November 2000 - January 2001 Reform of Russian Defense Export System

Konstantin Makienko

By signing Decree #1834 dated November 4, 2000, President Vladimir Putin initiated the third sweeping reform within the last seven years designed to enhance the system of Russian military-technical cooperation (MTC) with foreign states.

The first attempt to revolutionize the institutional system was made in November 1993, just one month after the October military-political turmoil in Moscow. The triad of institutes that would manage and supervise the arms trade was set up in the course of 1994. This system was composed of (a) the for-profit, state corporation "Rosvoorouzhenie" as the key arms dealer; (b) the State Committee for Military-Technical Policy (SCMTP), a ministerial level federal body set up to supervise and issue licenses to transfer weapons; and (c) a Presidential aid for military-technical cooperation, who would act as a liaison officer between "Rosvoorouzhenie," the SCMTP and President Boris Yeltsin. This structure operated independently of the Government, and was under the direct control of the powerful Head of the Presidential Security Service, Alexander Korzhakov.

Alexander Korzhakov’s dismissal in June 1996 allowed the Government to phase this system out from August 1996 to August 1997, and to extend its own authority over MTC. In August 1997, Vice-Premier Yakov Urinson embarked on a reform to complete this process. The reform put an end to the monopoly of "Rosvoorouzhenie," and created two more for-profit state corporations: "Promexport," to trade excess military stocks owned by the Defense Ministry, and "Rossiiskie tekhnologii" authorized to transfer military technologies. Thus the “Presidential” model of export monopoly was replaced by a multi-actor “government” model. This system, with a few adjustments, remained in place until 2000. In April 2000, "Rossiiskie tekhnologii" merged with "Promexport." Finally, in November 2000, President-elect Vladimir Putin restored the “Presidential” model of vertical governance of the arms trade and a monopoly of a single state intermediary.

According to Decree #1834 dated 4 November 2000, two state export-import intermediaries - "Rosvoorouzhenie" and "Promexport" - were merged to form "Rosoboronexport." Andrei Belyaninov, former first deputy Director General of "Promexport," was appointed as Director General of the new state corporation. Alexei Ogaryov and Sergei Chemezov, former directors general of "Rosvoorouzhenie" and "Promexport" respectively, were relieved of their duties, and "to be reassigned to another job." The Decree's provision to delegate regulatory functions previously vested in the Ministry of Industry, Science and Technology to the Defense Ministry has significant implications for the promotion of military-technical cooperation with foreign states.

What is at the Bottom of the Reform?

In August 1999, it became obvious that the system created by Yakov Urinson was destined to failure because of its inefficiency and lack of functionality.

First, both state intermediaries were engaged in fierce competition on international arms markets. This competition cultivated blunt antagonistic behavior of both companies in federal agencies and the mass media.

Second, the institutional confrontation of these two companies grew stronger, owing to the competition between two bureaucratic clans - "the old Kremlin group" and "the new President's entourage," - with both exerting control over the companies.

The institutional paralysis, which seized the Russian arms trade system, was predestined by Yakov Urinson’s reform. Though the inter-mediaries were initially thought to be targeted towards different sectors of the market, the internal documents circulating in the three companies were virtually identical, and permitted them to supply goods of similar nomenclature to the same markets. In Africa, when the conflict between Ethiopia and Eritrea and the internationalization of the civil war in Congo (former Zaire) in 1998 created an urgent demand for second-hand weapons, competition between the two intermediaries was low. Generally speaking, "Promexport" operated on the African market and stayed away from the new armaments sector. However, when the demand for second-hand weapons dropped in 1999, both "Rosvoorouzhenie" and "Promexport" competed for the same markets in India, Latin America and the Persian Gulf.

The imminent collapse of this structure, which became obvious after August 1999, was hastened by another reshuffle of factional bureaucrats. In August 1999, the MTC system was divided between the old Kremlin group with Alexei Ogaryov, then Director-General of "Rosvoorouzhenie," among their ranks, and the new President's entourage, to which Sergei Chemezov, then Director-General of "Promexport" belonged. This division seems to mirror a tradeoff between the Yeltsin "Family" and Putin's emerging team, designed to include his Petersburg associates and colleagues from the Foreign Intelligence Service (SVR). The tension between "Rosvoorouzhenie" and "Promexport" rose in harmony with the escalation of confrontation between those clans. As the old Kremlin group lost its political influence, "Rosvoorouzhenie" was stripped of political and bureaucratic levers, and a number of its contracts were transferred to "Promexport."

The new President's team, built on the principle of corporate loyalty, orchestrated the events by which the Russian system of the military-technical cooperation with foreign countries passed to its complete control. The old Kremlin group, based on a culture of nepotism and friendly business ties, lost its control over the MTC. Decree #1834 appeared like a bolt from the blue both for Prime Minister Mikhail Kasyanov and Head of the Presidential Administration Alexander Voloshin. Director General of "Rosvoourouzenie" Alexei Ogaryov met with the President on the eve of its sacking, but emerged from this meeting in full confidence that he would hold his office until the New Year at minimum. Moreover, the wording of Decree #1834 was drafted under unprecedented secrecy, and even such members of the anti-Ogaryov's coalition as Vice-Prime-Minister Ilya Klebanov (Petersburg faction of Putin's entourage) and Deputy Minister of Science, Industry and Technologies Grigory Rapota (lieutenant-general of the Foreign Intelligence Service) were not privy to the particulars of the imminent shake-up.

Institutionalization of the System

"Rosoboronexport" was the first component of the system, which was installed by January 2001. This structure incorporates the Com-mittee for Military-Technical Cooperation (CMTC) set up under the Defense Ministry and a new statutory base regulating arms export.

On December 1, 2000 the Committee for Military-Technical Cooperation with foreign countries (CMTC) was established under the umbrella of the Defense Ministry by Decree #1953. Mikhail Dmitriev, the former Head of the Information and Analytical Directorate of the SVR, was appointed as the CMTC Chairman with the rank of Deputy Defense Minister. The staff of the Committee totals 250 employees, the same as that of the SCMTP up to 1996. The Committee is under direct command of the President. According to the Decree, the priority functions of the CMTC are the elaboration of statutory legal acts dealing with MTC issues and issuing licenses to export-import military-purpose goods. Besides, the Committee is to submit proposals to grant rights to defense enterprises to export weapons and military hardware without the intermediary services of "Rosoboronexport." Today, six com-panies exercise this right, including the "Antey" Concern (developer and producer of air defense systems S-300V and "Tor-M1"), the Tula-based KBP - Instrument Design Bureau (developer and producer of short-range air defense systems and anti-tank missile systems), RSK "MiG" (producer of MiG-29 fighters), Central Design Bureau for Marine Engineering "Rubin" (producers of submarines), Kolomna-based Machine-Building Design Bureau (developer of portable surface-air missile systems, active tank protection systems, tactical ballistic missiles) and the Reutovo-based science-production association of machine building (developer of anti-ship missiles and surveillance and communications satellites).

The CMTC as a whole is almost an exact copy of the State Committee for Military-Technical Policy, which operated in 1994-1996. Their generic difference lies in the degree of their subordination - the SCMTC was an independent federal body, whereas the Defense Ministry is empowered with pro forma authority over the CMTC. However, the new committee is likely to operate under direct supervision of the President and independently of the Defense Ministry.

By signing Decree #8 dated January 6, Vladimir Putin approved the Charter of "Rosoboronexport", which provides it with exceptionally wide powers of foreign trade and financial rights. The Company has the right to deal not only in military, dual and special purpose products, but also “strategically important” raw materials, which means rare and non-ferrous metals, diamonds and oil. The company acquired the right to effect lucrative commercial deals including barter, leasing, stock exchange, financial, credit, insurance, re-export and other transactions. Thus, we are witnessing the emergence of an economic entity with far-reaching powers. "Rosoboronexport" in theory can become an efficient vehicle for the transfer of resources from Russia’s resource industry and from world financial markets to feed Russia's high-tech sector.

Conclusions

1. The November reform of the system of MTC with foreign states was predetermined. It resulted from the total crash of the Urinson three-channel structure of arms exports in concurrence with a new cycle of reshuffling of factional bureaucrats in command of the arms trade.

2. The reform re-instituted the Presidential vertical hierarchy of power over the MTC system, similar to that of 1994-1996 (except for the role of the Defense Ministry), and decommissioned the governmental model of the weapons trade. The Security Council of the Russian Federation can now be expected to enhance its authority.

3. Decree #1834 launched the process of building a one-channel MTC. This system is not perfect, but is the only one feasible in the context of today's Russia. The number and/or scope of rights of the other six entities of MTC could be reduced.

4. The reform is a manifestation of the reduced influence that the old Kremlin group has exercised in the field of MTC since August 1999. Backroom consultations may have led to an agreement to swap the old Kremlin group's positions in the domain of arms trade in exchange for the status quo in banking and the oil business. This could mark the beginning of a far-reaching process of elite transformation.

5. The organizational and staffing measures adopted could entail the risk of protracted implementation of signed contracts, a temporary slow-down of negations for new deals, and the threat of professional decline among the employees of "Rosoboronexport." Nonetheless, the execution of obligations under the "Rosvoorouzhenie" contract with People’s Republic of China, (transfer of fighters Su-30 MKK, Su-27UBK and project 956E destroyer to the amount of 1.5 billion USD) and with Greece (transfer of "Zubr" amphibious landing ship to the value of 50 million USD) and signing of the contract with India for the licensed production of Su-30MKI fighters to the minimum value of 3.3 billion USD make groundless the above apprehensions of risk.