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Top: The Russian defence industry still labours under the shadow of the Soviet era.

Tim Ripley, editorial director of Russian Aerospace & Defence Analysis (www.radea.com), monitors the defence industry in the former Soviet Union.

At the height of the cold war the Soviet Union's defence industry was engaged in a massive arms race with the US. Thousands of combat aircraft, armoured vehicles, warships and nuclear missiles were built every year by a network of more than 1,700 research institutes, design centres and manufacturing plants. The Soviets called this monolith their defence-industrial complex. Over the past decade, Russia's defence industry has undergone huge upheavals as it attempts to adjust to the introduction of a western-style free-market economic system and a cash-based economy.

The structure of Russia's defence industry is confusing to westerners and even to many observers within the country itself. Russia's defence industry differs fundamentally from any western model because of its communist heritage. Defence companies and prime contractors who compete for and manage defence contracts do not yet exist in Russia. For example, there is no such thing as the Sukhoi company that designs, builds and sells Su series aircraft. However, there is a design bureau that produces designs and prototypes for the Su series aircraft, but they can be made and sold by a number of factories.

The Soviet defence industry


Regional governments have also become closely involved in protecting and promoting defence enterprises in their region, with Omsk looking after its tank industry and St Petersburg promoting the city's shipyards

This confused state of affairs is a result of the collapse of the old Soviet way of doing business. Until the early 1990s the Soviet state was at the centre of the defence industry, providing direction and control to all elements involved in the development of weapons systems. The communist party politburo and then the council of ministers had to approve all defence-procurement programmes before the military industrial commission, or VPK, could launch them. It was the job of the VPK, assisted by the armament directorates of the various armed services, to oversee and co-ordinate weapon programmes from the concept definition stage by research institutes, through to the design and building of prototypes by the design bureaux, or OKB, and then into production at a number of manufacturing plants.

The various elements or enterprises in the defence-industrial complex did not have a western-style contractual relationship. They were all state-owned and followed the orders of the VPK. It was the state's job to ensure all the enterprises worked together and no money changed hands between enterprises. Following the demise of the Soviet Union, this system broke down. The new Russian government tried to transform the system into a cash-based one, but it has not been a success. Co-ordination and partnership between enterprises are now difficult to organise. Two super companies were set up, based on the old MiG and Sukhoi design bureaux, to include design, airframe manufacture, sub-component suppliers, marketing and sales. The constituent elements of these two groups were unhappy about the marriage terms and it has not been a success. The fundamental problem is Moscow's lack of tax revenue that would enable it to pay for products or services from defence enterprises, either those still in the state sector or those that have been partly privatised as so-called joint-stock companies. Almost all Russian defence enterprises are owed huge sums by the government, that have led to the build-up of massive debts to sub-component suppliers and to their own workers. This debt ran to over $1billion by late 1998.

The best source of revenue for defence enterprises is from exports, but this has generated heated arguments within the industry over how to divide the proceeds of any foreign sales. The state-owned defence export company Roosvoorouzhenie until January 1999 had a monopoly over all foreign defence sales except for a handful of enterprises. Some 21 enterprises were then given the right to market their products abroad.

To survive in an era of almost zero Russian defence spending with, for example, no new aircraft being bought in 1998 by Moscow, defence enterprises have had to resort to unusual ways to generate cash flow. Some have gone into air-charter work, others have tried to break free from Roosvoorouzhenie and gain the right to sell products directly to foreign customers. The KBP Instrument Design Bureau in Tula has been able to sell its products abroad successfully. Regional governments also have become closely involved in protecting and promoting defence enterprises based in their region, with Omsk looking after its tank industry and St Petersburg promoting the city's shipyards.

The future


Two super companies have been set up based on the old MiG and Sukhoi design bureaux

The Russian defence industry does still exist in the shadow of the Soviet era. In the past seven years no plants have been officially closed, although only 30 per cent of defence enterprises are still actively fulfilling military orders. Those in existence have just been allowed to decay or find new ways to occupy themselves. The equipment currently in production consists almost entirely of hangovers from the Soviet era or upgrades of old designs.

In July 1998, the Russian government announced that it wanted to consolidate defence enterprises from 1,700 to about 670 by the year 2000. These would then compete or tender for work against each other. This is likely to create major political problems because some enterprises have towns of 30,000 to 40,000 people dependent on them as their sole source of employment. Many Russian government and military leaders recognise that new corporate groupings need to be established to act as western-style prime contractors to develop and produce the next generation of defence equipment. There is talk of a single military aircraft company, a defence electronics company, an air defence company, a tank company and an artillery concern.

The tables in this section provide a snapshot of the defence industry in the former Soviet Union in late 1998. It is by no means comprehensive, but covers the major enterprises in the main sectors of the industry.

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