Samara's Defense Industry Moves Reluctantly Toward the Free Market

Old habits persist in Russian military complex, as managers still shy from converting factories or even marketing their highly competitive rockets

IN the decades before the 1917 Bolshevik seizure of power, commerce defined this Volga River city.

The trade of grain, wool, and leather goods largely drove the local economy, allowing merchants to dominate cultural life. Amassing small fortunes, they built fancy mansions in the city center and filled them with fabulous art collections.

The Bolsheviks' attempt to remake society put an abrupt end to the merchants' golden age here, as the free market gave way to Communist planning. The overhaul extended even to the city's name, which in 1935 was changed from Samara to Kuibyshev in honor of an old Bolshevik leader.

The most drastic changes did not come until World War II. Early in the war, with factories being evacuated westward as Nazi troops advanced into European Russia, this city almost overnight metamorphosed into a vital military production center. It also briefly became the Soviet Union's capital. (A peek at Stalin's wartime bunker, Page 9.)

The cold-war era saw Samara cemented into the Soviet Union's military-industrial complex. And national security concerns dictated that all important Soviet military-industrial centers, including Samara, become ``closed cities,'' meaning they had little, if any, contact with foreigners.

Secrecy shrouded Samara until only recently, when the Soviet system came unglued and the Communist Party was swept from power. Over the past few years the city has opened up again and gotten its original name back. In addition, ``conversion'' has become a buzzword, with Russia's new leadership stressing the retooling of military enterprises for civilian-oriented production.

But as this city tries to reorient itself, communism's 70-year legacy - especially its former closed-city status - is proving difficult to overcome. A significant problem is the inability to draw upon past experience. The communist assault on the entrepreneurial mentality was so thorough that many contemporary industrial managers here appear at a loss when it comes to market skills.

``They don't have any idea of what they don't know,'' says Richard Pierce, a US Peace Corps volunteer in Samara who provides market transition advice.

``Closed-city status retarded market thinking,'' adds David Lawrence, another Peace Corps volunteer. ``Since this was a military center, people here think it's a natural place for investment. But that isn't true.... There's competition for investment dollars, and if they don't encourage them, they won't come.''

Since former Soviet President Mikhail Gorbachev first started talking about military conversion in 1988, the effort has suffered from two deficiencies: the lack of a comprehensive plan and a shortage of funds. A few nationwide conversion blueprints have been formulated over the last five years, but they only outlined broad strategic aims, containing few tactical specifics. Also, the money outlook remains bleak, given Russia's economic crisis.

As a result, conversion is having problems gaining momentum. And in Samara, there is no shortage of complaints by conversion officials.

Vladimir Moskovsky, Samara's deputy mayor in charge of conversion, bemoans the city's industrialization experience. Back in 1941, when the Soviet Union was desperately trying to fight off the Nazis, plants here were quickly thrown up in the middle of fields, with some producing munitions even before roofs were finished, Mr. Moskovsky says. No consideration was given to human needs such as housing, transport, and sewage.

``This unbalanced character concerning the organization of industry and housing still exists,'' he says.

Yuri Motkov, chief of the Conversion Department for the Samara Regional Administration, criticizes the federal government for its rapid and deep cuts in defense spending. The drastic approach, Mr. Motkov says, has deprived many defense plants of the means to reorient.

What city officials have not complained much about, however, is Samara's former closed status. Moskovsky maintains the former restrictions have benefited the city's market transition.

``The closed-city status protected us against the market revolution, and this is good because revolutions never lead to anything good,'' he says, referring to Moscow's crash reform program implemented in early 1992. Those reforms, engineered by former Prime Minister Yegor Gaidar, lifted state price controls in many economic spheres, spurring massive inflation that is still running between 20 and 30 percent monthly.

But some Samara residents argue that the city's closed status hindered development of adequate communications. There is a huge waiting list to receive a telephone, they add, and even if there were phones, lines to Moscow and other cities are frequently unavailable.

Infrastructure-related conversion problems, such as the telephone shortage, could be solved if officials had a proper plan and the cash to implement it. As for the successful reorientation of plants themselves, Peace Corps volunteers say that something more than concrete tactics and money will be needed: the desire of factory directors to change their thinking.

Mr. Motkov admits that many directors stubbornly cling to outmoded Soviet business practicies, stressing social obligations, not profitability. ``They aren't able to use state credits effectively,'' Motkov says of many directors. Rather than laying off workers and using credits to improve the factory's efficiency, ``they use them to pay workers, and that's about all.''

Although there has been a drastic slump here in military production - including a drop of about 50 percent in 1992 compared with 1991 - unemployment is still surprisingly low. ``The last thing a manager will do is let workers go. It's all connected to their mentality,'' Motkov says.

The so-called ``old thinking'' is not just hindering efficient conversion but is holding back those defense plants that are capable of competing in the world arms market, says Mr. Lawrence of the Peace Corps. The Progress factory, which produces rockets that lift Russian spacecraft and satellites into space, is a case in point, he says.

``This company's product could compete, if only they had adequate marketing and financial operations,'' Lawrence says.

The Soyuz rocket produced by Progress should be an attractive option in the highly competitive and lucrative commercial satellite launch business. It is capable of boosting a payload of almost 7 tons into orbit and has a reliable track record of more than 1,000 successful launches. Perhaps more important for potential customers, it costs far less than its major competitors, including the rocket produced by the European consortium Arianespace.

Other Russian rocketmakers, working through the Russian space agency Glavkosmos, are starting to conclude lucrative deals. A Russian Cyclon rocket, for example, recently lifted a German satellite into orbit.

But according to Lawrence, Progress has yet to make inroads into the commercial launch market because managers do not take advantage of the company's strengths.

``The one thing they have going for them is low costs, but they try to charge as much as the competition,'' he says.

At the Progress plant on Samara's dusty outskirts, company officials do not appear to be fully aware of the profit potential of the Soyuz rocket. Yuri Grushin, a deputy factory director, talked about conversion plans to turn out bread cutters, furniture, and baby carriages, instead of rockets.

``I wouldn't say rockets are the most profitable. No one needs them,'' Mr. Grushin says. He declined to grant journalists permission to observe baby-carriage assembly operations, citing security regulations relating to rocket production.

``The secrecy regulations haven't been entirely lifted,'' he says. ``The rocket itself isn't a secret, but the machines used to produce them are.... It really doesn't depend on us.''

The Progress factory is developing a marketing department, Grushin says, but it lacks the funds to send employees abroad for training. He also complains that the West, and the US in particular, restricts Russian entry into the launch market.

The US and European Community, anxious to protect their satellite-launch market share, recently came to an understanding with Moscow that would limit Russia to 12 commercial launches with its Proton rocket by 2000.

``We consider the Americans to be our friends,'' Grushin says. ``But we do feel some pressure from them.''

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