Colloquium 1996 Panel III : Armed Forces and Defence Industry in Transition Economies: The Human Dimension

Military Enterprises in Russia: Adaptation to the Market System Leonid Kosals Leading Researcher, Institute for Population Studies, Russian Academy of Sciences, Moscow Summary The goal of this paper is the analysis of economic differences among Russian enterprises, particularly to determine the influence of these differences on the political and social shocks (using the case of military enterprises). We want to estimate whether current variations could provoke such shocks and break the relative stability in Russia. The basis for the classification is the survey (polling) of the military enterprises' directors, conducted in cooperation with Prof. R. Ryvkina, during May-June 1996. These enterprises are situated in all main economic regions of Russia. We utilized a special questionnaire, including questions about the socio-economic position of the military enterprises, as well as the changes which have taken place in these establishments. The directors acted as the "experts" on the position of their enterprises. This survey was undertaken by the League of Assistance to the Military Enterprises, which distributed 1000 questionnaires (145 directors answered). Classification for Analysis Of Economic Variations among the Military Enterprises According to the estimates received, the main part (58%) of the surveyed enterprises are in a weak position, on the verge of bankruptcy. Only 42% of directors reported an average situation in their establishments. Nobody gave the answer 'good position'. This fact isn't a new story. The same data can be extracted from official statistics. One could predict this as the inevitable result of the transition to the market system, when state paternalism was stopped. The important thing is to reveal the tendency, whether the position of the enterprises is worse, is stable, or perhaps improved. In order to learn this we asked the directors: "What were the changes in the position of your enterprise during one year?". This question was addressed to eleven fields of the enterprises' activity (has the situation improved, or worsened, or remained the same?). These fields are as follows: financial position, size of production, innovation activity, investment activity, personnel's attitude to the work, economic freedom of the enterprise, etc. Only in one field did the positive changes dominate over negative ones: 28% of the directors polled thought there is more economic freedom now, and only 10% of the directors reported a shrinking of this freedom (62% answered "there were no changes"). In the rest of the activities negative evaluations dominated. The most skeptical answers were in the fields of investment, innovation and financial position of the enterprises (by 28, 6 and 6 times, respectively, the negative estimates were higher than the positive ones). Relations between labor and executives, as well as the attitude to the work were also worse than one year before. Thus, the socio-economic indicators have slowed down simultaneously with the increasing economic freedom in the Russian military-industrial complex. Furthermore, there is a skeptical opinion among the directors about the future of their enterprises. This conclusion is drawn from their answers to the question: "If the current trends continue, do you expect improvement or aggravation in the economic position of your enterprises during 1996?". The answers were distributed as follows: 9% of the respondents expected improvements versus 66% who expected aggravations (25% gave the answer "I expect no changes"). However, when the executives estimated the strategic perspectives, the optimistic and pessimistic evaluations were approximately equal. This conclusion is from analysis of answers to the question: "What do you feel is the future of your enterprise in a long-term perspective?", which are distributed as shown in Table I (in per cent): Table I Expansion of production, increase of profits, hiring of new employees 26 Conservation of the status quo 46 Losses, decrease of production, lay-offs 24 The closing of the enterprise 4 Total 100

Methodology for the Analysis Do these data demonstrate that the market has led to the decline of every industrial enterprise and that no one can adapt to the market system? If that is true, then the communist opposition is right when they speak about a total collapse of the Russian economy as the consequence of market reforms. Then this economy has no opportunity to rise, after the shock, in the near future and an anti-democratic and anti-market regime is inevitable in the short-term perspective. To seek an answer to this question the author constructed a classification of the military enterprises surveyed. The first step was to create a classification using indicators of current economic position, using two classes. Firstly, the enterprises with relatively good economic positions (29%) were identified. These enterprises are not in jeopardy of bankruptcy, according to the directors' estimates. They made investments in 1995 and have relatively high wages now - 1.5 times higher than on average (700 thousand rubles or 140 US$ per month). Secondly, the enterprises with relatively bad economic positions (71%), which are on the verge of bankruptcy, with low wages and having a lack of investments were noted. The next step was construction of a classification of the enterprises on changes in the economic position during the past year. The first class (6%) were enterprises with positive dynamics of at least one among the three important economic indicators - financial status, size of sales, or investments. In the second class we included the establishments with aggravation of these economic indicators (94%). After all these actions, we made an analysis of the interaction between these two classifications and a composite classification was constructed, which is integrated in two dimensions - current economic position of the enterprise and its changes during the past year. As a result we obtained a classification including three groups of enterprises. First group: the enterprises have been adapted to the market system ('completely adapted' - 4% among the total). This is the group of enterprises with relatively good economic positions, which have been improving during the past year. They are not in jeopardy of bankruptcy, they could expand production and profits, as well as raise wages. This is the indicator of adaptation to the current market system in Russia. Second group: the enterprises at the beginning of adaptation to the current market system (25%). This group includes the enterprises with bad economic positions, but with positive dynamics of important economic indicators. They are at the start of the rise, which is the result of the positive changes in the internal socio-economic structure. They met the requirements for the new economic environment and now they are trying to compete in the new markets of civilian goods. Third group: the enterprises failed in adaptation to the market system (71%). Among these are the enterprises with bad economic positions which have been worsened during the past year. They are in danger of bankruptcy, investments have acutely slowed down or stopped completely, and production is decreasing significantly. Perhaps part of them have made a latent restructuring which has had no external effect so far, but our methodology and data received does not permit us to determine this kind of activity. The difference between these three classes is shown in Table II. Table II The difference in important economic indicators between three groups of enterprises. Groups of Enterprises Important Economic Indicators Changes in monthly production (%) Monthly wages (thous.R) Employment (number of workers) Share of civilian Production (%) Group I: 'completely adapted' +69 890 5915 60 Group II: in the beginning +21 485 4044 52 Group III: failed in adaptation -33 463 3040 51 Total -15 486 3406 52 Thus, the military enterprises having success in adaptation to the market system in Russia are the large establishments with a high share of civilian production and with personnel almost two times better paid than on average. They are concentrated firstly in industries where weapons are produced, as well as in the nuclear industry. The enterprises which have failed in adaptation are in electronics and partly in the arms production industry.

Factors of Adaptation Analysis of the differences between these three groups of military enterprises gave us the factors of adaptation to the market system. Privatization. The share of the privatized enterprises is 1.5 times higher in the 'completely adapted' enterprises than in the failed ones. Furthermore, among directors of the 'completely adapted' organizations the share of those who report privatization as a useful action for their enterprise is 2.5 times higher in comparison with the directors of the enterprises failed in adaptation (33% versus 13%). Therefore, success in privatization is one of the main factors of adaptation to the market system. Conversion. The rate of enterprises with completed conversion is 1.6 times higher in the group of the 'completely adapted' establishments. International economic activity. Success in this field was an important factor of adaptation. This conclusion is from analysis of the directors' satisfaction with the result of this activity: the share of respondents satisfied is almost 2 times higher in the 'completely adapted' than in the failed enterprises (50% versus 26%). Marketing activity. Success in marketing is one of the key factors of adaptation to the market system. Among leaders of the 'completely adapted' military enterprises there were none who had troubles in marketing versus 64% having such troubles in the group of organizations failed in adaptation. Social mood of the personnel. Success in solving social problems in the enterprise (thanks to higher wages, better social services, etc.) is also one of the factors of adaptation to the market system in Russia. So, answering the question on the social mood of the personnel, the directors of 2/3 of the 'completely adapted' mentioned this mood is quiet versus 4% of leaders of the establishments which failed in adaptation. Relative social consensus reached in the best enterprises has led to a good attitude to work, as well as to high discipline and activity of personnel. Directors' Expectations We mentioned above that the directors' expectations about the future of their enterprises are pessimistic in general. The expectations among directors of the first two groups ('completely adapted' and those which are in the beginning of adaptation) are relatively optimistic, contrary to expectations of the rest of the respondents. For example, among executives in enterprises of the first and second group, 83% and 60% respectively, are expecting a rise in production during 1996, versus only 23% in the third group. The same expectations are reflected in the demand of production, employment and other indicators. Relatively optimistic expectations of the directors of the adapted enterprises correspond with their plans to make investments. Almost 100% of them want to implement investments, while 53% of directors within the second group are going to make investments during 1996, versus 35% within the third group. Thus, somewhat less than 1/3 of military enterprises surveyed form the basis for stability in the near future. Their leaders and personnel have no interest in social and political shocks, in rapid changes in the economic course and in a return of communists to power. This is evident, for example, from the directors' answers to the question about the desirable economic line of the government: all the directors of enterprises from the first group want to continue the course to market reforms, as well as 57% among directors from the second group. However, only 47% of directors heading enterprises which failed in adaptation are supportive of a liberal economic transition. Therefore, in the near future representatives of the last group have the intention to refuse further market reforms and to move away from those top officials who implement these reforms. Thus, somewhat less than 1/3 of military enterprises surveyed form the basis for stability in the near future. Their leaders and personnel have no interest in social and political shocks, in rapid changes in the economic course and in a return of communists to power. This is evident, for example, from the directors' answers to the question about the desirable economic line of the government: all the directors of enterprises from the first group want to continue the course to market reforms, as well as 57% among directors from the second group. However, only 47% of directors heading enterprises which failed in adaptation are supportive of a liberal economic transition. Therefore, in the near future representatives of the last group have the intention to refuse further market reforms and to move away from those top officials who implement these reforms.