Thursday, April 24, 2014
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Reforming Russia’s Military Industrial Complex

Under President Vladimir Putin, Russia has launched a comprehensive program to restructure its defense industry, which has shrunk dramatically since the Soviet era. This process has achieved some progress, but fundamental structural problems persist that lead Russia to export large quantities of advanced weapons to conflict-prone regions, placing the Kremlin at odds with Europe, the United States, and other countries.

Over the last six years, the Putin administration has encouraged the nationalization and consolidation of private-sector defense firms into large, vertically integrated, state-controlled holdings. In November 2000, Putin approved the creation of a single government-supervised arms exporting agency, Rosoboronexport, to end the self-destructive competition that had developed between the country’s major weapons-exporting enterprises. Earlier this year, the agency gained the exclusive right to sell Russian weapons to foreign countries.

At present, the government is promoting the creation of a similar institution in the aviation sector, the new United Aircraft Building Corporation (UABC), which includes major state and private manufacturers of fixed-wing aircraft. Proponents of the merger believe it will improve the efficiency of the Russian aircraft industry and, by lowering costs, make Russian planes more attractive to foreign buyers.

Under Putin, Russian military spending has also rebounded. This year, the Russian government will provide the Ministry of Defense almost 5 trillion rubles ($189 billion) under the 2007-2015 State Armaments Program. The percentage of the defense budget allocated to purchasing military equipment will rise from 44% in 2006 to 50% by 2011.

The primary purpose of this increased spending is to push new weapons systems from the research and development stage to actual procurement for Russia’s armed forces. Over the course of 2007-2015, Russia’s army and navy will replace almost half (45%) of their military equipment.

In the past, poor government and industry practices frustrated similar plans to supply large numbers of advanced conventional weapons to Russia’s armed forces. The country’s military-industrial sector suffers from limited domestic orders and extensive overcapacity. Purchases for the Russian army and navy have been increasing, but still only sustain about one-fourth of Russia’s existing military production capacity. The Russian government now spends more on new Russian-made conventional weapons than do foreign purchasers. Yet, persistent inefficiencies in the Russian defense procurement system result in foreign buyers receiving more new systems than the Russian military.

As a result, Russia’s leading defense firms remain heavily dependent on foreign sales. Although Russia’s arms exports have decreased considerably since the Soviet period, its revenue per transaction is now greater because Russian firms have yielded much of the lower-end market to less expensive suppliers like China, India, and other former Soviet bloc allies.

Moreover, where the USSR transferred much weaponry under easy commercial terms or without charge (e.g., under long-term loans not expected to be repaid), Russia now discounts arms only for its closest allies. On March 27, 2007, the Defense Ministry announced that Russia’s annual arms exports increased by 50%, from $4 billion to $6.5 billion, from 2001 to 2006.

In an effort to both maximize foreign revenue and strengthen Russia’s own military potential, former Russian Defense Minister Sergei Ivanov, who now oversees Russia’s military-industrial complex and is one of the two leading candidates to succeed Putin as president, stressed the need for “the national defense industry to find a balance between a commitment to arm the Russian military and an opportunity to export arms to countries not subject to UN sanctions.” Besides helping to sustain the health of Russia’s military industrial complex, many Russian officials think that arms sales will promote Russia’s diplomatic interests by strengthening ties with recipient states.

These transactions, however, have complicated Moscow’s relations with foreign governments, particularly the United States. American officials complain that Russia’s self-imposed restrictions on arms sales are much weaker than those of Western countries, especially with regard to authoritarian governments accused of committing human rights violations or states seeking weapons of mass destruction.

Washington has protested against Russian military sales to Belarus, China, Iran, Syria, Uzbekistan, and Venezuela. In early January 2007, the US government imposed economic sanctions on three Russian companies, including Rosoboronexport, for selling missiles and other prohibited military technologies to Iran and Syria.

Russian officials insist that their military exports conform to all applicable international laws and involve primarily defensive weaponry that will not disrupt regional power balances. They add that the US and its allies also transfer large volumes of weapons to areas of conflict, including South Asia and the Middle East. Russian officials also contend that US and other foreign objections often reflect a desire to eliminate unwelcome Russian competition or curtail the Kremlin’s influence in important regions, such as Eastern Europe, Asia, and the Middle East. In 2005, the head of Rosoboronexport, Sergei Chemezov, said: “Let’s have no illusions: if we stop sending arms to export, then someone else will do it.”

Russia seems prepared to negotiate on some security issues, including such sensitive questions as Iran and Kosovo. Achieving limitations on Russian arms sales, however, will prove much harder. Given the condition of Russia’s military-industrial complex, considerations of national pride, geopolitical influence, and entrepreneurial profits will likely sustain Russian interest in selling weapons to almost any client no matter how distasteful to Western governments.

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