Political economy of Russian arms deal

By J. Kusnanto Anggoro

This is the first of two articles examining the surge in Russian arms sales in recent years.

JAKARTA (JP): In recent months Russia has moved aggressively in an attempt to win new customers for its arms export in Asia and the Pacific long dominated by the West.

Defense Minister Pavel Grachev visited Seoul recently and signed a contract of US$1.5 billion. Last year, Kuala Lumpur bought Russian 18 MiG-29 fighters, and is now testing the Russian-designed main battle tank T-72 and may place an initial order for more than sixty units.

Russia-Iran nuclear deals and the transfer of fighter Su-27 and missiles SA-10 to China are just some examples to illustrate how the Russia arms transfer is on the growth.

To some degree, this new aggressiveness reflects Moscow's increasingly urgent need to augment its hard-currency revenues. But it is also a part of a far broader nexus of problems stemming from the economic and political conditions within Russia and its defense-industrial complex.

For whatever reasons, this would certainly prove problematic for global and regional security.

The end of the Cold War has shrunk Russia's share in global arms market. Unlike Western countries, particularly the United States, whose share increased from 40 percent (1989) to 57 percent (1992), Russia's share has plunged from 37 percent to 11 percent.

There are several reasons for this. The lost of Soviet traditional market of Eastern Europe and of the third world such as Cuba, Vietnam and Afghanistan are the main causes of the Russian sinking share.

Russian defense procurement orders were reported to have plummeted by nearly 70 percent in the early period of post-Soviet Russia. This had greatly affected the production of Russian arms to export.

At the same time, the downfall of the Soviet Union has had an equally pernicious effect on the Russian arms transfer policy. Russia's observance of the UN sanction on weapons sales to Iraq and Libya, for example, has cost Moscow its most lucrative hard- currency markets.

To what degree all these upset the Russian economy has always been an open debate. A conservative estimate posits it for nearly US$18 billion a year. This figure, built upon Soviet data, is greatly inflated. For one thing, it does not distinguish between what should have been considered the gross value of Moscow's arms transfer to foreign countries and its real earnings from arms sales. In 1991, for example, nearly 65 percent of the Russian arms transfer was conducted without interest rate. For another, the rapid depreciation of roubles against U.S. dollar and the contraction of Russian defense industries plays a significant role to the downturn.

The more moderate estimate casts the lost of $3million-$3.4 million a year. That amount is in itself not significant in economic terms since the Russian needs around $50 billion a year for the continuation of its economic reforms.

Actual earning from arms transfer would fulfill no more than 10percent-12 percent of what the Russian needs. Nevertheless, what counts more in the policy making process has always been how the Russian perceived the role of arms transfer in its economic reforms; and it is in this point that most conservative politicians seemed to argue how important it was.

Sergei Karaoglanov, the head of Oboroneksport (a leading state trading association subordinated to the Minister of Foreign Economic Relations) launched in 1992 one of the earliest attacks on Moscow's adherence to the UN sanctions, rejecting outright the Foreign Ministry's policy of trying to reach accommodation with the leading western powers.

In what has since become the standard refrain of conservative critics of the government, Karaoglanov argued that Western aid could never make up for Moscow's lost arms-export revenues. He seemed to exaggerate the role of the revenue. Yet, even a moderate figure of $3.4 billion could provide the Russian government with financial reserve for highly politicized issue such as providing shelter for its returning Baltic troops, the improvement of Russian oil refineries and offsetting the displacement effects that ought to be anticipated in the conversion of defense industries.

This became a politically volatile issue until October 1994 in the conflict between President Boris Yeltsin and his conservatives adversaries on the issues of power sharing between the executive and legislative branches and between central and regional governments in the Russian Federation.

For most of his years in power, President Yeltsin has been facing tremendous challenges in almost all policy fronts. Both the shock therapy, promoted by former prime minister Yegor Gaidar, and the Russian accommodative behavior in international front, championed by Minister of Foreign Affairs Andrei Kozyrev, were the main targets of Yeltsin's critics.

In the wake of mounting criticism and conflict between the proponent and opponent of the presidential office, Yeltsin's counting on support of the military and defense-industrial complex was an unavoidable imperative.

Unfortunately for Yeltsin, the Russian High Command had never supported him unconditionally. Defense Minister Grachev, who is himself a Yeltsin confidant, has always backed Yeltsin. Some special units and few military commanders, however, did otherwise.

Back to 1992, the military supported Yeltsin's decree on special rule only after the president had given significant concession to them on arms transfer policy.

This is to say that the military industrial complex have significant role to play in the making of Russia's arms transfer policy. This is quite understandable since the military industrial complex involves directly and indirectly more than 35 million people, and thus could potentially become a very important and decisive electoral constituency.