Publication: Monitor Volume: 3 Issue: 140

The bank scandal which erupted last week provides a glimpse into the financial problems being faced by Russia’s military industrial plants. Unikombank was upbraided for alleged irregularities in the provision of a $237 million loan to the MiG-MAPO firm to fund the sale of MiG 29s to India. (See Monitor, July 10, 15)

Last August the government took a decision to merge the 22 design units and production plants involved in the production of military aircraft, but encountered resistance from the independent-minded directors of those plants (who even in Soviet times had been encouraged to compete with one another to come up with the best innovations). (Itogi, No. 28, July 15) Anatoly Manuev was brought in as the new director of MiG-MAPO to unify the 12 units involved in the production of MiGs.

It is not yet clear how much of the $237 million loan was received by MAPO, nor how much of it, if any, was spent on preparing for the Indian contract. More likely it went to cover outstanding bills and current operating expenses. Defense plants are desperate for cash: the federal government has fallen behind in paying even for the trickle of orders it has placed for the Russian armed forces, as well as in providing investment for conversion projects. Only 500 billion rubles ($100 million) of a promised 3.4 trillion rubles were allotted during 1995 and 1996, and nothing has been paid so far of the 2.4 trillion rubles promised in the 1997 budget. Moreover, these funds are spread thinly across more than 700 defense plants. On July 15 the government commission on operational questions, chaired by Boris Nemtsov, agreed to start releasing the 1997 conversion funds. (Izvestia, July 17)

The government’s efforts to create a unified Sukhoi complex out of the various bureaus and plants involved in producing Sukhoi aircraft also ran into trouble last month when two of the units — the Sukhoi OKB design bureau and the Komsomolsk-on-Amur production association — won a court order blocking the formation of the conglomerate. The Komsomolsk plant has a $2 billion order for Su-27s from China (financed by Inkombank) and prefers to remain financially independent. The Irkutsk plant favors closer integration of Sukhoi producers, although it too has a $1.5 billion contract for Su-30s for India (financed by Oneksimbank).

Earlier this year a government commission chaired by Economy Minister Yakov Urinson was formed to look into the problem, and decided that a loose grouping of firms would be less effective than an integrated company. The commission was apparently impressed by the wave of amalgamations taking place in the US aviation industry. If and when the structure of military aviation is finally worked out, the MAPO and Sukhoi VPKs will be in a position to try to raise money by selling shares — although the state will remain the majority shareholder. Opinions differ over whether the Russian military aviation industry has a bright future. Although the new Su-37 wowed audiences at the Le Bourget airshow last month, it currently lacks the avionics and weapons systems to go with its impressive maneuvering capability. Skeptics argue, moreover, that the next generation MiG and Sukhoi designs are still derived from research projects of the early 1980s.

More on Russian Military Reform.