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#18
Argumenty i Fakty
July 16, 2003
THE DEFENSE INDUSTRY: A FALL AGAINST THE BACKGROUND OF
SUCCESS
A virtual defeat for the defense sector - due to mismanagement
Author: Valery Buldakov, Robert Bykov
[from WPS Monitoring Agency, www.wps.ru/e_index.html]
RUSSIA IS ONCE AGAIN THE WORLD'S TOP ARMS EXPORTER. HOWEVER, THE STATE'S
MANAGEMENT OF THE DEFENSE SECTOR APPEARS TO BE WASTING ALL ITS ACHIEVEMENTS.
MEANWHILE, THE UPCOMING PRIVATIZATION IS EVEN MORE OF A THREAT, WITH THE
PROSPECT OF CRIMINAL CONTROL, PROFITEERING, AND NO INVESTMENT.
It is commonly believed that Russia can be rich solely through what nature
has provided. It traded in hemp and timber in the past; now it trades in
petroleum and nonferrous metals. But for the second year running, Russia has
been the world leader in exporting the most high-tech products - arms; and it
has started to make money.
Russia has really regained its top place in arms exports. Last year alone,
according to various assessments, Russia earned $5-6 billion from that. (In
comparison: US arms exports were under $4 billion).
Ten years ago, it was impossible even to imagine that our dying defense
plants could be capable of this.
It would seem that these billions could at least revive the defense industry,
if not completely normalize it. Yet only the other day, Army General Andrei
Nikolayev, chairman of the Duma defense committee, claimed: "Crisis and
large scale bankruptcy of defense sector enterprises make it impossible to solve
military reform problems and ensure the required level of Russia's defense
effectiveness. The Armed Forces are in a condition that enables us to say we
have already suffered a defeat. What sort of an army is it without up-to-date
industrial production..."
During the reform years, the Russian defense industry's output has fallen to
one-tenth of its previous level.
A POOR ARMY
Where in this case does the profit from contracts go? Nikolai Nikitin,
director general of the MiG Corporation, says around one- tenth of export
revenues is allocated for R&D. In May 1996, Sukhoi chief designer Simonov
asked the president for 10-12% for that purpose...
The Defense Ministry leadership has more than once asked to allocate a
certain part of the profit, $200-300 million a year, to re- equip the army with
new materiel. However, Article 2 of the law "On state defense
contracts" does not permit doing this directly. As a result, new combat
hardware in the Russian Armed Forces comes to 30% instead of the 60% accepted in
the world practice. The deterioration of the air fleet is 80%. All that is
because foreign clients pay with crispy dollars, while our Defense Ministry does
not always have even soiled rubles. Another paradox - equipping foreign armies.
Soon going to feed them?
THE INDUSTRY IS IN DEBT
There are 1,520 defense enterprises in Russia. The government owes them over
35 billion rubles, or $13-15,000 to each employee. Only profitable enterprises
that support themselves by exports can afford the luxury of investing in
development. But they are 15% of the total, at most: the Machine-Building Design
Bureau (Kolomna, Moscow region); Baltiysky Zavod and Severnaya Verf (St.
Petersburg); Almaz-Antei (Moscow); the aircraft enterprises Irkutsk Aviation
Industrial Association (IAIA) and Komsomolsk-on-Amur Aircraft Production
Association...
According to Alexei Fedorov, IAIA director general, these enterprises do not
swim in luxury. Their foreign currency revenues just ensure normal manufacturing
activity and enable them to repay to the state their rather large debts.
THE SHADOW REDISTRIBUTION
However, the state's control of the defense sector is weakening fast. The
list of enterprises that are the most important for the nation, so they are not
subject to privatization, has been cut significantly. For the defense industry
that just a short while ago was completely and absolutely state-controlled, the
era of redistributing has come, with shadow schemes to match - from machinations
with shares and deliberate bankruptcies to murders.
The two recent murders of defense enterprise executives were unanimously
described by the media as "defense contracts." On the same day,
hitmen's bullets killed Igor Klimov, director general of the Almaz-Antei holding
company, in Moscow; and Sergei Shchetko, deputy director general of an
Almaz-Antei subsidiary.
It looks like this is just the beginning of gangster wars for the Russian
defense sector. Armaments production is moving into private hands. How clean
these hands are is a major question, which for some reason does not always
concern the sellers of state property. Plants manufacturing guided missiles,
hand-held machine guns, and fuses are gradually placed, according to some
reports, under the control of criminal authorities. And these are rumored to be
Chechen.
Being aware of the history of the oil and aluminum redistributions, it is
easy to predict the outcome of this redistribution. A few people will pocket
tens of billions a year... And then, instead of investment in research and
development of new hardware, they will buy a football club, for example. There
have been such incidents already.
(Translated by P. Pikhnovsky)
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