Russia

Prospects for the Defense Industry

As the defense budget faces annual threats of receiving a smaller share of a shrinking GNP, experts predict that either the defense industry will collapse under its own weight in the near future or that the national budget will reallocate so much money to civilian programs that the industry simply will wither away.

The collapse theory is based on the fact that the two sources of funds in the military budget appropriations that support the defense industry--acquisitions and R&D--are shrinking at a rate faster than the industry can absorb. Although Pak claimed in early 1996 that defense orders constituted only 15 to 20 percent of the MIC's current orders, the civilian economy was not healthy enough to absorb the industry's new products, and most of the converted industries were not producing items with high market appeal. Therefore, Pak's Goskomoboronprom has emphasized dual-use technology that would bridge the gap between the two production sectors.

The fund reallocation theory is based on the premise that the real threats to Russian national security are domestic problems such as regionalism, terrorism, corruption, and crime. A hungry and disillusioned population existing on the edge of economic catastrophe since 1991 does not favor spending scarce funds on a military for which it perceives no immediate need.

The real long-term threat to the Russian defense industry is the reduced R&D funding allotment in the Russian military budget. In the opinion of Western experts, foreign sales will not provide the long-term security required to revive the R&D programs of Russia's military laboratories. In turn, the absence of an aggressive research program for new technology will cause foreign markets to dry up. In June 1996, President Yeltsin named Aleksandr Lebed', an outspoken advocate of smaller, better-equipped armed forces, to chair the Security Council. That move was expected to end arbitrary funding of inefficient MIC enterprises, but its meaning for future R&D was not clear.

The Soviet Union produced an excellent array of military equipment that has been distributed around the world. However, modernization has not continued under the Russian Federation, and the poor performance of Soviet equipment against United States equipment in Operation Desert Storm reduced the eagerness of international arms purchasers. Another problem is repair and replacement. The Russian record on resupply to foreign defense ministries has not been good, and the well-documented prospect of further deterioration in the Russian MIC does not build customer confidence.

From the onset of his tenure as director of Goskomoboronprom, Zinoviy Pak proved to be an imaginative and aggressive marketer of Russian military hardware. He energized the moribund Rosvooruzheniye to the point that it even was placing sophisticated advertisements in Western commercial publications aimed at United States and NATO armed forces. Pak also entered Russian dual-use technology, applied in such products as sports airplanes and high-speed passenger boats, in numerous international exhibitions. In March 1996, Soskovets reported that Russia's 1995 arms sales abroad exceeded US$3 billion, an increase of 80 percent over 1994 and 60 percent more than sales to the Russian military. About 75 percent of foreign payments for weapons were made in cash. By mid-1996 new sales of about US$7 billion already had been identified, and the predicted 1996 income was US$3.5 billion.