Updated: 10-Apr-2002 NATO Review

No. 2 - April 1991
Vol. 39

p. 16-22


Christopher Wilkinson of NATO's Economics Directorate

An article published in the NATO Review last year provided an assessment of the new figure for the Soviet defence budget which had been released in May 1989, and considered the effects of defence expenditure cuts first announced in January 1989. It also briefly discussed the Soviet defence industry conversion programme (1). Since that article was published, the transformation of the non-Soviet Warsaw Pact countries into independent states, the subsequent dissolution of the Warsaw Pact as a military alliance, Soviet unilateral force cuts and troop withdrawals from Eastern Europe, the unification of Germany within NATO and, above all, the Conventional Forces in Europe (CFE) agreement signed in November 1990 have all dramatically enhanced the security situation in Europe as perceived by the Alliance.

The effect of the January 1989 announcement by President Gorbachev of a 14.2 per cent reduction in military spending and a 19.5 per cent cut in military production, was difficult to calculate in the absence of realistic base figures. It was not until May 1989 that a new and more credible figure for total defence spending was revealed by President Gorbachev when he announced that 1989 defence outlays would be 77.3 billion roubles - and not 20.2 billion roubles as originally published. This was followed by an unprecedented series of disclosures by senior officials outlining reductions in defence spending for the 1986-1990 and 1991-1995 Five Year Plan periods. Between April and July 1990, however, the new figures were in turn effectively undermined, among others by former Foreign Minister Shevardnadze and by President Gorbachev himself, both of whom cited defence burden figures which imply significantly higher spending on defence than contained in the official budget.

This apparent uncertainty, even within the Soviet Union, over the magnitude of defence spending raises further questions as to how the Soviets calculate their defence outlays. NATO believes that this uncertainty has arisen because some aspects of defence spending are not covered in the published budget and, more importantly, because of the defects of the Soviet pricing system. There is decisive evidence that the prices paid by the Ministry of Defence for its armaments are substantially less than the cost of manufacturing the equipment, with the resulting losses offset by subsidies which may be difficult for Soviet officials to locate and measure.

In these circumstances, NATO planners have had little option but to continue to rely on independent estimates of Soviet resources committed to defence. These estimates, and in particular the force strength and defence production assessments which underpin them, remain essential in any evaluation of the interrelationship between defence resource allocation and defence posture. According to NATO's latest estimate of Soviet defence expenditure based on the BUILDING-BLOCK methodology (2), Soviet defence outlays were 130 to 160 billion roubles in 1989, or between 15 and 17 per cent of GDP. NATO calculates that defence outlays rose in real terms at a higher rate between 1985 to 1988 than in the previous five years, driven by the production of several new generations of weapons systems, the development of which predated President Gorbachev. However, unilateral force reductions, withdrawals from Eastern Europe and cuts in military production led to a six per cent real decline in defence expenditure in both 1989 and 1990.

Reductions and savings

Expenditure on military personnel has been reduced as the Soviet Union implements the 500,000 cut in military manpower announced by President Gorbachev in December 1989. However, this particular aspect of military restructuring appears to have been implemented in such a way as to arouse considerable discontent, at least among career military personnel. Employment opportunities for discharged servicemen have reportedly been lacking, while there have been numerous complaints about the inadequate provision of accommodation, particularly for discharged servicemen with families. The provision of accommodation and infrastructure, together with severance and pension payments, are likely to have offset much of the modest budgetary savings flowing from the personnel reductions.

These problems of absorbing discharged personnel are being exacerbated by difficulties which could not have been foreseen at the time the unilateral cuts were announced. Firstly, under bilateral agreements concluded with Czechoslovakia and Hungary, some 120,000 Soviet troops from the Central and Southern Groups of Forces are to be withdrawn by mid-1991, further burdening housing, social and educational services. Secondly, under the terms of the treaties related to German reunification some 360,000 servicemen from the Western Group of Forces and their dependants will have to return to the Soviet Union by 1994. However, in this case, the strains should be eased to some extent by the considerable funds which are being provided by the German government for housing and retraining the returning troops. Negotiations are continuing on the withdrawal of the Northern Group of Forces from Poland, the only other country in Central and Eastern Europe where Soviet forces are stationed.

Unilateral force cuts and the withdrawal of equipment have enabled the Soviet Union to achieve significant savings in operations and maintenance outlays, savings which mainly reflect the reduced holdings of ground force equipment, aircraft and ships by the Soviet forces. These reductions have considerably reduced the threat to NATO but, in general, the modern equipment which has been withdrawn has not been destroyed. Instead, equipment has either been stored east of the Urals - thus enabling the Soviet Union to avoid having to destroy it under the terms of the Conventional Armed Forces in Europe (CFE) agreement - or redeployed to residual units which have, as a result, been able to increase their holdings of up-to-date weapons. Actual destruction has largely been confined to obsolescent ground forces equipment and warships.

Perhaps the most significant development over the past two years has been the reduction in the procurement of some major weapons systems. It must be borne in mind, however, that these reductions have been made from very high annual production rates. The largest cuts have been taken by equipment for ground forces particularly tanks, with output being reduced by as much as one half to 1,700 in 1989, and further cuts were apparently carried out in 1990. Substantial cuts were also recorded in the output of field artillery and multiple rocket launchers. Overall, the reduced production of tanks and of these latter equipments appears to be consistent with Soviet statements on the way in which divisions are to be adapted to a more defensive posture.

Production of fighters and fighter bombers for the air and air defence forces declined by about 10 per cent in 1989, and probably also fell in 1990, while production of strategic offensive missiles was broadly unchanged. In the area of land-based missiles, emphasis was on mobile intercontinental ballistic missiles (ICBMs), while production and deployment of silo-based ICBMs may have been constrained to allow force modernization to proceed within prospective Strategic Arms Reduction Talks (START) limits. Production for naval forces, which are excluded from the CFE mandate, shows few signs of a slowdown, though this is perhaps not surprising in view of the long lead times involved in ship construction programmes. However, some major programmes have been, or are due to be, terminated. In the case of the Kirov nuclear-powered cruiser programme, halted after the fourth unit, termination has clearly reflected decisions on industrial conversion, but economic constraints may also have led to the decision which has reportedly been made to end construction of aircraft carriers for conventional take-off, after completion of the third unit, the Ulyanovsk.

Military space activities as measured by launch rates apparently declined in 1989, but given the importance of military space as a force multiplier at a time when reductions in other forces are being implemented, it seems likely that key space programmes will be maintained. Finally, there is some evidence that outlays on military research and development (R&D) began to level off in 1989, but these estimates are subject to considerably more uncertainty than those for the other major resource categories.

Soviet defence expenditures in the new security environment

Even within the new security environment, the prospects for Soviet military expenditure and defence production will remain of legitimate concern to NATO planning. For example, the successful implementation of the CFE treaty will lead to further substantial reductions in Soviet forces. In these circumstances, the capability of Soviet conventional forces will largely be determined by the extent to which treaty limited equipments are modernized and upgraded, and increased use is made of equipments not limited by treaty. Resource allocation decisions could have a significant impact on the pace with which the Soviet Union is able to modernize its residual forces. Such decisions could also affect military R&D strategy, and the extent to which reform within the military is able to proceed.

The immediate prospects for Soviet defence spending are difficult to assess. In late November 1990, Valentin Pavlov, then Finance Minister, announced a 10 per cent reduction in real defence spending for 1991. But last January, when the Supreme Soviet approved the budget for the current year, defence outlays were set at 96.6 billion roubles, a nominal increase of 36 per cent compared with the 1990 figure. Officials have explained that the increase reflects the sharply higher prices which the defence sector will have to face this year. Continuing force reductions and restructuring indicate that real defence spending probably will fall in 1991, but it is too early to tell whether the decline will be as large as Soviet officials claim.

Over the longer term, former Prime Minister Ryzhkov signalled in 1989 the Government's intention to reduce defence expenditure as a share of national income by between one-third and one-half by 1995 subject to satisfactory progress on arms control. But with Soviet economic growth likely to be much lower than was expected at the time this commitment was made, massive cuts would now be required to attain this objective. In these circumstances, there must be some doubt whether such a goal continues to form the basis of Soviet long-term defence expenditure planning. Nevertheless, it is likely that pressure on the Soviet Union to reduce the level of resources allocated to defence will continue. All five services (strategic rocket forces, ground forces, naval forces, air forces and air defence) will be affected by budgetary constraints, but even with significantly reduced levels of defence output, the smaller size of post-CFE forces would enable force modernization to continue, albeit at a slower rate than in the past.

The effects of defence industry conversion

In making an assessment of the likely and potential level of defence output over the coming years, the effects of defence industry conversion on the Soviet Union's capacity to produce and develop weapon systems must be taken into account. Conversion remains an important element in current economic planning despite criticism of some aspects of the programme and the practical difficulties experienced within the defence complex. According to Soviet figures, civilian goods accounted for about half of defence industry output in 1990 and this proportion is planned to increase to 65 per cent in 1995. Nevertheless, conversion is unlikely to fulfil all Soviet expectations. To be fully effective, a major and expensive restructuring of the military industrial sector will be required. In the short term, any financial savings will be limited by the costs of destroying conventional and strategic systems, the conversion of production facilities, verification and the construction of new military barracks. Soviet officials now understand that the financial and structural benefits of arms control and conversion will be smaller and longer in coming than they originally anticipated.

From the security viewpoint, NATO has a particular concern with the effect of conversion on reducing weapons output, and perhaps more importantly, permanently reducing the capacity of the defence-industrial base. Though civilian output from defence plants has increased and weapons throughput has fallen, in general there has been no significant reduction in weapons production capacity. In the majority of cases, military production lines have either continued operating at lower rates or have been mothballed. The consolidation of production in fewer plants and the closure or complete conversion of redundant capacity has occurred on only a limited scale to date. To a certain extent this may be due to the primary role of the traditional planning mechanism and the defence complex itself in implementing conversion, which may have allowed defence industry interests to preserve intact many of their military production functions. Another factor may have been the apparent reluctance of defence planners to rationalize defence plants and their warning of the need to retain mobilization capacity.

Though leadership decisions on future requirements for surge capacity could clearly affect the production potential of the defence industrial base, the capacity to step up military production will tend to be reduced in any case as resources are shifted to civilian production but the extent of any such reduction may depend to some extent on the way in which conversion is implemented. For example, the use of labour and equipment in processes far removed from defence production will degrade weapon production capacities more rapidly than if key defence industries are allowed to concentrate instead on closely related civilian production and development such as civil rather than military aircraft.

Also important will be the effects of political and institutional change and economic reform on the defence complex itself. The draft programme for defence conversion up to 1995, which has been approved by the Council of Ministers but not published in full, appears to confirm the leading role of the defence complex in the process of conversion. However, the future ability of the complex to preserve and control defence capacity is likely to depend, to a certain extent, on whether the alarming deterioration in Soviet economic performance prompts the leadership to introduce more radical measures to reform and restructure the defence industries. A further factor could be constitutional reform. For example, the draft Union Treaty, which seeks to define the relationship between the union and the republics, aims to maintain union control over defence production facilities, but the republics are likely to demand increased powers over defence plants located on their territory, particularly those plants which also produce for the civil sector.

The Soviet Union's long-term modernization capability is likely to be affected by the extent of the resource constraints on military R&D. Despite large cuts in the published military R&D budget and claims that about 150 research programmes have been halted, there is little evidence to date that any of the major weapons development programmes have been cancelled or stretched out. Nevertheless, pressures for a reduction in the resources allocated to military R&D are considerable, and could increase as Soviet force levels are scaled back. On the other hand, the military have been promised qualitative improvements to compensate for lower force levels and some military spokesmen have expressed discontent with the recently announced cuts. On balance, it seems likely that the leadership will protect key R&D programmes but may curb the long standing, but costly, practice of pursuing simultaneously more than one programme for closely related purposes. Soviet spokesmen have claimed that future R&D work will be carried out on a contractual basis, that competition between design teams is to increase, and that efforts will be focused on areas which will assist the defensive restructuring of forces. Soviet officials and the draft state conversion programme have emphasized the need to ensure that scientific and technological development should have civilian as well as military applications.

A further area where resource considerations are important is in the debate over military reform. This debate was given impetus by Gorbachev's inaugural speech as executive president in March 1990 when he stated that military reform would be one of his most important tasks. The debate has covered not only military doctrine and the future of the procurement and R&D systems, but the size and organization of the Soviet armed forces, the role of political administration within the military and the extent to which the forces should be professionalized. The outcome of this debate will depend critically on the extent to which military responsibilities are devolved to the republics under the proposed Union Treaty. It will also depend on the way in which the reform proposals formulated by the military are reconciled with the more radical plans put forward within the Supreme Soviet. Nevertheless, even if an allunion force is maintained along the lines preferred by the military leadership, concern over the resource costs involved is bound to remain a factor in determining the speed of any move towards smaller professional forces. These costs relate not only to the additional military pay and allowances which will be required, but for the improved facilities, standards of training, and accommodation - and perhaps above all high quality weapons - that such a force would expect.

Soviet defence budget - prospectsfor glasnost

In addition to the agreement on CFE, made within the context of the Conference on Security and Cooperation in Europe (CSCE), considerable progress has been made within the same overall framework in increasing openness in the defence economic area. An important precedent was set at the seminar on military doctrine which was held in Vienna in early 1990, under the auspices of the negotiations on Confidence and Security-Building Measures (CSBMs). In addition to promoting a high level dialogue among senior officers from the participating countries on military doctrine, and in particular on the new thinking in the Warsaw Pact, the seminar had sessions devoted to the exchange of information on military budgets. Five of the seven Warsaw Pact countries provided a briefing on their military budgets, the Soviet briefing being given by Colonel-General Babyev, Head of the Central Finance Directorate of the Soviet Ministry of Defence.

At the seminar, several speakers stressed that regular exchanges on defence budgets and programmes would contribute to a better understanding of intentions and capabilities and thus con-siderably enhance confidence. The seminarwas followed by proposals for CSBMs providing for a regular exchange of information on the deployment of major weapons systems and on military budgets, and these were adopted in Vienna and subsequently endorsed by the Paris CSCE Summit in November last year. Regarding budgets, the Vienna CSBM Document (3) which came into force on 1 January this year, requires all participating states to exchange information on their defence expenditures for the forthcoming financial year according to the UN standardized format. Each participating state "may ask for clarification from any other participating state on the budgetary information provided", and the participant so queried "will make every effort to answer such questions fully and promptly".

Although the adoption of these CSBMs is undoubtedly a positive development, it remains to be seen how much additional data the Soviet Union will be able to provide. In view of the prevailing uncertainty within the Soviet Union about the level of its defence spending, it would be unrealistic to expect too much in the near term thus, for the foreseeable future, NATO will have to continue to assess independently the magnitude of the Soviet resource commitment to defence.


(1) "Perestroika: the role of the defence sector", Christopher Wilkinson, NATO Review, No.1, February 1990, p. 20.

(2) The building block approach essentially involves the use of intelligence and published sources to identify and cost all those activities which make up the Soviet military effort. For a fuller explanation of this approach see "Soviet defence expenditure: past trends and prospects," Christopher Wilkinson, NATO Review, No.2, April 1989, p.16

(3) For a full discussion of the Vienna Document see, "The negotiations on Confidence- and Security- Building Measures: the Vienna agreement and beyond", Bruce George, NATO Review, No. 1, February 1991, p.15

© Copyright by North Atlantic Treaty Organisation 1991.