RUSSIAN ENERGY PROFITS AID RUSSIAN MILITARY, BUT NOT MILITARY-INDUSTRIAL SECTOR

Although energy and foreign policy issues have dominated reporting from Russia in 2006, there have also been interesting developments in the defense sector. The Putin regime has launched a comprehensive effort to modernize the Russian military, including its defense-industrial sector. Moreover, this effort has included substantial increases in defense spending, which has tripled since 2000. Although inflation has reduced this growth in real terms, the rise in spending is quite substantial and reflects both the economic revival of Russia since 1999 — largely due to energy profits — and the realization that no reform of the armed forces was possible without increased defense spending.

Yet despite the increases in defense spending, official figures indicate that annual spending remains at 2.7% of GNP. This is considerably less than the 3.5% ceiling stated in Russian laws. In other words, while raising spending on defense, Russian President Vladimir Putin has not acceded to the demands from military men, some Duma delegates, and Russian pundits to exceed those levels, at least in officially reported figures. Whether official figures are accurate and realistic is altogether another question. Moreover, both Putin and Defense Minister Sergei Ivanov have made it clear that they will not allow spending to exceed growth or to endanger the stabilization fund, which is intended to protect Russia against the ravages of inflation and the Dutch disease due to its reliance on energy. Even so, pressure to raise spending is growing.

This pressure comes from many sources. Inflation is undermining procurement by raising costs for all kinds of basic goods, such as metals and energy. The defense industry, despite endless reorganizations, remains unable to provide Russian forces with weapons and apparently prefers to sell abroad. Moreover there are still 1,550 firms in this sector, and many of them cannot work effectively under market conditions. Thus it is clear that this sector remains in crisis, stimulating demands for not just another reorganization — which is occurring — but for more spending on it. Other voices in the Duma are calling for increased spending either on conventional weapons, nuclear weapons, or both, citing either aggressive Western intent or the fact that only 20% of Russian weapons are at a contemporary level of effectiveness as justification.

Hitherto Ivanov and Putin have resisted going beyond the 2.7% figure even as that absolute total rises due to economic growth. As recognized by pundits like Alexei Arbatov, this steady course signifies their belief in a fundamentally benign threat environment, despite rhetoric to the contrary. However, they have moved to reestablish the old Soviet military-industrial commission under Ivanov, and he is calling for defense firms to produce more for the civilian market, just as their Soviet predecessors did. Furthermore it is apparent that the state, using organizations like Rosoboroneksport or the creation of industrial holding companies in the airplane and, soon, shipbuilding industries, is seeking to bring this sector under greater control. In this respect trends in the defense sector parallel similar ones in the energy sector, where state controls are also growing.

Past experience suggests that neither renewed state control nor neo-Soviet approaches can be effective. But it is also clear that market-based solutions to pressing economic problems do not enjoy state or public support in today’s Russia. Consequently the trend towards enhanced state control is likely to continue for some time. Thus despite the fact that Ivanov is actually delivering many times more new weapons to the Russian armed forces than was the case when he assumed office in 2001, the crisis of the defense-industrial sector will continue. At the same time, precisely because anti-Western rhetoric is now dominant and transparency and rule of law have been suppressed, Russia’s elite believe that Russia’s energy holdings allow it to defy or threaten the world, and neo-imperial objectives dominate foreign policy; it is likely that the pressure for ever more defense spending is going to grow regardless of Russia’s actual performance.

But even as this pressure grows, and even if actual spending continues to rise, either within or beyond the present ceilings, it is also unlikely that the Russian government or the Duma will have a clear idea of what Russia is actually buying and what it gets for its defense ruble. Absent any real internal accountability or rule of law in the government and genuine parliamentary and public control over state spending, this sector is likely to remain one of the most corrupt and opaque sectors of the Russian economy. That outcome can only continue to hobble recovery even as it moves forward. Two reliable indicators of Russia’s future trajectory in both domestic and foreign affairs will be the debate over defense spending figures and targets and the actual response by the government to the military-political pressure to raise that spending.

(Interfax-AVN, April 17, 20; RBK TV, April 18; Interfax, April 20; Izvestiya, March 15, 22, 29; Kremlin International News Broadcast, March 28, April 11; Novye vremya, April 20)