| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
They're Strangling Russia's Golden Goose (int'l edition) Poor management and corruption are killing arms sales If the latest Russian arms-export catalog is to be believed, there's something for everyone. Want to go fishing? How about the APS underwater assault rifle, marketed as a self-defense tool against ''dangerous sea predators?'' Need to win a border war? AVPK Sukhoi's state-of-the-art Su-27 jet fighter goes for $40 million. But read between the lines of the four-color tome sold by Rosvooruzheniye State Co., Russia's official arms exporter, and you get a different story. Most of the items exist only as prototypes because companies can't afford to produce them. Cronyism and election-year politicking, coupled with slumping sales, are killing Russia's golden goose. Weapons are the only manufactured products whose ''made in Russia'' label is an endorsement rather than a thumbs-down. In 1998, Russia earned $2.9 billion from official arms sales. But little of the money finds its way back to the companies that make Russia's tanks, aircraft, or guns. Most revenue from weapons sales disappears into the government budget, the pockets of political insiders, or campaign coffers. The result is far too many cash-starved producers. Sergei Stepashin, Russia's new prime minister, has promised to restructure the industry and has even created a new Cabinet post to oversee it. He is also angling to put his own people in top spots at Rosvooruzheniye. Critics question how much can be changed any time soon. Parliamentary elections are in December, and the presidential election will be held in June, 2000. The temptation will be strong to use funds from Rosvooruzheniye to finance political campaigns. In addition, neither the Yeltsin government nor the Communist majority in the parliament wants to put millions of defense workers on the street in the middle of a campaign season. Time is drawing short if the industry is to rebound. It's now a tangle of 1,700 semiprivatized companies scrambling for export sales and for the precious few orders that Moscow doles out. ''Unless the profusion of defense companies merge and focus on a few product lines, the industry will collapse in the next 8 to 10 years,'' says Siemon T. Wezeman, an analyst at the Stockholm International Peace Research Institute. It would help if Stepashin's new government could spend more to modernize Russia's armed forces. But Moscow is almost broke. Thus, Russian armsmakers are hurt most of all by the collapse of their home market. In 1990, the Russian government bought 40 fighter planes from its two major jet suppliers, Sukhoi and MAPO MiG. Now it buys just one or two a year. And there's no more government dole: Defense gets only a fraction of its Soviet-era research and development budget. MEDDLING MISHAPS. The Russians have made some business mistakes, too. In their haste to export, they flooded the market with weaponry, sparking wholesale price cutting. Hoping to end the dog-eat-dog competition, Moscow in 1993 centralized arms exports in the newly created Rosvooruzheniye. It quickly evolved into one of the most secretive and politicized state agencies in Russia. The political appointees who control it sometimes bungle deals. Last year, former prime minister Viktor S. Chernomyrdin tapped an executive from MAPO MiG to head Rosvooruzheniye. When he started lobbying Ecuador to buy MiG fighters instead of the Sukhois they preferred, the Ecuadorans walked away, and Russia lost a $600 million deal. Russia's armsmakers are hoping that Kosovo may give them a lift. They see the strong anti-Western feeling over NATO bombings as leading to new sales for the Russian military. But in the meantime, Russia is facing increasing competition in global markets. Such current customers as Hungary are frustrated the Russians can't deliver the goods or maintenance on schedule. After three years of explosive growth in the mid-1990s, arms exports fell 12% in 1997 and 14% last year. If Russia is to have any hope of reversing that trend, Stepashin will have to deliver on his promise to stop corruption and remake the industry. By Margaret Coker in Moscow _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS They're Strangling Russia's Golden Goose (int'l edition) TABLE: The Sorry State of Russia's Defense Industry INTERACT E-Mail to Business Week Online | |||
