#8 - RW 282
Moscow Times
November 11, 2003
Same Old Shake-Up Game
By Pavel Felgenhauer

The defense industry is again in a state of turmoil and change. It has been announced that Nikolai Nikitin, the CEO of MiG, which makes MiG-29 fighters for export, has been fired. Also, Ilya Klebanov, once a deputy prime minister in charge of arms exports, has been sent to St. Petersburg as President Vladimir Putin's envoy, losing his Science, Industry and Technology Ministry portfolio.

Last week, Putin chaired a meeting of the Commission on Military-Technical Cooperation with Foreign Countries, or KVTS, in person. This interdepartmental commission is the supreme body that decides arms export policy. The president is its official chairman; the prime minister, foreign and defense ministers, and the intelligence service chiefs are commission members.

This commission meets irregularly, and the president and other top-level members (as opposed to their representatives) are present only on occasions when genuinely important decisions are made. In his opening remarks at the meeting last week, Putin announced that reform will continue and that the arms trade will be "liberalized."

Informed sources in the arms trade business say that in practice this "liberalization" will mean that the present head of the state arms export monopoly Rosoboronexport Andrei Belyaninov (a former KGB officer) will be moved to become CEO of MiG. Rosoboronexport will have a new chief -- the rumors are that it may be deputy head Sergei Chemezov -- and will be directly subordinated to KVTS. Up to now, Rosoboronexport has been directly subordinate to Putin and overseen by Prime Minister Mikhail Kasyanov.

Until now, KVTS has essentially been a bureaucratic entity that monitored the arms trade, without the power to decide anything and without sharing much in the huge profits that arms exports generate for Russia. (The profits are to a large extent illicit, so creating a legal framework to distribute them is not easy to do.)

It is believed that if the KVTS will indeed be upgraded to become the main decision-making body for the arms trade, its present chief, General Mikhail Dmitriyev (who is also a deputy defense minister), will be replaced by someone closer to Putin.

The arms trade seems to be in good shape: The country is exporting over $4 billion worth of arms per annum, double on average what it did during the 1990s. So why the turmoil and constant change? Why are state-run monopolies constantly formed and reformed, and heads replaced?

As with the rest of the economy, the defense industry, inherited from the Soviet Union, is divided in two uneven parts: There are export-oriented production businesses that are relatively successful and create lots of cash; then there is a vast number of industrial plants that do not export anything, do not receive any significant procurement money from the budget and cannot produce modern civilian merchandise that can compete on the domestic market -- especially at a time when the ruble is strengthening against the dollar.

In the export-capable part of the defense industry (which produces jet fighters, guided missiles, submarines and warships) the constant squabbling, infighting, intrigue, management changes and property grabs are, as a rule, the result of overall success and profitability.

There have been reports that MiG is finally on the verge of signing its biggest contract of the decade -- to supply the Indian navy with well over 20 MiG-29K fighters to go with the modernized Soviet-built aircraft carrier Admiral Gorshkov. It is a deal that may bring MiG up to a billion dollars, and it is typical that at precisely this time Nikitin is ousted, to be replaced -- most likely -- by some Putin loyalist.

Nontransparent arms export deals regularly bring huge personal gain to the intermediaries and executives that see them through. So there is an informal system of rotation to allow one group to feed at the trough and then to be transferred to other less profitable posts in the business-government bureaucracy, freeing a place at the trough for others.

This cycle of corruption provides some stability and cohesion in the ruling elite, as long as all parties comply with the basic rules. But it also means that there is a tendency among chief executives to grab the profits and run. Furthermore, there is inadequate, if any, investment and a continuing degradation of production capabilities.

In short, the defense industry is like any other Russian industry.

Pavel Felgenhauer is an independent defense analyst.