Publication: Monitor Volume: 7 Issue: 148

A wide-ranging draft plan to restructure and revitalize Russia’s ailing defense industrial sector apparently won formal approval last week, but at least one source suggested that the blanket of official secrecy thrown over government deliberations of the plan could not hide the fact that it is anything but a done deal. The restructuring plan, which was approved at a meeting of top government officials on July 27, is part of a broader Kremlin effort to reform the country’s entire defense establishment. Parallel plans have already been set in motion to streamline and reform Russia’s armed forces and other security agencies, and a major restructuring of the country’s arms export establishment has also taken place. But reform of the defense industrial complex (VPK) is likely to be an even tougher–and politically more risky–problem for the Kremlin. There are estimated to be about 1,700 defense enterprises spread across the length and breadth of Russia, and their fate is bound up with that of hundreds of thousands of workers and, in some cases, the health of local and regional economies as well. The complexity of the problem means that deliberations on a restructuring plan have involved an extremely large number of participants, from a broad range of government agency officials to defense enterprise directors to Defense Ministry representatives to regional political leaders. The import of the government’s decisions in this area and the need to satisfy a welter of competing interests has, not surprisingly, put enormous pressure on Russian Deputy Prime Minister Ilya Klebanov, the close Putin aide who has been tasked with drafting the VPK restructuring program.

Precise details of the restructuring program are still hard to come by, but the plan appears in its general outlines at least appears to be consistent with a draft submitted by Klebanov this past March to a meeting of the Russian State Council’s Presidium (see the Monitor, April 3). The key feature of this draft, and of the plan approved last week, is a decision both to cut by one-half the total number of defense enterprises receiving state funding in Russia, and to administratively subordinate those firms remaining to thirty-six newly created defense holding complexes. Ultimately, state funding for defense production will be channeled exclusively through these holdings, a policy that the government hopes will provide an incentive for currently independent defense enterprises to integrate themselves into the new structures. Consolidation is to take place in stages. In the first, companies will be organized according to the type of weaponry they produce; in the second they will be integrated into what Klebanov calls “still larger civilian-military structures.” These are presumably the holding companies. The entire restructuring process, whose goal appears to be the creation of Japanese or South Korean style industrial conglomerates (that is, keiretsu or chaebol), is to take place over a period of seven years. Earlier reports had suggested that, as an added incentive for consolidation, the holding complexes were eventually to be granted the right to sell their products independently on the international arms market (Russian arms exports are in general now controlled by the state arms export company Rosoboroneksport). At least one Russian report suggested last week that this policy is now being reconsidered, however.

In comments that followed the government’s July 27 approval of the VPK restructuring plan, Klebanov was quoted as saying that the program was aimed at “the creation of an effective VPK structure, one capable of fulfilling any task set it by the president or the government.” He also suggested that the move to restructure was already underway–that it will start “already tomorrow” (, July 27). Two Russian press analyses of the July 27 meeting, however, suggested that a host of problems loom before the government before it can claim any real success in this area. Izvestia, which did give some credence to Klebanov’s claims, nonetheless pointed out that a handful of earlier and far more moderate efforts aimed at promoting VPK consolidation had in general been failures. One attempt, launched in 1994 and aimed–through the creation of the Antei company–at integrating the companies which make Russia’s S-300V and Tor-M1 air defense missile systems, never existed more than on paper. Two other consolidation efforts, one that attempted to integrate the makers of the MiG-29 fighter and the maker of Kamov helicopters, and another that aimed to integrate all the manufacturers of Sukhoi jets, also failed to get off the ground (Izvestia, July 28).

An earlier piece by Izvestia, moreover, observed that the July 27 meeting came only after four previous attempts to convene on the VPK restructuring plan had been postponed because of differences over the draft. The report also said that the general directors of Russia’s defense enterprises were “allergic” to the restructuring plan, largely because it would deprive them of their independence and authority. And it suggested that efforts to restructure the defense industrial sector were being hamstrung by the government’s own continuing failure to elaborate in any detail its future arms procurement plans (Izvestia, July 27).

But Vremya Novostei published a considerably more scathing critique of the government’s VPK restructuring plan on July 30. The newspaper suggested, among other things, that Klebanov’s claims of having won final approval of the restructuring plan were greatly exaggerated, in part because participants of the July 27 meeting also called for another month of deliberations on the project. Of greater importance, however, was the newspaper’s contention that serious disagreements have yet to be resolved between and among the many agencies that are taking part in drafting the restructuring plan. Indeed, the newspaper’s account of these ongoing disagreements suggests just how complex and unwieldy deliberations on the restructuring plan have been. It paints a picture of a jurisdictional and administrative nightmare involving not only the seven ministries which are identified as “customers” of the VPK restructuring plan, but also of tangles among the three or more ministries which have been given the status of “elaborators” of the restructuring plan. And, the newspaper writes, “Russian weapons exporters, owners of private [defense] enterprises, lobbyists from the Duma and the State Council, and representatives of large military-industrial regions exert influence over the elaborators of the program.” It is Vremya Novostei that also raises a question over whether the holding complexes will ultimately be given the freedom to trade on the international arms market (Vremya Novostei, July 30).

Russian experts suggest, meanwhile, that any delay in implementing defense industrial reform could be disastrous for the country. Izvestia, for example, says that the defense industrial sector is currently operating at only 20 percent capacity–and that more than half of this activity is devoted to arms exports. It also argues that Russia risks falling ever farther behind the West in terms of technological development if the government does not begin to raise domestic defense procurement levels this year, and it quotes experts as saying that for each year of downtime faced by Russian defense enterprises their Western counterparts race ahead by three years. Finally, and in this same context, Izvestia warns that Russia cannot continue to rely on arms exports–especially to its major customers, China and India–to keep its defense industrial sector afloat and to finance development of new defense technologies. These two countries are increasingly less willing to buy Russian armaments off the shelf, the newspaper argues, and instead are now most interested in securing access to what the newspaper suggests is a diminishing pool of Russian military-technological “know-how” (Izvestia, July 27).