russian defense budget & procurement
DESCRIPTION
Russian defense budget & procurementTRANSCRIPT
Conference on: Russian Decision Making and
Implications for Defense Spending
Lunch Session:
Defense Budget and Procurement
March 2, 2011
by Reed Livergood
I. Economy
Russia:
• Middle income country– Biggest country outside WTO
• G8 Member
• #1 in: • oil production
• natural gas
(production and reserves)
• #2 in:• Arms exports
• Coal reserves
• Rising:• GDP
• GDP per capita
• Life expectancy
• Education rates
• Hit hard by the financial crisis (2008-2009)
– Stabilization Fund drained• Reserve Fund
• National Welfare Fund
I. Economy
Source: OECD Factbook 2010
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
OECD GDP Canada
Finland
France
Germany
Italy
Netherlands
Norway
Poland
Spain
Sweden
United Kingdom
United States
Russian Federation
in billions
I. Economy
Source: IMF World Economic Outlook 2010
127
266
393433
528 535
355
253327
377417
507
677
843
1,055
1,349
1,669
1,232
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Russian GDP, constant prices (2009)
Gross domestic product, constant prices (2009)
in US billions
I. Economy
Source: IMF World Economic Outlook 2010
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
GDP per capita (PPP)Brazil
Chile
China
India
Kazakhstan
Korea
Poland
Russia
Ukraine
United Kingdom
United States
Venezuela
in US billions
I. Economy
Source: OECD Factbook 2010
Goods• Petroleum-based products
• Natural gas
• Wood-based products
• Metals
• Chemicals
• Medical equipment
• Agricultural products
Services• Financial
• Technology-based
• Information Technology-based
• Academic: mathematics, physics, engineering
• Communication
• Business
58 61 76106
143163 153
201
0
100
200
300
400
500
600
700
800
0
100
200
300
400
500
600
700
800
2001 2002 2003 2004 2005 2006 2007 2008
Russian Trade in goods
Imports of goods Exports of goods Goods trade balance: exports minus imports of goods
in USD Billions in USD Billions
-9.1-9.9
-10.9
-12.7-13.8 -13.6
-19.6
-25.1
-30
-25
-20
-15
-10
-5
0
0
20
40
60
80
100
120
140
2001 2002 2003 2004 2005 2006 2007 2008
Russian Trade in services
Imports of services Exports of services Service trade balance: exports minus imports of services
in USD Billions in USD Billions
I. Economy
Source: OECD Factbook 2010
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2001 2002 2003 2004 2005 2006 2007 2008
Russian Flows of Foreign Direct Investment
Inflows of foreign direct investment Outflows of foreign direct investment
in USD Millions
I. Economy
• 9.6% inflation rate (1-2011)
– Double from summer of 2010
– Biggest problem ahead of alcoholism (BRIC survey)
– Food inflation problematic
– Forecasts of 5.5% through 2015
• 2.7% growth rate
• R28.89 : $1 USD
• Interest rates increase after record low– 7.75% to 8%
Source: OECD Factbook 2010
21.5
15.8
13.7
10.9
12.79.7
9.0
14.1
21.3
12.311.2
10.4
13.7
9.69.0
20.9
0.0
5.0
10.0
15.0
20.0
25.0
2001 2002 2003 2004 2005 2006 2007 2008
Russian Inflation Rates
Inflation rate: all items Inflation rate: food
%
5.1 4.7
7.3 7.26.4
7.7 8.1
5.6
21.5
15.8 13.7
10.912.7
9.7 9.0
14.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2001 2002 2003 2004 2005 2006 2007 2008
Russian Real GDP growth compared to inflation
Real GDP growth (%) Inflation rate: all items
%
I. Economy
Source: OECD Factbook 2010
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
OECD Population Canada
Finland
France
Germany
Italy
Netherlands
Norway
Poland
Spain
Sweden
United Kingdom
United States
Russian Federation
in thousands
II. Budget
• Formulation
• Negotiation
• Implementation
– 5th biggest military budget worldwide• USA, China, United
Kingdom, France, Russia
• Executive Branch
– 8 Ministries• Ministry of Defense
• Ministry of Finance
• Ministry of Economic Development and Trade
• Legislative Branch
– Upper House• Federation Council
– Lower House• Duma
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)
– Inflation (%)• 6.5% (2011), 6.0% (2012),
5.5% (2013)
– Defense burden• 2.84% (2010), 3.01% (2011),
2.97% (2012), 3.39% (2013)
$0
$20
$40
$60
$80
$100
$120
$140
$160
Ap
r-1
98
3
Jan
-19
84
Oct
-19
84
Jul-
19
85
Ap
r-1
98
6
Jan
-19
87
Oct
-19
87
Jul-
19
88
Ap
r-1
98
9
Jan
-19
90
Oct
-19
90
Jul-
19
91
Ap
r-1
99
2
Jan
-19
93
Oct
-19
93
Jul-
19
94
Ap
r-1
99
5
Jan
-19
96
Oct
-19
96
Jul-
19
97
Ap
r-1
99
8
Jan
-19
99
Oct
-19
99
Jul-
20
00
Ap
r-2
00
1
Jan
-20
02
Oct
-20
02
Jul-
20
03
Ap
r-2
00
4
Jan
-20
05
Oct
-20
05
Jul-
20
06
Ap
r-2
00
7
Jan
-20
08
Oct
-20
08
Jul-
20
09
Ap
r-2
01
0
Jan
-20
11
Oil Future Contract (Dollars per Barrel)
Oil Price
Key Players
• President = Dmitry Medvedev
• Prime Minister = Vladimir Putin
• Deputy Prime Minister = Sergei Ivanov
• Deputy Prime Minister & Minister of Finance = Aleksey Kudrin
• Deputy Prime Minister & Chairman of Rosneft = Igor Sechin
• Deputy Finance Minister = Anton Siluanov
• Ministry of Industry & Trade = Viktor Khristenko
• Ministry of Economic Development = Elvira Nabiullina
• Minister of Interior = Rashid Nurgaliyev
• Federation Council Chairman = Sergei Mironov
• Fed. Council Defense and Security Committee Chairman = Victor Ozerov
• Duma Chairman = Boris Gryzlov
• Duma Defense and Security Committee Chairman = Victor Zavarzin
• Duma Budget Committee Deputy Chairman = Mikhail Babich
• Auditor of Audit Chamber Nicolai Tabachkov
• Defense Secretary = Anatoly Serdyukov
• 1st Deputy Defense Minister (Acquisitions) = Vladimir Popovkin
• Acting Chief of Armaments (MOD) = Oleg Frolov
• Deputy Defense Minister (Financial-Economic Work) = Lyubov Kudelina
• Chief of General Staff = Nikolai Makarov
• Ministry of Defense's Chief Social Guarantees Department = Anna Kondratyeva
• Defense Ministry Public Council Representative = Igor Korotchenko
• Defense Ministry Public Council Representative = Ruslan Pukhov
• FSMTC General Manager = Alexander Kopetsky
• Federal Service for Defense Contracts (Rosoboronzakaz) = Alexander Sukhorukov
• Federal Service Military-Technical Cooperation Director = Mikhail Arkadievich
• Deputy Director = Konstantin Biryulin
• Director General of Rosoboronexport = Anatoly Isaykin
II. Budget
Defense 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. Budget
Siluanov: (6-3-2010)
• Military:
– 2.6% (2010) of GDP
– Plan was 2.9% (2011), 3.0% (2012), 3.2% (2013)
• Has overseen four-fold increase of military
Medvedev: (11-25-2010)
• Military:
– R574 bn (2011), R726 bn (2012), R1160 bn (2013)
– % of GDP: 2.8% (2011)
Kudrin: (11-30-2010)
• Medvedev’s intention to secure R20 tn was a “new task”
II. Budget
• State Armaments Program (SAP)
– R20,700 tn• R19,040 tn for MOD
• R2.5 – R3.0 tn for other law enforcement agencies
– 1st time in last ten years defense burden is greater than 3%
– 70% to be spent by 2015
– R700 bn allocated for after 2015
• Goal: modernizing and renovation– 30% (by 2015), 70-80% (by 2020)
– R100 bn increase in procurement
– 6.5% raise in personnel pay
– R&D spending will drop • From 22% (2010) to 16% (2013)
Source: Centre for Analysis of Strategies and Technologies
II. Budget
Source: SIPRI Military Expenditure Database 2010
339314
266
66 58 5734 30 33 21 22 30 33 37 39 41 44 48 53 58 61 53
15.8
14.2
12.3
5.5 5.35.9
4.44.1
4.5
3.3 3.43.7
4.14.4 4.3
3.8 3.7 3.6 3.5 3.5
0
2
4
6
8
10
12
14
16
$0
$100
$200
$300
$400
$500
$600
$700
19
88
19
89
19
90
19
91
19
92
19
93
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94
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96
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97
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99
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20
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20
02
20
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04
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05
20
06
20
07
20
08
20
09
20
10
Russian Military Expenditures ($US bn) and Defense Burden (% of GDP)
Russian Military Expenditures $US bn (constant 2008) % of GDP
II. Budget
Sources: SIPRI, Russia in the 21st Century (Rosefields), Military Balance 2010 (IISS)
15.8
14.2
12.3
5.5 5.35.9
4.4 4.14.5
3.3 3.4 3.74.1 4.4 4.3
3.8 3.7 3.6 3.5 3.54.7 4.4 4.4 4.6
3.0 3.1
2.12.6 2.6 2.9
2.3 2.0 2.52.4 2.5 2.5 2.5 2.5 2.5 2.4
0
2
4
6
8
10
12
14
16
18
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Russian Defense Burden (% of GDP) SIPRI, Rosefielde, IISS
% of GDP (SIPRI) % of GDP (Rosefielde) % of GDP (IISS)
II. Budget
Source: SIPRI Military Expenditure Database 2010
744716
644
427404 397
361 359 362 350 356 367 368 381 385 387 389 397 403 413 424
339314
266
66 58 5734 30 33 21 22 30 33 37 39 41 44 48 53 58 61
46%44%
41%
15% 14% 14%
9% 8% 9%6% 6%
8% 9% 10% 10% 10% 11% 12% 13% 14% 14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
$0
$100
$200
$300
$400
$500
$600
$700
$800
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Military Expenditure: Russia to Europe comparison (constant 2008)
Europe Russia Russia as % of Eur Spending
in Billions
II. Budget
• Federal Service Military-Technical Cooperation (FSMTC)
• Military-Industrial Commission (MIC)
(Rosoboronzakaz)
• Kudrin & Serdyukov– 1.5% of GDP spent on army
modernization, military pay, & other
– Called for fair and honest elections to grant authorities mandate for executing difficult economic reforms
– Remains loyal to Putin
– Supported idea to purchase ships (Mistrals) vs. producing domestically
– Has overseen four-fold increase of military industrial complex
III. Procurement & SAP
• Navy: (100+ vessels)
– 20 submarines• 8 Borei-class ballistic
missile submarines
• Yasen-class nuclear attack submarines
• 3 Kilo-class submarines
– 35 corvettes
– 15 frigates• 3 Talwar-class
– Kirov- and Slava-class cruisers
– Mistral assault ships• (2 + 2)
– New Carrier• Design (2011), start
(2015), completed (2020)
– Auxiliary ships
– Service craft
• Kashin-, Sovremennyi-class destroyers likely to be retired soon
• Udaloy will become backbone
III. Procurement & SAP
• Air Force– 1994-2003 = 0 planes
– 2004-2009 = 3 planes
Investigation into 2 crashes (‘08)– 200+ aircraft had fin corrosion
Under SAP 2011-2020
– 600+ planes
– 1,000+ helicopters
• Su-30s
• Su-35s
• Upgrade MiG-29 to MiG-29SMT
• T-50 PAK-FA to be future– Ordered (2015), tested (2015)
• Helicopters– 500 Mi-24 Hind gunships
– Mi-8/Mi-17 transport
• Transport aircraft– Il-112
– An-70
– Il-476
– An-124
III. Procurement & SAP
• Nuclear Forces:
– Procurement, upgrading, maintenance in combat readiness will increase by 50%
– 10 batteries of S-500 anti-missile and anti-aircraft defense missiles
– 56 batteries of S-400 defense missiles
• Other Armaments
– Small batches of drones• UAVs
– Sniper rifles
– Felin (French) infantry combat suits
– T-90s
– AN-94s
Source: Military Balance 2010
III. Procurement & SAP
360,000 35%
35,000 3%142,000
14%
160,000 16%
80,000 8%
250,000 24%
Active Troops (2009)
Army Airborne
Navy Air
Strategic Deterrent Forces Command and Support
III. Procurement & SAP
Production in defense– 45% of defense output volume is
dual-use• Oil, gas, transport, energy, household
appliances, electrical engineering sectors
– 70% of scientific output is defense
– Output up 13% while total went 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
– UAC deal (Jan 2011) with MAG Industrial Automation Systems
• MAG VIPER Fiber Placement System and 2 HyperMachTM Vertical profilers to support aircraft manufacturing
III. Procurement & SAP
Partnerships
• Bridge short- and medium-term gaps
• Not cost free
• France: (STX & DNCS)
– Mistral amphibious assault 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
• Italy: Iveco joint enterprise
– Lynx light multi-purpose armored vehicles (LMVs)
(about 1,000)• BTR-80
• Tiger
III. Procurement & SAP
Investment
• Regulatory changes coming to improve climate, abolish limitations, revise legal investment framework– One of Putin’s last acts as
president was to sign the 50% acquisition law on strategic ventures
• $50 bn worth of bonds to be sold
• $10 bn worth of state assets to be sold until at least 2014
• 1/3rd of defense enterprises are bankrupt, 1/3rd are unstable
• 80% of production plants are obsolete
• Investment is 10-20% it is in developed countries
• Defense is “locomotive” of entire economy
• M&As are creating “industrial kolkhozy”
III. Procurement & SAP
Research & Development• Share of worldwide Russian
research-related products has dropped from 6% (1990), to 1% (2000), to 0.2% (2008)
• Japan spends 4x, Germany 3x, Czech Republic 2x more than Russia on scientific R&D
• Russia faced “stooping to the level of iron supplier”– ROE Director Isaykin
• Russian “Silicon Valley” (Skolkovo)
• Russian “DARPA”– Technological independence
Corruption– 9,000+ corruption-related law
violations• More than R870m in damage
• 950 officials involved
– Almost 10:1 ratio
– Fraud increased by 50%
– Most crimes committed by officials who have regulatory powers
– Mostly found in areas where “hard cash” and material resources are being distributed
IV. Exports
• Worldwide leader in exports (#2)
– USA, Russia, Germany, France, UK
• Total sales (2009) were $8.5 bn (FSMTC) with a 50% growth (2001-6)
• Have played important role domestically
– Arrears, inflation
• “Lifeline” for industry
SIPRI Top 100 Arms-producing companies (2009)
– 9 were Russian• Almaz-Antei (23)
• United Aircraft Corp. (29)
– Sukhoi
– Irkut Corp
– MiG
• TRV Corp (67
• Vertolety Rossii (73)
• Uralvagonzavod (76)
• UEC (90)
IV. Exports
• Exports– Rosoboroneksport (ROE)
• Rosoboronprom (ROP)
• ROE created (2000) and given exclusive right to sell exports (March 2007)– Sales (2009): $7.4 bn (10% increase
from 2008)
– Portfolio: $34 bn ($15 bn from 2009 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
• 4 others who can export:
– RSK-MiG
– Kolomna Design Bureau
– NPO-Machine-Building
– Tula Instrument Design (KBP)
IV. Exports
(2009)
• S-300 SAM Systems (China)
• 43 Su-30 fighters (Algeria, India, Malaysia)
• Missile weapons for fighters (UAC)
• 120 helicopters
• About 100 T-90 tanks (India)
• M&As Goals
– eliminate problems with skilled personnel shortages
– technology losses
– obsolete production lines
– low labor productivity
– product quality
– duplicative development
– excess capacity issues
IV. Exports
• China
– PLA Commander in Chief (Gen Xu Qiliang) saw “at least five more years of strong co-operation”
– Su-27s (J-11)• J-11B
– Su-33s (J15)
• India
– Uses about 70% Russian-made equipment• T-55s
• T-72s
• T-90s
• Submarines
• MiGs
• Sukhoi fighters
IV. Exports
• Algeria
– 2006 deal ($4.7 bn)• 40 MiGs
– 34 MiG-29s returned
• 20 Su fighters
• 16 Yak trainers
• 8 S-300s
• 40 T-90s
– 2010 deal (about $1 bn)• 16 Su-30s
• Libya
– 2010 deal ($1.8 bn)• Small arms (AKs)
• Light weapons
• Complex weapons
• Venezuela
– 2010 deal ($5 bn)• 92 T-92 tanks
• S-300
• 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