#10
Vedomosti
April 17, 2002
DEFENSE SECTOR HAS EXHAUSTED ITS RESOURCES
Author: Alexei Nikolsky
[from WPS Monitoring Agency, www.wps.ru/e_index.html]

THE DEFENSE SECTOR, WHICH WAS GROWING RAPIDLY A COUPLE OF YEARS AGO, HAS SLOWED DOWN. LAST YEAR OUTPUT ROSE BY ONLY 4.5%, MUCH LESS THAN IN 1999 AND 2000. OVER THE PAST TWO YEARS THE RUSSIAN DEFENSE SECTOR HAS EXPANDED TO MEET ALL SOLVENT DEMAND IN RUSSIA AND ABROAD.

Russia's defense sector simply has no room for growth

The defense sector, which was growing rapidly a couple of years ago, has slowed down. Last year output rose by only 4.5%, much less than in 1999 and 2000. Over the past two years the Russian defense sector has expanded to meet all solvent demand in Russia and abroad.

According to the report "Russia 2002: the economic situation", prepared by the Center for Economic Conditions last year, the increase in civilian production of the defense sector exceeded the growth of military production for the first time. Yet this did not save the industry from a sharp drop in growth. However, the huge growth in 1999 and 2000, according to Konstantin Makienko, an analyst with the Center for Strategy and Technology Analysis, was connected with the fact that it had started from a very low level - in 1998 the industry was in a severe recession.

In the opinion of Alexei Shulunov, Vice President of the League of Assistance to Defense Enterprises, the decline in growth is connected with the fact that last year ship-building plants produced fewer goods. Last year only one new ship - nuclear powered Gepard submarine - joined the Navy of Russia. In the words of a senior executive at a shipyard, the worst aspect is that ship repairs have nearly ground to a halt.

The situation in other "capital-intensive" branches of the military - like the Air Force - is no better. A representative of an aviation plant says that they have not ordered new planes and helicopters for the Air Force for over a decade, and they will not order them at least until 2005, if not 2010. Less than a third of military aircraft are ready to fly in case of war, which proves that not enough funding is being provided for maintenance and repairs. The third consumer of the military budget is the Strategic Missile Troops, which used to take half of all funding allocated for military hardware. At present the new minister does not favor them, hence purchase of new Topol-M missiles is poorly financed. According to Shulunov, last year state arms procurement was funded very badly, especially at the start of the year, which caused a 3% slump in defense sector production. The situation this year has been repeated, when in the first quarter of the year almost no funding was provided for state arms procurement. Shulunov believes that only adopting a two-year plan for purchasing military hardware can improve the situation.

As a result of interior financing deficit, arms export, consisting mostly of aerotechnics and tying products, remains that main source of income. According to Elena Sakhnova, an analyst with the Aton investment company, production of pursuit planes for export is growing. For example, the Irkutsk Aviation Union exported ten pursuit planes in 1999, eight planes in 2000, and 18 planes in 2001.

The output of the second largest military plants in Komsomolsk- on-Amur also increased. At the same time, production of civilian planes is still in a state of stagnation, and the Ulyanovsk Aviastar plant has produced only a few units. According to the analyst, this year the situation is not likely to improve. In the opinion of Makienko, production of civilian aircraft has reached the borderline of solvent demand because the effect of the devalued ruble has fallen. No significant rise in domestic defense spending is planned. In the words of Makienko, this year arms exports will not exceed $4 billion (in comparison with $3.7 billion last year). (Translated by Daria Brunova)

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