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 --------------------------------------------------------- A VIEW FROM RUSSIA Yuri V. Andreev Knowledge was power in the Soviet Union - and the Party kept a tight hold on both. Yuri Andreev says that the biggest obstacle to restructuring Russia's defence industry is that nobody really knows how big it is. Secrecy and inefficiency have combined to make the statistics unreliable. National security means that the state should still have a big say in the industry's future, but the private sector must also come in - and it won't unless it knows exactly what it is getting into. Professor Yuri V. Andreev is the Academic Secretary for the Russian Peace Research Institute at the Russian Academy of Sciences, and the Secretary of the Russian Commission for Promotion of Conversion. Before we start analyzing the impact of privatization of the defence industry on the labour market some general basic comments have to be made. The statistics available in present-day Russia leave much to be desired. Any analysis requires sufficient and reliable information about the entire economy, but especially about the military-industrial part of this economy. When we talk about the share of military expenditure in the GNP, we know that in the USA it takes about 5%. But if we try to assess the same in the Former Soviet Union (FSU) or even in the Russia of today, we get tremendously different figures and practically no official statistics. According to the former Gosplan (State planning ministry) of the USSR, military expenditure made up around 10% of GNP, but Mr.. Gorbachev used to refer to 18% of national income in late 1980s. The American economist Birman, who emigrated from the USSR some time ago, gave 25% of GNP as a result of his evaluations. Two Russian economists, Perwyshin and Lagutenko, went as high as 52% and 50%, respectively. What is important is that nobody showed any statistical basis for their appraisals; that is why it is hard to prove anything. My judgment tends to be, that most probably around 20% of GNP of FSU should be considered as close to reality. But the major problem still remains - we need reliable statistics that could give a clear and transparent answer to this basic question, especially in present-day Russia. Take a smaller question - how many factories are there in the Russian military-industrial complex [MIC] or were there in the MIC of the FSU? Some experts claimed about five thousand such units in FSU; others even put it at ten thousand. At the same time many officials name 1500 factories and 200 or more research bureaux in MIC of present Russia, which, according to available information, makes about 70% of the FSU figures. These last figures correspond to our own assessment of the place of the MIC in the economy of the FSU and present-day Russia. But again, we need official data; without them correct evaluation and proper programming are not possible. We are not debating here the ways and means of privatization in Russia, its general strategy. This could and should be a subject of another, special discussion. I am against privatising the Russian defence industry in general at present. My approach is based on determining the part of current Russian MIC necessary for maintenance of national security, converting the rest of MIC into civilian production, and privatizing this part of MIC. The first and most important question consists in considering the correlation between conversion and the national security doctrine, strategy and policy of the country. Only after agreement about this doctrine could the country put aside the capacities needed for military production and R&D. The rest could be clearly considered as available for conversion and privatization. In Russia, such a military doctrine is already adopted. However, it makes up only part of national security doctrine, which is still under debate at present. The result of this debate will decisively influence the limits of, and the entire terrain for, the conversion of military production and R&D in Russia and their further privatization. The defence industry as such should remain in state hands: according to available information around 400 such factories, which will be engaged only in military production, are already picked out. A private defence industry in Russia could create, in my judgment, a lot of troubles domestically and internationally. As for diversified firms, which produce both military and civilian goods, they should be in mixed [public and private] enterprises. According to the available information privatization is going rather slowly. Of all factories and research bureaux only about one hundred changed hands. At the same time, the state plans to speed up the process and to sell about 69% of all MIC enterprises before the end of the voucher privatization, including some big and well-known firms. As for the labour market, we know that employment in the defense industries of Russia has decreased by 19% in 1993 as compared with 1991. However, there is considerable hidden unemployment in the industry. The factories and research institutions still keep a lot of workers and researchers on their payroll [salaries are very low anyway] in the hope that they might get contracts one day. In fact, the real decrease in the number of working people is most probably much higher than officially stated. It has to be pointed out that the MIC has already lost a great part of its most dynamic, industrious and young people, who went into businesses often totally disconnected with military production. According to the statistics, for the first three months of 1994 5000 factories had shut-downs of a sizable duration, 428 out of them are closed altogether. At the end of the first quarter of 1994, the number of unemployed reached 4.4 million people; by the end of 1994 it could become 8.8 million or 11% of the labour force. A considerable part of these factories and unemployed people belongs to the Russian MIC. According to our analysis of this problem, the impact of slow-going privatization in this area on the labour problems of Russia's MIC is quite negligible. The problems are caused not by privatization, but by other processes. They are a result of something popularly known as "conversion", but in fact of the lack of conversion. Russian military production stopped or decreased totally by 48% in 1993 as compared to 1991. However, for many reasons, civilian production did not start instead - it even decreased in the same period by 13%.conversion and privatization. Conversion and privatization are closely connected. Privatization should follow the conversion of that part of the Russian MIC, which is in excess of national security needs. In the years of the Cold War, the military-industrial complex of the USSR consumed up to 4/5 of all national financial, human and technical resources. As a result, 60% (according to some other estimates- 80%) of the industry was connected with the military. In Russia alone, with approximately 70% of the military-industrial complex of the FSU, about 7 million people are employed in defence-oriented industries (indirectly, counting the subcontractors, up to 16 million). In the basic sciences, half of all expenditure was connected with the military; in space research, about 70%. Half of all firms in Moscow and about 3/4 in St. Petersburg belong to the MIC. Russia has ten so-called "secret" towns totally devoted to nuclear defense production. In Arzamas-16, Chelyabinsk-70, Penza-l9, Tomsk-7, Sverdlovsk-44, Krasnoyarsk-26 and other such towns live about 700.000-900.000 people. There are also dozens of smaller secret towns producing other types of armaments. We badly need programs for conversion, and for privatization in a country where the economy still bears signs of over-militarization. Sometimes one could hear, that some programs, maybe even many, already exist. If, as in the case of the State Program on Conversion of the USSR, signed in 1990, they remain secret and unpublished, they might expect the same, not very bright fate. Conversion and privatization need also corresponding legislative backing. The law on conversion of defense industries in Russia was adopted in March 1992. The social side of the law is especially important - it regulates the problems of the employed personnel in a country where one fifth is in one way or another connected with the military-industrial complex. But it is only the first step in creating a comprehensive legal basis in this area. How could privatization exercise a positive influence on, and promote a solution to, the labour problems of the Russian MIC? New private firms born out of MIC could present some ample possibilities for new employment, but they seldom do so. The retraining of unemployed or potentially unemployed labour force from MIC has not really started in full swing yet. In this area the role of the private sector could be extremely important. It is extremely important to develop mutually beneficial international cooperation in the field of conversion and privatization. The first steps have already been made. Considerable work was undertaken by Russian on one side and American, German, Italian, French partners on the other. In June 1992, a joint Russian-American declaration on defense conversion was signed which envisages the establishment of a US-Russian Defense Conversion Committee to facilitate conversion through expanded trade and investment. Of course, there are many obstacles in the way. Some difficulties spring from systemic differences and a lot of effort is needed to harmonize the economic bases of our countries. Other difficulties are connected with bureaucracy, the inefficiency of our management, and the tremendous corruption. As a result only a few hundred million dollars of foreign money are invested in the Russian MIC at the moment. We need concepts and models of international cooperation in the field of conversion, worked out together by experts of respective countries. Some coordinating bodies for that already exist and should be activated. The UN system which showed great interest in this problem could be more actively involved in the process. The concept of cooperation in this field ought to be based on the following grounds: _ No help is needed, except in extreme situations. _ Cooperation should be mutually beneficial. _ It is better to develop such cooperation with fully converted factories. _ It is preferable [but not a "must"] to develop such a cooperation with privatized, fully converted firms. However, instead of developing mutually beneficial cooperation including investment, we get a lot of advice whose value leaves much to be desired. Take, for example, the article "Defense conversion: bulldozing the management", published by K. Adelman and N. Augustine in "Foreign Affairs" in 1992. They give the Russians a lot of recommendations and design a number of models, although they state at the beginning of the article, that conversion in the US has "a discouraging history of failure". They cite an expert's report that says that "successful examples of such conversion [of the military production of the USA] are difficult to find. Detailed research has not identified a successful product in our economy today which was developed through a military-to-civilian approach. As of 1990 there are very few concrete examples of actual conversion". Therefore it seems to me quite questionable to recommend models based on such results. It is clear that conversion in Russia must go on even without any cooperation and of course without any help. The military-industrial complex of the FSU was created independently. Russia can survive without help and cooperation, but we will hardly survive without conversion and most probably without privatization of a considerable part of MIC. ------------------------------------------------------- Copyright 1994 NATO All rights reserved. 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