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Russian Military Industry

The present condition of Russia's defense sector is critical, and the reasons are well known. One is the aging of highly qualified production personnel, many of whom are approaching retirement age. Engineering school graduates are unwilling to take jobs in the defense sector because of low wages. No worker replacements are trained anywhere in the country either. Earlier, it was taboo to draft workers from defense factories into the army. Now this privilege is abandoned, and graduates of the few surviving vocational schools seek employment elsewhere, but not in the defense sector where receiving a foreign travel passport is a problem.

Another problem is the aging of the equipment in the defense industry: its production lines and machine tools have long passed the 30-year limit. Many key technologies have been lost as have co-production links. The uncontrolled growth of energy costs is outstripping inflation and is well above the deflators provided by the Economic Development and Trade Ministry. It was obvious that the 2006-2015 government defense order would fall short in both the range and quality of products ordered.

The Russian Federation inherited the largest and most productive share of the former Soviet defense industry, employing as many as 9 million workers in 1,125 to 1,500 research, design, and production facilities. Russian defense industry wage increases had not kept pace with inflation, meaning that most Russian defense enterprises had steadily lost their best workers (estimates ranged from 800,000 to 1 million lost per year) to Western companies or the emerging Russian private sector. In 1997 the Russian defense industry consisted of over 1,700 firms and nominally employed some 2.5 million workers.

While defense enterprises were found throughout the country, a significant portion was concentrated in a dozen cities and regions, where over one-third of the labor force worked in defense. Those installations were concentrated in particular regions, whose economies tend to be heavily dependent on the industry; in the Republic of Udmurtia, for example, more than two-thirds of workers and industrial capacity were attached to defense in some way in the early 1990s. Moscow has large plants for air force and missile components, and St. Petersburg specializes in naval design and production as well as infantry weapons.

A Russian defense plant was, in some ways, a throw-back to a US factory-town. A "town-forming enterprise" completely provides for urban activity and permanently participates in different programs of social purposes. Such a defense plant is really a mini-city in itself, with its own apartments, doctors, clinics, restaurants, and power plants. Outside of Moscow and St. Petersburg, defense plant employees frequently live in company apartments, shop in company stores, and eat in company cafeterias. In the 1990s up to 80 percent of a defense plant's budget went to maintaining these social services. The plant manager was often as concerned with making deals to bring in potatoes and bread to feed his people as with joint venture agreements, and these and other transactions were often conducted on a barter-basis.

In a town-forming enterprise, the life and prosperity of citizens depended on stable work for the enterprise. A town-forming enterprise concerns itself with creation of more jobs, and so would establish productions line outside the mainstream business. In the 1990s plant managers often attempted to maintain production even without budget authority to keep workers busy. This led to an excess inventory of weapons, which plant managers tried to sell, even as the downsizing armed forces also sought to sell off now surplus military equipment.

By the mid-1990s most Russian defense enterprises would have been considered bankrupt in Western terms, and the situation worsened after the financial collapse of 1998. The Ministry of Economy reported that 400 defense enterprises were unable to pay their debts. The industry needed modernization and many defense enterprise managers were eager to learn about the basics of marketing, finance, and modern business practices. Many defense plants reduced operations to only a few days per week at most.

The Thirteenth Five-Year Plan of the Soviet Union covered the period 1991-1995. The Sixteenth Five-Year Plan would have covered 2006-2010, and the Seventeenth Five-Year Plan would have covered 2011-2015. It would appear that the demise of the Soviet Union did not erase the penchant for Five Year Plans, since both the Yeltsin and Putin governments released new long range plans every five years, coinciding with the intervals that would have been covered by the Soviet Five-Year Plan. In the United States, the conterpart activity is the Quadrennial Defense Review, on four year centers.

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