|
Russia's Defense Industry Restructuring Program: a Critical Analysis
Konstantin MAKIENKO
In October-November 2001, Russia adopted two very important documents that laid out the main parameters for the functioning and development of the Russian defense-industrial complex (DIC) in the period to 2010. These documents were the Basis for the Russian Federation's policy in the area of the development of the DIC in the period to 2010 and the more distant future, and the federal targeted program on reforming and developing of the defense-industrial complex in 2002-2006.
Basis of Russian policy for the DIC to 2010
On November 10, 2001 President Vladimir Putin approved a document titled Basis for the Russian Federation's policy in the area of the development of the DIC in the period to 2010 and the more distant future. The Basis is a fundamental doctrinal document that sets out the goals, principles, priority areas and main tasks in the development of the Russian defense-industrial complex. It postulates that the strategic goal of Russia's policy for the development of the DIC is to ensure its effective functioning as a high-technology, multi-profile sector of the Russian economy capable of meeting the needs of the national armed forces, saturate the domestic market with dual-purpose and civilian high-tech products, strengthen Russia's position on the world market for goods and services, including arms and military hardware, and bolster socioeconomic stability in the country. The main policy goal for the medium-term has been declared as bringing the composition and structure of the DIC in line with new market conditions.
The Basis sets out the priority areas for Russia's policy in the DIC. They include:
the establishment of a regulatory-legal foundation for the functioning and development of the DIC,
improving government regulation and control over the operations of the DIC, the launch of mechanisms for managing state assets in the DIC,
renewing the fixed assets of the DIC,
financial-economic recovery of economic players in the DIC in conjunction with their restructuring,
creating systemic, diversified, integrated structures,
the development of the export potential of the DIC, expanding sales markets, increasing the effectiveness of military-technical cooperation with foreign states,
developing cooperation with fellow CIS members, especially signatories to the Collective Security Treaty.
The document highlights the following main principles of Russian policy for the development of the DIC:
government regulation and support for the development of the DIC, as well as control over its functioning,
the priority of federal interests in the resolution of issues regarding the functioning and development of the DIC,
prevention of critical dependence on foreign states in carrying out the activities of the DIC.
The following main tasks of Russian policy for the development of the DIC are highlighted:
It should be especially stressed that the Basis allows for the involvement, on a competitive basis, of nongovernmental structures and nongovernmental investors in work on state defense contracts.
The main mechanisms for implementation of the Basis are:
the federal targeted program on reforming and developing of the defense-industrial complex in 2002-2006,
the government weapons program for 2001-2010,
the government defense order,
the targeted investment program for the technical re-equipment and development of the production capacities of DIC enterprises.
The Basis is to be implemented gradually. In the first phase, the federal targeted program on reforming and developing of the defense-industrial complex in 2002-2006 is to be carried out by 2006.
In the period after 2010, there are plans to:
modernize the main production assets of the DIC,
hand over the "coordinating, management and control functions" currently held by federal bodies that manage the DIC to the newly created integrated structures,
conduct research and development on promising weapons systems and complexes, and make preparations to begin their serial production,
ensure that integrated DIC structures gain a strong presence on foreign markets for high-technology products, and carry out the bulk of work on diversifying the business of these structures.
The program on reforming and developing of the DIC in 2002-2006
On October 11, 2001, that is, even before the approval of the Basis, the Russian government approved the federal targeted program on reforming and developing the defense-industrial complex in 2002-2006. The declared goal of the program is "the formation of a new appearance for the DIC by way of its reform in accordance with the tasks of building up the military and taking into account the parameters of the state weapons program for 2001-2010, as well as to create the conditions for the steady development of the defense-industrial complex." The program is to be implemented in two stages. In the initial phase, which will last from 2002 to 2004, there are plans to:
create a regulatory base for the subsequent formation of integrated structures in the defense industry,
form these integrated structures themselves,
implement projects of internal restructuring at these integrated structures and selected organizations, including their technological complementation,
"implement measures to increase control by the state over the activities of defense-industrial complex organizations."
In the second phase of the program, from 2005 to 2006, there are plans to:
form research and production complexes, including inter-sectoral and international ones,
continue to implement measures to optimize the proportion of government participation in the capital of integrated structures and key organizations of the defense-industrial complex.
The main declared task of the Program is to ensure the steady development of the DIC, development and production of competitive military and civilian products, optimizing the composition and structure of the DIC by concentrating military production in a restricted number of research-production complexes controlled by the government (author's italics).
The Program is expected to receive 35.69 billion rubles ($1.15 billion) in funding, including 14.78 billion rubles ($0.48 billion) from the federal budget and 20.91 billion rubles ($0.67 billion) in 2002 prices from off-budget sources. The government resolution, however, states that as the Program is being implemented the amount of financing will be subject to annual review taking into account the capabilities of the federal budget. The implementation of the Program is supposed to result by 2006 in the creation of an effective DIC structure based on the formation of research-production complexes that would be operating at 70% of capacity. It is stressed that one of the expected results of the Program's implementation is supposed to be an "increase in the proportion of state participation in the capital of the head companies of integrated structures to controlling share packets". By the end of the Program's term, the new composition of the DIC based on research-production complexes is to be "largely" complete.
Description of the situation in the DIC
The Program gives a realistic and frank description of the current state of affairs in Russia's defense-industrial complex. It states that 1,700 DIC enterprises employ 2 million people. By form of ownership, these enterprises break down into 43% state owned, 29% joint-stock companies with state participation, and 28% joint-stock companies without state participation. The DIC accounts for 35% of Russian exports of machinery and equipment, and 27% of total domestic production of engineering products. The situation in the DIC is characterized by the following circumstances:
the suspension or reduction to a minimum of production of the most important weapons and military equipment. The virtual cessation of work on development of aviation materials, new artillery powders, hard rocket fuels and initiation agents.
the preservation of a large number of obsolete production lines that are on average operating far below capacity,
the progressive aging of production and research equipment, 75% deterioration of active production assets on average and for a third 100%. The proportion of new equipment up to five years old amounts to 4.6%.
aging and poorer quality research and production personnel; low wages, usually a third lower than the average in industry,
the loss of technology for the creation of a components base,
disintegration of technologically related production and research and development organizations.
Goals and tasks
As we have already said, as a result of the implementation of the Program the structure of the DIC is supposed to be optimized through the creation of a restricted number of integrated structures that would cover the whole cycle of work on development, production, sale and operation of weapons and military hardware. Such integrated structures are to be created by ensuring that the parent companies of these structures have a decisive role in the management of organizations that are part of them. The government is also to have a part in the management of the integrated structures and key DIC organization when it comes to "control over the use of financial resources". At the same time, the Program declares that the goals should be attained with the minimal use of budget funds. The Program also sets out the mechanism that will be used to increase the state's stakes in DIC enterprises: this will be the maximum use of the state's rights to previously created results of intellectual activity or the transfer to the state of share packets in joint-stock companies through additional share issues. The Program also allows for the possibility of reorganizing some state unitary enterprises into state-budget enterprises. Such reorganizations will take place mainly in the area of narrowly specialized explosives, experimental and assembly-outfitting production lines.
Role of the state
The program calls for government support for a number of measures and projects to reform the DIC, if these measures are vital to ensuring national security and cannot be implemented without state support because they are commercially unviable or call for creating civilian production. But the Program proposes an astounding form of such state support: "the acquisition into state ownership of additional share packets in those companies that are to be included in research-production corporate structures". Naturally, there can be no talk of these stakes being paid for. Confiscation is to be carried out on the pretext of reestablishing the rights of the state to intellectual property. However, "intra-firm restructuring of enterprises and organizations, detachment, isolation and liquidation of selected production should be conducted mainly at the expense of the resources of enterprises themselves and other off-budget sources".
The Program in detail sets out a list and composition of integrated structures that will be created in the next four years. It is interesting that they, as a rule, include both state enterprises and joint-stock companies with predominantly or exclusively private capital. Such a mix only reinforces the suspicion that the Program effectively launches the large-scale re-nationalization of the few privatized segments of Russia's defense-industrial complex. As an example, we cite a few of the integrated structures that are to be created in 2002-2004:
JSC "RAC "MiG" is to be formed on the basis of the existing federal unitary enterprise RAC "MiG", a number of enterprises that were part of VPK MAPO (developers and manufacturers of aircraft systems and engines), as well as the Aircraft-Building Plant Sokol (Nizhny Novgorod). It should be noted that 39% of Sokol belongs to the Kaskol Group, while only 38% remains in government hands;
JSC "AKhK "Sukhoi" will be created based on the Sukhoi Aircraft Military and Industrial Complex. Irkutsk Aviation Industrial Association (IAIA), of which only 14% belongs to the government, is mentioned among the enterprises to join;
Ilyushin Aircraft Complex, with the Chkalov Aviation Production Association in Tashkent mentioned as a member;
Aerospace Equipment Corporation;
Tupolev;
the Avionika Concern, created on the basis of NPTs "Tekhnokompleks".
In the area of engine building, the Program mentions the Kuznetsov Complex, Perm Engine-Building Center and federal unitary enterprise Salyut. Note that the Saturn Scientific Production Association Joint Stock Company (Saturn NPO), the most aggressive and dynamic among existing engine-building corporations, is not mentioned in the list of integrated structures slated for creation in 2002-2006. This corporation is mentioned in reference to "research-production complexes," the larger and more diversified corporate structures that will be created after 2004.
In the second phase of the Program, in 2005-2006, there are plans to create two airplane and helicopter building complexes: SVSK-1 (based on Tupolev, RAC "MiG" and Kamov Company) and SVSK-2 (Ilyushin Aircraft Complex, AKhK Sukhoi and Mil Moscow Helicopter Plant).
For the development of air defense systems, there are plans to create a single company called PVO (anti-aircraft defense) that would include Antei, NPO Almaz, MRTZ and the company Defense Systems. In the area of shipbuilding, the Program mentions the Medium and Small-Tonne Shipbuilding Concern, created on the basis of the assets of Interregional Investment Bank, as well as the Baltiysky Zavod, which would include the Baltiysky Zavod shipyard itself and the Aisberg design bureau. In light of the scandal involving the placement of a Chinese contract for Project 956ME (Sovremenny class) destroyers with Baltiysky Zavod, it is interesting to note that JSC Shipbuilding plant Severnaya Verf is not mentioned in the Program at all.
Critical analysis
With the approval of the Basis and the Restructuring Program, as well as following the passage of the weapons program to 2010 by the State Duma, Russia has in general formed an ideological doctrine for the development and functioning of the DIC.
The adoption of the Restructuring Program shows that, with the drastic weakening of the powers of governors, the federal authorities have a chance to overcome the resistance of local elites, which have until now blocked corporate building in the area of the DIC.
The realistic description of the current situation in Russia's defense-industrial complex shows that the government is fully aware of the need to restructure the DIC and reform the mechanisms of its management based on the creation of large integrated structures.
Along with these positive elements, one must note the risks that are embedded in the Program as well, which could reinforce the stagnation processes in the DIC. Such risks include, first of all, the clearly expressed discrimination against private players in the defense-industrial complex. The Program openly declares that "state participation in the management of integrated structures and key organizations of the defense-industrial complex must be ensured". And it is these state-controlled integrated structures that will become the "main executors of the government defense order and export contracts". Thus, nongovernmental corporate associations are being given a clear signal that they can give up hope of getting domestic or export orders.
The Program is completely vague on the issue of how existing private or predominantly private enterprises will be integrated into the new structures described in the document. The suspicion arises that government agencies will simply put intense pressure on the owners of these enterprises with the aim of effectively renationalizing or destroying businesses not controlled by bureaucrats. However, it is clear that the successful creation and subsequent functioning of a multi-profile high-tech sector of the economy based on the DIC is possible only within the context of its wide-ranging privatization. The state has repeatedly proven that it is not capable of effectively managing its assets. Furthermore, in effective absence of state contracts, preserving large-scale state ownership in the DIC is not exactly an obvious choice.
The focus on preserving cooperative ties with CIS countries is quite disputable. It is clear that Russia currently has an economic weight that, in the context of globalization, does not allow it to remain an autonomous, sovereign defense-industrial pole. International alliances are necessary. But they should be created first of all with promising, growing Asian countries, not with corrupted, bankrupt, post-Soviet ones described in Brzezinski's geopolitical pluralism model.
 |
