PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels --------------------------------------------------------- DEFENCE INDUSTRY PRIVATIZATION AND NATIONAL SECURITY REQUIREMENTS: THE UKRAINIAN CASE Nikolai Kulinich Defence conversion in the Ukraine started when the country was part of the USSR, and one third of the Soviet military complex was on Ukrainian soil. Nikolai Kulinich says this has left the country with too many weapons it doesnŐt need, and a defence industry still dependent on the former Soviet Union. Despite these problems, conversion has made good progress and more consumer goods are being made. But old habits die hard. No defence companies were included in the first wave of privatisation, and none will be sold off in the second wave. The Ukraine wants the international community to contribute to the financing of its conversion programme. Nikolai Kulinich is the head of the Department of International Organizations and Diplomatic Service at the Institute of International Relations, Kiev University. The conversion of defence industry is one of the most complicated problems directly connected with the Ukrainian National Security Issue. The dimensions of defence conversion must be dictated by the military security requirements of Ukraine, the peculiarities of the defence industry, weapons production technologies, and equipment for the National army. Sovereignty and independence, and the territorial integrity and invulnerability of its borders have to be maintained. Ukraine considers that the threat of war has not yet disappeared. Possible reasons of conflict can be of political, territorial, national-ethnic, religious origin based on real existing disputes which not always are settled by states in friendly way. We're all witnesses to that. That's why Ukraine considers it necessary to have both its armed forces to ensure its national security and national defence industry which will meet its requirements in weapons and equipment at a sufficient level. The problem is to evaluate the "sufficient level" of national defence industry. This is the crucial issue facing Ukrainian national security and economy. The conversion of military industry of Ukraine was started in 1988 within the framework of the former USSR. The last five-year state program of conversion was meant to reduce military output, increase the production of civilian goods, and improve the quality of manufactured goods able to compete on the world market. Thus the program of conversion was planned to ensure a more or less gradual transition to output of civilian goods using a wide network of co-operative deliveries from all 15 republics of the former USSR. By the time of the collapse of the USSR 30% of all the USSR military-industrial complex (MIC) enterprises were located on Ukrainian soil. That means 15-20 enterprises from each of nine All-Union ministries dealing with the USSR defence industry. These enterprises together with enterprises of seven former All-Union machine building ministries form the basis of the Ministry of Machine Building, Military-Industrial Complex and Conversion of independent Ukraine (MINMASHPROM). This Ministry was created in 1992 1. By January 1, 1993 MINMASHPROM Ukraine managed approximately 3590 enterprises which comprised 2056 industrial enterprises, 479 scientific centres, and 246 project design centres 2. Purely military industry was represented by 700 enterprises with a total number of approximately 1450000 employees. By the time of the Soviet UnionŐs collapse, the proportion of Ukrainian involvement in armament construction and supply was : - In complete (finished) armament supply - 15% (compared with Russia - 79%). - In complete (finished) armament construction and development - 7% (Russia 91%). - In armament sales (abroad) - 14% (Russia - 71%). At that time, 50% of the Soviet military fleet warships, ICBMs, tanks, radio-electronic equipment were built on Ukrainian territory 3. Some negative features of the Ukrainian Military-Industrial Complex (MIC) still exist. - Excessive resources devoted to armament construction areas such as rocket launchers, warships, and battle-tanks. - The lack of full-circle military industry in manufacturing the majority types of armament. - The great dependence on external armament procurements and order (basically from Russia). - The high level of dependence for spare parts supply and co-operation with MIC on the CIS. Eighty per cent of components for military manufacturing are supplied from the CIS. For example, in order to complete the construction of the cruiser, "Ulianovsk", at Ukrainian naval shipyards, spare parts and components from 2500 CIS military enterprises were needed. Obviously, the type of military-industrial complex we have does not fit the concept of Ukrainian national security, or the concept of an efficient market economy. In 1992 on the initiative of the MINMASHPROM and other departments, enterprises and organizations, the State Conversion Program was developed; it consists of more than 540 conversion sub-programs. Taking into consideration the experience of other countries and national interests, these sub-programs have been radically revised. They were regrouped into 22 complex programs. More clear priorities were provided and the basis for economic encouragement (preferable credits taxation etc.) was formed. The acute (3 times) reduction in the output of military equipment and weapons by 1993, has been matched by a significant growth in the output of civilian goods. The rate of the growth was 115% (4). Conversion is aimed at producing civilian goods which are of high demand in the national economy. State regulation of the conversion process allows us to avoid chaos in restructuring military industry and ensure more efficient distribution of scarce financial and raw material resources. Sometimes, partial conversion of plants and factories using former organizations and structures requires additional investments for mastering civilian goods production. Here it is very difficult to estimate actual expenditure and enterprises do not have the incentives for modification and improvement in the quality of their products, etc. Converted plants have to orient themselves towards many buyers instead of one - the state. In this case they bear the overall expenses in the process of products replacement. They lack flexibility in use of equipment,and they cannot properly define output volumes in good time. This significantly slows down development of the conversion process. There are two ways of increasing the effectiveness of MIC. One is through the privatization of military industrial enterprises; the second is by increasing investment into state-managed military industrial enterprises. Let's review the first possibility in the context of the current realities of Ukrainian economy. Three months ago the "first wave" of privatization of state-managed enterprises began in Ukraine. One hundred and fifty enterprises of the medium and small scale were designed to be privatized. There is not one enterprise from the MIC in this list. It is evident that there are no essential plans of privatization of MIC enterprises for the forthcoming future in the MINMASHPROM. The second way is the most acceptable for the Ukrainian government. Volumes of investments in conversion and foreign investment in particular are not sufficient. To carry out conversion together with the simultaneous formation of a free-market economy without foreign assistance may take an unacceptably long time. The Ukrainian government has some ideas as to how to accelerate the conversion with foreign support and assistance. - The implementation of UN Institute on Problems of Disarmament (Institute Report No. 47 to the UN General Assembly) on the organization of international assistance through technical consultations, equipment etc. for the purpose of transition of post-communist countries to a market economy; - The formation of International Conversion Assistance Center; - The formation of the UN "Register of significant military enterprises subjected to conversion" for assisting them financially from international sources. The Ukrainian government is sure that the International Community, the West, in particular, will benefit from allocating now necessary funds. Such an allocation will also promote regional and international security. [1] V. Antonov. "Oboronka" Ukrainy vibraet svoy put. "Krasnaya zveda" 26.02.1993 [2] V. Antonov. konversia vojennogo proizvodstva. "Uriadovy kurier" No. 25-26 18.02.1993 [3] V. Antonov. ukrainiski put konversil. "Uriadovy kurie" No. 9, 10 21.01.1993 [4] V. Durdinets. Vice-Speaker, Verkhovna Rada of Ukraine. Modern Ukraine and security in Europe. Speech at International Seminar. June 1993. ---------------------------------------------------------- Copyright 1994 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1994 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.