Reforms in Russian Defence Industry: Problems and Prospects

Baidya Bikash Basu, Researcher, IDSA



The dramatic disintegration of the Soviet Union and the collapse of the socialist system have entailed the colossal transformation of the country's social, political and economic structures. The dismantling of the redistributive state accompanying the privileges and advantages is leading to a rapid overhaul of the social structure in Russia. Russia is witnessing the rebirth of "political capitalism" in power and property relations. The collapse of the socialist system affected the military industrial complex (MIC). In the Soviet days, the MIC formed the backbone of the Soviet command economy. Top priority was always given to the defence sector in the Soviet centralised, hyper-militarised economy with highest wages, best retirement benefits, better quality housing, medical care, and durable consumer goods to its work force.

The uneasy development in the sphere of economy has threatened the political and legal authority of the state. The failed coup of August 1991 was the beginning of the end for the Soviet Union. The rouble collapsed against the US dollar. Hard currency debt of the Soviet Union was more than $72 billion. Inflation was about 20 per cent per month despite extensive price control. Export revenues collapsed and hard currency reserves touched the nadir. The worst was yet to come and that was the plummeting fall of the Soviet Foreign Economic Bank (Vneshekonombank) depriving its depositors of their money.1

Russian defence industry sector consists of 1,600 enterprises employing two million people.2 Since 1991, the labour force in the defence industry has declined dramatically. The defence industry was one of the best-paid industrial sectors but since 1991 pay levels have declined steadily in relation to the average industrial wage. Mikhail Malei, Yeltsin's adviser on defence related matters, lamented the loss of skilled workers describing those leaving the defence sector as "the most dynamic, literate and skilled people."3 The most successful industries have been nuclear and shipbuilding. Electronics and its related industry have been severely hit. The Russian computer and communications equipment industries have almost disappeared.

Problems: Early 1990s

Russian economy stands at a policy of crossroads where destatisation has given way to liberalisation. Institutional backbone of the Soviet command economy has been broken leading towards radical marketisation and transformation to a market economy. Initially, market reform began during Gorbachev's time within the command economic structure. Sadly, the scope and depth of the market economic system was never understood by the reformers in the Gorbachev period and as a consequence the financial situation deteriorated rapidly without any structural change taking place. The period 1991-97 witnessed a massive decline in the military output of Russian defence enterprises and organisations. The level of military production in 1997 was only 8.8 per cent of what it had been in 1991.This decline took place in 1992 as a result of the economic reforms implemented in that year. This decline was not uniform across the branches of the industry. Electronics and communications equipment industries suffered the largest falls, almost 80 per cent, with shipbuilding protected by foreign orders for civilian vessels, with a fall of only one-third. In 1996 shipbuilding industry experienced a sharp fall. Annually, the average rate of decline has been roughly 30 per cent. Since the break-up of the Soviet Union for the first time, in 1998, there has been an increase in military output by five per cent, the missile and space sectors, aircraft and shipbuilding sectors have survived by exploiting the export potential.4

In this case, several factors accounted for the decline in arms production. First, procurement for the Russian armed forces has been cut drastically due to severe budgetary constraint. Second, the demand of civilian goods produced by the defence industry has drastically fallen because of stiff foreign competition and depressed domestic demand. Third, insufficient working capital, lack of investment and delayed payment from the Ministry of Defence (MoD) and other customers have resulted in problems of wage arrears. The MoD's debt to the arms industry was estimated at around 20 billion roubles in 1997 out of which 25 per cent was for unpaid wages. Less than 20 per cent funds were allocated for planned procurement and R&D contracts.5

Defence industrial restructuring of the national defence industrial base is a trend noticeable in every country. One of the major consequences after the collapse of the Soviet Union was the dismantling of most central institutions that administered the Soviet defence industrial complex. There were nine defence-industrial ministries under the Soviet system and their operation was exclusively at the national level. A newly established Ministry of Industry subsumed the functions and personnel of the old defence industrial ministries. The powerful superministry known as the Soviet Military Industrial Commission (Voyenno-promyshlennaya komissiya, VPK) lost its Soviet days special status. The Ministry of Industry had departments for many other civilian branches of industry as well. In early 1992, this Ministry of Industry was disbanded and one State Committee for Industrial Policy and four committees for various sectors of the nation's industry were created. One of these four committees was particularly for defence industry.6

In October 1992, the Committee on the Defence Industry was set up by President Boris Yeltsin. The Russian Committee on the defence industry, or Roskomoboronprom by its Russian name, was divided into eight departments. The eight departments were Aviation industry, Ammunition and Special Chemical Products, Armaments Industry, Communications Industry, Radio Industry, Missile and Space Technology, Shipbuilding industry and Electronics Industry. Roskomoboronprom was responsible for all defence industries and their activities, both civilian and military. This committee was much weaker than the old ministries under VPK, but it did provide a meeting place for the old military-Industrial bureaucracy to regroup itself. Now this particular bureaucracy desperately wanted to upgrade the status of Roskomoboronprom. It was elevated to the status of State Committee on the Defence Industry (SCDI), (Goskomoboronprom) in September 1993. Goskomoboronprom was the successor to the Soviet Military Industrial Commission and various ministries responsible for defence production. Some 2,500 defence related industries; research institutes and design bureaus were under Goskopmoboronprom. In May 1996, Goskomoboronprom was upgraded to create a ministry of the Defence Industry (Minoboronprom). In March 1997, Minoboronprom was dissolved and most of its functions have been transferred to the Ministry of Economy.7

It is very important to note that the present character of the Russian economy is different from the centralistic and bureaucratic Soviet economy. Russian economy today is in a transitional phase moving towards competitive market economy. In practical terms, there is no appropriate macro-economic policy for the defence industry between the Ministry of Defence and Ministry of Economy (MoE). Russian leadership had no definite guidelines for the defence industry. Yeltsin in his major reform speech of October 28,1991 devoted little attention to defence industry. His message was simple and direct: the problem was that defence industry needed to be drastically reduced. Lack of a clear military doctrine (including principles of force structure and weapons requirement and weapons development and procurement programmes) halted the prospect of quick action towards conversion and ownership issues (state versus private). The Minister of Economy, Yegor Gaidar and his team of reformers drastically reduced the defence procurement budget by more than two-thirds. And many defence enterprises did not receive any orders at all. Gaidar could never establish control in policymaking with regard to military doctrine and national security goals. In the overall context of broader reform process, the defence industry was under tremendous pressure, breaking away from the old system and establishing a place in the new system. Decentralisation and deregulation of economic behaviour intensified during this period. In the new 1992 Military Doctrine, it was mentioned that budgets being reduced no bigger spending on manufactured arms but more spending on R&D projects and creation or maintenance of production capacity capable of producing top-level weaponry. The May 1992 draft was debated for a year. When this doctrine went to Russian Parliament in 1993 for debate it was not approved. On November 2,1993 Russia's new Military Doctrine was officially adopted and an entire section on "the economic foundations of the Military Doctrine" was added. Conversion, procurement, arms sales, foreign co-operation, and industrial policy were mentioned. This doctrine strongly asserted the task of guaranteeing military security by the state by maintaining the defence potential of the country on an appropriate level, taking into account the existing and potential threats as well as the nation's economic possibilities and the availability of human resources. The then Defence Minister Pavel Grachev stressed that the new doctrine was based on the real political, economic and military possibilities of the Russian State.8


A. Conversion

At the beginning of the economic reforms, many Russians believed that market reforms would automatically lead to democracy. The reforms started to stumble as the Russian leaders lacked sufficient knowledge of market economy and a good knowledge of the Soviet economy. Also, the leadership had little knowledge and experience of governing a state. Russia is still in the very early stages of democracy. The worsening financial situation affected the capability of defence industry. Restructuring of the defence industries meant restructuring of the Soviet economy. The failure of Gorbachev's conversion programme was due to the subsidies provided to the defence industries although there was a steep reduction in defence procurement budget in 1989. But, there was an increase in the allocation for civilian production, which completely made up for the reduction in military weaponry. Conversion process was a top down approach, typical of the Soviet system without proper economic or technological logic. New technologies and processes proved to be costly for civilian production. Civilian production costs eventually shooted up because the government did not permit to use the defence idle capacity of the defence industries for civilian industries. Law on Conversion was signed by President Yeltsin on March 20, 1992. Conversion is traditionally understood as the replacement of one kind of technology, equipment and production by another for instance, military technology with civilian technology or vice versa. The "main principle" governing conversion being "the use of high-technology capacities of the defence industry to produce output capable of competing on the foreign market" (Art. 2:2). There would be "priority targeted state programmers for socio-economic development" and those were to be appropriate to the scientific and technical level of the industry and to the professional skills of the workforce (Art. 2:3). The defence industries would be compensated for keeping their mobilisation capacities even for creating ones (Art. 2:4). Defence plants would be given at least two year's notice before receiving any cutbacks in orders (Art. 3:3) Defence industries were to be protected against circumstances that reduced their profits. (Art. 8:3). The defence industries in some cases, would be subsidised so that prices on their conversion products would remain below world market prices (Art. 8:5).9 Mikhail Malei in an interview has described the conversion process "in order to introduce new technology and equipment there should be an overall plan, second to halt the production process, third to remove the old equipment fourth to acquire new equipment, fifth to assemble it, sixth to teach the workforce how to use it, seventh to start up the new production process. From this point on conversion is over." This stage-by-stage conversion process has to be accompanied by systematic financial support. According to Malei, "a reduction of 70 per cent in the overall volume of defence industry this kind of conversion will take 15 years and cost US $ 150 billion."0 There was a problem in transferring military related technology to the civilian manufacture. Also the standard of civilian technologies and goods produced by the Russian defence industries was lacking in quality and there was no question of competing with the civilian goods manufactured by the defence industries of the West. Collapse of the Russian domestic market, inflation resulting in the lesser purchasing power of the Russians saw the drop in demand for civilian products. As Julian Cooper says, "from the outset there were efforts to plan conversion on a national scale. This grandiose top-down planning exercise proved to be futile: the USSR collapsed before a viable national conversion programme could be agreed and implemented. In selecting civil goods to be produced at military plants, economic considerations played a minor role. What mattered was not market demand or profitability, but the technical possibilities of the plants to be converted."11 The Russian government was highly optimistic that the defence industries would switch over to producing civilian goods. Defence industries continued to manufacture weapons, unwanted they were, as the MoD could not pay for them and arms exports underwent a sharp decline. In an environment of uncertainty the defence industries were under pressure to cut their military output and employment shrank by 700,000 in 1992 almost twice as much as in 1991.12

Unfortunately, this law did not clearly define the actual steps towards conversion. Federal conversion programme began. For the years 1993-95 the MoE focussed on 14 specialised programmes for Goskomoboronprom. They were: civil aviation, shipbuilding, energy, (including conversion of industries belonging to the Ministry of Atomic Energy-Minatom), forestry, housing, road-construction, agriculture, textiles, food-processing, trade, consumer durables, communication and information technology, ecology and medical equipment The programme was approved by the Russian President and the government. 1.67 trillion roubles (at 1989 values) budget was provided. This programme collapsed and is no longer operational only because of lack of continued finance and proper management of defence industries.13 The MoD's inability to pay for the defence goods and services created a negative impact and the very idea of conversion programme got discredited. In December 1995 the government adopted a federal conversion programme for the period 1995-97 which focussed on seven specialised programmes for Goskomoboronprom. They were: civil aviation, shipbuilding, fuel and energy sector equipment, medical equipment, electronics, consumer goods, and communications and information technology and for Minatom. 18.6 trillion roubles was allocated as fund till the end of 1997 which included a budgetary funding of 7.3 trillion roubles, conversion loans of 6.3 trillion roubles and non-budgetary sources of five trillion roubles.14 In late 1997 the Federal Programme for Restructuring and Conversion of the Defence Industry for the years 1998-2000 was prepared by the MoE. Reduction of arms producing industries from around 1700 to 670 by the year 2000, and 35 more by the year 2005. Through the rationalisation of arms production, through vertical integration within industrial sectors and a limited number of horizontal mergers this reduction was to be achieved. Funding and support for conversion to civil production was to continue. A Government Commission for the Financial Improvement of the Defence Industry Organisations was established in February 1998 to facilitate implementation of the programme. In March 1998, a federal law on Defence Industry Conversion was adopted by the State Duma. Estimated cost of this programme over the period 1998-2000 is around 25.5 billion roubles (at 1998 prices), half was to be allocated from the federal budget.15 Russian defence industry has exhibited a certain degree of diversification in civilian production.

Results of Conversion

Not all conversion activities have been unsuccessful. Notable developments are seen in those sectors of the economy that have strong domestic demand backed by real purchasing power. Enterprises developing and manufacturing equipment for the fuel and energy sector have found customers for their new products. Although this has not been without frustrations that Russian oil & gas companies show a preference for imported technology, amid calls for better co-ordination of new producers to strengthen their lobby. The Severodvinsk State Centre for Atomic Ship Building is involved in a state supported project of vital concern: the supply of drilling rigs and specialised ships for off-shore oil & gas exploration and exploitation off the Pechora and Barents seas. This is spearheaded by the joint-stock company AO Rosshel'f, led by academician Yevgeny Velikhov, a vigorous advocate of dual-use technologies. The equipment is built using capacities earlier devoted to submarine construction.16

More modestly successful has been the programme to develop and manufacture equipment for the coal industry. An import substitution programme, it provides Russian sources of supply for technology previously acquired from producers in Ukraine and Kazakstan that accounted for 60 per cent of all coal industry equipment in Soviet times. The principal missile launching silos and rail mobile launcher producer Yurga machine-building works in Siberia, nuclear technology and large-calibre gun producer AO Nizhne-gorodski mashinostroitel'nyi zavod, missile transport erector launcher builder Volgograd Barrikady are among the some 20 defence industry companies involved in this programme. The quality of the new equipment has been praised by representatives of the coal industry and has raised export possibilities.17

The proposed building of a high-speed railway between St Petersburg and Moscow, reducing commuting time to three hours, is one of the most significant projects that has seen the involvement of more than 50 defence industry companies in the design and building of transport equipment. Particular participation of the Rubin Central Design Bureau of St Petersburg, the principal Russian design organisation for nuclear submarines, the Yakovlev aircraft design organisation responsible for the design of the Sokol high-speed (250/kmph) train, have provided increased conversion opportunities. St Petersburg VNII Transmash, principal research institute for armoured vehicles, Tikhvin AO Transmash (where the train is being built), previously part of the tank-and-tractor-building concern Kirovskii zavod are involved in this project that has reportedly employed more than 17,000 people by April 1995.18

The collapse of the Russian electronics industry was an issue of serious concern for the government and the ministry of defence. Starved of funding, the federal programme for its revival did not apparently meet with much success. The conversion programme of Minatom was relatively more successful and focused more on the development of microelectronics, including the production of materials for the manufacture of advanced components and fibre optics, and the development of new supercomputers. Minatom's ability to fund conversion activities from its substantial export earnings was its great advantage. Planned funding for Minatom's conversion programme for 1995-97 was almost thrice of what was allocated to the programme for the development of the electronics industry, and had much greater credibility, as two-thirds was to be derived from non-budgetary sources, as opposed to only one-third for the latter.19

The West has taken an active interest in the Russian defence conversion programme by funding individually or through multi-lateral institutions. The Russian defence nuclear industries are being helped by the Americans in dismantling the weapons of mass destruction. Under the Nunn-Lugar programmes (known as Co-operative Threat Reduction programmes), the US department of defence has provided assistance to facilitate partnership between American firms and Russian defence industries. The US Congress authorised $1.2 billion of the Defence department budgets for the years 1992-1994. Approximately $480 million worth of contracts were signed and $150 million had been actually spent by January 1995. In those fiscal years, 1992-1994, $212 million could not be spent in this programme mainly due to organisational problems, negotiating particular contracts and projects and overall the attitude of the Russian MoD and Minatom. The Russian MoD and the Minatom wanted to have a greater say and maintain a high level of secrecy. Congressional authority over this money lapsed. No doubt, US Congressional critics raised strong objections of this programme. Not a single nuclear warhead was dismantled after two years of implementation.20

The US-Russia Investment Fund (TUSRIF) is funded by the US government which provides capital (both equity and loans) and technical assistance to Russian and western companies in Russia. In May 1985, TUSRIF was established by merging two existing institutions, the Fund for Large Enterprises in Russia and the Russian-American Enterprise Fund. Through Overseas Private Investment Corporation (OPIC), the United States is investing in Russia by providing direct loans to small and medium sized US companies to open up new joint-ventures. The European Union's Programme for Technical Assistance to the CIS (TACIS) is supporting a European partnership in developing new civilian helicopters alongwith the Mil and Kamov design bureaus. The defence industries are adapting themselves to the realities of defence conversion and to the new economic environment in which they must operate including the competitive demands of the external market. Needless to say, the devaluation of the rouble will surely have an economic impact on the arms industry.21

B. Privatisation

The issue of privatisation baffled the key players in the decision making process; the military, the defence-industry bureaucracy, the managers or directors and the reform politicians. The question was State ownership or private ownership and all four were thinking on their own lines.

The military wanted to retain the restrictive policies in privatising the defence industry. They were for the core group of industries, responsible for Russia's defence production nearly about one-third to two-fifths of the total defence industry. The rest could to be privatised. There was general disagreement on the core industries and those, which were not core.22

The defence-industry bureaucracy wanted that Roskomoboronprom should have the decisive say in the management of the defence industry. Roskomoboronprom was to retain the special status of the defence industries and to see that the defence industry is as large as possible requiring a special treatment in the major economic reform legislation.23

The management wanted the survival of their industries simultaneously retaining control over them. A peculiar situation was noticeable where the motives of the defence-industry bureaucracy converged with the management of the defence industry. Only thing was who would control? Roskomoboronprom or the individual managers. Some favoured rapid privatisation and some were for the status quo. In other words, they wanted to privatise in their own way.24

In November 1991, when President Yeltsin formed his new government he chose a radical reformer Anatoly Chubais to head the State Committee for Management of State Property or (Goskomimushchestvo) GKI, Russia's "privatisation ministry." Chubais proceeded deftly on the issue of general privatisation simultaneously retaining the special status for the defence industry privatisation. The first half of 1992 saw this issue of privatisation being debated sharply and a compromise was reached under which workers and management could purchase 51 per cent of shares from the outset. The remaining 49 per cent of shares were kept open for the outsiders. Also, Chubais never made any attempt to privatise the large enterprises. The large enterprises could privatise the way their management wanted. The privatisation programme was passed by the Parliament in June 1992. GKI was becoming more powerful and in May 1993 Yeltsin edict decreed GKI in achieving privatisation for those defence industries which had less than 30 per cent of the defence orders of total sales. There would be no obstacles toward complete privatisation. A sharp division was seen between GKI, Roskomoboronprom, and the management. In this environment of intolerance on August 19,1993, Yeltsin issued a decree particularly devoted to defence industry privatisation. This was the first legal act that directly dealt with defence industry privatisation. Both Roskomoboronprom and the managers got their respective powers in controlling the defence industries. Roskomoboronprom was to play the deciding role in defence industry privatisation. MoD was to act as the quality control apparatus. Roskomoboronprom was to be the defender of management for both the GKI and the outsiders. In case of a joint-stock company, Roskomoboronprom was to decide who could be that company's director. Special "qualifying certificate" issued by the government would make the individuals eligible to be general directors of joint-stock companies producing armaments. Roskomoboronprom would have powers to recommend appointments as the state's representatives on the boards of companies. A representative of Roskomoboronprom will be in the standing arbitration commissions for resolving disputes in privatisation of defence industries.25

Under the changed relationship between Goskomoboronprom (see pg. 1667) and industries caused by privatisation, four categories of enterprises were created. Some fully privatised facilities that no longer engaged in military work left the state committee. The other fully privatised enterprises were still considered to be under the supervision of the Goskomoboronprom by having entered into agreement with it. Joint-stock companies in which the state held stake were included in this category. Then there were the fully state-owned enterprises that remained subordinate to the committee. The end of 1995 saw almost 13 per cent of the committee's total number of facilities leave. 28 per cent had state ownership stake and the remaining 35 per cent were state controlled. Only 21 per cent of the enterprises in the aviation industry were fully state owned; the armaments industry had 35 per cent of the corresponding proportions, that produced infantry weapons, armoured vehicles, optical equipment and solid-propellant missiles. The shipbuilding industry had 40 per cent, 54 per cent in the missile-space industry, and 82 per cent in the munitions and special chemicals industry.26

The privatisation of defence enterprises were controversial and a number of individual cases had generated extensive media coverage. Notable instances have been that of the Rybinsk aero-engine works, one of the larger producers of aircraft engines in Russia. Goskomoboronprom and the company's management resisted government's attempts to sell off its shares, fearing a take over by AO Gazprom who they feared may stop building aero-engines. By early 1996, AO Rybinskie motory was put on the list of strategic enterprises whose federal shareholding could not be sold prematurely. The issue of foreign participation in the ownership of defence sector companies was of great concern to the communists and nationalists who campaigned against the idea. The campaign was successful in so far as it prevented the small US company Nick and C Corporation from acquiring shares in Russian defence industries. Nick and C Corporation had acquired shares in 19 Russian defence industries, including some heavily engaged in military work. In March 1996 the Moscow Arbitration Court ruled the acquisition of shares by Nick and C Corporation as illegal and ordered their surrender. Foreign ownership stakes in serious defence related industries in Russia seem improbable for the present.27

Amid perceptions that privatisation of defence enterprises posed a threat to Russian national security, President Yeltsin established a federal commission to review privatisation of defence industries in the run-up to the presidential elections in April 1996. Prior to the establishment of the federal commission, the then chairman of the State Property Committee, Aleksandr Kazakov in February 1996 had spoken in terms of 400 defence industries which would not be privatised.28

The government decree of July 13, 1996 approved a total number of 480 industries that would remain in full state control, out of which 45 are in the aviation industry, 60 in the missile-space industry, 60 in the armaments industry, 93 in the munitions and special chemicals industry, 54 in shipbuilding industry, 51 in the communications equipment industry, 73 in the radio industry, and 44 in the electronics industry. Proportionately the munitions industry had the highest share of state-owned-facilities, out of the total number of facilities in each branch. The overall state-owned facilities represented almost 30 per cent of Minoboronprom's 1,700 enterprises. The Minatom and the Russian Space Agency additionally had fully state-owned facilities. Additionally there were firms where the state had retained controlling interest. Thus compared to most market economies, the weapon development and manufacturing in Russia was set to remain under the state sector of the economy.29

C. Corporatisation

Since1991 when the new Russian regime was inaugurated, till December 19, 1994 there was a lack of any coherent policy for the restructuring of the defence industry. On December 19, 1994 a government decree was promulgated, dealing specifically with measures to stabilise the economic situation of enterprises and organisations in the defence complex. The decree called for a restructuring on three lines by the first half of 1995: i) The creation of state scientific and production centres for the development and production of the more important types of military hardware. ii) The formation of fully state-owned facilities also called the treasury factories. iii) The transformation of other defence industries into joint-stock companies. The inability of the government to secure adequate state budget funding for the state centres and treasury factories delayed the process where by early 1997 the restructuring process had hardly begun.30

The formation of new corporate structures by mating related design and manufacturing facilities in companies, corporations, military-industrial companies or financial-industrial groups became the principal thrust areas of restructuring since 1994. The creation of financial-industrial groups (FIGs) by Presidential Decree no. 2096 (adopted on December 5, 1993) on the pattern of the South Korean Chaebols was to replace the Soviet centralised defence industrial structures. The first deputy defence minister, Andrei Kokoshin actively advocated this policy of creation of FIGs since 1992. Basically there were two types of FIGs: i) FIGs formed by ministerial decision from above usually focussing on large industrial enterprises and science and production centres. ii) FIGs, which are created voluntarily and are often centred on banks or major financial institutions. FIGs provided the thrust in the establishment of joint ventures producing, selling, and maintaining civilian products through dual-use technology. Some of the joint ventures have their success stories in exporting Russian weaponry, thereby keeping the wheels of the Russian economy moving. The FIGs united enterprises, R&D organisations and financial institutions which are seen as the future locomotives of the Russian economy. The formation of the military-industrial company, Moscow Aviation Production Organisation (MAPO) in the early 1996, through a Presidential Decree, was an example of the policy of FIGs promoted strongly by Boris Kuzyk, the then advisor to Yeltsin on military-technical cooperation; Andrei Kokoshin, the then First Deputy Defence Minister; Oleg Soskovets, the then First Deputy Prime Minister and incharge for Russian military-technical cooperation with foreign countries and the then new minister of the defence industry Zinovy Pak. This state-owned company was organised by uniting 12 enterprises together, employing 100,000 people and marked a major step in the restructuring of the Russian aviation industry. The MiG design bureau signed a contract with MAPO. MiG would be responsible for aircraft modification and MAPO would be responsible for the maintenance, technical service and supply of spare parts. MiG-MAPO has gained access into the export market producing high quality combat aircraft as well as civilian aircraft. The MAPO included the MiG design organisation and its associated MAPO production plant, the Kamov helicopter design organisation, the St Petersburg Klimov aero-engine design bureau, major manufacturers of system, and Aviabank. Sukhoi, a major aviation corporation, was organised on similar lines at the end of 1996. It is a joint-stock company with 100 per cent state capital. Sukhoi company includes other aerospace industries and design bureaus like Komsomolsk-na-Amure, Novosibirsk, and Irkutsk. The Il'yushin transnational FIG was another initiative in the aviation industry, by mating the Moscow design organisation with Voronezh and the Taskent Chkalov plant in Uzbekistan.31

The Russian government realised that conversion and privatisation programme was impossible without proper funding and it stressed an active arms export policy. To prevent the collapse of the defence industry, in November 1993, a new state agency the State Corporation for Export and Import of Armament and Military Equipment (Rosvooruzhenie), came into existence Rosvooruzhenie's main task is to handle the export of weapons and combat equipment on the basis of decisions taken by the President or the government. It works under the direct supervision of the Russian government and is accountable to the President of the Russian Federation. Rosvooruzhenie is incharge of investing private and government funds into the Russian VPK. It organises export activity with the MoD in close co-operation. The MoD also deputes officers to Rosvooruzhenie to co-ordinate their activities, thereby increasing the export of high-tech weaponry meeting international standards. Rosvooruzhenie also carries out market research along with the MoD and the Ministry of Foreign Economic Relations (MFER). Market research not only adds an economic vantage point, but also helps to understand the market from the Russian security point of view. On August 20, 1997, two more state owned enterprises were created by Presidential Decree no. 907-Promexport and Rossiyskiye Tekhnologii. This decree also transformed Rosvooruzhenie into a wholly government owned enterprise. Promexport has been given responsibility to provide spare parts, components and service support as well as disposal of surplus equipment from the Russian armed forces. Rossiyskiye Tekhnologii is incharge of providing technological know-how and license manufacture.32 Russian defence industry has already taken a large step in restructuring the national defence industrial base in the reality of market economy. The transnationalisation of defence production is one of the solutions in maintaining "national" defence industrial capacity in the contemporary era of declining defence procurement budgets.


Conversion, Privatisation and Corporatisation are the three major aspects of Russian defence industry reforms. Defence industries are going through tremendous time of change. The reforms are being carried out with limited financial resources meeting the defence needs of 21st Century Russia in effective and economic terms. For the first eight months of 1999, overall production in Russia's defence industry has increased by 15 percent.33 Russian defence exports will continue to remain the mainstay in Russia's defence industrialisation in future. This will necessitate increase in technical collaboration and cooperation with other countries such as, India through increased forms of bilateral military-technical cooperation through transfer of technologies and manufacturing under license.



1. Richard E. Ericson, "The Russian Economy Since Independence," in Gail W. Lapidus ed., The New Russia (Boulder, Colorado: Westview Press, 1995), pp. 37-38.

2. Defense News, October 18, 1999, p. 84

3. Clifford G. Gaddy, "The Price of the Past" (Washington D.C.: Brookings Institution Press, 1996) p. 125.

4. SIPRI Yearbook 1999: World Armaments and Disarmament (Oxford: Oxford University Press, 1999), p. 391.

5. Ibid., p. 391-392.

6. n. 3, p. 69-70. Also see Yevgeni Kogan, "Russian Defence Conversion and Arms Exportation" Peace Research Institute Frankfurt (PRIF) Report NO. 41, 1995 pp. 2-3.

7. Ibid.

8. n. 3, pp. 72-73.

9. n. 3, pp. 74-75

10. Yevgeni Kogan, "Russian Defence Conversion and Arms Exportation" Peace Research Institute Frankfurt (PRIF) Report NO. 41, 1995 pp. 3-4.

11. n. 10, pp. 3-4.

12. Ibid., p. 4.

13. Ibid., p. 5.

14. Julian Cooper, "The Future of the Russian Defence Industry," in Roy Allison and Christoph Bluth, eds., Security Dilemmas in Russia and Eurasia (London: Royal Institute of International Affairs, 1998) p. 100. Also see SIPRI Yearbook 1996: World Armaments and Disarmament (Oxford: Oxford University Press, 1996) p. 432.

15. SIPRI Yearbook 1999: World Armaments and Disarmament (Oxford: Oxford University Press, 1999), pp. 393-394

16. Julian Cooper, "The Future of the Russian Defence Industry," in Roy Allison and Christoph Bluth, eds., Security Dilemmas in Russia and Eurasia (London: Royal Institute of International Affairs, 1998), p. 101.

17. Ibid.

18. Ibid.

19. Ibid., p. 102.

20. n. 3, p. 183. Also see Kevin P. O' Prey, A Farewell to Arms (New York: Twentieth Century Fund Press, 1995) pp. 85-91.

21. n. 3, p. 183. Also see Kevin P. O' Prey, A Farewell to Arms (New York: Twentieth Century Fund Press, 1995) pp. 85-89.

22. n. 3, p.77.

23. Ibid., pp. 77-78.

24. Ibid., p.78.

25. Ibid., pp. 79-84.

26. n.16, p. 106

27. Ibid.

28. Ibid., p. 107

29. Ibid.

30. Ibid.

31. Ibid., p. 108. Also see SIPRI Yearbook 1996: World Armaments and Disarmament (Oxford: Oxford University Press, 1996) p. 434

32. Peter Litavrin, "The Process of Policy Making and Licensing for Conventional Arms Transfers" & Yuriy Kiirshin, "The role of the Ministry of Defence in the export of Conventional Weapons," in Ian Anthony ed., Russia and the Arms Trade (Sweden: SIPRI, Oxford University Press, 1998) p.109 & pp. 117-118.

33. n. 2, p.84.