Defense Reforms of the Russian Federation
Following the collapse of the Soviet Union the defense industry and military-industrial complex of the Russian Federation suffered greatly. For the duration of the 1990s and early 2000s Russia’s capabilities in these fields were crippled by corruption, inadequacy, the inability to transform to a market economy, and a lack of funding. At times the entire defense industry functioned and produced at less than 10 percent of its overall capability, and reports eventually surfaced that anywhere between 25-35 percent of firms and enterprises in operation were bankrupt. Furthermore, to compound the problem, a majority of officials and military experts estimate that approximately 70-80 percent of the Russian armed forces’ equipment was out of date and obsolete as of 2005.
Throughout the course of President Vladimir Putin’s two terms in office, however, state revenues continued to increase significantly as energy, arms and munitions, and trade exports soared. As a result of Russia’s newly founded wealth and power the economy recovered from its low points in the 1990s and expanded impressively. High oil prices and an increased demand for energy provided Russia and Putin with the opportunity to address important domestic issues such as defense.
Defense had always been an integral element of the Russian economy, but by 2004 the industry had still failed to adapt to a market system in which uncompetitive and unproductive firms were rooted out and their resources re-allocated for more profitable use. In response President Putin introduced a series of reforms intended to restructure and strengthen the industry as a whole. The measures were also designed to increase state control over the sector.
A major reason Russian embarked upon a series of defense reforms was to protect the energy sector, which had developed into a powerful revenue source by the early 2000s. By 2005 officials across the globe were forced to recognize that Russia’s energy supplies were developing into an integral element of the world energy market, including that of the United States. In March-April 2006 it was announced that the U.S. market was prepared to import upwards of 10 percent of its liquefied natural gas (LNG) supply from Russia, and numerous experts surmised that the number could eventually climb to 30 percent. Naturally, the security and availability of energy supplies became a major aspect and concern for Russian defense and security establishments. Pressure mounted in Moscow for the government to reform the dilapidated defense sector and the military.
The restructuring of the military-industrial complex was likewise considered an essential element of defense reform. Under the tutelage of Putin and Minister of Defense Sergei Ivanov, the Russians chose to emphasize the creation of vertical integrated holdings in specialized sectors, such as aviation, shipbuilding, tank building, radio electronics, automobile, and information technology. It was hoped that this would not only reorganize and enhance the defense industry, but that it would provide a method to funnel private, including foreign, investments into the defense sector. The birth of these holdings would eventually force western and U.S. companies to treat the new Russian companies as partners or competitors.
As of November 2006 there were 579 state-owned enterprises and 428 shareholding firms (some estimates claim that there were 1,700 firms around this time period). The reforms in the defense industry were more or less intended to promote mergers and acquisitions among these enterprises and firms. The main purpose was for the reforms to serve as a catalyst for desperately needed closures and bankruptcy declarations. Meanwhile, the sector’s enterprises that survived the reforms, which experts concluded would approach the range of 46 percent, could consolidate their assets into approximately 40-45 integrated holdings.
The primary state authority charged with overseeing the process of creating holding companies was Rosoboronexport (ROE), which was created through the merger of Promexport and Rosvooruzhenie in November 2000. As of mid-2007 the company remained Russia’s main arms-selling agency. In prior years, however, ROE became an industrial powerhouse that monopolized entire sectors of industry on behalf of the state. It also began participating actively in the civilian industry as well. Since 2002 Rosoboronexport had been investing in the domestic sector by creating incentives for specialized holdings.
Rosoboronexport also signed up to play an active role in the Federal program designed to reform the defense industry from 2007-2011. ROE agreed to partake in financing, restructuring, and management of the state’s holdings within the sector.
In areas of the defense sector where vertical holdings had not been established it was decided that a governmental body would provide state oversight. In reference to foreign defense orders President Putting approved the decree titled, “On Military and Technical Cooperation between Russia and Foreign States” in September 2005. The Federal Military and Technical Service was granted the authority to appoint managers to administer export contracts. The approval of these contracts was based on collective decisions.
The state also planned to strengthen its control in the sector and liberalize domestic investment opportunities via Public Private Partnership (PPP) principles in rebuilding the state’s industry and reforming the defense and security complex. This would be accomplished by combining state funding and business initiatives, which would assist the nation’s industry and military-industrial complex.
