Publication: Monitor Volume: 7 Issue: 65

While Russian and international news sources have focused in recent days on the spate of appointments President Vladimir Putin made to key defense and security posts, there has been less attention devoted to another Kremlin reform effort within the defense sector which could ultimately prove to be even more important. That is the restructuring, streamlining and–if the Kremlin’s hopes are realized–revitalizing of Russia’s troubled defense industrial complex. Putin’s efforts in this area received some initial attention late last year, when he dissolved what were then Russia’s two leading state arms trading companies–Rosvooruzhenie and Promeksport–and transformed them into the currently existing state arms trading company Rosoboroneksport. The administrative restructuring was accompanied by a series of personnel changes which, much like the recent appointments to Russia’s various “power ministries,” placed Putin loyalists in key positions atop the country’s arms export hierarchy.

The reorganization and revitalization of Russia’s vast defense industrial sector is a far more complex problem, however. It is also one which requires more than a series of personnel changes in relevant government ministries. Russia’s defense industrial complex, said now to be composed of some 1,700 enterprises across the length and breadth of Russia, has suffered enormously since Moscow first initiated tentative efforts to demilitarize the economy in the late 1980s. A subsequent series of Russian reform efforts aimed in large part at “converting” defense factories to civilian use has also done little to arrest the sector’s long and precipitous decline. Russian defense enterprises have suffered especially from the government’s drastic reductions in defense spending over the past decade, and their efforts to reorient themselves toward civilian production have been further hampered by both a dearth of investment funding and by the Soviet practice of creating highly concentrated defense industrial centers in a number of different Russian regions. Efforts to restructure the sector have likewise suffered from a lack of political will; enterprise directors and regional authorities have resisted policies aimed at addressing overcapacity by shutting down those factories with the worst long-term prospects.

A restructuring plan now being drafted by the Russian government, however, apparently signals the start of yet another Kremlin effort to address this same complex of problems. According to Russian news accounts, the draft plan was presented formally for the first time to a March 22 meeting of the Presidium of the Russian State Council, an advisory body made up of governors drawn from Russia’s regions. The venue for the presentation was probably not accidental. Defense enterprises are critically important to the economies of many regions, and the Kremlin’s ability to effect changes in this area will likely depend in large part upon its success in winning (or squeezing) support from regional leaders. It may, however, be seeking–at least initially–to avoid a direct confrontation with those governors for whom defense industrial reform is a critical issue. According to one Russian report, Putin waited until a regular rotation of the State Council Presidium’s membership produced a group lacking any such governors. Indeed, during the March 22 meeting Putin entrusted a presidium “rookie,” Yaroslavl Governor Anatoly Lisitsyn, with the task of organizing the government’s initiatives in this sensitive area. Lisitsyn reportedly has little familiarity with the issues relevant to defense industrial reform and has on his territory only one major defense enterprise: the Rybinsk Motor plant (Kommersant, March 23).

Russian reports were not entirely consistent in their descriptions of the draft plan for reorganization of the defense industrial complex, but its major points appear to be as follows. The plan is apparently intended to orient Russian armaments development through the years 2010-2015. Administratively, the plan calls for creating a structure of some thirty-five to forty scientific production complexes. About a dozen of these complexes will unite researchers and enterprises producing final products (planes, helicopters, ships, tanks); another dozen or so complexes will include producers of armament systems; the remainder will be composed of producers of other components (such as engines and electronic equipment). The activities of these scientific production complexes will in turn be overseen to a greater or lesser degree (here Russian reports were especially unclear) by five federal defense agencies created last year under Russian Deputy Prime Minister Ilya Klebanov’s orders. These five agencies, which appear to have played only a limited role in Russian arms policy to date, are organized to oversee production of conventional munitions, conventional arms, shipbuilding, control systems and aerospace agencies. Indeed, Klebanov, who is reported to be close to Putin (and who was seen by many as a possible candidate for the Defense Ministry job recently given to Sergei Ivanov) is in charge of drafting the defense industrial reorganization plan and will apparently coordinate government policy in this area.

As Russian reports make clear, enterprise directors are likely to resist the loss of independence which will come with being subordinated to the scientific production complexes. The Kremlin is hoping to bring them into line, however, by making it clear that defense procurement allocations–which Klebanov and others have also suggested are set to rise–will be distributed only through the complexes. The government has apparently sweetened the pot a bit more by promising that the complexes will also be allowed some independence in trading arms on the international market. The downside, however, is this: Funding offered through the complexes will be made available only to the most promising Russian defense enterprises. According to one report, approximately one-third of the currently existing 1,700 defense enterprises will either go out of business or be forced to produce something else. Klebanov will present a more finalized version of the draft defense industrial reform plan on April 15, after which it will be circulated (presumably among the governors) for additional revisions. Ultimately, according to Russian reports, the plan is to be presented for consideration to the Russian Security Council. A final version is expected to be finished in about three months time (, March 22; Kommersant, Segodnya, March 23; Vremya novostei, March 26; Finansovaya Rossia, April).

If the ultimate aim of the defense industrial reorganization is to create a defense sector capable of equipping a reformed Russian army with the latest military hardware, a more immediate goal appears to be improving the chances of Russian defense enterprises to sell their wares on the international arms market. That, at least, appeared to be the gist of recent comments by Putin and Klebanov. At a March 21 meeting of a Russian government commission on arms exports, for example, Putin praised Russian exporters for having sold US$3.68 billion worth of arms in the year 2000, a figure which topped Russia’s 1999 total of US$3.5 billion. But he complained that Russia continued to trail behind major Western countries in this area. Then, during a March 28 press conference, Klebanov appeared to expand on Putin’s remarks, saying that Russia has the potential to overtake Britain in the coming years as the number two exporter of military hardware in the world, behind the United States (Reuters, Vedomosti, March 22; Izvestia, March 29). The remarks reinforced the conclusion that Moscow intends to compete ever more aggressively on the international arms market, and that it hopes to use revenues from arms sales abroad to maintain and modernize its domestic defense industrial sector so as eventually to be able to reequip Russia’s own troubled armed forces.