#19 - RW 271
Moscow Times
August 27, 2003
Defense Industry: Top-Down or Bottom-Up
By Yulia Latynina

All last week, the town of Zhukovsky in the Moscow region played host to the sixth Moscow Aviation and Space Show. The major networks hailed the exhibition as equal or even superior to its chief European rivals, France's Le Bourget and Britain's Farnborough.

The main difference between this year's air show and last year's was the

presence of the American delegation, a signal event for U.S.-Russian relations. But the real explanation is probably more prosaic. The Americans fell out with the French over Iraq and opted to skip Le Bourget this year. They couldn't let the money allocated for air shows go to waste, so they spent it on a trip to Russia.

In fact, none of the so-called innovations at this year's exhibition was

really new at all. At best, the show featured upgrades of old designs. The main task facing the Russian aircraft industry may be the production of a fifth-generation fighter jet, but the show offered little hope that this goal will be achieved anytime soon.

There are objective reasons for this. The meager Russian budget can no longer support a Soviet-sized defense industry. It's like trying to sail an aircraft carrier in a pond. No design upgrades will ever make that possible. There is also a more subjective reason. No sector of the economy is more hamstrung by government regulations than the defense industry, and no sector faces a similar threat of radical changes in its ownership structure.

Two competing models of integration are at work in the Russian defense industry: top-down and bottom-up. Integration from the bottom up occurs, for example, when a thriving private aeronautics company begins to buy up its component suppliers. The one truly successful example of bottom-up integration is Irkut, formerly the Irkutsk Aviation Production Association. The state owns just 14 percent of the shares in Irkut, yet the company, which recently signed deals with India and Malaysia for its Su-30MKI and Su-MKM fighter jets, is Russia's second-largest aircraft exporter. Irkut has already bought up the Beriyev Taganrog Aviation Scientific-Technical Complex, a producer of amphibious aircraft, and the Russkaya Avionika design bureau. The merger of Irkut with the Yakovlev design bureau was announced at this year's Moscow air show.

Top-down integration occurs when companies are swept into state-owned holdings by presidential decree. These holdings become the fiefdoms of top officials. Budget money is allocated for developing new weapons and gets lost somewhere along the line. Two such holdings have been created to date.

The first was Sukhoi, created when Industry, Science and Technology Minister Ilya Klebanov was top dog in the defense industry. Even privately held Irkut was slated for inclusion in the Sukhoi holding, which would have spelled the end of bottom-up integration. The thought was that Sukhoi would provide a soft landing for Klebanov after his retirement from public service. But then Klebanov's star began to fade, and Irkut was left alone.

Next came the Almaz-Antei holding, whose board of directors was chaired by Viktor Ivanov, the powerful deputy chief of the presidential administration. The general director of the missile defense systems maker was Ivanov's assistant Igor Klimov, who was gunned down in June.

So which model will prevail, top-down or bottom-up integration? This is a question of politics, not economics. A private defense industry is the breeding ground of a liberalism united with patriotism. Think what you like about the U.S. military-industrial complex, but over there private defense firms form the foundation of the Republican Party.

Public or private, the defense industry will always involve bribes. That's the nature of the beast. But if a private defense industry ever develops in Russia, we will no longer have to make do with the outdated weapons our soldiers use in Chechnya. We will produce the sort of state-of-the-art weapons that the Americans brought to bear in Iraq.

Yulia Latynina is a presenter of the "24" news and comment program on Ren TV.

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