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Military-Industrial Complex 1991-2000
The military-industrial complex (MIC) was always the most technologically advanced branch of Soviet industry; it manufactured products that were not merely competitive on foreign markets but were often superior to their Western counterparts. It appeared that the collapse of the Soviet Union would bring the MIC enormous profits, since the Soviet Union had delivered about $20 billion worth of weapons abroad annually, but had received payments of only $3-5 million in currency; the rest was a donation to ideologically friendly regimes. In reality, everything turned out differently. Yearly exports of Russian weapons fluctuate from $1.7-4 billion. This is less than 4% of the total volume of Russian exports and allows Russia to hold fast to a not very honorable fourth place among major arms-exporting countries. The annual average of $2.8 billion is the main income of 1600 MIC enterprises. The share of the main buyer of the industry's production, the state, amounts to only about 30% of purchases of domestic armaments. Nevertheless, as before, the state represented by the Ministry of Defense, specialized government arms agencies, and Rosoboroneksport, the special government middleman for arms exports, plays and will continue to play a key role in the industry's development.
HISTORY: 1991-2000
It was only towards the end of a ten-year period of independent existence that the Russian defense industry understood and accepted the new rules of the game. Prior to this, the directors had all hoped for the renewal of Soviet volumes of financing and fought against the new owners of the enterprises with all available means.
1991
In March, general manager of the Russian Commodity Exchange (RCE) Konstantin Borovoi and director of the central engineering research center Vladimir Utkin signed an agreement on cooperation in creating a military-industrial exchange. From this point onwards, arms manufacturers, sensing the approach of a drastic liberalization of the economy, began to adapt to market conditions.
In April, Russian premier Ivan Silaev announced plans to give economic independence to enterprises of the MIC.
In June, several large MIC enterprises founded the Konversiya commodity exchange.
On August 20, Boris Yeltsin signed the decree "On Securing the Economic Basis of Sovereignty of the RSFSR," according to which all federal enterprises and organizations on the territory of the RSFSR, including MIC enterprises, would be transferred to the jurisdiction of Russian control agencies.
In October, several MIC enterprises, the Russian Commodity Exchange, and the MIC exchange presented AO Military-Industrial Investment Company (MIIC) that they had previously founded. AO MIIC's stated goal was to invest funds in the defense industry.
At the end of the year, workers at defense-industry enterprises that had been left without state orders for 1992 held demonstrations across the country.
On November 3, Boris Yeltsin signed the decrees "On Measures to Stabilize Operations of the Industrial Complex of the RSFSR during Economic Reform" and "On Priority Measures for Organizing Industry Operations." In actual fact, the issue was about the return of MIC enterprises to state control.
1992
In January at the founding meeting of AO MIIC, three large shareholders, RCE, the Economic News Agency, and the Russian National Commercial Bank, announced they were leaving the company. According to RCE president Konstantin Borovoi, " through MIIC, MIC structures are trying to order us about" and a situation of "the tail wagging the dog" had developed.
On February 12, the Supreme Soviet adopted the law "On Conversion of the Defense Industry," which promised MIC enterprises very favorable conditions for converting to civilian production. Presidential advisor Mikhail Malei announced that implementing the conversion plans would require $150 billion, which the state did not have at its disposal, and he proposed that MIC enterprises convert to export-oriented high-tech production rather than civilian production.
On May 7, a civilian bureaucrat was appointed first deputy minister of defense for arms purchases; he was Andrei Kokoshin, deputy director of the Institute for the US and Canadian Studies. The management corps pinned its hopes on him to renew full-fledged state defense orders, believing that Kokoshin would be able to find a compromise between military requirements and the government's capabilities. Kokoshin was developing an industrial policy program, which was staked on the creation of powerful industrial holdings that were supposed to play the role of economic locomotive. The plan was to create the most favorable conditions through issuing state credits and granting tax concessions. Implementation of the program has not even started.
At the same time, vice-mayor of St. Petersburg Georgy Khizha was appointed vice-premier for industry regulation. This appointment was considered a major success for the defense lobby.
In July, Boris Yeltsin signed a decree on the privatization of the Sukhoi Design Bureau (DB); the enterprise's management initiated the privatization. The DB's principal designer, Mikhail Simonov, announced plans to make the firm a "world leader in aircraft construction."
On October 25, Viktor Glukhikh, an advocate of state regulation of MIC activities and an opponent of privatization of defense enterprises, was appointed chairman of the Committee for the Defense Industry.
In November and the first half of December, a whole series of government resolutions on privatizing defense enterprises was signed; however, when Viktor Chernomyrdin was appointed Prime Minister, the process of mass privatization of the MIC was suspended.
1993
On April 15, Oleg Lobov was appointed vice-premier responsible for the MIC, among other things; Georgy Khizha was dismissed. However, by August, supervision of the defense industry had passed to First Vice-Premier Oleg Soskovets.
The main event of the year was Boris Yeltsin's signing of a decree on November 25 on the creation of Rosvooruzhenie, the state company for export and import of arms and military equipment; the company was granted the exclusive right to export Russian weapons. Before this, 12 enterprises had had this right on the basis of licenses from the Ministry of Foreign Economic Relations (MFER). The largest of these companies were the Oboroneksport foreign economic association; Spetsvneshtekhnika; the Voentekh firm set up by the Ministry of Defense; Promeksport, which was part of the Russian Committee for the Defense Industry system; and the central administration for collaboration and cooperation (MACC) of MFER. Rosvooruzhenie was created on the base of Oboroneksport and Spetsvneshtekhnika, while Voentekh and MACC lost the right to export; Promeksport was allowed to fulfill previously concluded contracts. Viktor Samoilov was appointed head of Rosvooruzhenie.
As a result of the sale of shares of the Irkutsk Aircraft Production Association (IAPA) at an auction in December, only 14.7% of the enterprise's shares were left as federal property.
1994
In January, Boris Yeltsin appointed Evgeny Shaposhnikov, ex-Minister of Defense of the USSR and ex-Secretary of the Russian Federation Security Council, as his representative at Rosvooruzhenie. Viktor Samoilov would be fired on November 25 on the basis of a document check carried out under Shaposhnikov's supervision.
The coup at Rosvooruzhenie was engineered by a former head of the central administration of MFER for military-technical cooperation, Central Intelligence Office colonel Aleksandr Kotelkin, who had moved from MFER to the Presidential Security Service (PSS) along with his colleagues. With the support of the head of the PSS, Aleksandr Korzhakov, Kotelkin's team first secured the appointment of Boris Kuzyk, former deputy head of the military-technical cooperation administration of MFER, as presidential assistant for military-technical cooperation with foreign countries (MTC). They then paved the way for the removal of Viktor Samoilov. Kotelkin himself took Samoilov's place. Later, a State MTC Committee headed by Kotelkin's teammate Sergei Svechnikov was created to exercise state control over arms exports. Within a few years, Aleksandr Kotelkin would become the most influential figure in the Russian arms business.
In May, the government resolution "On Granting Enterprises the Right to Participate in Military-Technical Cooperation between the Russian Federation and Foreign Countries" was signed, it defined the conditions for defense enterprises to obtain export licenses for their production.
In May and June, the shares of the Nizhny Novgorod shipyard Krasnoe Sormovo were sold off at check and money auctions. Kakha Bendukidze's firm Almaz Marketing became the largest private shareholder (more than 10%).
A check auction was held in June for the sale of shares of the Moscow Mil' Helicopter Factory (MHF), the developer of Mi helicopters. AO MMM Invest and Sadko-Arkada bought up 29% of the shares. It was claimed that American aircraft manufacturers Boeing and Sikorsky had acquired the shares under cover of this firm in order to fight the main Russian competitor.
On December I, a government resolution created the federal state unitary enterprise (FSUE) Antei Concern industrial company (general director Yury Svirin, principal designer Veniamin Efremov) consisting of enterprises involved in the development and production of the S-300V and Tor antiaircraft defense systems. By the end of the 1990s, Antei would become the largest independent arms exporter in Russia.
1995
In January, the government changed the privatization rules for the Mil' Helicopter Factory, securing 25% of the shares as federal property for three years; while the shares that had been sold before were now resold at higher prices. As a result, about 12% of the shares were in the hands of the American investment corporation Oppenheimer Corp.
In March, Interros Capital, which was part of the Interros Group, won an investment tender for the sale of 20% of the shares of the Leningrad Optomechanical Association (LOMA). The company's management retained a controlling block.
ONEKSIM Bank began buying up the shares of the Sukhoi DB from the company's workers. In response, the DB's general director Mikhail Simonov formed an alliance with Inkombank, which had also started to buy up the company's shares. By this time, Rosvooruzhenie was already at work on a major contract for the delivery of Su-27's to China and organizing licensed production there, and ONEKSIM Bank was trying to drive Inkombank out of servicing these contracts.
At the end of the process of privatizing Severnaya Verf (Northern Shipyard), the battle for control over the enterprise began. At the time, a contract worth $1 billion for delivery of two "Modern" class destroyers to China pledged by Severnaya Verf in Soviet times was already being prepared for signature. By 1995, 32.9% of the shares were controlled by Soyuzkontrakt.
In May, the government signed a decree on the union of the MiG Aviation Scientific-Industrial Complex (ASIC) and the Moscow Aircraft Production Association (MAPA). This was the first step in the formation of a concern on the basis of manufacturers and developers of MiG airplanes. MAPA MiG, headed by Vladimir Kuz'min, received the right to carry out independent foreign economic activity.
After a series of check and money auctions for the sale of shares of the Baltic shipyard, the largest shareholders were IST Company (15%) and Promstroibank (8%).
On November 28, 1995, DB Sukhoi was excluded from the program of documentary pledge auctions at the insistence of the State Committee for the Defense Industry and the company's management. It was proposed to sell the 51% of the shares belonging to the state for $12 million. By this time 14% DB's shares were controlled by ONEKSIM Bank, 25% - by Inkombank.
1996
On January 18, Viktor Glukhikh was dismissed as head of the State Committee for the Defense Industry. He was replaced by Zinovy Pak, who was able to raise his department's status to the level of a ministry. However, within a year, the Ministry of the Defense Industry would be eliminated and its departmental branch administration rights would be included in the Ministry of Economics headed by Yakov Urinson, who held the rank of vice-premier.
At the end of January, Boris Yeltsin signed a secret decree on the formation of the MAPA military-industrial complex, which included 11 enterprises; besides allied manufacturers of MiG-29 fighter planes, the MIC included the Kamov helicopter design bureau, which provoked a strong protest from the head of the firm, Sergei Mikheev. Deputy general director of MAPA MiG Aleksandr Bezrukov was appointed general director of MIC MAPA.
About ten enterprises and design bureaus specializing in designing and producing antiaircraft defense systems founded OAO Defense Systems. This company became the main executor of contracts for delivery of S-300PMU units to China and Cyprus.
On August 26, Boris Yeltsin signed a decree on the creation of the Sukhoi Aviation Military-Industrial Complex (AMIC) on the base of DB Sukhoi; the Komsomolsk-on-Amur (KoAAPA), Irkutsk (IAPA), and Novosibirsk (NAPA) aircraft production associations (APA); and the Taganrog-based Beriev Aviation Science and Technology Complex (TASTC). First Vice-Premier Vladimir Potanin initiated the decree. Aleksei Fedorov, director of the pro-ONEKSIM Bank Irkutsk APA, was appointed head of the Sukhoi AMIC. General director of DB Sukhoi Mikhail Simonov, Inkombank, and governor of Khabarovsk Territory Mikhail Ishaev opposed these plans. As a result, Fedorov was not able to corporatize KoAAPA or NAPA; only the state blocks of shares in DB (51%), NAPA (14.7%), and TASTC (38%) were transferred to the AMIC.
In September, OAO Gidromash of Nizhny Novgorod, which was the exclusive producer of hydraulics and undercarriages for the aerospace industry in Russia, obtained the right to export its production independently. By that time, the enterprise was controlled by the Belukha Company, which later increased its block of shares to 60%.
1997
Aleksei Ogarev, an old friend of Tatiana Dyachenko's family and messmate of her husband Leonid, was appointed the new presidential assistant for defense. Ogarev gradually backed Boris Kuzyk off from questions of arms exports and limited his access to the president.
Around 20 enterprises that were capable of cooperating in the production of S-300PMU antiaircraft defense systems founded the Defense Systems financial and industrial group. The group's central company was an open joint-stock company (OAO) of the same name that had been founded in 1996.
On May 28, an extraordinary meeting of MIC MAPA's board of directors made the decision to remove Vladimir Kuz'min as general director of MAPA MiG on the initiative of Aleksandr Bezrukov, chairman of MIC MAPA. On June 10, Bezrukov was removed as head of MIC MAPA by government decision. Anatoly Manuev, who had been general director of DB MiG until 1991, was appointed as the new chairman of MIC MAPA. Manuev appointed Grigory Nemov, former deputy to Kuz'min for production, as MAPA MiG's new general director. Kuz'min himself became Nemov's advisor.
In July, by a decision of the Irkutsk Court of Arbitration, about 40% of IAPA's shares that belonged to Belukha through front companies were frozen. Belukha sold its IAPA block to the Russian Credit Bank, and used the proceeds to buy 20% of the shares of the Sokol Plant (Nizhny Novgorod). In October, Vladimir Koval'kov was elected IAPA's general director at an extraordinary shareholders' meeting.
On August 21, Boris Yeltsin changed the system of military-technical cooperation with foreign countries at the suggestion of Viktor Chernomyrdin. It was transferred to the prime minister's control. Along with Rosvooruzhenie, the right to arms exports was given to Promeksport and the new state enterprise Russian Technology (sale of production licenses for Russian armaments). The State Committee for Military-Technical Cooperation was abolished. Evgeny Anan'ev, the head of MAPA Bank, was appointed as new general director of Rosvooruzhenie. The prime minister's opponents said that Anan'ev was conscripted to secure financing for Chernomyrdin's presidential election campaign.
In November, Anatoly Manuev resigned from the post of chairman of MIC MAPA, and two months later, Vladimir Kuz'min was appointed to this post with the support of Evgeny Anan'ev. Later on, Mikhail Koruzhev, a founder of the firm Russian Avionics together with Evgeny Anan'ev, became head of MAPA MiG. Russian Avionics became one of the main developers of methods for modernizing MiG-29 airplanes.
Soyuzkontrakt obtained another 18.85% of Severnaya Verf's shares and tried unsuccessfully to replace the enterprise's management.
In November 1997, Soyuzkontrakt transferred 32.9% of the shares of OOO Interrosprom to MFK, a member of the ONEKSIM Bank group; Yury Rydnik, a Soyuzkontrakt manager, became president of BaltONEKSIM Bank. By the end of 1997, the ONEKSIM group controlled 50.5% of the shares of Severnaya Verf.
In November, IST sold its shares in the shipyard to ONEKSIM Bank, which now had a controlling block (50.5%). In December, the factory got a contract worth more than $1 billion to build three frigates for the Indian navy.
1998
At the beginning of January, Aleks Fedorov was fired by government order from the post of general director of AMIC Sukhoi. He returned to the Irkutsk APA, where he held the position of president. Mikhail Pogosyan, chief designer of the S-37 Berkut (Golden Eagle) plane and one of Mikhail Simonov's favorite scientists, was appointed head of the AMIC.
On February 3, Boris Yeltsin fired Boris Kuzyk, his assistant for military-technical cooperation. This officially completed the rout of Kotelkin's team. At the end of the year, Kuzyk became general director of the holding company New Programs and Concepts (NPC), to which the Interros Group transferred all its defense-industry assets, i.e., Severnaya Verf, Moscow Radio Engineering Factory, Degtyarev Mechanical Plant (Kovrov), and Leningrad Optomechanical Association [this year (2001) NPC announced the sale of its shares of the last two enterprises]. Andrei Dutov, a department head at ONEKSIM Bank, became first deputy general director of NPC.
By May, as a result of a mass buy-up of Krasnoe Sormovo sharesfrom its workers, Kakha Bendukhidze's structures had 30% of the company's shares. Krasnoe Sormovo's management controlled about 13%. This led to the battle for representation on the board of directors between Bendukidze and the shipyard's management.
During a sale of shares of the Rostov Helicopter Factory (Rostvertol), large Moscow banks and foreign companies acquired 55% ownership of the factory. The shareholders were Russian Credit Bank, ONEKSIM Bank, Olympiysky Bank, Belukha, Rospromstroibank, CS First Boston (19.5%), and the Vertol-Service group. Rosvertol controlled about 25.7% of its own shares.
One of the small creditors of the Mil' Helicopter Factory (MHF) initiated a bankruptcy procedure against it. By 1999, 31% of MHF's shares belonged to the state, while the other owners of the factory included more than ten foreign companies and ONEKSIM Bank, which owned 8.3% of the shares. Thus, foreign investors owned about 42% of the factory's shares.
During the banking crisis, Russian Credit sold its IAPA shares. Twenty-five percent were sold to foreign investors - part of them went to the Oppenheimer investment fund, bought part to Brunswick UBS Warburg. The Russian company AKB (Incorporated Bank) Forpost, which was friendly with Russian Credit's management, bought 15.12%, adding to the 5% it already owned. Another friendly company, FTK Company, already had 19.97% of IAPA's shares.
In September, ONEKSIM Bank sold its shares of the Baltic shipyard to Triang, Baltic Shipyard-Finance, and Rostekhimport, which were connected with the factory's management. The Interregional Investment Bank (IIB) also became a co-owner of the Baltic shipyard. By the end of the year, the largest shareholders were (IIB (17%), Baltic Shipyard-Finance (10.2%), Rosvneshtorg and Petrorus Shipping (19.9% in aggregate), and Inkombank (9%).
On November 27, after Evgeny Primakov was appointed prime minister, Evgeny Anan'ev was fired. Grigory Rapota, former deputy to Primakov for the Foreign Intelligence Service, became the new general director of Rosvooruzhenie. Rapota had never been involved in arms sales before. In the prime minister's circle, the explanation for this choice was that Primakov did not want to turn Rosvooruzhenie into a bank for the Communist Party in the 1999 parliamentary elections. In fact, First Vice-Premier Yury Maslyukov, who was a Communist Party member, had lobbied to have his own proteges appointed as head of the state company.
1999
In January, the Rosprom financial and industrial group became the largest shareholder of the Kurgan Engineering Works.
On February 2, at Yury Maslyukov's suggestion, AMIC Sukhoi's first deputy general director, designer Nikolai Nikitin, was appointed general director and principal designer of MIC MAPA. He revised the enterprise's plans; severed relations with Russian Avionics; and announced plans to participate in the production of civilian aircraft, particularly the Tu-334. The leading designers at the MIC's engineering center regarded this as the plan of a representative of a competing firm to ruin MAPA; 12 designers submitted their resignations.
At a meeting of DB Sukhoi's shareholders on May 28, Mikhail Simonov was removed from the post of general director and Mikhail Pogosyan was appointed in his place. Simonov would later quit the board of directors as well, keeping only the post of principal designer.
After Evgeny Primakov and Yury Maslyukov were dismissed, the defense departments were separated from the Ministry of Economics during a government reorganization in May. Four agencies were created on their base: control systems, conventional armaments, ammunition, and shipbuilding. On May 31, Il'ya Klebanov, ex-director of LOMA and vice-governor of St. Petersburg, was appointed vice-premier for military-technical cooperation.
On August 2, presidential assistant for military-technical cooperation Aleksei Ogarev was appointed the new general director of Rosvooruzhenie. Interestingly enough, Grigory Rapota was dismissed right after Evgeny Primakov announced his intentions to head the Otechestvo-Vsya Rossiya (Fatherland-All-Russia) electoral coalition. Along with Ogarev, Aleksandr Kotelkin returned to the state company (he was named chief advisor to the general director) with his team (his proteges occupied key positions at Rosvooruzhenie). Ogarev's staffing decisions caused a real sensation: Kotelkin's group had previously been at odds with the president's assistant, who had been one of the initiators of Kotelkin's replacement with Anan'ev in 1997. Ogarev's only comment was a terse "We reached an agreement."
In September, Sergei Chemezov was appointed head of Promeksport. He had worked in the GDR (East Germany) with Vladimir Putin and then in the president's executive office.
The Moscow Court of Arbitration brought in outside management to MHF for a one-year period and appointed Sergei Belogur as outside administrator. When the company's debts had reached 190 million rubles, the Interregional Investment Bank joined in the reorganization of MHF. The bank bought up a controlling parcel (58%) of the factory's debts and acquired 7% of its shares, planning to increase its share in the factory's charter capital to 15%. Leonid Zapol'sky was named bankruptcy trustee.
In November, IST bought 15% of the shares of the Baltic shipyard.
2000
In January, Il'ya Klebanov declared his unconditional support for Nikolai Nikitin and MIC MAPA was renamed the MiG Russian Aircraft Construction Corporation. At the same time, Russian Avionics lost its license for developing defense products.
On February 11, Russia and Belarus concluded an intergovernmental agreement on the creation of an interstate financial and industrial group named after the Russian financial and industrial group Defense Systems. Three Belarussian enterprises joined the new group. Il'ya Klebanov was named chairman of the board of governors, and head of OAO Defense Systems Sergei Batekhin became its secretary.
Posprom decided to get rid of its shares in the Kurgan Engineering Works. The buyer was the SIBUR Company, which by the end of the year had concentrated about 80% of the enterprise's shares. Company representatives announced plans to integrate it into an engineering holding that was being set up to produce equipment for the oil and gas industries.
The United Aircraft Instrument-Making Consortium bought 10.87% of IAPA's shares from the Oppenheimer Fund and then transferred them to Brunswick's control (a total of 25.76% of the shares). The enterprise's management retained a controlling block of shares: FTK Company owned 19.97%, AKB Forpost owned 19.86%, and another 10.18% belonged to shareholders from the labor collective and were concentrated in ZAO Aerokom.
In April, Vladimir Putin included Russian Technologies in Promeksport by decree. For three years, the special middleman's export volumes had never exceeded $20 million. The company's liquidation was considered the first step towards uniting Promeksport and Rosvooruzhenie under the command of Promeksport's general director Sergei Chemezov.
In June, the Kaskol Corporation created on the base of Belukha got control and then bought the shares of the Sokol Plant from the Oppenheimer fund. As a result, Kaskol had control of 38.38% of Sokol's shares, and Kaskol president Sergei Nedoroslev was elected chairman of the factory's board of directors.
By the middle of the year, a controlling block of Rosvertol's shares had been concentrated in its subsidiary structures, which were controlled by management. The Kaskol group (15%) and the Russian Credit Bank (11.7%) remained as Rosvertol's other major shareholders.
In September, after Il'ya Klebanov's intervention in the dispute around Krasnoe Sormovo, Kakha Bendukidze won an important victory: amendments to the company's Charter at a shareholders' meeting. The new board of directors included four representatives of the United Heavy-Machinery, including Bendukidze; three government representatives; and Krasnoe Sormovo's general director Nikolai Zharkov and executive director Aleksandr Konstantinov.
On November 4, Vladimir Putin signed a decree on the creation of the state enterprise Rosoboroneksport on the base of Promeksport and Rosvooruzhenie. Aleksei Ogarev was dismissed. Sergei Chemezov was named first deputy general director, and deputy director of Promeksport Andrei Bel'yanikov unexpectedly became head of Rosoboroneksport.
The Moscow Court of Arbitration replaced Leonid Zapol'sky, MHF's bankruptcy trustee, with Vladimir Bogocharov.
In December, Bogocharov made the Gosinkor Corporation the factory's main creditor to the detriment of other creditors, including the Interregional Investment Bank. Gosinkor and MHF concluded an agreement on granting credits of 148 million rubles for a three-month period for repayment of the factory's debts to creditors.
In December, the Line and Volga-M firms set up by Krasnoe Sormovo's management suddenly sold their shares (slightly more than 10%) to United Heavy-Machinery, which gave Kakha Bendukidze a controlling block of the enterprise's shares.
by Il'ya Bulavinov
PRESENT
Formally, the present structure of the military-industrial complex is simple: each enterprise falls within the jurisdiction of one of five defense agencies depending on the nature of its production. However, total structural chaos reigns within the MIC. This is caused by the fact that all of the industry's enterprises can be divided into three groups based on their form of ownership: state, mixed, or private. But in actual fact, regardless of their form of ownership, the enterprises are controlled by their managers and their economic situation depends primarily on the presence and volume of export orders.
Structure
The Russian defense industry today rests on five pillars - the Aerospace Agency, the Control Systems Agency, the Conventional Armaments Agency, the Shipbuilding Agency, and the Ammunition Agency. Through the heads of these agencies, Yury Koptev, Vladimir Simonov, Aleksandr Pozdrachev, Vladimir Pospelov, and Zinovy Pak, the state represented by Vice-Premier Il'ya Klebanov controls the enterprises of the MIC, regardless of their form of ownership. However, in reality, the agencies have only official powers to manage the factories and design bureaus. They lack the most important things - money and the right to order the factories to manufacture defense products.
The Ministry of Defense is the main domestic customer, and the prosperity of a particular enterprise depends on it. In fact, there is stiff competition among developers and manufacturers in almost the entire range of armaments being produced in Russia, and there is not enough money for all of them. Thus, for example, the military's decision to develop a new tank based on the T-90 at the Ural Coach Works in Nizhny Tagil means the Transmash factory in Omsk with its T-80 loses out. The Ministry of Defense approves new designs and finances research and development activities that subsequently bring export revenues to the enterprises, and the Ministry of Defense decides whether or not to permit the sale of various types of armaments abroad.
In this sense, the deputy minister of defense for armaments is the key figure for arms manufacturers. Colonel-General Aleksei Moskovsky currently holds this post. The fact that Moskovsky worked for Vladimir Putin as deputy secretary of the Security Council in 1999-2000 lends him extra weight. Putin thinks highly of him: at one time, Moskovsky was considered the main contender for the position of Minister of Defense.
Finally, Rosoboroneksport is the main connecting link between MIC enterprises and foreign customers. The company was formed in November 2000 by the merger of Rosvooruzhenie and Promeksport, a smaller special state exporter. With the exception of six enterprises that have the right to export their products independently, the entire defense industry can operate on the foreign market only through Rosoboroneksport. It determines which equipment to recommend to a potential customer (e.g., the T-80 or T-90) and which factory will take one or another order. Therefore, in the end, the head of Rosoboroneksport has even more power than bureaucrats to control what goes on in the industry. The prime concern of each group occupying a dominant position in the Russian power hierarchy is seemingly to advance its own protege to the state company. In this sense, the appointment of Andrei Bel'yaninov, a former KGB spy in East Germany, as head of Rosoboroneksport in 2000 was not unexpected.
At the end of the year, workers at defense-industry enterprises that had been left without state orders for 1992 held demonstrations across the country.
The Air Force
Aircraft have been in greatest demand on the foreign market in recent years. Since 1995, their share of Russian arms exports has never been less than 50%.
Officially, the largest aircraft construction corporation designing and producing military aircraft is the Sukhoi Aviation Military-Industrial Complex (AMIC). It was set up in 1996 by decree of Boris Yeltsin on the base of the Sukhoi Design Bureau (DB); the Irkutsk (IAPA), Komsomolsk-on-Amur (KoAAPA), and Novosibirsk (NAPA) aircraft production associations (APA); and the Taganrog-based Beriev Aviation Science and Technology Complex (TASTC). When the Sukhoi complex was being set up, provision was made to transfer a state block of shares of the enterprises to it. This would have given the central structure the power to actually manage the structural subdivisions that had either filled or were filling orders worth nearly $10 billion in recent years.
However, in reality AMIC today is a relatively small management company that controls only the Sukhoi DB, 51% of whose shares belong to the state (Mikhail Pogosyan combines the posts of head of AMIC and the DB). The management of the Irkutsk APA, headed by the association's president Aleksei Fedorov, owns a controlling block of the enterprise's shares, while the state owns only 14.7% of the shares. Therefore, the factory carries out independent marketing and innovative policies with funds from deliveries of Su-30MKI planes to India and from establishing licensed production there. The situation is similar at the Beriev APA in Taganrog, which develops amphibious Be-200 airplanes: the enterprise's state-owned shares (38%) were transferred to AMIC, but private shareholders control the remaining shares. The Komsomol-on-Amur and Novosibirsk APAs have not been turned into corporations; they are unitary state enterprises with a formal relationship with AMIC. In any case, no one has shown much interest in NAPA, which repairs obsolete Su-24 bombers and is ready to begin assembly of new Su-34 models in future; however, the Su-34's export prospects are very hazy. At the same time there is KoAAPA, which has negotiated multibillion-dollar contracts for delivery of Su-30MKK planes to China and is organizing licensed production of Su-27SK's in this country. This company could have become the heart of AMIC. However, until recently, the governor of Khabarovsk Territory, Viktor Ishaev, and KoAAPA's general director, Viktor Merkulov, successfully opposed plans to turn the enterprise into a corporations and transfer a controlling block of shares to AMIC.
Then, on November 26, Vladimir Putin signed a new decree on the formation of OAO Sukhoi Aviation Holding Company. The document proposes to turn KoAAPA and NAPA into corporations, transfer 74.5% of their shares to AMIC, and assign 25.5% to the Russian Fund for Federal Property (RFFP). The intention is to transform AMIC into the Sukhoi Incorporated Holding Company (IHC) when both factories become full members of a single holding.
Another domestic aircraft-industry giant, the MiG Russian Aircraft Construction Corporation (RACC), is only now recovering from a crisis that unexpectedly followed the conclusion in 1994 of the first major export contract (more than $600 million) for delivery of 18 MiG-29 fighter planes to Malaysia. Signs of revival began to appear only in 1999 after Nikolai Nikitin, a former designer at Sukhoi DB, was appointed head of RACC. The company then succeeded in selling MiG-29 airplanes to Bangladesh, and contracts with Burma (Myanmar) and Yemen followed in the same year.
The Sokol airplane Plant in Nizhny Novgorod, which produces two-seater MiG-29UB planes and is actually controlled by the Kaskol group headed by Sergei Nedoroslev, stands out from other Russian aircraft construction enterprises. A relatively large contract ($325 million) for modernizing 125 Indian MiG-21 fighter planes is barely profitable, and Sokol's prospects are very uncertain.
The situation for domestic helicopter manufacturers is even more difficult. Only the Kumertau Aviation Production Enterprise is in relatively stable condition: in recent years, it has delivered several dozen Ka-31 and Ka-32 naval helicopters developed at OAO Kamov, headed by Sergei Mikheev, to India and South Korea. At the same time, attempts to promote the Ka-50 Chernaya Akula (Black Shark) helicopter, perhaps the most widely advertised Russian attack helicopter, and its two-seater modification, the Ka-52 Alligator, on the foreign market have essentially fallen through. So far, not a single one of these machines has been sold abroad, although Kamov had been counting heavily on Turkish and South Korean orders worth a total of more than $5 billion.
The Navy
Shipbuilding ended up in perhaps the worst condition after the collapse of the USSR and the abrupt cessation of military assignments. The production of ships and submarines is the most expensive defense activity (the cost of building a single destroyer is about equal to the cost of producing 20 modern fighter planes or 150 tanks). Therefore, shipyards that have been able to win even one export contract can be considered successful enterprises.
Thus, a Chinese order for two Modern-class destroyers was enough for Severnaya Verf (Northern Shipyard) of St. Petersburg to join the ranks of major world arms exporters, since the contract was worth $1 billion. The Baltic shipyard, also of St. Petersburg, earned the same amount for building three frigates for the Indian navy. The demand for Kilo-class submarines observed in the 1990s foreordained the stable condition of the Rubin Central Design Bureau (CDB) and the Admiralteiskie Verfi (Admiralty Shipyards).
In these conditions, even factories that specialize in producing small ships and cutters have attracted private capital. Thus, Almaz Shipbuilding Company , which is part of Kakha Bendukhidze's United Heavy-Machinery, filled a Greek order for two Zubr (Bison) landing hovercraft worth $100 million this summer. Almaz is now finishing work on two Svetlyak (Firefly) patrol boats for Viet Nam.
Antiaircraft Defense
At the beginning of the 1990s, Russian arms manufacturers pinned high hopes on exports of antiaircraft defense systems. By then, the USSR had had time to create a huge development reserve of antiaircraft defense devices. Tor short-range, Buk (Beech) medium-range, and S-300 long-range units, as well as the Igla (Needle) portable antiaircraft missile unit, easily surpassed world counterparts. However, these hopes were only partially justified.
Only two countries, China and Greece, made major purchases of antiaircraft defense systems: they bought S-300 and Tor-M1 systems for $1.5 billion. In addition, Finland received a small consignment of Buk systems against repayment of Russian government debts. The Kolomenskoe Engineering Design Bureau, which developed and produced Igla systems, also earned several hundred million.
Nevertheless, a fierce battle for control over the enterprises that developed and produced antiaircraft defense systems has been going on all these years. In the mid-1990s, several enterprises that participated in producing S-300P systems set up the Defense Systems financial and industrial group. Thanks to the support of high-ranking military officers and the administrative influence of Vladimir Potanin, head of Interros, the Defense Systems group became the general contractor for Rosvooruzhenie for fulfilling export contracts totaling about $900 million.
Igor Ashurbeili, developer of the S-300P system, general director of the Almaz CDB, which had not joined the Defense Systems group, accused Defense Systems of not paying all the royalties owed to designers from export earnings and tried to take the place of the group as general contractor for export contracts.
Interestingly, Almaz and Defense Systems could not live without one another. Almaz did not have the facilities for mass production but was the leading developer of the prospective S-400 system, whereas Defense Systems could not operate without Almaz, because the design bureau was the holder of the specifications for the S-300P and S-400 systems. But the two companies could not work together. Sergei Batekhin, the head of Defense Systems, said he was willing to transfer a controlling block of shares of the central company to the state for the subsequent creation of a unified antiaircraft defense concern, implying that key posts in the concern would go to Defense Systems managers. However, Almaz managers, who actually controlled their enterprise, despite the fact that 51% of its shares were state-owned, vigorously opposed these plans, since they felt that the only goal of Defense Systems' leadership was to get control over the concern's financial flows.
The Antei concern, the strongest player in the industry today, became an unexpected ally of Almaz in this struggle. Unexpected, because the Antei Scientific and Production Association (SPA) and the Almaz CDB had been clashing with one another for half a century. There had probably never been more implacable enemies in the Russian defense industry than principal designers Veniamin Efremov and Boris Bunkin. However, Antei simply could not advance its S-300 modifications, the S-300C (designed for land forces) and S-300P (for antiaircraft defense forces), onto the foreign market, but at the same time had successfully started selling its Tor-M1 units and already netted more than $700 million. Antei was a state unitary enterprise that was de facto fully controlled by its management headed by general director Yury Svirin but did have the right to export independently. Therefore, like Almaz, the concern was categorically uninterested in setting up an "antiaircraft defense concern" headed by Defense Systems managers.
Conventional Armaments
The Tula Instrument Design Bureau is the largest defense-industry exporter with the right to sell its products abroad independently. Up to 2000, the enterprise had earned as much as $500 million from deliveries of Tunguska missile-firing systems and antitank missile systems, and last year, it concluded a sensational $734-million contract with the United Arab Emirates for delivery of 50 of the latest Pantsyr'-1S missile-firing systems. The contract was sensational, because the Pantsyr' system as such does not exist, and many specialists believe it is simply impossible to create an antiaircraft defense system with the characteristics specified by the design bureau. Nevertheless, in spite of the fact that the company is a unitary state enterprise, the DB's general director and principal designer Arkady Shipunov is one of the most influential figures in the industry.
However, the first manufacturer of military equipment for land forces to sign a major export contract was the Kurgan Engineering Works. It delivered more than 500 BMP-3's (infantry combat vehicles) to the UAE and more than 100 BMP-2's and BMP-3's to Kuwait worth a total of $1.5 billion. Later on, the factory delivered 40 BMP-3's to South Korea for $210 million and more than 40 BMP-3's to Cyprus for $68 million against repayment of state debts. It was for implementation of these very contracts that Mikhail Khodorkovsky's company Rosprom acquired the factory. However, deliveries of BMP's later decreased sharply, and the oligarch lost interest in the defense industry; last year, the Kurgan Engineering Works was sold to SIBUR.
After Russian Aluminum acquired the Gorky Car Factory, still another domestic industrial giant became involved in defense production: the Arzamas-based engineering plant, which produced BTP-80 and BTP-90 armored troop carriers, became part of the GAZ structure.
A dramatic struggle between two Russian tank factories, Transmash in Omsk and Ural Coach Works in Nizhny Tagil, unfolded in the second half of the 1990s. The factories had had no new contracts since 1996, and it was clear that the enterprise that got a major new export order would be the one that survived. Transmash gambled on a large Greek tender and lost. Then this year, Ural Coach Works landed an order worth a total of $730 million to produce and set up licensed production of T-90S tanks in India. This of course settled the longstanding dispute between Transmash and Ural Coach Works: even now it is obvious that Nizhny Tagil will get an order from the Ministry of Defense to develop a new primary battle tank for the Russian army.
Outlook
In October and November the government and the president approved two fundamental documents that will determine the future of the Russian defense industry for the next ten years: the special federal program "Reform and Development of the Military-Industrial Complex in 2002-2006," and "Foundations of Russian Federation Policy for Development of the Military-Industrial Complex in the Period up to 2010 and Future Prospects." The documents set out a policy for concentrating research and industrial facilities, which should lead in the end to the formation of about 50 defense holdings and concerns. Although directors and governors have complained in private conversations that the central companies of the concerns would be turned into new unneeded middlemen between the factories and the customers, no one dares to openly oppose plans approved by the president. What is more, many private factory owners are even prepared to voluntarily increase the state's share in the equity capital of their enterprises. They understand that in this case it will be easier for them to secure government orders.
However, this does not mean in the least that the process of forming concerns will proceed smoothly. On the contrary, the battle over the form of associations and the candidates for management of the concerns has started, because in the end the fate of the united enterprises depends on these two factories. Since the concerns in each particular case will be formed on the basis of a presidential decree, the critical stage in the battle among lobby groups for the signatures of presidential and government bureaucrats has already begun.
by Il'ya Bulavinov
TRENDS
The most interesting event in the past six months was the launching of the first two Russia-India aircraft missile projects, which will allow the creation of a single Russian-Indian military-economic space similar to the European and the forming trans-Atlantic ones.
New Brands and New Players
The main trend that has clearly developed in the past year is the appearance of new brands in the aircraft industry and the production of associated onboard electronic equipment and aviation systems. Since the main source of currency supply to Russia is the export of fighter planes of the Su-27 family, the development of new companies is proceeding most actively on the base of factories and design bureaus involved in the production and development of these machines.
Thus, the Irkutsk Aircraft Production Association (IAPA) headed by Aleksei Fedorov signed a huge contract worth $3 billion with India for licensed production of 140 of the latest multifunctional Su-30MKI fighter planes. On the credit side, IAPA has an agreement with New Delhi for another 32 of these planes. In this way, Aleksei Fedorov is able to carry out highly independent industrial and innovation policies. This summer, it was learned that the association bought a controlling block of shares of the Russian Avionics Independent Design Bureau, which carries out research and development work on modernizing fighter planes of the Su-27/30 family under the leadership of Mikhail Korzhuev. Thus, IAPA acquired its own innovation center and decreased its dependence on the Sukhoi DB. In addition, IAPA owns 70% of the shares of ZAO BETAIR, which markets and sells Be-200 amphibious airplanes. IAPA currently has orders worth $4 billion on its books. For the period from 2002 through 2005, the association expects to receive orders worth another $1.5-3.2 billion. IAPA was the first enterprise of the military-industrial complex (MIC) to begin operating by means of financial instruments after implementing a bill program in March of this year. Finally, the European concern EADS plans to locate production of fuselage components for its airbuses at IAPA.
Another corporate structure that has loudly proclaimed itself in the past year is involved in developing onboard electronic equipment (OEE). The Aerospace Equipment intergovernmental financial and industrial group (IFIG) headed by Sergei Bodrunov unites more than 20 enterprises that develop and produce OEE for the two main Russian fighter planes, the Su-27 and MiG-29. It is estimated that the group produces 60% of all aviation instrumentation for them. As a result of major Chinese and Indian contracts, the value of the orders on Aerospace Equipment's books has reached $1 billion. Bodrunov owns nearly 12% of IAPA's shares and is working to create a new base in the business connected with the production of systems for fighter planes of the Su-27 family-propulsion engineering. As the owner of 20% of the shares of the Lyul'ka-Saturn Design Bureau, which designs AL-31F engines for the Su-27, Bodrunov has called into question the legality of the creation of the Saturn engine-building corporation, which was formed by means of a merger and conversion to unified stock of Lyul'ka-Saturn and the commercial production factory Rybinsk Motors. Yury Lastochkin, the president of the new structure whose creation has been announced this summer, is building a corporation, over the fierce opposition of minority shareholders, in a hostile environment of competing engine-building factories like Salyut (Moscow), and Perm Motors.
Finally, in October, it was announced that still another corporate structure working in the area of onboard equipment had received a license. The Technocomplex research and production center, which produces up to 40% of the OEE for Su-27's and MiG-29's, is crystallized around the Ramen Instrument Design Bureau (RIDB), which actually belongs to its general director, Givi Dzhandzhgava. It is interesting to note that IAPA leans towards working with Aerospace Equipment, while traditional first-generation corporations like Sukhoi Aviation Military-Industrial Complex and MiG Russian Aircraft Construction Corporation prefer to work with RIDB.
Still another new player in the military-industrial complex field is the Interregional Investment Bank (IIB). It became widely known a year ago when it actively joined in a struggle with Guta Bank for control over the Moscow Helicopter Factory (MHF). The battle was successful, and Yury Andranov, who was close to the bank, became general director of the factory. In addition, the bank owns the assets of a number of shipyards, which mainly produce small- and medium-displacement vessels, such as cutters, corvettes, and patrol boats (frigates). In August, the creation of the Small- and Medium-Tonnage Shipbuilding Association with the participation of the IIB was announced. The Association united shipyards that were wholly or partially controlled by the bank; it is headed by Mikhail Kheifits, former manager of the naval department at Rosvooruzhenie and now an IIB vice-president.
However, IIB only appears to be a new player in the defense industry. This bank has actually worked long and actively with enterprises of the military-industrial complex and with state arms trade middlemen. The construction of a quasicorporate shipbuilding structure around IIB may affect the distribution of forces in the shipbuilding industry in Russia. For example, one Association member, the Yantar' shipyard of Kaliningrad, which is finishing work on two Corsair-class patrol boats, is fully capable of changing the configuration of Russian offerings on the market for naval production, which up to now has been formed by the Severnaya and Baltic shipyards.
Traditional Brands: A Struggle for Survival
The marketing and innovation activities of the new players have revived even old brand names. After a prolonged period of staff and organizational instability, Mikhail Nikitin, the new general director of the MiG Russian Aircraft Construction Corporation, has built the first vertically integrated aircraft company. Previous hotbeds of separatism, the Mikoyan Aviation Scientific and Production Complex, and the MAPA commercial production plant are under full control of the managing company and have been transformed into engineering and production centers, respectively. The situation with MiG-29 sales on the world market has recently improved. Just this year, contracts worth more than $0.5 billion have been signed with Burma and Yemen. Interestingly, the same brand splitting now being observed in the Sukhoi system could have happened in the MiG system. An alternate pole of corporation building could have been formed around the Sokol Plant in Nizhny Novgorod, whose situation in many respects resembles the situation at the Irkutsk factory. Like IAPA, Sokol is a joint-stock company with a significant portion of private capital that is located in a regional city with a relatively cheap but qualified labor force. However, in contrast to Aleksei Fedorov, Sokol director Vasily Pankov either did not want or was not able to accumulate a controlling block of shares in his enterprise and did not invest money in research and development of the counterpart to the Su-30MKI fighter plane in the light fighter class, the multifunctional MiG-29UBT system with Oca phased array radar. In June of last year, the Kaskol group of companies bought 38% of Sokol's shares; Kaskol's president, Sergei, Nedoroslev, was counting on making the factory a production site for implementing his projects for construction of a family of regional planes.
In all probability, a process of corporation building will also be activated around the Sukhoi AMIC at the beginning of 2002. Today, the management company and its chief, Mikhail Pogosyan, effectively control the Sukhoi DB and are simultaneously fighting with the leadership of Khabarovsk Territory and the Komsomolsk-on-Amur APA for the financial flows the APA receives as a result of filling a large Chinese order for Su-30MKK fighter planes.
A parallel trend towards diffusion of traditional brands has been observed along with brand splitting. Thus, after several waves of migration of engineers and top managers from the Sukhoi and MiG systems and back again, it is very difficult to speak of original Mikoyan or Sukhoi schools of design. Signs of industrial convergence of the two scientific and industrial systems have also appeared. Thus, if MiG Corporation signs a contract to deliver MiG-29K shipborne fighter planes to India, it plans to locate wing production at Komsomolsk-on-Amur, which has experience in building Su-33 shipborne fighter planes.
International Cooperation: Pilot Projects
What are probably this year's most important events in the military-industrial complex are meanwhile being lost in the din of information connected with the Sukhoi AMIC and the Antiaircraft Defense Concern. These events are the first launch of the Russo-Indian PJ-10 missile carried out under the BraMos project and the publication of information on the start of research and development work to create a joint Russo-Indian multifunctional Il-214/MTA transport plane. The participants in the project are the Reutov Scientific and Production Engineering Association headed by Gerbert Efremov, the Irkutsk APA, and the Il'yushin Design Bureau on the Russian side and the Defense Research Organization (DRDO) and the aircraft construction company HAL on the Indian side. In addition, vice-premier Il'ya Klebanov recently announced that Russia and India would work jointly to develop a fifth-generation combat plane. Subject discussions are supposed to begin next year after the government has named the contractor on the Russian side (this will probably be Sukhoi).
These events have enormous significance. The main flow of military-industrial transactions in the world does not take place on the open market but rather inside closed or half-closed military-economic zones-the European and forming trans-Atlantic zones. Russia has no chance of staying in the arms market or even simply preserving the remains of its defense industry unless it immediately sets about forming the same kind of large international military-economic field. India is a nearly ideal partner. Unlike China, there are no military-political risks with respect to New Delhi. The financial capacities of both sides are comparable, as are their management culture and bureaucratic practices. Even India's relatively low ability to pay is a positive factor. If the Indian military and Indian manufacturers had more money, Israel and France would take Russia's place.
by
Konstantin Makienko
All the Article in Russian as of Dec. 04, 2001
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