Army Accounting
Degradation of the Russian Army was explained during the 1990s by the lack of adequate financing. Nowadays, Russia has funds for the army’s real modernization. Yet, key goals of the army reform remain unachieved even in these conditions, Vitaly Tsimbal and Vasily Zatsepin of the Institute for the Economy in Transition (IET) believe.
How Servicemen Are Paid
The year of 2006 was the last one in the program for complete transition of level-readiness military units to contract basis. Yet, the results are contradictory, to say the least.
On the one hand, the number of military units manned on contract basis keeps growing. Conscripts no longer serve in hot spots. Head of the Central Organization-Mobilization Department Vasily Smirnov assured there are no draftees in Chechnya at all, there are contract soldiers only. Thus, the problem of switching to the voluntary principle of manning has been solved not just for some military units, but for one of Russia’s regions.
On the other hand, frequent amendments to the federal target program for transition to contract basis show that the program is going not so smoothly. Expenditures increase, while the total number of contract soldiers reduces. Instead of former 147,578 positions, there will now be only 138,722 contract-manned positions (125,359 in the armed forces, and the rest in the Interior Ministry’s internal troops and in the frontier service). Yet, it will be hard to achieve even these figures.
The upcoming crisis of the contract system is factored, to a great extent, by the General Staff itself. Large part of the program’s funds is spent on garrison infrastructure, combat training, etc. These expenditures are definitely needed regardless of the manning system. Yet, they should be financed separately. The funds allocated for the transition to contract manning should be spent on raising contract soldiers’ pay, and on making contract service more attractive. Otherwise, contract service becomes non-competitive at the labor market, due to the growth of incomes and average salary in the country.
However, the problem was exacerbated not only due to the misallocation of the program’s funds, but also due to the method of calculating military pay, which was changed by an order of former Defense Minister Sergei Ivanov. In most countries, the amount of military pay is determined by the size of the basic monthly salary, while various bonuses to the salary play a lesser role. The Russian Defense Ministry went in the opposite direction, making the salary dependent on bonuses.
Servicemen are dissatisfied with the disparity in military pay. Incomes of commanders (beginning from the 35th category) have grown. Ensigns of the Defense Ministry’s Central Staff (the 8th category) and ensigns in Chechnya receive higher pay than many officers in regular forces (under the 16th category).
Military personnel’s dissatisfaction reached the high command. Sergei Ivanov, who approved that calculating method in summer 2006, in autumn had to give orders for working out a new method. From January 1, 2007 and on, salaries according to position and rank were adjusted. However, there has been no official order of the defense minister for changing the method of calculating the military pay yet. Anyway, the dependence will not change significantly, while the disparity in the pay of lower and higher positions has increased.
The issue of making contract service more attractive needs to be solved immediately. The average monthly salary in Russia exceeded 11,000 roubles in October 2006, growing even more in recent months. Consequently, all positions of contract-service common soldiers, non-commissioned officers, and company officers become non-competitive at the labor market. Thus, it turned out that only servicemen of the Defense Ministry’s Central Staff were transferred to really lucrative contracts.
How Weapons Are Bought
Victorious announcements that the army’s re-arming and re-equipping have been improved are not completely true either. Last year, when the provision for buying weapons and military equipment increased again, the problem became especially obvious. The provision for buying materiel nearly tripled over the last four years, from 80 billion roubles in 2002 to 237 billion roubles in 2006. It will grow by 25 percent more (up to 302 billion roubles) in 2007. Yet, such growth of expenditures is absolutely disparate with the pace of the army’s reweaponing and re-equipping.
For instance, the amount of the state defense order in 2006 has exceeded by nearly 1.5 times the annual export of Russian weaponry. While tens of modern strike fighters Su-30 MK and their modifications are supplied to China, India, Malaysia annually, only several of those jets per year are supplied to Russia’s Air Force. Certainly, the precise data is kept secret. Besides, the jets produced for export and those made for Russia’s own army differ in quality greatly.
The main causes of this state of affairs is quite obvious. First, the funds are misallocated, which often means that they are simply embezzled. According to the Audit Chamber of Russia, the total sum of financial violations in the sphere of army from 1999 to 2005 made up 15.8 billion roubles.
Second, the weapons and equipment for the Russian Army are bought at extremely overestimated prices. The overcharge happens due to corruption, and to more complicated structural reasons. The matter is that the total work level of defense enterprises makes up only 40 percent now. In separate sectors of the industry, the load of the state defense order is between 9 and 30 percent. Consequently, all factory overhead costs become included into the cost of a small-scale production output, which creates uncontrollable growth of defense product prices.
According to the Federal Tax Service, out of the 198 strategic enterprises and organizations with bankruptcy signs, 170 belong to the military-industrial complex. Tax departments issued decrees to collect arrears by means of the assets of 150 defense enterprises and organizations. It shows that the expenditures on the defense industry began growing in the conditions when the restructuring of the military complex was not completely over yet (or was not even started in some regions). Consequently, on the one hand, the expenditures growing due to the overcharge turn into a covert subsidizing of ineffective and non-restructured factories. On the other hand, incomplete restructuring and its consequences (debts, arrears, bankruptcy of enterprises) create a high risk of corruption in the sector, especially when the funding from the federal budget increases drastically.
How the Budget is Formed
Considerable growth of defense expenditures has already provoked discussion about the sum that Russia is really spending on the army now. Former Presidential Economic Advisor Andrei Illarionov disproved the statements from the president’s address to the Federal Assembly. They claimed that Russia’s defense expenses are equal to those of Great Britain and France, and are 25 times less than those of the U.S.
Indeed, the terms “defense expenses” and “military budget” used in the president’s address do not completely coincide with similar western terms, even in official documents. Thus, the statistics of NATO’s military expenses and of the Stockholm International Peace Research Institute (SIPRI) includes into these terms the expenses on maintaining armed forces and defense agencies, that is, the military pay, salaries of civil employees, war pensions, current operating expenses, expenses on combat training, buying weapons and military equipment, its modernization, R&D, and capital construction. At the same time, it does not include expenses on civil defense, and some expenses linked to former military activities (additional payments to war veterans, expenses on weapon conversion and recycling). The Institute for the Economy in Transition (IET) analyzes Russia’s defense expenses. Like NATO and SIPRI, IET takes into account the expenses on all federal paramilitary units. Unlike those organizations, IET considers civil defense as military expenses, going by the fact that the UN’s System of National Accounts of 1993 classified civil defense into the section “Defense” in the functional classification of budget expenses. Besides, IET takes into account expenses on military industry and weapon recycling.
The president’s statements were based on the data of Russia’s budget. Indeed, the expenses in the budget’s section “National defense” (2.5 percent of GDP) in 2006 hardly differed from the relative defense expenses of Great Britain (2.3 percent of GDP) and France (2.4 percent of GDP), and were considerably less than U.S. expenses (3.8 percent of GDP). Yet, to make the comparison of Russia’s military expenses to foreign ones more adequate, national defense expenses should also include the provision for war pensions (it is 0.3-0.5 percent of GDP in 2006), which will make up 2.8-3.0 percent of GDP instead of 2.5 percent. Taking into account expenses on the Interior Ministry’s internal troops and on civil defense forces, the ratio of Russia’s military expenses reaches 3.7 percent of GDP, which exceeds by nearly 1.5 times the declared expenses in the “National defense” section. In this case, Russia’s military expenses become considerably higher than those of Great Britain and France, and quite comparable to U.S. expenses estimated in relation to the country’s GDP. In absolute terms, considering the purchasing-power parity (PPP), Russia’s military expenses reached an impressive sum of $70 billion in 2006 (according to IET’s data). Certainly, it is less than the $511.1 billion of the U.S.; yet, it is not 25 times less, but only 7.3 times less, and it significantly exceeds the expenses of Great Britain and France ($54-55 billion).
However, the discrepancy of terms described here, manifesting itself mainly in domestic-policy manipulations, is not the only problem of Russia’s counting its military expenses. Along with their total growth, the share of hush-hushed items grows as well. Military budget is becoming less and less transparent from year to year. Thus, classified expense items in 2007 increased not only in quantity (from 11.8 to 12.2 percent), but also in quality: secret items appeared for the first time in the section “Interbudget transfers” and in the subsection “Applied research in national economy”.
Moreover, a new difficulty appeared in 2005, becoming more and more palpable since then. Moving some military expenses from the “National defense” section to other sections of the budget is being explained as adapting budget practice to international standards. No one minds the real adaptation, while its implementation in Russia’s budget causes a number of questions. For instance, why secret expenses were moved to non-war sections? How come that education and healthcare expenses were 0.01 percent of GDP in 1998 in the “National defense” section, while in 2006 the military expenses on healthcare, sport, and education reached 0.26 percent of GDP, but already outside of the “National defense” section? Consequently, we estimated that the amount of military provision moved to other sections of the federal budget in 2006 exceeded 0.3 percent of GDP, or 90.8 billion roubles. Chairman of the State Duma’s Defense Committee Viktor Zavarzin estimated the military expenses hidden in other sections of the 2006 federal budget at 132 billion roubles (0.5 percent of GDP).
This year, the estimations of hidden military expenses look less. Yet, we should keep in mind that the approved budget will be amended at least two times more, according to Russian habit. Thus, it is hard to say what sums will be really allocated by the end of 2007. It is even harder to predict the amounts to be really spent, for each year brings drastic changes to the situation. For instance, the budget’s cash execution in 2001 in the “National defense” section exceeded the legally determined provision of 33 billion roubles. Last year, over 4 billion roubles was saved in that same section, according to the preliminary data of the Federal Treasury.
All the above-mentioned problems of Russia’s defense sector are of the same nature, and make up a united picture. A non-reformed structure, -- be it staff structure, armed forces management structure, or defense industry structure, -- eventually gives wrong incentives to economic agents and people working in the system. Lack of transparency of expenses and the absence of independent control increase chances that the constantly growing provision for defense sector will not lead to its real reforming and modernization. Even despite the fact that current budget revenues allow to carry it out.
Vitaly Tsimbal, Vasily Zatsepin
All the Article in Russian as of Apr. 02, 2007
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