What does the future hold for Russia's weapon industry?

LONDON: Russia is increasingly bullish about the success of its arms-export drive and what this means for its ailing military-industrial complex (VPK) industries. The country is among the world's four largest arms exporters -- together with France, the UK and the US -- with trade worth $3.5 billion in 1996. Alexander Kotelkin, formerly general director of the state arms-export agency Rosvooruzhenie, even claimed that its annual share of the export market could grow as large as $7 billion by 2000. This is a genuine achievement, but not the deus ex machina Russia appears to believe.

In its extraordinary drive to increase arms sales Russia is resorting to technology transfers, such as licence production. In the long-term, however, this strategy could well undermine domestic manufacturing by creating tomorrow's competitors from today's customers. In the course of these endeavors, the VPK industries are having to sell their most advanced equipment abroad even before it reaches the country's own forces. This is partly because Russia's military services cannot afford to purchase the hardware for themselves.

Russia's military-industrial complex has suffered years of decline, despite early and abortive efforts at conversion to civilian production and periodic restructuring. In 1996, total output fell by 27% to less than a quarter of its 1991 level. The labor force also shrank by 13% in the same year. The remainder face under-employment affecting perhaps a third of the notional workforce -- and wages that are both low, 60% of the industrial average, and often paid 3-4 months in arrears. Not surprisingly, such deterioration has resulted in growing industrial militancy and social unrest, including strikes and rising levels of pilfering and absenteeism.

However, there has been some evidence of recovery in 1997, as well as the most profound restructuring to date. In March, Russian President Boris Yeltsin abolished Minoboronprom, the Ministry of the Defense Industry, as part of his overall government reshuffle. In August, he sacked Kotelkin and reorganized Rosvooruzhenie itself, in an attempt to satisfy the major weapon producing firms by loosening them from central bureaucratic controls. Rosvooruzhenie had become a bloated and allegedly corrupt institution, whose 10% sales commission was often inflated to 20-50% through dubious accounting practices.

Power within the VPK has thus tilted away from representatives of the old industrial elite -- whose main priority was preserving an increasingly untenable status quo -- towards more reformist figures with a particular interest in arms exports. Rosvooruzhenie has also lost its virtual monopoly on sales. This will lead to further liberalization of the VPK, although it will be limited so long as the government views arms exports as both a political and economic issue.

Russia's leaders have long advocated an aggressive and ambitious arms-export drive, which they see as essential for a variety of reasons. First, it is vital to maintain the VPK, which is crucial for the survival of Russia's manufacturing base and technological capability, and has a direct political function. In the past, cost considerations led to the development of massive military industries, on which the economic life of towns and even whole regions still depend. For example, according to a 1996 independent Russian survey, 70% of the working population at Udmurtia in the southern Urals region depend either directly or indirectly on the defense industries. The closure of such establishments, or even their substantial reduction, would have a cataclysmic effect on local economies and create greater support for the Communist Party and other opposition forces.

Second, exports are regarded as an important means to generate the necessary research and development (R&D) funding to ensure that Russia at least maintains its existing technological position. This factor also explains why the Defense Ministry, which until early 1996 had vigorously resisted proposals to sell Su-27 fighters to China, has suddenly reversed its position. In August 1997, the more advanced Su-30 combat aircraft was also sold to Indonesia.

Senior military officials are working to a lengthy reform program, which aims to achieve substantial reorganization and re- equipment from around 2005. With the defense budget under constant pressure -- reduced by 20% in May 1997 -- they cannot afford to fund R&D. Senior military officials have thus been converted to the idea of letting Russia's customers provide the funding. Projects that once were priority military requirements, such as the Sukhoi T-60S multi-role bomber, have now been made contingent on finding potential weapons export markets and backers.

High-ranking figures in the defense industry hope that countries will become dependent on Russia for spare parts and future technological developments and acquisitions. However, this hope is probably in vain, given that some states (China, for example) are beginning to modify and upgrade the latest Russian designs, helped by countries such as France, Israel and South Africa.

Russia is clearly eager to sell military hardware, but within certain boundaries. It is a member of the Missile Technology Control Regime and the 1996 Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies. While both of these arms-control agreements restrict technology transfers, Russia will increasingly test them to the limits. Nuclear-weapon technology is probably not for sale -- although Moscow is dangerously close to agreeing deals for the supply of nuclear-power reactors to Iran, which could benefit Tehran's nuclear-weapon program. Sales to countries bound by international sanctions, such as Iraq, are also still proscribed. Apart from these exceptions, Russia is now selling its best equipment and, perhaps most importantly, its designs and technologies, to many nations, most notably China.

Moscow has certainly managed to acquire new customers, although at the same time it has lost traditional markets in Eastern Europe. Recent sales include:

* MiG-29 fighters to Malaysia;

* MiG-29, MiG-21 BIS and Su-30 MK aircraft, an A58 resupply tanker and a Taruntal 1 minesweeper to India;

* T-80 tanks and BMP-3 armoured combat vehicles (ACVs) to South Korea;

* Su-27s and fast-patrol boats to Vietnam;

* Su-30 aircraft to Indonesia;

* MiG-29 SM fighter, YAK-18T trainer, BMP-1 and BMP-2 ACVs and T-72 tanks to Bulgaria;

* BMP-2 and BMP-3 ACVs to Kuwait;

* MiG-29s to Slovakia and Kazakstan;

* BMP-3 ACVs to the United Arab Emirates;

* T-72 tanks and BMP-1 ACVs to Iran;

* BTR-80 personnel carriers to Hungary and Turkey; and

* Mi-17 helicopters to Bangladesh, Colombia, Indonesia, Laos, Mexico, Myanmar, Pakistan, Sri Lanka, Turkey and Venezuela.

Russia sells two-thirds of its total exports to China, India and Vietnam. China and India, however, are looking to produce their own indigenous versions of major equipment, with a view to scaling down their imports and expanding their own exports. There are dangers for Russia in technology transfers. For example, if Russia transferred Su-30 combat aircraft technology to China, it would not follow that China would be dependent on Russia for a few Su-30 high-technology components. This tactic may once have been true, but given the current state of China's industrial development it is no longer so.

Combat aircraft account for two-thirds of the total turnover, and, beyond a few other sales (such as the 40 Su-30s that India agreed to purchase in December 1996 for $1.8billion), these are almost all MiG-29 or Su-27 aircraft.

The remainder is largely made up of sales of Kilo-class diesel-powered attack submarines (exported to China, India and Iran) and air-defense systems, mainly S-300 (SA-10) missile launchers (on order to Cyprus), SA-19 Tunguska gun-missile vehicles (exported to India) and SA-11 Buk-M1 missiles (sold to Finland). There have been sales of small arms and combat vehicles, however, but these are not big dollar earners.

Reputations can easily be overtaken by poor back-up servicing, new international competitors or lost through bad luck. The T-80 main battle tank, for instance, was deployed in Grozny without infantry cover and thus suffered heavy losses to Chechen guerrillas. This outcome was predictable, a sign of bad military leadership, rather than poor design. Nevertheless, the image of burned-out T-80 tanks is powerful, and further production has been halted in favor of the T-90.

The abolition of Minoboronprom and the emasculation of Rosvooruzhenie represent only partial (and in many ways damaging) liberalization. It is likely, however, that Rosvooruzhenie's successor -- which is meant only to be a facilitating and coordinating agency -- will succumb to classic Russian empire- building and aspire to the same central role.

This will be resisted by the powerful Finance-Industrial Groups within the VPK, such as MiG (Mikoyan-Gurevich)-MAPO (Moscow Aircraft Production Association) and Sukhoi. Indicatively, Rosvooruzhenie's new head is Evgeni Ananev, the chair of MAPO bank. The arms industry will thus be polarized between a few profitable big players, and many unprofitable enterprises that can no longer work through a powerful marketing agency but need to be kept operating for both social and political reasons.

Arms exports will remain a life-line for Russia's military- industrial complex -- but not necessarily a lasting one, and they are certainly no alternative to greater restructuring. Without a strong domestic market it is difficult to see how an arms industry can sustain itself over any period of time. The danger is that Russia's arms manufacturers and its government will increasingly be tempted into dubious foreign deals.