1. Conference on:
Russian Decision Making and
Implications for Defense Spending
Lunch Session:
Defense Budget and Procurement
March 2, 2011
by Reed Livergood
3. I. Economy
Russia: • 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
4. 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 Federation
Source: OECD Factbook 2010
6. 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
2009
Source: IMF World Economic Outlook 2010
7. I. Economy
in USD Billions Russian Trade in goods in USD Billions
800
700
800
700
Goods
600 600
• Petroleum-based products
500 500
400 400
• Natural gas
300 300 • Wood-based products
200
143
163 153
201 200
• Metals
100 106 100
•
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 products
in USD Billions Russian Trade in services
Services
in USD Billions
140 0
120
-5
100
-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
8. 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 investment
Source: OECD Factbook 2010
9. 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
10. 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 Federation
Source: OECD Factbook 2010
12. 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
14. 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 Defense's 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
15. II. Budget
Defense and Security Draft
Jane’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)
16. II. Budget
Siluanov: (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”
17. 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
21. 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)
22. III. Procurement & SAP
Source: Centre for Analysis of Strategies and Technologies
23. 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
24. 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
25. 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
26. 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 Support
Source: Military Balance 2010
27. III. Procurement & SAP
Production 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
29. III. Procurement & SAP
Partnerships • 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
30. III. Procurement & SAP
Investment • 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”
31. III. Procurement & SAP
Research & 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
32. 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)
34. 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
35. 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
36. 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
38. 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?
39. 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