Russia-The Defense Budget Structure and Conditions

The 1996 defense budget of the Russian Federation, ratified by the State Duma in December 1995, allotted 78.9 trillion rubles (about US$19 billion--see Glossary for value of the ruble), of which about 16 percent, or 12.6 trillion rubles (about US$3.0 billion), was allocated to acquisitions, and 7.3 percent, or 5.8 trillion rubles (about US$1.4 billion), was earmarked for research and development (R&D). Russia's 1995 budget had allocated 10.2 percent to R&D and 21.2 percent to acquisitions. By comparison, the 1996 United States budget for the Department of Defense totaled US$249 billion, of which US$39 billion (15.7 percent) was designated for acquisitions and US$34 billion (13.7 percent) for R&D. In February 1996, the Security Council allocated between 50 and 54 trillion rubles (US$10 to US$11 billion) to fund additional state orders from the MIC, including money for accelerated R&D and production of advanced weapons systems. This supplementary, targeted allocation represented a significant increase over the allocations for 1994 (US$2 billion) and 1995 (about US$3.4 billion), indicating a possible redirection of resources to R&D even as the military operating budget remained flat.

Data as of July 1996

Russia's military-industrial complex (MIC) is coordinated by the State Committee for the Defense Industry (Gosudarstvennyy komitet po oboronnoy promyshlennosti--Goskomoboronprom). In 1996 this agency included about 2,000 production enterprises and 920 research organizations with a directly employed work force of about 5 million. However, a 1996 estimate identified about 35 million Russians as receiving their income from enterprises linked in some way to Goskomoboronprom. The research organizations are the heart of Russian military research and development. They take new weapons and military matériel projects from concept to prototype, then hand them off to the production enterprises. Production enterprises do prototype construction, production runs, and modifications.

Zinoviy Pak was appointed director of Goskomoboronprom in January 1996. Prior to his promotion, Pak managed a large defense enterprise in Moscow. His predecessor, Viktor Glukhikh, was dismissed by President Yeltsin for mismanagement--a move that made Glukhikh the scapegoat for a multitude of problems that beset the defense industry in the first half of the 1990s.

The Russian MIC includes an industrial base that is wholly owned by the Russian military. In the Soviet era, defense industries were created solely to arm the Soviet Union, and as such they had the highest national priority in the allocation of technology and talent. The complex regularly consumed 20 percent of the gross national product (GNP--see Glossary) and 15 percent of the industrial labor force. 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. Beginning in the late Gorbachev era, planners mistakenly expected to achieve conversion by a Soviet-style centralized program and without additional funding to support the lengthy, stagewise conversion process.

Although MIC conversion received much publicity and billions of dollars in Western aid after 1992, government funding for that program decreased steadily in the mid-1990s, and only a small percentage of allotted funds actually were spent for conversion. No funds were authorized for conversion in the 1995 budget. Some defense industries have mounted successful conversion and restructuring programs, however. Russia's leading aviation firm, the Mikoyan-Gurevich (MiG) Aviation-Scientific Production Complex, has formed joint ventures with the Moscow Aircraft Production Association (MAPO) and enterprises in Germany, India, and Malaysia. The Sukhoy Holding Corporation has been formed to combine formerly separate design, development, and production operations for high-performance aircraft; Sukhoy has branched out into production of business and commuter aircraft, which accounted for about half its sales in 1995. The MiG and Yakovlev design bureaus also began developing commercial aircraft in the early 1990s.

Given its intrinsic shortcomings, the MIC became a major liability rather than a boon to the Russian economy as the initial momentum of conversion dissipated. In December 1995, the complex's average basic wage rate fell to two-thirds the average for industries in the nonmilitary sector.

Shortly after assuming the Goskomoboronprom directorship, Pak admitted that the defense industry could not survive unless it were reconfigured. He proposed a smaller military and a smaller defense industry--a course whose wisdom was reflected in statistics on recent performance. In 1995 defense industrial production fell by 21 percent compared with 1994, when production in turn was 25 percent lower than 1993. In January 1996, orders were 25 percent below the level for January 1995, and in the first half of 1996 the Ministry of Defense had not completed payment for its 1994 and 1995 deliveries from defense plants. Hardest hit were the shipbuilding, radio, electronics, and ammunition industries. The reason for such a steady decline is that the MIC had only a single customer, the Ministry of Defense, which had an ever-shrinking budget allocation for repairing and modernizing old equipment, buying new matériel, and funding research for future models. Because few enterprises of the MIC had been privatized (a situation that ensured that complete state control would continue), government subsidies kept many alive through the mid-1990s.

Between 1991 and 1994, annual production of main battle tanks dropped from 900 to forty, of infantry fighting vehicles from 3,000 to 400, of fighter aircraft from 225 to fifty, and of helicopters from 350 to 100. Those statistics partly reflect the intentional reduction of forces that began in the late Gorbachev era before the dissolution of the Warsaw Pact in 1991, but they also indicate the overall deterioration of the industry.

In the first half of 1996, the only fully active production program was that for the SS-25 intercontinental ballistic missile (ICBM). Some other enterprises were producing relatively small batches of armored vehicles, most of which were for export. The great majority of the production facilities, including most of the aircraft and shipbuilding installations, were dormant.

The Defense Budget

The 1996 defense budget of the Russian Federation, ratified by the State Duma in December 1995, allotted 78.9 trillion rubles (about US$19 billion--see Glossary for value of the ruble), of which about 16 percent, or 12.6 trillion rubles (about US$3.0 billion), was allocated to acquisitions, and 7.3 percent, or 5.8 trillion rubles (about US$1.4 billion), was earmarked for research and development (R&D). Russia's 1995 budget had allocated 10.2 percent to R&D and 21.2 percent to acquisitions. By comparison, the 1996 United States budget for the Department of Defense totaled US$249 billion, of which US$39 billion (15.7 percent) was designated for acquisitions and US$34 billion (13.7 percent) for R&D. In February 1996, the Security Council allocated between 50 and 54 trillion rubles (US$10 to US$11 billion) to fund additional state orders from the MIC, including money for accelerated R&D and production of advanced weapons systems. This supplementary, targeted allocation represented a significant increase over the allocations for 1994 (US$2 billion) and 1995 (about US$3.4 billion), indicating a possible redirection of resources to R&D even as the military operating budget remained flat.

Data as of July 1996