Publication: Prism Volume: 1 Issue: 4

The Russian arms buisness is producing losses for everyone–except some now wealthy dealers

Secrets of the Russian Arms Business

by Aleksandr Zhilin

The Russian government commission investigating Russian governmentfirms involved in arms sales abroad has been shocked by its discoveryof open and widespread violations of Russian law, informed sourcessay. The commission has turned over its documentation to the maincivilian and military prosecutors. And the latter have begun toprepare indictments.

The commission’s first find had nothing to do with corruption:rather, the group found that arms sales to foreign customers havecontinued to fall since the end of the USSR. Indeed, much of theproduction of the military complex for 1992 is still sitting inwarehouses. By September 1994, the commission found, unsold inventoriesof military goods amounted to $5 billion. In the seven aviationfactories alone, 192 military helicopters with a value of $3.2billion were sitting unsold. In the two tank factories, 500 T-80Uand T-72 tanks worth some $65 million each remained without abuyer. In the naval yards, six ships built more than three yearsago have not found a customer–but the yards are nonetheless buildingeight more even though four of these do not have any possiblecustomers.

Despite these unsold inventories and the state’s own budgetaryshortfalls, the economics ministry continues to plan for the productionof more such goods. Thus, last year, the Urals Transport MachineryWorks prepared 84 self-propelled mine sweepers and received fundingfrom the government even though there were no buyers.

Over the last two years, more than 1800 tons of military equipmentbuilt for Guinea, Syria, India, Iraq, Yemen, Libya and Cuba didnot move. The estimated value of the goods in the warehouse hereis equal to $37 million. And even its storage is expensive. TheRussian state arms agency Rosvooruzheniye had to pay more than500 million rubles over the last two years for storing all thesegoods.

The inspection commission also noted that much of the military-technicalcooperation between Russia and foreign firms worked against theinterests of Russia itself. This was particularly true of Russia’sties with arms dealers who work as intermediaries. Their feeshave continued to grow, frequently to as much as 20% of the totalcost of the sale. And to take but one example, the Turkish traderA. Shen received from the Russian government several million dollarsin hard currency for his work in this area in 1992-93 alone. Sincethen, the Russian arms merchants have continued to give him specialfavors even when these concessions violate Russian law. Accordingto the commission, Moscow is now paying similar foreign salesmencommissions of $30 to $35 million dollars a year. And that doesnot count the money spent on the various Russian intermediarieswho also get a cut.

The investigators also found that as the export of Russian militarygoods has fallen, so have the prices and profits Moscow receivesfor these goods. For example, in 1993, a Russian state militarycompany sold Turkey 110 armored personnel carriers for $150,000each. At that time, Brazil was selling a similar machine for $187,000,Canada for $258,000, and the US for $184,000. But the arms dealerwho served as an intermediary received a commission of $2.7 millionand, as a result, the Russian firm lost more than $5.5 million.The investigators found numerous similar examples.

Another thing that the investigators discovered was that manyRussian firms were violating government regulations on the handlingof classified information. In 1994, one construction bureau soldthe Chinese technical documentation without state approval. Thefirm received $896,000 for its troubles. But the value of thesedocuments was at least $4 million and the firm should have receivedclearance from Moscow, something it did not do.

As unfortunate as all these and other cases are, they were norevelation to those specialists who had followed developmentsin the arms export business. Many violations noted in the commission’sreport in fact were linked to the behavior of senior officials–includingmembers of Yeltsin’s immediate entourage. The fact that the courtshave not yet been able to deal with this situation raises a seriousquestion: Who benefits from this scandalous situation? Nowadaysin the Russian press, analysts read tea leaves in order to determinethe answer. Some say that the information about these scandalswas released by Marshal Yevgeny Shaposhnikov, who was tired offighting the corruption in the Russian arms export organization.But this is unlikely. Shaposhnikov is almost certainly involvedin the corruption himself.

Others blame the CIA. But in fact the truth is very simple. Theleak of information was organized by officials in the prosecutor’soffice who were angry that they could not bring charges becauseof the position and personal ties of those involved. Now thatthe scandal of Rozvooruzheniye is in the open, the very forceswho were involved, and who tried to keep things quiet, are workinghard to limit the damages to themselves. Unfortunately to theextent that they succeed, they will only increase the damagesto the Russian arms business and to Russia itself.

Aleksandr Zhilin is the military correspondent for Moskovskienovosti.