Russia's military-economic potential: state and prospects.

An officer who has devoted his life to defense of his homeland is naturally interested in the state and prospects of military organizational development and its economic foundation. Today this interest is intensified, on the one hand, by the fact that the country's economy is beginning to show signs of a recovery from its deep crisis and, on the other, by the increase in military expenditures in the world recorded since 1998. Thus, in the USA they increased by $18bn in 2001 and by $30bn in 2002. In 2003, US military expenditures are to go up by another $48bn to a total of $379bn, and by 2007 the overall figure is to reach $451bn. (1) In other words, only the increase in US military expenditures in 2003 will be far in excess of Russia's entire military budget for the year. So what are Russia's military-economic capabilities?

The Substance of the Military-Economic Potential and Its Interconnections with Economic and Military Strength

The economic possibilities for ensuring military security are characterized by the military-economic potential (MEP) and military-economic strength (MES), which, for their part, are based on the country's economic potential (EP) and economic strength (ES). These categories find a quantitative expression in numerous indicators. In this article we shall largely confine ourselves to overall indicators. As such let us take: for EP--the country's area and population; for ES--gross domestic product (GDP); for MEP--that part (share) of ES which can be used for military purposes given maximum possible military-economic mobilization; and for MES--the final military product (FMP), i.e., the share of GDP consumed by the state's military system during the period under review. The money equivalent of FMP is the country's current military spending. If necessary, we shall specify these overall indicators and supplement quantitative indicators with qualitative ones.

It is well known that the problem of formation and realization of MEP tends to become more complicated with the development of the economy and military science. Up to the end of the 19th century, it largely amounted to raising money for recruitment of soldiers and maintenance of troops, with a resulting redistribution of resources between military and civilian consumption. That was possible because 90% of military consumption consisted of conventional products, and not of military products proper. In the 20th century, in view of a sharp increase in the share of purely military-purpose products within the structure of military requirements, the center of gravity has shifted to the area of conversion of civilian production into military production: today it is not enough to raise money, because the main thing is to convert it into military products (tanks, guns, aircraft and other sophisticated military equipment).

At the present stage, the interconnections between war and economics are becoming even more complicated, the content of MEP is diversified, and the mode of its conversion into MES undergoes a change. The new elements are as follows.

First, a national security economy is taking shape. In this economy, a definite share of what remains after the deduction of minimal civilian consumption can be allocated to ensure military security. This share, which constitutes the military economy, is used to maintain not only the Armed Forces, but also other troops (border, interior, etc.). Moreover, with an increase in the quantity and intensity of nonmilitary threats and in the outlays on countermeasures against these threats the share of MEP in ES tends to decline, while MES is broken down into a number of elements on functional-departmental lines.

Second, in computing MEP one should take into account that in contrast to MES, which is concrete as a phenomenon existing at a given point in time, it can constitute a larger or smaller share of GDP. This depends on the kind of war for which it is being computed, since only those military-economic capabilities which can be created and realized in the given kind of war have any real meaning. For example, to conduct a war similar to World War lithe military-economic mobilization rate can be brought up to the level of 50% (such a limit was reached by the Soviet Union and Germany). Consequently, in this case Russia's MEP can be assessed as one-half of GDP (without deductions for ensuring non-military types of security). But when it comes to wars of the sixth generation (2) (some idea of them is given by the wars against Iraq and Yugoslavia, and by the antiterrorist operation in Afghanistan), Russia's MEP should be assessed as a much smaller figure (since the current sectoral structure of the Russian economy is i nadequate to meet the military-economic needs of such wars; moreover, a part of the resources will have to be allocated to maintain other kinds of security). In this case, MEP in effect amounts to current MES (or may be marginally in excess of it), whereas its defense-economy part will constitute a certain share of that amount.

Third, the size of MEP as the maximum possible degree of economic mobilization is influenced, on the one hand, by its mobility, military-economic preparedness and survivability, and on the other, by the duration and intensity of the presumed war. The main difficulty in computing MEP consists in the indeterminate character of wars of the foreseeable future. Without entering into polemics on this issue (this is a very complicated scientific problem in its own right), let us proceed from the present RF Military Doctrine, in accordance with which we have to distinguish within the country's MES (and MEP as its limiting value) constituent parts providing economic support for strategic deterrent forces and general-purpose forces.

The State of Russia's Military-Economic Potential and Military-Economic Strength

Among the factors that determine the economic potentialities of the state the human factor is the crucial one. Thus, in the structure of US national wealth at the end of the 20th century human capital accounted for 73.7%, financial assets for 16.2%, real estate for 7.9%, and consumer durables for 2.2%. (3) While giving priority to the human factor, one should not underestimate the role of other factors. Of great importance here is the correlation between the various EP elements, and the conditions and degree of their realization at the present time. If a country has a large area and huge reserves of mineral and energy resources, but very low population density and not consistently favorable climatic conditions, it is difficult to convert economic potentialities into real ES, because this requires substantial time and investments, which are lacking at the given moment and may be lacking in the foreseeable future. On the other hand, if a country has a small area and scant natural and energy resources, realizati on of the human factor will involve considerable outlays and complications, such as difficulties in maintaining foreign economic relations in wartime. As the most representative indicators of EP let us take a country's area and population size. In terms of population, the first place in the world belongs to China, and in terms of area, to Russia, but as of now neither of these states has fully realized its potentialities or is in possession of the largest ES.

In computing MEP and MES, we think it advisable to proceed from realized EP, i.e., from actually attainable, sustainably reproducible, and quantitatively and structurally determinate ES. The attained ES is measured by the absolute and relative (per capita) amount of GDP. In terms of per capita GDP at the end of the 20th and the beginning of the 21st century, the USA ranks first in the world with $31 thousand, followed by Japan with around $30 thousand, Germany with $26 thousand, France with over $24 thousand, and Britain with $23 thousand, while Russia trails behind more than 50 countries with just over $3 thousand. Out of the planet's population of 6 billion, 1 billion live in countries with per capita GDP of $10 thousand or over. (4) This indicator shows the degree of economic development, but it should not be absolutized, because the actual ES of a country compared with other countries is expressed in terms of the absolute amount of GDP, from which resources are drawn to meet the entire range of requireme nts: economic, political, military, etc.

For example, China's per capita indicator is only $777. But since its population is 1.24 billion, the absolute volume of GDP is around $1 trillion, and in the future (given fuller realization of the human potential) it could equal or be times larger than the respective US figure. In the 1980s, the Soviet Union's GDP amounted to over 60% of the USA's GDP, and there was a prospect of reaching the US level even with lower per capita figures.

As mutually complementary ES indicators let us take the absolute volume of GDP and GDP per capita. MEP and MES derive from ES, so that the overall MEP indicator appears as the maximum possible, and the MES indicator, as the actually used share of ES at the given time. The dimensions of MES can be expressed in terms of EMP, whose money equivalent is the total amount of the country's military expenditures, and also in terms of EMP as a share of GDP or in terms of military expenditures as a share of the state budget. Both these indicators are recognized throughout the world. An American handbook of defense economics describes military expenditures as the best indicator of the activity of the armed forces, their share in GDP as a good measure of the military burden on the economy, and their share in the national budget as an indicator of national political priorities. (5) One can agree with that.

The limiting value for military expenditures as a share of GDP (i.e., the size of MEP) and the share of these expenditures in the state budget in different countries are relatively stable, although they may change at different historical stages of their development depending on the character and temporal parameters of wars. As regards the amount of current military expenditures (MES), there is more freedom of choice in this area. In peacetime, MES as a share of GDP in major countries ranges from 1% to 4-5%, whereas during the arms race it was as high as 9% or more. Their level and correlation reflect the state of military-economic security and the vector of the state's military-economic policy. Objectively there is a possibility that a country with a lesser ES than that of its adversary (partner) can create an equal or even greater MES and maintain it for a definite period of time. For example, Germany managed to do that at the beginning of World War II, and the Soviet Union, during the postwar arms race. Fo r that reason one should not underestimate the possibilities of a blitzkrieg, just as one should not overestimate the possibility of maintaining a high level of military-economic mobilization for a long time in the course of an arms race.

Let us now tabulate the aforesaid indicators for a number of countries, introducing at least one indicator of military strength (MS) as an expression of the final result of the state's military-economic efforts. The most widespread indicator of MS is the numerical strength of the armed forces.

As the table shows, in terms of overall indicators of economic strength, Russia today can no longer aspire to its former role of one of the two superpowers; moreover, it is weaker than any of the states listed in the table. A look at various specific indicators of Russia's economic strength will show that, for example, the volume of production of metal-cuffing machines, press-forging plant, tractors, grain harvesters and timber in 2001 was on the level of the first five-year period, and the manufacture of fabrics and footwear, on the level of the early 20th century. Most indicators reflecting the state of Russia's economic security have left the corridor of threshold values. Thus, in 1998-1999 the ratio of actual to threshold value was 0.45 for indicators showing the amount of investment, 0.47 for defense spending, 0.2 for expenditures on research, and 0.45 on education; such indicators as the share of the population with incomes below subsistence level and the rate of unemployment are inordinately high, but the most worrying trends have been recorded in demographic development.

Overall and specific intrasystem indicators of military-economic security, (6) whose real base is the defense-industry complex (DIC), are just as disheartening. As a result of conversion, the output of military products in 1997 was over 10 times lower than in 1991, and that of civilian products, over 5 times lower. (7) Instead of a reallocation of capacity between military and civilian production in favor of the latter, we find a catastrophic drop in production in both areas. However, the main danger does not lie in the quantitative reduction, but in the qualitative changes within the DIC: instead of a transfer of high technology and skilled personnel to the civilian sector there has been a weakening (not to say disintegration) of schools of thought and loss of a part of the intellectual potential (and property). Deprived of a single scientifically grounded government policy in the field of science and technology and of minimally necessary financial and economic support, and being subjected to ceaseless reor ganization and to privatization that is incompetent in military-economic terms, Russia's defense industry complex is no longer capable of guaranteeing military-economic security. It has lost a major system attribute: the intrasystem economic and administrative ties between its constituent elements that used to integrate them into a single whole. Without these ties they are no longer elements of a system, but "fragments of a broken cup."

Russia's EP indicators alone are higher than the respective indicators for Germany, France, Britain and Japan, and in terms of area Russia also surpasses China and the USA, but the degree of realization of its economic potential is much lower than in these countries.

So, one can draw the following conclusions: the balance of Russia's MEP indicators has undergone a radical change for the worse; the existing systems of economic support for the military structures counteracting the threats to national security fall short of the military-economic requirements of forces safeguarding the country against real and potential military threats; and the indicators showing the state of the country's military-economic security are outside the limits of threshold values.

The Prospects of Ensuring Russia's Military-Economic Security

It is difficult to forecast the distant future at a time when the country is in the pit of a major depression. The first thing we have to do is to get out of it and to assess the real strength and potential of a renewed Russia and the new world balance of power. In the foreseeable future, we should aim to return to the economic level from which the downturn started. A revival of economic strength is, in my view, the most urgent and realistic task. But we should not seek to restore the former, pre-perestroika economic structure or to maintain the present structure, which has markedly deteriorated in the years of reform. Structural policy in the recovery period should be oriented toward the priority development of high technology industries, and also toward implementing the latest technology in mining, manufacturing, and fuel and energy industries, which will make it possible to effectively realize the country's immense potential.

Russia has a vast territory with abundant natural resources surpassing those of any other country in the world. This is a key factor of a revival of ES, but its realization is impeded by the unfavorable prospect of the country's demographic development in the foreseeable future. Over the past decade, Russia has entered a period of absolute reduction in population size. Since 1993, the country's population has been falling by 0.7-0.9 million a year, and by 2001 the figure was down to around 145 million. The mortality rate for men in Russia is 2-4 times higher than in the developed countries. (8) Coupled with other unfavorable factors, this has had an extremely negative effect on the movement of the country's GDP in the current decade. In order to reduce and neutralize their negative influence, we need to overcome the primitive notions about the correlation between spontaneous and deliberate regulation factors in a market economy, to live down the neopagan worship of the "invisible hand" and pursue an active s ocioeconomic policy.

Some steps in this direction have already been taken. Thus, a Fund and a Center for Strategic Studies have been set up and are functioning, and long-range programs, concepts and basic policy principles have appeared for various spheres of life in society, notably in the field of science and technology, aviation and DIC development for the period until 2010 and for the longer term. Their implementation should ensure higher rates of GDP growth and of the country's development in general.

Among the numerous studies on this topic (very few of which have actually been put to use), let us recall a forecast made by Academician A. Aganbegian. He started by formulating Russia's principal task for the next three decades: to join the "golden billion" countries. (9) For this purpose, we should have an annual GDP growth rate of 5-7% for 30 years, root out waste, raise the investment rate to 27-28% of GDP, foster the private-owner instinct, and go over to a market-oriented mechanism conducive to economic growth.

It is hardly worth analyzing extrapolative forecasts, whose authors take data on the rate of Russia's economic growth over longer or shorter periods of its past history, make a rough guess at the macroeconomic growth indicator for the next 10-15-20 years (pessimistic, optimistic and optimal), and use simple arithmetic operations to calculate the prospects of economic development. For example, it turns out that in 1820-1913 the average annual rate of per capita GDP growth in the world was 1.37%, while in Russia it was 2.05%; in 1913-1998, the figures were 3.02% and 1.7%, respectively; and the averages for nearly two centuries were 2.13% and 1.89%. (10) Of course, such computations have a definite cognitive value, especially if they are supplemented by data on the periods of crisis and postcrisis development, wars and postwar rehabilitation. But their practical value is insignificant.

Forecasts for the foreseeable future are pretty dismal: over the next 10-15 years, the country can only reach the level from which the catastrophic fall in its economic power began, whereas other countries will have gone far ahead. One is naturally tempted to look for some kind of unorthodox solutions, for a sort of "Russian miracle." Hopefully, such solutions will eventually be found. Exploratory research has to be stepped up. Here I would only like to make a few remarks on the military-economic aspects of some possible solutions.

First, the question of preparing and making a major leap forward in building up ES and MEP through an improvement in the mode of providing economic support to meet the state's military-economic requirements should be analyzed from every angle. It is a matter of orienting the economy toward high technology, radically enhancing the country's military-economic preparedness through the implementation of dual-purpose technologies and products in the military and civilian sectors of the economy, and promoting integration processes in both these sectors and between them. This will make it possible to markedly reduce the available MES while slashing the time required for a possible conversion of civilian production into military production. In a military sense, such an approach will make it possible in case of necessity to rapidly achieve the required (including maximum) increase in MES, and in the economic sense it will ease the burden of military spending in peacetime and release resources for faster economic growt h. In some respects this resembles the postwar experience of Japan. In contrast to Japan, Russia has substantial opportunities for using the potential (albeit decreased) of the defense-industry complex.

Today the main segments of the DIC can be revived in a new capacity and become generators of many high-technology, highly concentrated and rationally organized lines of production in the civilian economy. Major viable structures, such as AVPK Sukhoi and VPK MAPO, are already beginning to take shape within the DIG alongside diversified holding companies known as the second generation of vertically integrated structures in the DIG. Thus, the New Programs and Concepts company (NPK) was set up not by directive, but through a concentration of the assets of high technology enterprises with real market prospects. It has acquired enterprises belonging to UNEXIMbank: VPK Severnaia Neft, LOMO, Degtiarev Plant, Moscow Radio Engineering Plant, and the North Western Shipping Company, including seven ports, three shipbuilding and ship repair yards, two repair and maintenance facilities, and a fleet consisting of more than 300 ships. In 2000, the company completed a contract for the delivery to China of two Project 956E des troyers, in January 2001 it laid down the first of ten new universal Project 01010 Valdai dry cargo carriers, and in early 2002 signed a contract for another two 956E destroyers. (11)

The attitude to the DIC is beginning to change. In 1998-2000, military production almost doubled, reaching a level corresponding to 18.7% of the volume of the Soviet Union's military production in 1991; over the past two years, the state defense order has been financed roughly according to schedule, and debts owed to enterprises for the performance of works under defense contracts are being paid off; in 2001, R & D financing was increased by 43%, and in 2002, by 40%. In 2001, the ratio between military expenditures on the maintenance of troops and on their development, which used to be 70% to 30%, was already 56% to 44%, and by 2006 it is scheduled to reach 50% to 50%.

The DIC's recovery is promoted by efforts to create conditions for the successful activity of modem corporations emerging in the process of its restructuring in accordance with RF President's Decree No. 1768 of 23 October, 2000, On Measures to Ensure Concentration and Rationalization of Defense Production in the Russian Federation and The Basic Principles of RF Policy in the Field of Development of the Defense-Industry Complex for the Period Until 2010 and for the Longer Term, which put the development of the DIC among the top priorities of state policy and specified the main lines and tasks of its improvement as a diversified high-technology sector of Russia's economy. The State Armament Program for 2001-2010 is also of great importance. Under the Federal Law on the Federal Budget for 2002, expenditures on national defense total 2,841,576,831 thousand rubles, or 2.6% of expected GDP and 14.6% of all budget expenditures. (12) Let us note, however, that some mass media are not very optimistic on that score. T hus, the director general of NPO Almaz is quoted as saying that optimistic reports on better treatment of the DIC are no more than myths and legends. He says that in 2002 the allocations requested by NPO Almaz for financing development works were markedly reduced, whereupon these allocations, already coordinated with the Air Force, were further reduced by nearly one-half by a higher Defense Ministry authority, while the prospect of obtaining funds for system modernization fades away into the distant future. (13)

Second, another consideration is connected with the need to enhance the efficiency of the military economy and military organizational development in general. In this article we have mostly dealt with the overall quantitative parameters of ES, MEP and MES, but their qualitative parameters, structure and ability to meet current and future military requirements are just as important. In my view, the military reform is centered precisely on the solution of this problem. But military requirements depend on the nature of real and potential military threats, on the character of probable wars and military conflicts, and on what kind of military system is being created by the state in order to guarantee military security. In this connection, we have to make a thorough scientific analysis and resolve a number of problems.

In particular, it is necessary to distinguish in theory and institutionalize in practice various economic subsystems ensuring the operation of structural elements of the military organization: the defense-economy potential and the corresponding subsystem of the military economy of the Armed Forces, and also similar potentials and military-economic subsystems of other troops, military formations and agencies. These military-economic subsystems objectively exist as specific areas of military-economic relations and complexes of military-administrative structures with financial and economic resources functioning within their framework. In my view, we should clearly designate all these elements of the military organization, draw up a complete list of them, and determine their intrasystem and intersystem connections. This is an elementary organizational requirement, but it is also important because the departmental status of "other" elements implies performance by them not only of military, but also of nonmilitary tasks. I think we should lay down clear-cut principles for separating military and nonmilitary expenditures, and also for differentiating between various kinds of military expenditures. Lack of theoretical clarity and legal certainty in this matter hinders the institutionalization of these military-economic subsystems. But this affects many matters of practical. activity, such as the organization of financial and economic support, computation of the actual amounts and structure of military expenditures, control of designated-purpose use of allocated funds, military-economic analysis and evaluation of the effectiveness of the military organization, etc.

These problems have to be studied within the framework of national security economics. Military expenditures must include only that part of the expenditures of Russian agencies constituting the military organization which is expressly designated to ensure defense capability and military security, a point made by S.F. Vikulov, M.K. Smirnov, V.V. Storonin, A.A. Rakhmanov, V.I. Tsymbal and many other specialists. (14) No theoretical solutions to these problems have yet been found either in Russia or in other countries, which is evident from the lack of coordination in world military-economic statistics. But without such solutions it is difficult to talk about optimal ways of enhancing the efficiency of economic support for military organizational development.

A third consideration is connected with the need to overcome the old stereotypes of thinking and strategy in the field of ensuring national security and not only in Russia, but also in the leading states of the world. The threats to mankind's very existence which first emerged in the 20th century and which have now come to present a great challenge are of a global nature and cannot be resolved within the national framework. Attempts to remove these threats solely from positions of national security, often at the expense of other nations, can only bring the world closer to an environmental disaster, energy hunger, depletion of resources and outbreak of wars with unpredictable consequences. It is high time for all countries to pool their efforts in order to develop a global security concept and use it as a common basis for their own national security concepts and for resolving national security problems. After the tragedy of September 11, 2002, there appeared to be a growing awareness of this in many countries , including America. But the first successes in the fight against terrorism have led to a situation where the US leadership, convinced of its omnipotence, ignores the reasons that engender terrorism and the need to overcome them, absolutizing military means in the fight against terrorism and pursuing a policy of double standards. Its unilateral withdrawal from the ABM agreements is the most dangerous manifestation of national egoism and underestimation of the priority of global interests. The US national ABM defense system is a direct threat 'which could lead to a nuclear winter and to the destruction of mankind, and not an instrument for saving the Americans.

An awareness of the global nature of present-day threats to mankind's security and its very existence, and concerted efforts by the entire world community in combating these threats, the threat of war in the first place, could do a great deal to improve international relations, reduce the military burden and create more favorable conditions for raising the peoples' living standards.

Military-Economic Capabilities of Some Countries at the End of the 20th
Century

                    EP                    ES                    MES



                                                              Share
                                                              of FMP
           Popula-    Areq                  GDP                 in
            tion,    thou sq   GDP,         per     FMP,       GDP,
Countries  million     km       $bn      capita, $   $bn        %

USA          270      9,373    8,211      30,410     266       3.2
China       1,238     9,597     961         777     18.4       1.9
Japan       126.3      378     3,783      29,953    51.2       1.3
Russia       145     17,075     447        3082     22.4       3.2
Germany      82        357     2,143      26,134     9.5       1.5
France       59        552     1,433      24,288    46.8       2.8
Britain      59        244     1,357      23,000    31.8       2.7

              MES       MEP       MS
                                Numer-
                     For a       ical
                      50%      strength
           Share     share        of
            in       of FMP     armed
           world       in      forces,
           FMP,       GDP,      thou-
Countries    %        $bn        sand

USA         36       4,106      1,448
China        3        481       2,840
Japan        7       1,891       236
Russia       3        224       1,274
Germany      5       1,072       334
France       7        717        359
Britain      4        679        211

Note: Data on the numerical strength of Russia's Armed Forces refer to
2002.

NOTES:

(1.) See: Rossiiskaia gazeta, February 6,2002.

(2.) See: V.I. Slipchenko, Voina budushchego. Shestoje pokolenie, Moskovskiy obshchestvenniy nauchniy fond, Moscow, 1999.

(3.) See: SShA: ekonomika, politika, ideologia, No. 1, 1998, P. 52.

(4.) See: Yezhegodnik SIPRI, 2000, pp. 252, 268-269; Nezavisimoe voennoe obozrenie, No. 4, 2002.

(5.) See: Handbook of Defense Economics, Vol. I, ed. by Keith Hartley and Todd Sandier, Elsevier Science B.V., 1995, pp. 57-58.

(6.) See: Voennaia mysl', No. 6, 2000, pp. 26-34.

(7.) See: Yezhegodnik SIPRI, 2000, pp, 236, 346.

(8.) See: "Kontseptsia demograficheskogo razvitia Rossiiskoi Federatsii na period do 2015 goda," Rossiiskaia gazeta, February 16, 2002.

(9.) See: Ekonomicheskie strategii, No. 1, 2001, pp. 745.

(10.) See: Voprosy ekonomiki, No. 4, 2000, p. 85.

(11.) See: Rossiiskaia gazeta, January 9, 2002.

(12.) See: Rossiiskaia gazeta, December 31, 2001.

(13.) Nezavisimoe voennoe obozrenie, No. 10, 2002.

(14.) See: Voennaia mysl', 2001, No.2, pp. 8-11, No. 3, pp. 5-11, No.4, pp. 31-35; 2002, No. 1, p.33.

Aleksandr Ivanovich POZHAROV was born in 1926 in Kamen'-na-Obi, Altai Territory. He graduated from the Naval Communication School in Oranienbaum, Leningrad Region (1946), and the M.I. Kalinin Higher Military Pedagogical Institute in Leningrad (1954), and held various positions in the Pacific and Baltic fleets and in the Main Political Directorate of the Soviet Army and Navy. A participant in the Great Patriotic War of 1941-1945. Having resigned as head of the political economy and military economics department at the Military Finance and Economics University, he is currently a professor in the same department. He is the author of close to 100 scientific works in the theory and history of military and national security economics.