Russian defense budget & procurement

Conference on: Russian Decision Making and Implications for Defense Spending Lunch Session: Defense Budget and ProcurementMarch 2, 2011by Reed Livergood

OutlineI. EconomyII. BudgetIII. Procurement & SAPIV. Exports

I. EconomyRussia: • Rising:• Middle income country • GDP • GDP per capita – Biggest country outside WTO • Life expectancy• G8 Member • Education rates• #1 in: • oil production • Hit hard by the financial • natural gas crisis (2008-2009) (production and reserves) – Stabilization Fund• #2 in: drained • Arms exports • Reserve Fund • Coal reserves • National Welfare Fund

I. Economy in billions OECD GDP Canada $16,000 Finland $14,000 France Germany $12,000 Italy $10,000 Netherlands $8,000 Norway Poland $6,000 Spain $4,000 Sweden $2,000 United Kingdom $0 United States 1970 1974 1978 1984 1988 1992 1998 2002 2006 1972 1976 1980 1982 1986 1990 1994 1996 2000 2004 2008 Russian FederationSource: OECD Factbook 2010

I. Economy in US billions Russian GDP, constant prices (2009) 1,800 1,669 1,600 1,400 1,349 1,232 1,200 1,055 1,000 843 800 677 600 528 535 507 433 417 393 377 400 355 327 266 253 200 127 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Gross domestic product, constant prices (2009)Source: IMF World Economic Outlook 2010

I. Economy in US billions GDP per capita (PPP) $16,000 Brazil Chile $14,000 China $12,000 India Kazakhstan $10,000 Korea $8,000 Poland $6,000 Russia Ukraine $4,000 United Kingdom $2,000 United States Venezuela $0 1995 1996 1997 1998 2004 2005 2006 2007 1991 1992 1993 1994 1999 2000 2001 2002 2003 2008 2009Source: IMF World Economic Outlook 2010

I. Economyin USD Billions Russian Trade in goods in USD Billions800700 800 700 Goods600 600 • Petroleum-based products500 500400 400 • Natural gas300 300 • Wood-based products200 143 163 153 201 200 • Metals100 106 100 • 76 0 58 61 0 Chemicals 2001 2002 2003 2004 2005 2006 2007 2008 • Medical equipment Imports of goods Exports of goods Goods trade balance: exports minus imports of goods • Agricultural productsin USD Billions Russian Trade in services Services in USD Billions140 0120 -5100 -9.1 -9.9 -10 • Financial -10.9 80 -12.7 -13.8 -13.6 -15 • Technology-based 60 -19.6 -20 • Information Technology-based • 40 -25.1 -25 Academic: mathematics, physics, engineering 20 0 -30 • Communication • 2001 2002 2003 2004 2005 2006 2007 2008 Business Imports of services Exports of services Service trade balance: exports minus imports of services Source: OECD Factbook 2010

I. Economy in USD Millions Russian Flows of Foreign Direct Investment 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - 2001 2002 2003 2004 2005 2006 2007 2008 Inflows of foreign direct investment Outflows of foreign direct investmentSource: OECD Factbook 2010

I. Economy % Russian Inflation Rates• 9.6% inflation rate (1-2011) 25.0 21.5 21.3 20.0 20.9 – Double from summer of 2010 15.8 14.1 15.0 13.7 13.7 – Biggest problem ahead of 12.3 10.9 9.7 9.0 10.0 11.2 12.7 alcoholism (BRIC survey) 10.4 9.6 9.0 – Food inflation problematic 5.0 – Forecasts of 5.5% through 2015 0.0 2001 2002 2003 2004 2005 2006 2007 2008 Inflation rate: all items Inflation rate: food• 2.7% growth rate % Russian Real GDP growth compared to inflation• R28.89 : $1 USD 30.0 21.5 25.0• Interest rates increase after 15.8 13.7 14.1 20.0 12.7 10.9 9.7 9.0 record low 15.0 10.0 8.1 – 7.75% to 8% 7.3 7.2 7.7 6.4 5.1 5.6 4.7 5.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 Real GDP growth (%) Inflation rate: all items Source: OECD Factbook 2010

I. Economy Canada in thousands OECD Population 350,000 Finland France 300,000 Germany 250,000 Italy Netherlands 200,000 Norway 150,000 Poland Spain 100,000 Sweden 50,000 United Kingdom 0 United States 1952 1956 1958 1962 1968 1974 1978 1980 1984 1990 1996 2000 2002 2006 1950 1954 1960 1964 1966 1970 1972 1976 1982 1986 1988 1992 1994 1998 2004 2008 2010 Russian FederationSource: OECD Factbook 2010

II. BudgetSource: Google stock images

II. Budget • Executive Branch – 8 Ministries • Ministry of Defense • Ministry of Finance• Formulation • Ministry of Economic Development and Trade• Negotiation • Legislative Branch• Implementation – Upper House • Federation Council – 5th biggest military – Lower House budget worldwide • Duma • USA, China, United Kingdom, France, Russia

II. Budget• Basis: – Oil price • $75/bbl (2011), $78/bbl (2012), $79 (2013) – Oil and gas income (% of GDP) • 8.1% (2011), 7.9% (2012), 9.3% (2013) Oil Future Contract (Dollars per Barrel) $160 – Inflation (%) $140 $120 • 6.5% (2011), 6.0% (2012), $100 5.5% (2013) $80 $60 $40 – Defense burden $20 $0 Oct-1984 Oct-1987 Oct-1990 Oct-1993 Oct-1996 Oct-1999 Oct-2002 Oct-2005 Oct-2008 Apr-1983 Apr-1986 Apr-1989 Apr-1992 Apr-1995 Apr-1998 Apr-2001 Apr-2004 Apr-2007 Apr-2010 Jan-1984 Jan-1987 Jan-1990 Jan-1993 Jan-1996 Jan-1999 Jan-2002 Jan-2005 Jan-2008 Jan-2011 Jul-1985 Jul-1988 Jul-1991 Jul-1994 Jul-1997 Jul-2000 Jul-2003 Jul-2006 Jul-2009 • 2.84% (2010), 3.01% (2011), Oil Price 2.97% (2012), 3.39% (2013)

Key Players• President = Dmitry Medvedev • Defense Secretary = Anatoly Serdyukov• Prime Minister = Vladimir Putin • 1st Deputy Defense Minister (Acquisitions) = Vladimir• Deputy Prime Minister = Sergei Ivanov Popovkin• Deputy Prime Minister & Minister of Finance = Aleksey • Acting Chief of Armaments (MOD) = Oleg Frolov Kudrin • Deputy Defense Minister (Financial-Economic Work) =• Deputy Prime Minister & Chairman of Rosneft = Igor Lyubov Kudelina Sechin • Chief of General Staff = Nikolai Makarov• Deputy Finance Minister = Anton Siluanov • Ministry of Defenses Chief Social Guarantees• Ministry of Industry & Trade = Viktor Khristenko Department = Anna Kondratyeva• Ministry of Economic Development = Elvira Nabiullina • Defense Ministry Public Council Representative = Igor• Minister of Interior = Rashid Nurgaliyev Korotchenko• Federation Council Chairman = Sergei Mironov • Defense Ministry Public Council Representative = Ruslan Pukhov• Fed. Council Defense and Security Committee Chairman = Victor Ozerov • FSMTC General Manager = Alexander Kopetsky• Duma Chairman = Boris Gryzlov • Federal Service for Defense Contracts (Rosoboronzakaz) = Alexander Sukhorukov• Duma Defense and Security Committee Chairman = Victor Zavarzin • Federal Service Military-Technical Cooperation Director = Mikhail Arkadievich• Duma Budget Committee Deputy Chairman = Mikhail Babich • Deputy Director = Konstantin Biryulin• Auditor of Audit Chamber Nicolai Tabachkov • Director General of Rosoboronexport = Anatoly Isaykin

II. BudgetDefense and Security DraftJane’s & RIA Novosti:• Income: R8844 tn ($290 bn ) – 17.6 (% of GDP)• Expenditures: R10,658 tn ($329 bn) – 21.2 (% of GDP)• Deficit = -3.6% (of GDP) – R -1814 bn• Military: $60 bn – 13.8% of GDP Source: Military Balance 2010 (IISS)

II. BudgetSiluanov: (6-3-2010) Medvedev: (11-25-2010)• Military: • Military: – 2.6% (2010) of GDP – R574 bn (2011), R726 – Plan was 2.9% (2011), bn (2012), R1160 bn 3.0% (2012), 3.2% (2013) (2013)• Has overseen four-fold – % of GDP: 2.8% (2011) increase of military Kudrin: (11-30-2010) • Medvedev’s intention to secure R20 tn was a “new task”

II. Budget• State Armaments • Goal: modernizing and Program (SAP) renovation – R20,700 tn – 30% (by 2015), 70-80% (by 2020) • R19,040 tn for MOD – R100 bn increase in procurement • R2.5 – R3.0 tn for other law – 6.5% raise in personnel pay enforcement agencies – R&D spending will drop – 1st time in last ten years defense • From 22% (2010) to 16% (2013) burden is greater than 3% – 70% to be spent by 2015 – R700 bn allocated for after 2015 Source: Centre for Analysis of Strategies and Technologies

II. Budget Russian Military Expenditures ($US bn) 15.8 and Defense Burden (% of GDP) $700 16 14.2 14 $600 12.3 12 $500 10 $400 339 314 8 $300 266 5.9 5.5 5.3 6 4.4 4.5 4.4 4.3 $200 4.1 4.1 3.7 3.8 3.7 3.6 3.3 3.4 3.5 3.5 4 $100 66 58 57 53 58 61 53 2 37 39 41 44 48 34 30 33 22 30 33 21 $0 0 1994 1995 1996 1997 1998 2006 2007 2008 2009 2010 1988 1989 1990 1991 1992 1993 1999 2000 2001 2002 2003 2004 2005 Russian Military Expenditures $US bn (constant 2008) % of GDPSource: SIPRI Military Expenditure Database 2010

II. Budget Russian Defense Burden (% of GDP) SIPRI, Rosefielde, IISS 18 15.8 16 14.2 14 12.3 12 10 8 5.9 5.5 5.3 6 4.4 4.5 4.4 4.3 4.1 4.1 3.8 3.4 3.7 3.7 3.6 3.5 3.5 4 3.3 4.7 4.4 4.4 4.6 2 3.0 3.1 2.9 2.6 2.6 2.4 2.5 2.5 2.5 2.5 2.5 2.4 2.1 2.5 2.3 2.0 0 1990 1992 1994 1996 1999 2001 2003 2006 2008 1988 1989 1991 1993 1995 1997 1998 2000 2002 2004 2005 2007 % of GDP (SIPRI) % of GDP (Rosefielde) % of GDP (IISS)Sources: SIPRI, Russia in the 21st Century (Rosefields), Military Balance 2010 (IISS)

II. Budget in Billions Military Expenditure: Russia to Europe comparison (constant 2008) $800 80% 744 716 $700 70% 644 $600 60% $500 46% 50% 44% 41% 427 424 404 403 413 397 385 387 389 397 $400 368 381 40% 361 359 362 356 367 339 350 314 $300 266 30% $200 15% 14% 14% 20% 14% 13% 14% 11% 12% 9% 8% 9% 9% 10% 10% 10% 8% $100 66 6% 6% 61 10% 58 57 48 53 58 34 33 33 37 39 41 44 30 21 22 30 $0 0% 1988 1990 1993 1995 1997 1999 2002 2004 2006 2008 1989 1991 1992 1994 1996 1998 2000 2001 2003 2005 2007 2009 Europe Russia Russia as % of Eur SpendingSource: SIPRI Military Expenditure Database 2010

II. Budget • Kudrin & Serdyukov – 1.5% of GDP spent on army modernization, military pay, & other – Called for fair and honest elections to grant authorities• Federal Service Military- mandate for executing difficult Technical Cooperation economic reforms – Remains loyal to Putin (FSMTC) – Supported idea to purchase ships (Mistrals) vs. producing• Military-Industrial domestically Commission (MIC) – Has overseen four-fold increase of military industrial complex (Rosoboronzakaz)

III. Procurement & SAPSource: Centre for Analysis of Strategies and Technologies

III. Procurement & SAP• Navy: (100+ vessels) – Mistral assault ships – 20 submarines • (2 + 2) • 8 Borei-class ballistic – New Carrier missile submarines • Design (2011), start • Yasen-class nuclear attack (2015), completed (2020) submarines – Auxiliary ships • 3 Kilo-class submarines – Service craft – 35 corvettes – 15 frigates • Kashin-, Sovremennyi- • 3 Talwar-class class destroyers likely to be retired soon – Kirov- and Slava-class • Udaloy will become cruisers backbone

III. Procurement & SAP• Air Force – 1994-2003 = 0 planes • Su-30s – 2004-2009 = 3 planes • Su-35s • Upgrade MiG-29 to MiG-29SMT Investigation into 2 crashes (‘08) • T-50 PAK-FA to be future – 200+ aircraft had fin corrosion – Ordered (2015), tested (2015) • Helicopters – 500 Mi-24 Hind gunships Under SAP 2011-2020 – Mi-8/Mi-17 transport – 600+ planes • Transport aircraft – 1,000+ helicopters – Il-112 – An-70 – Il-476 – An-124

III. Procurement & SAP• Nuclear Forces: • Other Armaments – Procurement, upgrading, – Small batches of drones maintenance in combat • UAVs readiness will increase – Sniper rifles by 50% – Felin (French) infantry – 10 batteries of S-500 combat suits anti-missile and anti- – T-90s aircraft defense missiles – AN-94s – 56 batteries of S-400 defense missiles

III. Procurement & SAP Active Troops (2009) 250,000 360,000 24% 35% 80,000 8% 35,000 160,000 142,000 3% 16% 14% Army Airborne Navy Air Strategic Deterrent Forces Command and SupportSource: Military Balance 2010

III. Procurement & SAPProduction in defense – 45% of defense output volume is – UAC deal (Jan 2011) with dual-use MAG Industrial • Oil, gas, transport, energy, household appliances, electrical engineering sectors Automation Systems – 70% of scientific output is • MAG VIPER Fiber Placement System and 2 HyperMachTM defense Vertical profilers to support – Output up 13% while total went aircraft manufacturing down (PM Putin 4-21-2010) – Production declined 46% (1991- 2001) – Russian government wants to supply 5% of the world’s aircraft by 2015, 10% by 2025

III. Procurement & SAPSource: Russian Defense-Industrial Base, CSIS

III. Procurement & SAPPartnerships • Italy: Iveco joint• Bridge short- and enterprise medium-term gaps – Lynx light multi-purpose armored vehicles (LMVs)• Not cost free (about 1,000)• France: (STX & DNCS) • BTR-80 – Mistral amphibious assault • Tiger ships • 1st two to be built in France – 20%, 40% Russian-built – $1.9 bn est. • 2nd two to be built in Russia – 80%, 80% Russian-built

III. Procurement & SAPInvestment • 1/3rd of defense enterprises• Regulatory changes coming to are bankrupt, 1/3rd are improve climate, abolish unstable limitations, revise legal • 80% of production plants investment framework are obsolete – One of Putin’s last acts as • Investment is 10-20% it is in president was to sign the 50% developed countries acquisition law on strategic ventures • Defense is “locomotive” of• $50 bn worth of bonds to be sold entire economy• $10 bn worth of state assets to be • M&As are creating sold until at least 2014 “industrial kolkhozy”

III. Procurement & SAPResearch & Development Corruption• Share of worldwide Russian – 9,000+ corruption-related law research-related products has violations dropped from 6% (1990), to 1% • More than R870m in damage (2000), to 0.2% (2008) • 950 officials involved• Japan spends 4x, Germany 3x, – Almost 10:1 ratio Czech Republic 2x more than – Fraud increased by 50% Russia on scientific R&D – Most crimes committed by• Russia faced “stooping to the officials who have regulatory level of iron supplier” powers – ROE Director Isaykin – Mostly found in areas where• Russian “Silicon Valley” (Skolkovo) “hard cash” and material• Russian “DARPA” resources are being – Technological independence distributed

IV. Exports• Worldwide leader in SIPRI Top 100 Arms- exports (#2) producing companies – USA, Russia, Germany, (2009) France, UK – 9 were Russian• Total sales (2009) were • Almaz-Antei (23) $8.5 bn (FSMTC) with a • United Aircraft Corp. (29) – Sukhoi 50% growth (2001-6) – Irkut Corp• Have played important – MiG role domestically • TRV Corp (67 • Vertolety Rossii (73) – Arrears, inflation • Uralvagonzavod (76)• “Lifeline” for industry • UEC (90)

IV. ExportsSource: Centre for Analysis of Strategiesand Technologies

IV. Exports• Exports • 4 others who can – Rosoboroneksport (ROE) export: • Rosoboronprom (ROP) – RSK-MiG• ROE created (2000) and given – Kolomna Design Bureau exclusive right to sell exports (March 2007) – NPO-Machine-Building – Sales (2009): $7.4 bn (10% increase – Tula Instrument Design from 2008) – Portfolio: $34 bn ($15 bn from 2009 (KBP) due to Saudi Arabia, Libya, Venezuela) – Works with 700+ enterprises and provides R3-4 bn/yr loan guarantees – Reports to MIC• ROP created (2005) to officially sign contracts

IV. Exports (2009) • M&As Goals• S-300 SAM Systems (China) – eliminate problems with• 43 Su-30 fighters (Algeria, skilled personnel India, Malaysia) shortages• Missile weapons for fighters – technology losses (UAC) – obsolete production• 120 helicopters lines• About 100 T-90 tanks (India) – low labor productivity – product quality – duplicative development – excess capacity issues

IV. Exports• China • India – PLA Commander in Chief – Uses about 70% Russian- (Gen Xu Qiliang) saw “at made equipment least five more years of • T-55s strong co-operation” • T-72s – Su-27s (J-11) • T-90s • J-11B • Submarines • MiGs – Su-33s (J15) • Sukhoi fighters

IV. Exports• Algeria • Libya – 2006 deal ($4.7 bn) – 2010 deal ($1.8 bn) • 40 MiGs • Small arms (AKs) – 34 MiG-29s returned • Light weapons • 20 Su fighters • Complex weapons • 16 Yak trainers • Venezuela • 8 S-300s • 40 T-90s – 2010 deal ($5 bn) • 92 T-92 tanks – 2010 deal (about $1 bn) • S-300 • 16 Su-30s • Syria – Forgiven 75% of debt with purchases

Conclusion• Key Questions still remain for Russia: – How will insufficient allocation distribution be addressed and who will assert this effort? – What role does inflation play in setting budget allocations? – Will civilian control ever come to pass? – What are the measureable steps to create a Russian version of “Silicon Valley” or “DARPA”? – How will the SAP 2011-2020 adapt to the changing nature of military threats?

Conclusion• Glasnost (transparency) is needed – again• The nature of the military budget system assists in uncontrolled growth and should have civilian formulation and execution powers• The nature of oligopoly and secret cost information hurt production and allocation efficiencies• High Inflation, rampant waste, corruption, and bureaucratic interference have all affected the front- line soldier in detrimental ways

Russian defense budget & procurement

by Reed Livergood on Jun 29, 2011

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Russian defense budget & procurement Presentation Transcript