Under President Vladimir Putin, Russia has launched a comprehensive program to restructure its defense industry, which has shrunk dramatically since the Soviet era. This process has achieved some progress, but fundamental structural problems persist that lead Russia to export large quantities of advanced weapons to conflict-prone regions, placing the Kremlin at odds with Europe, the US and other countries.
Over the last six years, the Putin administration has encouraged the nationalization and consolidation of private-sector defense firms into large, vertically integrated, state-controlled holdings. In November 2000, Putin approved the creation of a single government-supervised arms exporting agency, Rosoboronexport, to end the self-destructive competition that had developed between the country's major weapons-exporting enterprises.
Earlier this year, the agency gained the exclusive right to sell Russian weapons to foreign countries.
At present, the government is promoting the creation of a similar institution in the aviation sector, the new United Aircraft Building Corporation (UABC), which includes major state and private manufacturers of fixed-wing aircraft. Proponents of the merger believe it will improve the efficiency of the Russian aircraft industry and, by lowering costs, make Russian planes more attractive to foreign buyers.
Under Putin, Russian military spending has also rebounded. This year, the Russian government will provide the Ministry of Defense with almost 5 trillion rubles (US$189 billion) under the State Armaments Program. The percentage of the defense budget allocated to purchasing military equipment will rise from 44 percent last year to 50 percent by 2011.
The primary purpose of this increased spending is to push new weapons systems from the research and development stage to actual procurement for Russia's armed forces. Over the course of 2007 to 2015, Russia's army and navy will replace 45 percent of their military equipment.
In the past, poor government and industry practices frustrated similar plans to supply large numbers of advanced conventional weapons to Russia's armed forces. The country's military-industrial sector suffers from limited domestic orders and extensive overcapacity. Purchases for the Russian army and navy have been increasing, but still only sustain about one-fourth of Russia's existing military production capacity. The Russian government now spends more on new Russian-made conventional weapons than do foreign purchasers. Yet, persistent inefficiencies in the Russian defense procurement system result in foreign buyers receiving more new systems than the Russian military.
As a result, Russia's leading defense firms remain heavily dependent on foreign sales. Although Russia's arms exports have decreased considerably since the Soviet period, its revenue per transaction is now greater because Russian firms have yielded much of the lower-end market to less expensive suppliers like China, India and other former Soviet bloc allies.
Moreover, where the USSR transferred much weaponry under easy commercial terms or without charge (under long-term loans not expected to be repaid), Russia now discounts arms only for its closest allies. On March 27 the defense ministry announced that Russia's annual arms exports increased by 50 percent, from US$4 billion to US$6.5 billion, from 2001 to last year.