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. Last Updated: 07/27/2016

DEFENSE DOSSIER: Military Keeps Crisis Alive




The International Monetary Fund, World Bank and the Japanese government have saved Russia from financial collapse. But the $17.1 billion bailout will probably only buy some time, and in several months, the problem may be even worse.


Up until 1991, the Soviet economy was producing thousands of tanks, guns, planes and rockets a year. In 1992, production virtually stopped, but this mammoth defense industry -- bigger than the world ever knew -- has not been since reformed or technologically restructured. Instead, it was speedily privatized by Anatoly Chubais, with overall control granted to the Soviet-era managers and arms designers -- the defense industry nomenklatura -- who became truly independent, with no more Communist Party watchdogs around.


This crooked privatization was, apparently, a deliberate political gamble. For several years, the management was happy: They exported Soviet-era mobilization reserves of spare parts and materials for cash as scrap metal. Some of this "scrap," of course, turned out to be sensitive military equipment that ended up in Iraq, Iran, China, Britain, the United States and other countries with an interest in Soviet military technology.


Other Russian military industrialists were even more lucky. They were officially allowed to export at world prices arms that were made for cheap using former Soviet equipment and components mostly stocked away during the Cold War.


This privatization game gave Yeltsin much-needed support in fighting his numerous foes and winning elections. Most of the Russians who benefited from privatization, arms trade, sell-offs of military supplies and equipment, manipulation of defense budget funds and so on since the collapse of the Soviet Union were former communists. Many of them genuinely hate pro-Western liberal ideas and Western influence in Russia. But a restoration of Soviet-style communism could roll back the crony privatization, and so they gave Yeltsin their grudging support.


Russia's present upper class genuinely disregards the aging Kremlin ruler. But it still effectively supports Yeltsin as a guarantor of stability. Chubais served his master well during mass privatization. Now he has managed to clinch a deal with the IMF that saved Yeltsin when the nomenklatura's loyalty began to waiver.


However, the tactical political brilliance of Yeltsin's industrial and defense policies that helped to attract the support of key generals and defense industry chiefs had a darker side.


To keep up the money flow, Yeltsin's nomenklatura supporters in the armed forces and defense industry also needed to keep their factories, design bureaus and tank divisions officially afloat, even if the factories had long ago stopped producing anything sellable or the ghost "tank divisions" could not possibly defeat a band of stray monkeys.


At the same time, successive Yeltsin governments could not clarify the problem or begin genuine, long-ago-proclaimed military reform, defense industry conversion or any other badly needed structural reform, since this would have destroyed their political base. Economics Minister Yakov Urinson recently introduced a reasonable plan to cut down and restructure the defense industry. But he told me that he has no political force to do anything. "My plan is no more than a recommendation or a base to begin some discussion," he said. "If we try to actually do something, the political resistance becomes overwhelming."


So the Defense Ministry continued to keep enlisting more men than it could possibly feed, and defense plants did not go bankrupt. They also did not discharge their workers, pay them wages, pay for gas, electricity or water, or pay taxes. If they ever did pay anything to anyone, it was mostly in barter.


For some time, this system continued to function. While the oil and gas industry and the aluminum and iron smelters were producing and earning lots of export dollars, the government could function and even give some money to the defense sector. But then the Asian crisis sent commodity prices tumbling, and everything collapsed.


Now the West has come in to rescue the system with a massive bailout. Apparently, Western bankers believe that the "invisible hand" of market forces and some tinkering with lending and exchange rates will soon reform the ruling Russian nomenklatura into efficient managers that will put the country back to work and then repay the lent money.


Pavel Felgenhauer is defense and national security affairs editor of Segodnya.