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Russia: Arms Industry Rationalizes For Survival

Moscow, 5 February 1997 (RFE/RL) -- Russia's biggest and best defense industry enterprises are moving to establish a series of powerful alliances to boost their competitiveness in the international and domestic arms markets.

defense officials told RFE/RL that this integration process is "already running at full steam." In Russia, as in the other major powers, the end of the Cold War era has seen a dramatic scaling-down of arms purchases and such rationalization is the only way for hundreds of companies to survive.

Yuri Chervakov of the defense Industry Ministry says his ministry plans to boost integration among aviation, artillery and high-precision weaponry enterprises first, with other industry sectors following.

Ministry officials are now studying the successful rationalization process underway in the naval industrial sector, with a view to applying its lessons to the military-industrial complex more broadly.

Chervakov told our correspondent in Moscow that according to Minoboronprom's plans, more than 320 production facilities, research institutes and design bureaus will unite into a total of 30 state-controlled corporations. The ministry's plans have aready won approval from the federal government and its power agencies, and five such conglomerates have already been set up.

The restructuring in the engine-building sector will for instance see a total of 44 enterprises uniting into a maximum of five corporations. As for the instrumentation and avionics sectors, some 120 companies will merge to form 12 corporations. Russia's 38 scientific research institutes will unite into just five conglomerates.

Chervakov says most of these corporations will be formed within the year, but this seems unlikely due to unconcealed reluctance of the few profit-making flagships in the military-industrial complex to merge with their less fortunate counterparts.

The total number of defense industry enterprises in Russia has shrunk from 1,800 to just 500 in the past few years, mainly due to the dramatic decrease in state contracts. The Russian air force, for instance, purchased no planes at all last year. Moreover, the Russian government fails to pay even for those few orders which power agencies place among the remaining 500.

The federal government currently owes the defense industry 9 trillion roubles ($1.6 billion) of which is 3 trillion was incurred during the last year. It seems unlikely that the cash-strapped state will be able to pay thise huge debt off soon, to say nothing of placing more orders in the near future. Russia has cut its military spendings from 7.9 percent of GDP in 1990 to the current level 3.7 percent.

The Ministry of Economy predicts an economic revival which would see Russia spending at least 5.5 percent of GDP on its military early next century. But Chervakov says that by then, most of the remaining 500 enterprises will have died out unless they stand united.

He cites the U.S. defense industry as an example of how to handle the crisis. Beset with same difficulties of suddenly falling orders, industry oversupply and duplication of effort, U.S. defense-related companies have engaged in a whirlwind of alliances and mergers so as to give themselves the strength and resources to survive. The same trend has been slower getting underway in West Europe, where European Union governments have been reluctant to see their countries' companies submerged into pan-European conglomerates.