and control to all elements involved in the development of weapons systems.

The Communist Party Politburo and then the Council of Ministers had to approve all defence procurement programmes before the Military Industrial Commission, or VPK, could launch them. It was the job of the VPK, assisted by the armament directorates of the various armed services, to oversee and co-ordinate weapon programmes from the concept definition stage by research institutes, through to the design and building of prototypes by the design bureau, or OKB, and then into production at a number of manufacturing plants.

The various elements or enterprises in the "defence-industrial complex" did not have a western style contractual relationships. They were all state owned and just followed the orders of the VPK. It was the state's job to ensure all the enterprises worked together and no money changed hands between enterprises.

With the demise of the Soviet Union this system broke down. The new Russian government tried to transform the system into a cash based one but it has not been a success. Co-ordination and partnership between enterprises are now difficult to organise. Two "super companies" were set up based on the old MiG and Sukhoi design bureau, to include design, airframe manufacture, sub-component suppliers, marketing and sales. The constituent elements of these two groups were not happy at the terms of the "shot gun" marriage and they have not been a success.

The fundamental problem is Moscow's lack of tax revenue, so it can pay off products or services from defence enterprises, either those still in the state sector or those which have been partly privatised as so-called joint stock companies. Almost all Russian defence enterprises are owed huge sums by the government, leading to them building up massive debts to sub-component suppliers and their own workers. This debt ran to nearly $1 billion (US) in late 1998.

The best source of revenue for defence enterprises is from exports but this has generated heated arguments within the industry over how to divide the proceeds of any foreign sales. The state owned defence export company Rosvoorouzhenie in theory has a monopoly on all foreign defence sales, except for a handful of enterprises. How the revenue from foreign sales are divided between Russian defence enterprises is still not clearly defined.

To survive in an era of almost zero Russian defence spending, with, for example, no new aircraft being bought in 1998 by Moscow, defence enterprises have had to resort to unusual ways to generate cash flow. Some have gone into air charter work, others have tried to break free from Rosvoorouzhenie and gain the right to sell products directly to foreign customers. The KBP Instrument Design Bureau in Tula has been able to successfully sell its products abroad. Regional governments have also become closely involved in protecting and promoting defence enterprises based in their region, with Omsk looking after its tank industry and St Petersburg promoting the city's shipyards.

The Future

The Russian defence industry still exists in the shadow of the Soviet era. In the past seven years there has been almost no reduction in capacity, no plants have been officially closed. They have just been allowed to decay or find new ways to occupy themselves. The equipment currently in production are almost all hangovers from the Soviet era or upgrades of old designs.

The Russian government announced in July 1998 that it wanted to consolidate defence enterprises from then 1,700 to some 670 by the year 2003. These would then compete or tender for work against each other. This is likely to create major political problems, with some enterprises having towns of 30,000 to 40,000 people dependent on them as their sole source of work.

Many Russian government and military leaders recognise that new corporate grouping need to be established to act as western style prime contractors to develop and produce the next generation of defence equipment. There is talk of a single military aircraft company, a defence electronics company, an air defence company, a tank company and an artillery concern.

There are also efforts to re-centralise export policy, with a re-vamped Rosvoorouzhenie leading the effort to capture a greater share of the global defence market.

Marketing/Holding Companies/Industrial Groups

These are the main marketing or trading entities that operate in foreign markets: Rosvoorouzhenie, the Russian state arms export company for new equipment; PromExport, the Russian state arms export company for surplus equipment; Rossiyskiye Technologii, the Russian state export company for military technology; Aviaexport, the Russian civil aviation exports company; Ukrspetsexport, the Ukrainian state owned defence export company which has a similar role to Rosvoorouzhenie; Beltechexport, the Belarusian state arms export company which has a similar role to Rosvoorouzhenie.

A number of industrial holding groups have been formed, including: the MAPO MiG military aircraft group, containing 12 enterprises; the AVPK Sukhoi military aircraft group, containing five enterprises; Medium Transport Aircraft Consortium, a joint Ukrainian-Russian company to set up to produce the An-70.

Aerospace

This sector of the industry is most well known in the West with the many of the enterprises and their products being household names. While Sukhoi and MiG have secured important foreign export orders from China, India and Malaysia, the sector is still working well under capacity.

Perhaps the most successful sector at generating foreign currency is the space booster industry, which is now a global leader thanks to its reliable and cheap rockets.

Land Systems

The land systems sector has been heavily hit by cutbacks in Russian defence spending, with annual tank product slashed from more than a 1,000 to a few score units for export customers. Competition with the Ukrainian tank industry is intense.

Defence Electronics/Radars/Guided Weapons

The Russian guided weapons sector is closely inter-linked with the radar and defence electronics industries. The design effort on many missile systems was led by radar research institutes and design bureau, leading to the lines between research, design and manufacture being blurred. There is still considerable foreign interest in Russian surface-to-air missiles.

Naval Systems

Naval products have been identified as a major growth area for foreign sales and a number of new products are expected to emerge from this sector over the next few years. The St Petersburg based Rubin Central Design Bureau is one of the world leaders in conventionally powered submarine design.

Ukraine India

Due to their shared Soviet heritage, the Ukrainian and Russian defence industries are closely linked and share many of the same problems. There are more than 200 defence enterprises in the Ukraine, involved in aircraft, armoured vehicle, radar, missile, land systems and naval programmes.

The Ukraine had a thriving business selling off second-hand military equipment. As far as new equipment is concerned, it is concentrating on two main areas, large transport aircraft and main battle tanks, where it is having some success selling 325 T-80UD tanks to Pakistan for delivery by 2003.

There is strong Russian and Ukrainian co-operation on the An-70 future large aircraft programme, with Moscow planning to co-produce a large number of the aircraft.

China and India

The old Soviet Union's best customer for it's aerospace and defence products, China and India, have maintained their relationship with the new Russia.

Trade links have increased and both countries are continuing to licence produce Russia's most advanced products, with the first Chinese Su-27 (NATO: Flanker) due to fly this year.

These links look set to grow and they will remain a core market for Russia.