Military Industry Under Yeltsin

With the end of the Cold War, Russian defense plants lost nearly 80 percent of their funding from the Russian government. At the same time, defense plants lost export earnings due to loss of traditional Soviet bloc markets and the general decline in the world arms market. During the 1990s the Russian defense budget dropped to levels that were a trivial fraction of those of the Soviet era, and manifestly insufficient to support all or even many of the existing defense industry firms.

The Russian defense industry underwent changes which included a shift from production of military to commercial goods; the restructuring of firms into a mixture of holding companies, joint ventures, and small spin-offs; and a shift towards integration into the world economy.

Since the early 1990s one of the principal thrust areas of restructuring was the formation of new corporate structures that would unite design and manufacturing facilities into Financial-Industrial Groups (FIGs). Deputy Defense Minister Andrei Kokoshin actively advocated this policy beginning in 1992, and the creation of financial-industrial groups was authorized by Presidential Decree no. 2096 (adopted on 05 December 1993). The intent was to integrated corporations on the pattern of Western companies, or the South Korean Chaebols, to replace the Soviet centralised defence industrial structure. These new entities would span multiple enterprises, though on a scale smaller than the entire industrial sector encompassed by the Soviet-era ministries.

The essence of economic restructuring, and a critical consideration for foreign loans and investment in Russia's economy, was the privatization program. In most respects, between 1992 and 1995 Russia kept pace with or exceeded the rate established in the original privatization program of October 1991. As deputy prime minister for economic policy, the reformist Chubays was an effective advocate of privatization during its important early stages. In 1992 privatization of small enterprises began through employee buyouts and public auctions. By the end of 1993, more than 85 percent of Russian small enterprises and more than 82,000 Russian state enterprises, or about one-third of the total in existence, had been privatized.

On October 1, 1992, vouchers, each with a nominal value of 10,000 rubles (about US$63), were distributed to 144 million Russian citizens for purchase of shares in medium-sized and large enterprises that officials had designated and reorganized for this type of privatization. However, voucher holders also could sell the vouchers, whose cash value varied according to the economic and political conditions in the country, or they could invest them in voucher funds.

By the end of June 1994, the voucher privatization program had completed its first phase. It succeeded in transferring ownership of 70 percent of Russia's large and medium-sized enterprises to private hands and in privatizing about 90 percent of small enterprises. By that time, 96 percent of the vouchers issued in 1992 had been used by their owners to buy shares in firms directly, invest in investment funds, or sell on the secondary markets. According to the organizers of the voucher system, some 14,000 firms employing about two-thirds of the industrial labor force had moved into private hands.

The next phase of the privatization program called for direct cash sales of shares in remaining state enterprises. That phase would complete the transfer of state enterprises and would add to government revenues. After that procedure met stiff opposition in the State Duma, Yeltsin implemented it by decree in July 1994. But the president's commitment to privatization soon came into question. In response to the monetary crisis of October 1994, Yeltsin removed Chubays from his position as head of the State Committee for the Management of State Property, replacing him with little-known official Vladimir Polevanov.

The Russian government initially planned to privatize about three-fourths of its more than 2000 defense enterprises by the end of 1994. Four categories of enterprises were created:

1. fully privatised facilities that no longer engaged in military work
2. fully privatised enterprises that were still engaged in military work
3. joint-stock companies in which the state held a stake
4. fully state-owned enterprises that remained directly subordinate to state

About 700 of Russia's defense enterprises had to some degree been privatized, although the government retained a significant if not controlling interest. By 1995 only 21 percent of the enterprises in the aviation industry were fully state owned; the armaments industry had 35 percent state ownership; the shipbuilding industry was 40 percent; 54 per cent in the missile-space industry, and 82 per cent in the munitions and special chemicals industry. By 1995 privatization had gained a negative reputation with ordinary Russians, who coined the slang word prikhvatizatsiya , a combination of the Russian word for "grab" and the Russianized English word "privatize," producing the equivalent of "grabification." The term reflects the belief that the privatization process most often shifted control of enterprises from state agencies to groups of individuals with inside connections in the Government, the mafiya , or both. Distrust of the privatization process was part of an increasing public cynicism about the country's political and economic leaders, fueled by the seeming failure of Yeltsin's highly touted reform to improve the lot of the average Russian.

Yeltsin's June 1996 bid for reelection brought a virtual halt in privatization of state enterprises during the campaign period. After Yeltsin's reelection in July 1996, his financial representatives announced continuation of the privatization program.

A government decree of 13 July 1996 approved a total number of 480 industries that would not be subject to privatization. Over 450 enterprises, mainly research institutes and design bureaus, were to remain government-owned. Of these, 45 were in the aviation industry, 60 in the missile-space industry, 60 in the armaments industry, 93 in the munitions and special chemicals industry, 54 in shipbuilding industry, and 168 in the communications and electronics industry.

In the drive for privatization after the fall of communism, Russian planners initially believed that this, the best supplied and most efficient of Russian industries, could be converted easily to production for the civilian market and thereafter would become an engine of economic growth. Such optimism obscured the complex's total lack of a civilian market for its products and its inexperience in developing and selling goods in a competitive marketplace. Russian defense firms, while strong in engineering and manufacturing, lacked expertise in marketing, management, and financial analysis.

Most defense plants resided in old, deteriorated buildings and rely on obsolescent and often worn equipment. Defense industry pay was often in arrears, by up to 10 months in some cases. When paid, it had not kept up with inflation and many engineers and production workers left defense firms for small technology firms or the private sector. Many worked in the retail sector, operate kiosks, or drove taxis.

By the late 1990s the Russian economy was plagued by a serious non-payments problem, and inefficient and decaying infrastructure, severe environmental problems, inadequate housing, and poor quality consumer goods. These were compounded by the financial crisis that developed in 1998, which worsened an already existing wage arrears and tax revenue problem. By the end of the decade the government did not have the resources to meet its obligations to the defense plants for past years, to fund any conversion plans, or even to place significant new orders for defense equipment.

After inheriting the unfinished transition of that period, Russia struggled to develop a suitable new set of concepts in the 1990s. The first step, the doctrine of 1993, was considered a temporary document leading to a full statement of goals and circumstances to be formulated around 2000. The Thirteenth Five-Year Plan of the Soviet Union covered the period 1991-1995, the Fourteenth Five-Year Plan would have covered 1995-2000. The demise of the Soviet Union made the formulation of a new military doctrine to replace that of the Gorbachev regime an obvious necessity. However, urgent political questions delayed the onset of deliberation on a new doctrine until May 1992. From that time, completion of the doctrine required seventeen months, much of which was filled with acrimonious debate. In November 1993, the final version was approved by the Russian Federation's Security Council and signed by President Boris N. Yeltsin as Decree Number 1833.

The military doctrine's treatment of the military-technical and economic foundations of the armed forces -- the process of providing and maintaining modern military hardware -- was the aspect that shows the greatest gap between policy and reality. The doctrine described a policy of preserving a military-industrial base capable of manufacturing modern military equipment in quantity. It also described a ten- to fifteen-year research, development, testing, and evaluation cycle for new weapons. In the mid-1990s, only a very fragmentary commitment to those goals was visible in Russia's assignment of spending priorities. At the very least, defense policy delayed until after the turn of the century a large share of the acquisition costs and demands on the national industrial base that such a commitment would involve. At that point, a new military doctrine could address the issue of technological and economic support.

State Program for 2005 (Bases 2005)

The Thirteenth Five-Year Plan of the Soviet Union covered the period 1991-1995, and the Fifthteenth Five-Year Plan would have covered 2001-2005.

The principles (concept) of the state policy of the Russian Federation on the military building for the period up to 2005 were affirmed by the President RF, 30 July 1998 ("bases -2005"), the complex of economic, sociopolitical, organizational and technical, strictly military and other measures of military building for the radical quantitative- qualitative conversion of the military organization of the Russian Federation determines the basic content of military reform in the period up to 2005.

By the basic purpose of military building and development of military organization during this period are the optimization of structure, a reduction in composition and number of power component of military organization on the basis of the aggregation of forces and facilities of armed forces, other troops, military shaping and organs during the solution them the defence problems of country and National Security.

The achievement of the objective of military building by the principles (concept) of the state policy of the Russian Federation on the military building for the period up to 2005 was provided for into two stages.

Within the framework of the first stage (up to 2001), basic efforts were to be concentrated on the planning, the organization and the fulfillment of the first priority structural conversions, and also other measures, directed toward the creation of conditions for increasing in the qualitative parameters and lift of the effectiveness of all components of military organization.

Within the framework of the second stage (up to 2005), after the completion of structural conversions it was planned to take on a sequential increase in the technical equipment, power-weight ratio, resursoobespechennosti, professionalism, mobility, other qualitative parameters of the military organization of state and its components.

The basic directions of military reform in the Russian Federation, the specific "bases -2005"), were:

• the improvement of system and raising the qualitative level of the state administration of military building;
• the optimization of the system of the organs of the Arms Forces Administration, structure, composition and number of military organization, the balanced development of its components;
• reducing to the minimum of the number of ministries and departments, by which it is permitted to have in its troops and military formations;
• the improvement of strategic planning, bringing volume and content of the tasks of military organization into the correspondence with the real needs of defense and safety of the Russian Federation, the exception of unusual to military organization functions and tasks;
• the improvement of the systems of combat and mobilization readiness, mobilization preparation in the Russian Federation;
• an increase in the effectiveness of the system of operational and combat training, of training the soldiers;
• strengthening organization, law and military discipline;
• the improvement of the systems of staffing, preparation of personnel, of military education and of military science;
• the optimization of technical support with the passage to the united system of the orders of armament and military equipment of the general purpose;
• the priority solution of the problems of the modernization of armament and military equipment, creation of scientific and technical, design and production reserve, fulfillment R & D, directed toward the creation of the new, standardized, standardized, highly effective weapon system for the re-equipping of military organization;
• the structural, technological and qualitative transformation of the material and technical base of military organization, defense industrial complex;
• passage to the united, integrated and standardized system of the logistics of all components of military organization;
• bringing the system of the financial guarantee of military organization into the correspondence with the new economic conditions, the step by step passage on the cost the budgetary calculation of material values, and also to the acting forms of bookkeeping accounting;
• the guarantee of complete and economical utilization of extra-budgetary funds, the non-admission of the expenditures, not justified by the interests of defense and safety of the Russian Federation;
• the improvement of the system of the social welfare of military building, an increase in social status of soldiers;
• conducting active state policy on strengthening of the authority of military service, and also on the military patriotic training of citizens and their preparation for the military service;
• the development of international military-political (military) collaboration, first of all with the participating governments OF THE CIS, and also military technical collaboration with the foreign countries;
• the improvement of the normative lawful base of military building, development of military organization, its juridicial relationships with the civic community and the state on the democratic principles.