Tough Conversion for Russia's Armsmakers

With weapons orders from the Russian government collapsing and aid failing to materialize, Russian armsmakers are seeking Western investment to convert to civilian production

SOVIET leader Mikhail Gorbachev appeared before the United Nations in 1988 to announce a bold program to cut the Soviet Army by half a million men and to convert the massive defense complex to civilian production.

Four years later, with the Soviet Union and Mr. Gorbachev no longer on the scene, the conversion program remains little more than paper. Yuri Glyibin, who headed the group that drafted the plan, admits that the plan, which called for some 500 military factories to be converted, has effectively been shelved. The veteran defense industry bureaucrat is back at work on another plan, this time for Russia, as the head of the Ministry of Industry's department on defense conversion.

"Conversion is going on but it is not a planned process," says Mikhail Malei, conversion adviser to Russian President Boris Yeltsin. He complains that little financing has come through for conversion, without which the plans are useless.

"The Gorbachev plan was brilliant but Mr. Gorbachev forgot to indicate sources of financing for conversion." He estimates a serious conversion plan needs $10 billion a year for 15 years. "Now we are not even trying to work out another complex plan for conversion for which Russia doesn't have the financing."

Instead of a careful effort to shift the military-industrial complex away from arms production, Russia has plunged into what one defense industry official decries as "spontaneous conversion." Government orders drop

This is the result of a plunge in defense spending by a Russian government trying to control its massive budget deficit. According to Russian officials, orders for military hardware this year were down about 60 percent, more than 10 times the drop in the United States. The decline in research spending is even greater.Mr. Malei, an energetic former defense industry executive, cites cases where orders dropped to zero. The Balakirevo machine plant near Moscow which manufactured mines and self-guided artille ry shells for tanks and cannons, saw its orders drop by 86 percent, he says. Out of four shipyards making nuclear-powered submarines, only one is still working.

Russian officials decry the collapse in orders, particularly its impact on the Russian economy. Malei estimates that the defense industry directly employs about 4 million workers, with an additional 12 million employed servicing the industry. According to most estimates, defense spending during the Soviet era consumed between 15-20 percent of the gross national product.

In addition, defense industry is concentrated in certain areas such as the Urals, Moscow, and St. Petersburg. The region of Udmurt, west of the Urals, is most dependent on the defense industry with 86 percent of the economy defense-related, Malei says.

"The fate of these people depends entirely on ... these plants," Malei says. "No government - Yeltsin or anyone else - can allow the death of those plants. That would mean creating volcanoes on the territory of the military-industrial complex; social outbursts near huge concentrations of weapons."

Officials also express concern that an uncontrolled breakup of the defense complex would mean an irreplaceable loss of the greatest concentration of highly skilled manpower in the Russian economy. "We think it is necessary to maintain the scientific-technical potential, to preserve it in the defense industry," says Industry Ministry official Glyibin.

"We must stop the destructive explosion of our defense industry," says Alexander Vladislavlev, deputy head of the influential Union of Industrialists and Entreprenuers. "It is the treasure of our economy, the best engineers, the best scientists, the best technology, the best infrastructure."

A draft policy prepared last summer calls for preserving the high technology potential in the defense industry there. "The majority of enterprises found themselves unprepared for the radical reduction of subsidies for hardware purchases," the study says. "An internal brain drain from the defense complex can be perceived."

The study concludes that the level of Soviet defense technology began to lag behind the West by the mid-1980s, especially in computers, guidance and communication systems. Even the lead over countries such as Brazil, China, and India "will be lost within a couple of years" without state intervention, the authors warn.

In a speech before the Russian parliament this fall, Acting Premier Yegor Gaidar claimed that 124 billion rubles were allocated this year for conversion needs. This includes 77 billion rubles in long-term credits for factories carrying out a level of conversion greater than 15-20 percent of its production capacity.

According to Interfax news agency, Premier Gaidar's newest draft economic program proposes allocations of funds in 1993 to avoid mass unemployment at defense plants, including 250 billion rubles in low-interest credits and 94 billion rubles in subsidies. In addition, Mr. Glyibin explains, there are specific subsidies, for example, for retraining programs as well as compensation for salaries and bonuses lost in the collapse of production. Government subsidies help shields defense manufacturers from hyperi nflation.

Certain industries have been targeted for government investment, such as the aircraft industry. The government is now funding a wide range of projects to develop new civilian aircraft to replace the aging Soviet airfleet. Even Mikoyan-Guryevich, the designer of jet fighters, has been commissioned to develop a short-range passenger aircraft. Inadequate sums

But officials such as Malei dismiss these sums as wholly inadequate. They openly point to revenue from arms sales overseas as a source of funding for cash-strapped defense plants. "We should be very realistic about that," Glyibin cautions. "There is very tough competition in the international arms market," he points out, particularly now that Russia has lost the old Soviet markets in Eastern Europe, Cuba, and other former allies.

Another often discussed source of financing is Western aid and investment. But here, too, the results have been disappointing. Malei charges that Western aid programs have almost all failed to materialize. And investment is minimal, though he does point to some successes such as the involvement of an American tractor-maker in the failing Balakirova artillery shell maker. State control

But Malei and other officials admit that part of the problem is the government's decision to leave most of the defense industry off the list of state enterprises to be privatized. "This is a big mistake of the government," says Malei, who favors allowing up to 49 percent of defense factory shares to be sold, including to foreign investors.

The government has also made no move to separate off the civilian side of the defense industry. Civilian production constitutes about 40 percent of the total output of defense plants. Many key consumer goods, such as televisions, refrigerators, video-cassette recorders, and washing machines, are made almost entirely by defense plants.

At the same time, the government has opted to halt the cutback in defense hardware production next year. The draft budget for 1993 calls for an increase of 10 percent in defense equipment orders, Gaidar told defense industry officials during a tour last week of Urals facilities.

The government plans to spend 160 billion rubles, adjusted for inflation from current levels. But Industry Minister Alexander Titkin, in an internal memo reported by Russian and Western news agencies in September, argued that spending should be at least 263 billion rubles to avert wholesale plant closings and a halt in production of mainstay weapons such as advanced jet fighters and heavy tanks. Mr. Titkin, known for his conservative views, lost an internal battle with Gaidar.

But Glyibin adds that the level of subsidies is still an open question. "It is not a final figure."

* Part 2 of 2. Part 1 on Russian arms sales appeared Nov. 25.

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