SOVIET DEFENSE INDUSTRY: CONFRONTING RUIN (SOV 91-10042)

Created: 10/1/1991

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Soviet Defense Industry: Confronting Ruin

An Intelligence Assessment

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Soviet Defense Industry: Confronting Ruin

An Intelligence Atsenment

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Soviei Defense Industry: Confronting Ruin

Judgments

1

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ad mate ihat tbe rent value of Soviet defense industry'saboutercent80 Cuts iohave not been offset by increased civil production (ice figureweapons output continued to

decline during theonths of this year, and Ihe defensesector's total production of civil goods probably fell at well. Wc believe defense industry's output will continue to shrink in the second halferhapsrccipstous rate. Thb decline has undermined the sector's ability to finance conversion, even as the economic pressure to convert increases.esult, many defense-industrial facilities arc desperately seekingWesternemorrhage of their best workers and to stave off insolvency

The Gorbachev leadership initially thought that conversion would be manageable because defense industry already produced some civil goods and had relatively advanced production facilitieskilled labor force. However, the leadership assigned new civil production responsibilitiesaphazardwithout regard forlant Had any experience in similar types of production. Many defense-industrialincreasingly responsible for their owncurrently suffering severe cash-flow problemsesult of falling military orders and disruptions in supply chains. Monetary assistance from traditional central sources had rased the fiscal pain of some defense plants, but the nation's deterioraling financial condition increasingly hinders (he government's ability to help plants stay solvent

In the wake of the failed coup, defense industry will contract dramatically and be fundamentally restructured. The weapons orders lhat sustain Ihe industry will continue to decline -perhaps abruptly -as republics exercise Iheir new political power and as their economic priorities and nascent inslilutSon* emerge. Defense-industrial plants' survival will depend on their commitment to conversion, the availability of Western financial assistance, and the political and economic obiectives of the republicespecially in Russia and Ukraine:

The failed administrative approach to conversion is probably dead. Thell now force defense-ind est rial plants to operate crrtciently and icspond to consumer demand for civil products or go bankrupt.

Defense industry is now at Ihe mercyew group of leaders who are critical of its operations and intend to streamline, reorient, and privatize lhe sector.

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Figure I

Defend Industrial

Unlet* and until Western aid is provided, defense industry will have little funding to retain and retrain workers and retool facilities for civil manufacturing.

The defense industry that emerges from the current upheaval could wellthe weapons indusiry of some West Europeanmay own the largest final-assembly and component plants, but these will behort financial leash. Defense industry's size will be determined by what is left of the procurement budget and by the prospects forwill be expensive to maintain much excess (and increasingly obsolete) capacity for mobilization. The base of the future defense industry could, perhaps, consist of the most modern of theajor final-assembly plants andouple hundred component plants

Even cut back to this tire, however, the defense industry would have the potential to produce in substantialide range of techno logically advanced weapons. Certainly tbe huge pool of talented and well-trained engineers, technicians, and laborers ensures the availability of corewell into the future, and, while much of today's physical plant and equipment is obsolete by Western standards, there are pockets ofDefense indastry's capability early in (be next century will depend prirnarily on tbe republics' ability to overcome daunting rxoUerns in tbe transition and eventually lotable marketmanage tbeirnterrelations, market ire and privatize theirdowrtsin and convert defense industry, and then to marshal the latent capabilities of the residual weapons production resources.

Scop.papa track! lhe balling piogrcss of conversion and examines how

defenseinancial condition deteriorated ai ilenlral guidance and market forces simultaneously andindustry will most likely respond to further cuts ingreater decentralization, and possible foreign assistance.these bsues in light of the unsucr-ssfulugustagainst the Gorbachev leadership by hardliners from thelhe military-industrial complex By also updating our analysis oncomposition of defense industry's output, thb paperest lhe validity and usability of published Sovietaad budget dau Other papers in this scries include tbeInulligencc Report SOVDecember

SSR: Estimating the Composition of ihe Defense Industry's Output: Dl Research Paper1

efense in9 Soviet Stele Budtrt Still Not Credible^

lTnTJZrS0^L hesorir6 DI

ihe EData to the Unitedhan Meets

rVmof Blank

Soviet Dcfrrne Industry: Confronting Rain

Soviet defense indusim! lector has lone bcea ai the apca of Ihc So-hi command economy, enjoying near absolute priortly on resources (seeecause ils immense productive capacity ss-ss purposefully developedxceed ihc imrrtediaie needs of ihe hupe Soviei mililary machine, defense industry has kmg been tasked to manufacture consumer roods and capita! equipment. Defense-industrial plan iside range of manufacturing machinery and have pioneered the develcsprneal and proeJuctioo ofmanufacturing technologies in Scmet indastry Defcase-tndusirsal plants are max* manufacturers of equipment for Ihe agricultural sector and the railroad industry. Dual-useis ships, aircraft, and communicaiionscome from defense-industrial enterprises Finally, defense industrya wide ranie of consumer foods in largewaihing machinei. to vacuum cleaners, todefense-industrialarc the lead wganiralions for manufacturing certain goods, such as htghdemand consumer

Tbe procurement and force cuts Gorbaebev set in motion iaigo andenxusse the tradrtional basis for defense industry's shelteredGorbachevs plans to convert defense industry meani Ihat iu civil production would no longer beideline but would constitute the asajority of its ouiput. Ultimately, defense industry'separata lector would be determined byMoreover,of defense industry'! central pUnausg apparatus and iu associated vail and costly party control nsech-anism soon realiicd that tbey, loo, would have to justify their yobs on economic grounds

Defenseupport for the oohodoxy the coup plotters represented was based ia large part on fears that further cuts in weapons production, combined with pressure to convert and adaptarket reforms, would lead to tbe ditmembermenl of defense industryonsequent lou af suius and possible financial ruin. Ironically, the failure of the coup has dotmyed

Hka, fi ihe Sanies Defemu ledmssryT

Through years ofnveslment. ihr Soviets hat* developed aa Immense defense-Industrialacilities. Including about ISO major final-assembly plants, thousands of component and material produciion facilities, andOOdevelopment, and test facilities. Defense-industrial production Is heavily coneeniraied in the Russianereenl) and Ukraine II ivtith Ike rest scattered among other republics mtkin the Russian Republic, three major cemers-Moscow. St. Petersburg (Leningrad) ami ihe Ural,the greatest number af

Traditionally, ike Soviets have centrally managed thisthe Military Industrial Commission IVPK) has cemtrolled defense-Industrial output and ensured supplies to ike sector's plants.esult. Ihe defense Industries have been relatively Insulated from the ben tlrnecksonage, ihal have plagued the rest of the economy Over the past few years,ombination afeco-ncmue reform, aad the keigkiened ecomymlc chaos throughout the nation has reduced ihe sector'sInsularity and made It more vulnerable to Iheconomic problems

8 the leadership has enlarged the sector by giving It civil plants to meet new elvtl obligations. The leadership hoped thai extension of defense Industry's traditional resource priorities and application of the lector's highly regarded technological expertise would quickly nnderedte long neglected civillatiOfood-procatslnm and light industry (textiles and footwear) machine maiding plants were resubordsmsted to lha sector as pan of the food industry modernization program. In9 defense industry absorbed the facilities of theMinistry of the Mtdltal Equipment Industry, and ihe Ministries tf Gvil Aviation andwere moved Into the sector

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not only many defense industrialisu' careers, bul alio what slim chant* there once waa for an orderly breakup of defense indusiry. The rector now faces many radical changesime when it is both insotveni and bereft of leadership. ,

Corrrrntorc SorieS9 the Sovieis announced ambitious plans lo increase defense industry's civil production. These plans call for lhe rector's chit pcocjction to grow by mote lhanercent per year85 and for the share of civil produeiion ia total defense industry output to riselaimed level oferceni8 toercent

Soviet officials originally claimed that they were on track in meeting their goals, although ibey have, yet loetailed breakout of defense industry's total production. Inhen Chief of tbeStaff Mikhail Moiseycv said defense industry's civil production accounted6 percent of total defense industry outputhe Soviets have not yel indicated what defense industry's0 civil production share was, although in0 then Premier Nikolay Byrhkov implied thai the civil share would reachercent, slightly cacecding the plannedhe Slate Committee for Statistics iGoskornstat) report on the economyowever, warned that conversion hadbegun to slow down ai ihe end of tbe third quaner. The Goakomstai report on theeleased indmitted thai there wasecline in the overall volume ofin defense industries in conjunctionrop in the production of miliury output was not offsetuite substantial increase in lhe output of civilian products and consumert was noi until1 that the CPSU Central Committee Commission oo Conversion claimed that lhe proportion of civil. is now overerceni." i

Riihko* nurd thai. ihrooihai reoeWcden in tke dc'caw omplci had meneroral ova ihe. -hue civil output *wdercent aid mUVurv oulswt

Bad fallenerccat. Thiienv) tbtfterto* lor

the histhe draft (tinele.wd hi9 by Gosplan First Deputy Chairman Vafcnli* Smjslov. tatted for the share of end predactk* toercent

After nearly three years of conversion. Soviet claims regarding the program* progress and lis benefits to consumer*ore realistic lone. Commemn-tors1 spoke aboul the number of plants thai will berecently former First Deputy Prime Minister Vladimir Shcherbakov claimedlants would be convened, an increase fromreviously claimed What ihey often are describing, however, iseorientation of miliury lines but merely increased production of civil goods oo existing lines or new produaion using excess capacity (seendeed, suiemenu by former Soviet Prime Minister Valentin Pavlov and the CPSU Central Commission on Ceo version suggest that,8 tohe strictfor. ai most, one-fiflb of defense industry's increased consumer goods output. Some Soviethave admitted privately thaiandful of eJeferw-indusirial facilities were lo be loullyIn contrast with earlier, optimisticn Ihe potential benefiu of conversion, defense-industrial ministers and ibeir enterprise directors conceded inhat conversion is costly, that their pbnu are suffering financial hardship, and that lime is required for tbe nation's most technologicallysector to shift lo increased civil prcduction. particularlyovearket system.

nd CIA Estimates

To assess the Soviets* claims and to evaluate their capabilities to shift defense industry resources from miliury to civil production, we independently esti-mate the value of defense industry's output ofconsumer durables, and producer durables,uilding-blockur estimates indicate that Soviei claims artificially innate lhe share of civil production in defense industry's output. First, defense industry's civil output share was increased byfiativilian machine-building

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JV.orMrCommits- at ikei>tryi CWpu* The eBlmalei of lhe lolalf

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Of the autiititu* produced of

and other wapoa* valued in7 prion

2

Claims and Evidence af Savin

Claim, Beak, impMc Interview* WC

^he Soviets have mad' general Halmsnumber of planli andacilitiesSoviet journedlsti and defenseniamatvrs have alio public

specific facilities Invtdved in some aspect of conversion

Weapons production plants claimed lo be onverting

Specific plants

acilities claimed to be

Specificfacilities

Evidence. We have

prekm has Indicat-

140

ed increased or new civil produeiion at defense-industrial facilities and has allowed us to track conversion at planti where we believe militaryhas dropped or will decline:

Blanll producing new or more civil goods Major weapons planti where militaryhas declined

Major weapons plants where militarylines have been altered Specific RdtD facilities where tomeactivity Is occurring

15

iibi nded andavil machine-building enterprise! were resuboedinaicd to defense industry. The Sovieu mdude otiipal fromm cronies when ihey caleauaU defense industry's civil output Second, much "civil" output contiSU of Dish-quality capiul equipment tucfa as admachinefee andin wespom productinally, and meatigh-ranking ofboal of the Ministry of the Defenicrecently revealed thai the civil output ihare it

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aiiifkiaily high because lhe Sovieu aggregateistdustrial goods, and cotoamer goods auing dif-feravt vslution measures (types of rarices) Weapon, and industrial goods are valued using entcrptite wholesale pikes, and consumer goodi aic valued using retail prices. Retail prices on consumer goods include both irantportation coats and tbe icieetive. highly different it led. and often masMve "turnorct tan," '

Wc used the met Sociology developed in the earlier report, together with eesastottstc sistrtiKs the Soviets released9o update our analysis. Wc estimated defense industry* output of consumer goods and production machinery and combined these with ourates of Soviet weapons production io calcuUu defenseroduction breakdown9lthough the shares we calculated for there sornewhat different from lhe canes tbe Sonets have announced, their trends track well over lime with ibe correspond-ing CIA estimates (see ubkl.0 shareas well as the production estimates for total defense industry output aad iu output of consumer goods, appear continent with the slowdown in comer-tion that the Sovieu admitted tn

Despite progress in shifting the balance between defense industry's weapons and etvtl production,defense industry fell far short of it* goals for increased civil output. CIA estimates show that Soviet weapons productioo decreased byercent tat9efense inditstry's output ofgoods increasedercent9 and byercenttedcat, bul tnucb-rtccded, benefit to tbe Soviet consumer Al Ihe same time, however, defease industry's output of mantifao tunng equipment, after increasingerceninly increasedercentesult.

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erase aad ChU Ptoouciioo in ToUl Drfew Issdustry Output

Production of .Selected

roduction of civil roods iacreatcdercent in9stimated total defense indiistryand civil geioot fellercent9ercent0 (tee figure 2)

PriBiiInn ataraatca1

Detente industry's output oat continuing to fallthe coup attempt. At tbe overall Soviet economy shrunk and general supply disruptions increased,industry scat findieg it even more difficult than90 to transform the productionfreed by cuts in weapons orders Into additional civil ptodncllon. Efforts to convert efficiently were probably abo hindered by conflicting orders toindustry. In February then Prime Minister Pavlov called for mora capital equipmentto consumer goods production -even though the original plans to rapidly expand consumer goods output were apparently still in place

Through ibe first us monthsutput growth rates for defense industry's production of selected consumer goods were mixed (see figure -'i snd its total output of consumer goods fellercent. This performance, however, was relatively goodwith that of mosl other sectors of the Soviet

economy, where activity fell sharply. Defenseoutput of manufacturing equipment abo most likely dropped in ibe first halfatC

, d.es:cs that weapons output continued towe have yet toby how much. On balance, defense irsdusiry'i total ouiput continued to fall during ihc first six monthsxtending its economic slump to twoalf years

Defense industry's ouiput will moat likely shrink at an even fatter pace, perhaps precipitously. in the socond halfeaponskdy lobe hardest bit, as the failed exaap attempt has given ihe republics leverage to initiate immediate casts. Civil production will abo suffer. The various republics will most likely issue contradictory instruction to the

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Oefwx-IndmiritS Onlpal of .Serectrd

industrial facilities located on Iheirnduiiry will nora red ihc

rffcctt of ibe general chaos spreading throughout (he Soviet economy '

The CaaaaauBacea mg Pi sfaaawj sates

Many defense-industrialfoe iheir ownsuffered severe cash-flow problemsesult of falling military orders tor example {la*

ormer lassaD-seak producertanks

(hat the plant bat had to lay offereenl of its wortrrs aad tripled its tractor prices in order to meet its operating Costa Finsiiicially strapped defense plants have received some of their traditionalasaistancf frota central sources, bul the nation's deteriorating financial conditions increasingly hinder thebility to help defense-industrial plants stay solvent.

1 The Pavlo* government claimed to be sensitiveindustry's financial problems. ThenPrime Minister Sbctierbakov itated inthat Use government was con reined aboutfinancial problems, particularly theirworkers. The only offer of financial assistanceended, however, was specific investorareas inaviation,shipbuilding, space, communications, andandcould provide onlyrelief for ihc financial difficulties of the plantstheplans

toonversion fundercent tax on defense output but prospects are dim thatund will materialize. Center and republic disputes concerning contributionsimilar fund creatednd these disputes have beenia the wake of Ihcugust coup.

Plant managers' reactions to their rsrunctal straits range from trying to socrcase civil output, lo teasing product:f military orders ihat sic unprofitable, to searching for export sales. However, these plants that try to cover losses in military orders with increased

civilas (be Si. Petersburgroducer or navalcompliined lhai salescivil goods arc not as lucrative. Typically defenic planu are designed Tor small-scale acrica production ofprodueiion occursob-shop basis and output ranges from lessew thousandof mass production, where output can rangeew thousand to tens of ihousands. Batch produeiion does not provide for economies orare key lo many areas of civil production, particularly consumer goods The Soviet press reports that the costs of producing some types of food-processing equipment at partiallyfactories can runoimes more than the costs at plants thai specialize in making suchDefense industry's attempts lo pass on its costs have beenfor food-processinghave reportedly declined substantially because customers rebel against what they perceive as price gouging

socialhousing and access to necessity and (usurywith militaryIn addition, many workers and managers in the sector believe that working on civil goods wastes their skills:

Jlhey0 workers during lhe. and the Ministry of Defensewhich0 workers during lhat same time, feared additional work force losses becauseercent of its enterprises lacked money to provide those social benefits needed to retain personnel.

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premier artillery production facility, claimedwere upset because their jobs were abolished or changed and wages were lowered, and many left orrivate inoperative thai was renting pan of the facility.

the same time, reduced miliiary orders arcIhe unit costs of weapons, and even plants wiih long traditions in weapons production are rejecting unprofitable miliiary ordersCL,

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in0 that officialsTank Plant decidedto cease tank produeiion after the Ministryreduced its tank order by one-third:this dcciiiini was reversed

later that year. Defense industrialisu looking for capon sales face lhe twin challenges of overcoming negative impressions about ihe performance of their equipment in Iraq during the Gulf war and the inability of iheir traditional cuitomers to pay cash for their purchases.

The Chel'yabinsk Tank Plant lost JO percent of its work force after il ceased lank production

his military orders had droppedercentnd, although he hoped io transfer workers io civil production, he feared many of his specialists would leave.

As financial conditions al their plants deteriorate and workers migrate elsewhere, defense industrialisis have es pees led fears about their financial ability toaintain the weapons production base tZ

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financialwell as the loss of lheand prestige lhat usually accompanycaused defease industry lo loseSkilled workershave sought employ mem elsewherewith privately owned ecorxratirak. areor are attranptirtg to emigrateheCPSU ConraniM en Comersjonhat many enterprises are on the "vergeand thai defense workers' relativeslipped sharply Defenseoneyhave made it even more difficult to pctyride the

Olber plants, such

at the St. Petersburg Arsenal, are concerned thai additional cuts in military orders will force then to face deduces on doting (town weapons prod act vco haves aad then deter mining whether to keep them intact or tear them rlowaenate eaants have lorn down pant of their military production lines-C

J the CheTyabtntk Tank Plant has allegedly placed nonconvertible equipment in storage

olution

As defense indusiry struggled to adjust to declining miliury orders and meet the leadership's demands to produce more gccds foe the civil economy, the Soviets looked to internal and external sources for solutions to ease the sector's financial plight Despite sutemenu on deceniraliisng Soviet industry, Pavlov and his colleagues continued ir call for centralizedof defense industry and to promote state orders to keep iu plants supplied with production materials and customers for iheir goods- In1 the Pavlov government also provided some deuUs of the "clarified'" conversion program It had promised in June. According to Minister of Ecottotrucs andShcherbakov, (he plan directed defenseefforts into five previously noted priority areas that play to the sector's perceived strengths and called for defense industry to increase consumer goodsand output of medical equipment. Defense iiYdastrialisu probably svere pleased with thisbecause it required less reorienution of their planu and workers

During the past year, reformers proposed their own changes for defense indusiry that would further shrink iu size and alter iu method of operating within the Soviet economy. First submitted in the fallhe Shaulin plan proposed that defensebe scaled down0 toercent of iu current size by stripping the sector down to government-owned weapons final-assembly facilities. All other industry would be privatizedarket system. Duringoviet economist Grigoriy Yav-linskiy and academics at Harvard University'sSchool of Governmentlan to reform ihc Soviet economyarket-oriented system-like the ShauUn plan it abo called for streamlining defense industry and privatizing most of the sector's facilities. Both of ihese reform plans died afterGorbachev tried to merge them with the more conservative reform programs of the Ryzbkov and Pavlov govern menu

After three years of conversion, with results ranging from limited progress in consumer goods to dismalin rrunu facto ring machinery to retool the food-processingand his advisers opted to seek Western assistance for

defense industry conversion. During tbe Londonsummit ofations inorbachev admitied tbat the Soviet Union could not solve iu economic problems without Westernassbunce and presented defenseriority program for foreign ioirestment. Heosi of0 billion for conversion assisunce and identified three areas for foreign irrvratmcnt:

Commercializing dual-useWestern firms could work jointly with Soviei defense industry on short-term investment schemes to develop commercial projects for csubUshedcspabititics In aviation, shipbuilding, space, and communications.

Profound reorienution of defensestated that thb program would require long-term inveslment aimed alignificant part of defense industry to Ihe ouiput ofsystems, agricultural machinery,ide range of consumer items.

Government-assisted programs for the environment and nationalin these areas would be aimed al developing technologies for safely eliminating chemical, nuclear, and conventional weapons and establishing early warning systems to present unauthorized or terrorist-instigated launches of nuclear weapons.

ations did not immediately respond with as much assistance as Gorbachev desired. Tbey took Ihlle action to redirect their traditional forms of financialfor specific food or cortsurtier goodssuch aid provides only minimal assistance to defense induiiry. The Soviet Union was promised "special associate status" with Ihe Interna-lional MoneUry Fund (IMF) and ibe World Dank, but this will not make il eligible for the billions of dollars it requested for conversion ,

Gorbachevs proposab failed to address Western govern-rnems' concerns that tbe Sovieu would use financial aid to expand conversion without changing the

program's focu* fromtransfercniK ot tabor oroefense plam'i output of ihc civil food* ii ha* traditionallythe rep Us cc root of military assembly lines with linti devoted IO civil output Overtaonheaper aod easier thaa replacement in (he abortdivert ion also enable* Ibe Sovieu toeapon* production mobiliuitou base. '

The Sovieu subsequently applied (or full membership status in both the IMF and the World Bank; however, they would be ineligible to receive funds from tbese organizations until after ihey were approved forprocess thai takes two lo Ave years Moreover, the financial benefits of such membership would not be Immediately forthcoming to ibe Sovieu upon receiving admission lo these orjaniutxxiithese agencies generally provide financial asd only after the applicant ukcias slashing government spending, includingaddress the root cause of hs financialhus, conversion, aid from such international leadingcould be contingent on tbe Sovieu' first taking sei torn that further increase ibe financial pressures on defense indusiry.

Gorbaebev abo otTercd some specific strategics for private foreign investment in convernoo. including direct investment in defense indusiry firms andpurchase of entitling enterprisesoseunder construction Thus far, however, he has been unable to attract much micresl from Western firms, which have found convent-no to not alwaysrofitable undertaking (seehe Gorbachev leadership abo pitched conversion to Japanarge group of Japanese government, financial, and industrial representatives to tourindustrial plants as part of discussions

rom the US Experience

US weapons manufacturers Junereat deal of experience attempting to convert to mil production os they tried to cope with cyclical decline! in defense orders. To lap Into that experience, in0 the Other af Soviei Analysis, together with Ihe United States Air Farce Academy,tmferesocethe lessons of US Industrial conversionfor the Soviet conversion program. Seniorfrom every sector of US defense Industry presented case studies on their companies' converilon ejjoets and shared their evaluations of various Soviei conversion strategies.

The US managers highlighted the pitfalls inThey cited twofrequem lourcesew civil product diawi on technologies the firm has little experience with and when the' design practices and overhead eons, keyed to the requirement! of the weapons procurement process, drive up ihe priceivil product far beyond what could be chargedompetitive market. Both problems are evident in the Soviet conversion

Most of the US manufacturers abandoned narrow conversion projects In favorundamental reorien-latlon of corporate business lines. To accomplish this, ihey drew heavily oa external financial, technical, and marketingavailable In the US market economy For this reason, the US managers doubted that the Soviet conversion program would lucceed without fundamental reform of the Soviet economy

Aftersuafh of the Ccarp

Threatened by coo version's disruptions and theof market reforms, defense industrialist* have puWidy and privately resisted change, and thbled lo the partidpaiion of key defense iadttstri-alisu in theugust coop against Gorbachev. For

minilu defense industrial plant manager* hailaboul their planli* problem!0 iheytlcr ia Prattle warning lhai ihe iccub wat in "dirend. inovtUkaya Roiiiyo pub liteiler from defense induttrialisu to Gorbachev and Pavlov requesting funding forlicing indication of defente induiiry disMiitftction wilh leadership policy occurred inhen Olc*eading defente indwitrulai who waa tcrvini at firttin man of lhe Defeme Council, blasted cottversionoundtable discussion printed in Moscow den. Baklanov and Aleksaodrefente-induti rial arte tm and president of tbe traditional in Association of Industrial Enter-prices, eventually became pruminent participants in the coup against Gorbache' and since then have been arrested and charted with tie*ton

Tbe postcoup shitteup hat itrengthened leadento implement the radical economic reforms long resitted by defente Industry. Newly installed Minuter of Economy and Forecasting Yevgenly Saburov atated the views of refcemers when be told Komiomotskaya yavda onugust thai "the defente commutt ceasexistind of tingle cniiiy separate from the country's economy, suckingaburov and others tueh as reform economitis Stanitlav Shatalin and Grigoriyember of the interim economic committee created after the coup to manage Ihe ccottomy. believe defense industry thould be limited to final-anemNy facilities, and the rest of its plants should beAi the leaderships plans evolve over tbe next few months, defense-industrial plants will be stripped of their traditional priorities, kite their subsidies, and be forced to balance their books or go bankrupt ,

Any reform program from the center, however, will have to come to terms with the aims of ibc republics, who are claiming control of defense-industrialOn their territory- particularly trie Russian Re-public aad Ukraine, where the vast majority of-indusirial faciliiies are located. Both the Russian Republic and Ukraine have claimed larisdic-lion over all enterprise* within their borders, and ihe Russian Republic has stated that it plans loweapons production at selected facilities and

convert Other defease plants to civil production.republic* that perceive securityuch as Arcrbaijaa and Armenia, might increase weapons product on and convert civil plant* to weapon* output. Even if miliiary orders do increase in tome republics, plaai man* gen Userc will have to face ibe challenge of rebuilding their work force and forging new supply reUtionshlps before they can meet new production repuirrmenu

Outlook

Defense industry will contract dramatically aad be fundamentally restructured Economic disarray has ledreakdown in the sector's resource base and redoubled pressure to eul defense spending. Moreover, the rtformen' victory over the bardfanen means that advocate*artcl-orirnlcd economic reform will be preeminent, so defense industry will have tomore efficiently and cost consciously as well as be rctpomrvc lo consumer demand. Finally, theof the Communist Party and the ouster of high-level defente industrialists and military commanders who directly or indirectly supportedup have deprived the sector of allies who traditionally have protected its interest! during resource or reform deei-tion making

The political changes and economic turmoil lhai have been accelerated by the failed coup have generated widespread promises of Western humanitarian aid and made debt rescheduling and Western government assistance for conversion highly probable Thelarrnoil makes neat-term private irrve*uneni by Wei tern firms less likely unless businessmen'sare insured by Western governments.

Unlet* and until Western aid is provided, however, defense industry will have lo struggle with little financial relief ia sight. The sector's total output is likely to continue so fall at planu staffer fromweapons orders and continue to experiencetransforming pei duct ion potential freed by iheae call into additional cml procuciioo Failing tales will make il even more difficult to And funding lo retain and retrain workers and retool facilities for civil

manufacturing and to obtain neededtbe potentialicioui downward ipiial. Problems will most likely be especially severe in cities such as St. Petersburg (Leningrad) and Moscow and in the Urals region, where defense industry is the major employer. Russian leaders, such as the Chair' man of the USSR Committee for the Management of the National Economy. Ivan Silaycv, have urged that the state pay the svages of defense industry workers during the conversion process, but such an action would both increase the exploding budget deficit and undercut ihe immediate financial imperative to'

Further, defense industry is at the mercyew group of national and republic le iders who are critical of its operations, have stated their intentions to streamline tbe sector and implement reforms in its weapons development and production activities, and plan to abandon the administrative approach toRussian Defense Minister Kobets, eventhe failed coup, had called for virtualof the defense industryplan that appears more radical than tbat advocated lastin tbe Shatalin program. Shatalin called foroercent of defense industrythat produce all or primarily civil goods or dual-usebe withdrawn from the defense-industrial sector and transferred to republic jurisdiction and privatized. Kobets has gone even further thanby advocating consolidation of weapons productionubset of the remaining component and final-assembly plants and shifting the sector's otherlo purely civil production. Under this plan,necessity would ensure that defense sector plants moved out of defense Industry will cither convert Quickly or go bankrupt. Moreover, even those weapons produciion plants thai remain in defense industry would havedjustecentralized supply system in which they will not enjoy priority access ioand skilled workers, and tbeir managers will have to scramble to keep their plants supplied.

Recently, some proposals that would dismantleindusiry have emerged, although the need for arms exports to earn bard currency together wiib the military's desire to salvage key weapons programs will probablyotal weapons production hah.

Russian Republic Vice President Rutskoy. who is in charge of Russian defense industry conversion, an-nounccd in mid-September that be had proposed halting weapons production for three years. In early September, the USSR Deputy Minister of Defense Industry said tbe Cornmittee for tbe Management of the Economy was considering ending all "capons production.

Although we cannot predict with certainty either the exact nature of defense-industrial downsizing or the rapidity of Ibe process, tbe defense indusiry that emerges could well resemble, structurally, theindustry in some West Europeanmay own ihe largest final-assembly andplants, but these will behort financial leash. Defense industry's sire will be determined by the procurement budget and the prospects for hard currencywill be too expensiveaintain much excess (and increasingly obsolete) capacity for mobilization. The base ofuture defense industry could, perhaps, consist of ihe most modern of theajor final-assembly plant! andouple hundred component plants

Even cut back to this size, however, defense industry would have the potential to produce in substantialide range of technologically advanced weapons. Certainly the huge pool of talented and well-trained engineers, technicians, and laborers ensures tbe availability of core personnel well inio the future, and. although much of today's physical plant and equipment is obsolete by Western standards, there are pockets of excellence. Defense industry's capability early in tbe next century will depend primarily on tbe republics* ability to overcome daunting problems in the transition and eventually totable marketmanage their politicalmarketize and privatize their economies, downsize and convert defense industry, and then marshal the latent capabilities of the residual sveapons produciion resources.

Original document.

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