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23 June 2015

MIC - the Guardian of Fortress Russia

Why does the defense industry in today’s Russia ensure the resurgence of authoritarianism, lobby for confrontation with the West and disregard its losses?

In post-Soviet Russia, the collapsed total command-administrative model has been replaced by a political-economic hierarchy based on state corporatism which was born, and has reached its heyday, under Vladimir Putin. As in the USSR, the defense industry or military-industrial complex (MIC) has managed to occupy one of the key roles in this hierarchy.

With regards to the MIC, this is not about market efficiency, but preferences of power elites, powers of authority and participation in the distribution of budgetary funds. The main distinctive features here are the total dependence on state financing and the low level of cost control on behalf of parliament and the government. In addition, decisions regarding the purchase of any given types of defense items are taken behind the scenes by the military, security officials and military manufacturers who are themselves former military and intelligence officers.

The state corporation ‘Rostec’ which controls the lion’s share of the defense industry is headed by Sergey Chemezov, a comrade-in-arms and friend of Vladimir Putin’s. The Board of Directors of the state-owned company, ‘Uralvagonzavod’, which produces armoured vehicles and railway cars is chaired by another comrade-in-arms of Putin’s – Yevgeny Shkolov. The ‘Rosoboronexport’ company, the sole intermediary in the supply of all Russian firearms abroad is headed by Anatoly Isaikin, formerly of the KGB and FSB, a Major General, retired. Prior to the spring of 2015, much of the funds of the Russian Federal Space Agency were held in accounts at ‘Fundservicebank’, whose Board of Directors comprise former intelligence and military officers and which is directly related to MIC enterprises, including the state corporation ‘Rostec’.

All this led to the MIC taking a major role in ideological and political life, in securing electoral support for authorities and in foreign policy, too. As a result, it became one of the most ‘interested parties’ first in the cooling of relations between Russia and the West, and then in the confrontation between them.

The defense industry and the idea of modernization

For the government and society in post-Soviet Russia, the notion that the former scientific and technical greatness of the Soviet Union was supposedly inherited by Russia and that it only needs to be applied properly is one of great significance. The point is, however, that the development of Soviet cutting-edge technologies and their manufacture were related to the defense industry. Hence, outside of the command-administrative system, they were, objectively, doomed.

The failure to create effective economic and political institutions has led the Russian political class to the conclusion that only by reviving its former technological and industrial potential can the country regain influence over global processes and ensure the well-being of its citizens. The political class itself, it is believed, shall also gain membership to the club of world elites. 

In a predictable manner, hopes have been placed squarely on the MIC which, as envisioned, could become the driving force for Russian modernization – one should just give plants sufficient funds and install loyal persons at their helm. Nobody has paused to consider the fact that attempts to practically implement this fallacy will guarantee nothing aside from the resurgence of the dictatorial regime.

This illusion proved to be beneficial for the authorities. It allowed the abandonment of the process of MIC conversion – which was carried out during 1992-1993 (and was a complete failure) – the programme for the conversion of armament factories to civilian production, competitive on the domestic market. And since the defense industry became a locomotive of technical development, hypertrophied economic powers remained in the hands of the state. Here, there was a consensus across all parts of the Russian political spectrum; discussions were limited as they focused solely on which companies were to benefit from public procurement and to what extent.

There are numerous examples of this kind of approach being employed. In 1994, the Khrunichev State Research and Production Space Centre where Tatyana Dyachenko, the daughter of President Boris Yeltsin worked at the time, started to develop a new space-launch vehicle ‘Angara’. Yet another example was the commencement of construction of a new space launch site in the Far East in 1997.

The rapid rise in oil prices in the 2000’s allowed the proliferation of public investment in the MIC and state armaments procurement. Russia’s military spending grew almost 22-fold (at current rates) between 2000 and 2015. Aerospace spending increased almost 18-fold, since the beneficiaries of which were also enterprises of the defense industry.

In 2006, in order to monopolize control over granted funds, the above mentioned state corporation ‘Rostec’ was founded. Another illustrative example is the State Armaments Programme, adopted in 2011 and planned to run until 2020, which was attributed a colossal amount: 20 trillion roubles or about 400 billion dollars at the current exchange rate (600 billion dollars at 2011 rates).

It is important to understand that today’s Russian power elites cannot give up on the idea of regular cash injections into the MIC, and not only because of the high-level beneficiaries of these expenditures. The major stumbling block for Russia’s leadership is that it would then have to admit that it has been venturing down the wrong path for all these years, and that the existing political and economic institutions are not able to ensure the industrial development of the country. This would bring about the need to rely on private initiative to the detriment of bureaucratic powers, to place one’s bets on local self-government and abandon the hypertrophic role of defense and law-enforcement agencies in the sphere of economic regulation.

The electoral role of the MIC

Nearly 2 million people are employed by the Russian defense industry, and they are successfully mobilized by the management of enterprises and trade unions to participate in elections. Alongside civil servants, siloviki and social workers, MIC employees constitute a significant portion of the loyal electorate which the existing political regime in Russia relies upon.

The following observation serves to testify to the important role of employees of the Russian defense industry in elections; the number of votes for ‘United Russia’ is higher than average across the home region in industrial cities which have a high proportion of enterprises in their economy which are connected to the defense industry. For example, in Nizhny Tagil, where ‘Uralvagonzavod’, which manufactures tanks and railway cars, is based, the party won 49.48% of the vote in the most recent local elections. The percentage of the vote for the Sverdlovsk region was a far more modest 33%. The situation in Komsomolsk-on-Amur is also similar, where jet fighters are manufactured by the ‘Sukhoi’ company and where nuclear submarines are produced. ‘United Russia’ received 72% of the vote there, whereas the average for Khabarovsk Krai was 38%.

A high sense of loyalty and paternalistic expectations with respect to the existing authorities are typically observed in employees of armament factories. It is the government which ensures state defense purchase orders and implements extended social assistance programmes in the case of job losses. This sets apart the MIC from the other sectors of the Russian economy.

The defense industry as a lobbyist for the international isolation of Russia

The lobbying role of the Russian defense industry is of utmost importance, the study of which is of pressing interest in the light of anti-Western political policy employed by Russia.

The phenomenon dates back to the 1930s when a stable relationship between the defense industry and the top-brass of the army and secret services was formed. This relationship guaranteed a privileged position for the MIC in the Soviet political-and-economic hierarchy as well as unrivalled lobbying power in the days when decisions on arms procurement were taken contrary to all rational argument. Suffice it to say that from the 1950s through to the 1980s the Soviet Union produced 248 nuclear submarines of various types. That is, on average, one submarine every 45 days.

The key problem faced by today’s Russian defense industry was inherited from the very same era – its inability to operate according to market rules and become a part of the global economic system. The fiasco of the conversion programme of 1992-1993 showed that armament factories were not able to utilize technologies available at the time to manufacture goods for civilian consumption and that they were rather less than receptive to innovation generally. Even the fact that arms are sold by Russia to other countries today can be directly attributed to developments of the Soviet era. This means that the MIC has an intense interest in state protectionism and in increasing public investment; the absence of which would render its existence impossible.

One cannot consider the MIC’s economic activity to be efficient; cost-push inflation is typical of all of its enterprises. For example, revenues of the ‘Votkinski Plant’ – the main producer of intercontinental ballistic missiles in Russia – increased by a factor of 4.7 between 2010 and 2013 due to an increase in a state purchase order, whereas its profit only increased by a factor of 3.2. At the same time, the cumulative annual toil of each employee generates less than 2000 dollars in gross profit at the current exchange rate.

High indebtedness to state banks is also an issue. In 2013, the revenue of the ‘Votkinski Plant’ amounted to 20.8 billion roubles, short-term liabilities – 22.8 billion. The ‘Krasmash’ plant, a producer of submarine-launched ballistic missiles, generated revenue totalling 7.9 billion in the same year, while its short-term liabilities amounted to 9.5 billion. The ‘Reshetnev’ company, a major producer of satellites – 29.8 billion in revenue against 51.8 billion in liabilities. The revenues of the largest producer of weapons for aircrafts, ‘Tactical Missiles Corporation’, amounted to 10.85 billion back in 2014 and its short-term liabilities were recorded at 15.6 billion.

Not only does all this place the existence of the Russian MIC at the mercy of the current political regime, but it ensures that it is the foremost interested party as regards the increase of military spending. And for this reason, the threat of a major war should always be acknowledged.

The way that Russia reacted to the installation of American missile shield systems became a striking and telling example of this tendency. Moscow remained calm when the United States started producing such systems and even managed to withdraw from the Anti-Ballistic Missile Treaty of 1972. But in 2004-2005 its stance became extremely negative. No serious foreign policy efforts, apart from endless rhetorical passaggios detailing its concerns, were made by Russia in order to solve the aforementioned problem. It turned out that Russia’s real focus was on the purchase of ‘Iskander’ tactical missile systems and the development of new missiles and submarines for strategic nuclear forces.

The role of the MIC in Russian-Ukrainian relations appears ever more interesting. When President Viktor Yanukovych came to power in Ukraine, Russia sought to ensure that it would, if not takeover, enter into joint ventures with the Ukrainian defense industry at the very least. The Ukrainian revolution put paid to all of these plans, but Moscow’s subsequent aggression, amongst other factors, should have given the Kremlin control over key plants located in the very regions of Ukraine where ‘Novorossiya’ was earmarked for formation. Since the beginning of hostilities, at least 5 defense industry enterprises from the Donetsk and Luhansk regions have been relocated.

And the most important thing is that, regarding the issue of continuation of the warfare in Ukraine, civil servants among the Russian leadership in charge of the MIC assume the posture of hawks. The fact is, that ‘Russia-the-fortress’, which is at loggerheads with the West and subject to increasing international isolation, is not only a means of preserving the current political regime, but also of ensuring the uninterrupted flow of government funds. 

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