Abstract
It is now more than twenty years since the collapse of the Soviet Union and the beginning of transition to a market economy. The non-market, ‘planned’ economic system of the old order had its own specific mode of functioning, which over time had a profound impact on the structure of the economy. The article explores the extent to which the far-reaching economic transformation undertaken in post-communist Russia since the end of 1991 has overcome the legacies of the Soviet system. Has the socialist economic order that existed for over sixty years disappeared entirely, or are there still survivals and legacies that shape and influence, at least in part, the present-day Russian economy? These issues are examined by focussing on one particular sector that played a dominant role in the USSR, namely the defence industry and the military economy more generally. It is concluded that there are indeed significant survivals and legacies of the socialist past: market transformation is still incomplete.
Biographical details
Julian Cooper OBE is Professor of Russian Economic Studies at the Centre for Russian and East European Studies of the University of Birmingham, and was Director of the Centre from 1990 to 2001 and again during 2007–08. Between 2005 and 2011 he was also Co-Director of the Centre for East European Language Based Area Studies (CEELBAS), and is currently Associate Fellow of the Chatham House Russia and Eurasia Programme. His research is concerned with the development of the Russian economy, with particular emphasis on the economics of defence and security, external economic relations, including economic integration within the CIS, and science, technology and innovation policy. He has participated in projects and consultancy for the UK government, OECD, European Commission, NATO and other international organisations.
The Soviet economic system came to an end with the collapse of the USSR and the disappearance of communist rule in the final days of 1991. In the author's view, economic collapse was not the cause of the end of the communist order, although without doubt the economic system was in very serious crisis at the time. An already dysfunctional economy had been disorganised and weakened further by reforms undertaken in the name of perestroika by Mikhail Gorbachev and his government. But it was political factors above all that ended communist rule and the USSR and, as has been argued, the economic system could possibly have lived on, albeit in as an ineffective and poorly performing mixed form of economy, combining elements of ‘planning’ with market forces. 1 In the event, the new government of an independent Russian Federation, led by Yegor Gaidar, embarked on a difficult process of market transformation, at least in the short-term, costly in human terms.
See, e.g. Ellman and Kontorovich (1998). However, the present author regards this possibility with scepticism.
Now, over twenty years later, it is instructive to consider just how far this market transformation has progressed. Does Russia now possess a fully functional market economy genuinely comparable with much longer established economies of Western Europe or the United States? Has the socialist economic order that prevailed for some sixty years disappeared entirely, so that it is now receding into memory of interest only to historians? Or has it left survivals and legacies that shape and influence, at least in part, Russia's present-day economy? These issues will be explored in the present article, which draws to some extent on the experience of one particular sector of the economy; a sector that in Soviet times could be considered by some criteria relatively successful. This is the defence industry, or the military economy more generally, which proved able in the USSR to secure nuclear parity with the United States and a conventional capability that throughout most of the post-war years presented a challenge to NATO member countries.
One of the most insightful analyses of the socialist economic system is that of the Hungarian economist János Kornai. 2 He demonstrated that this was an economic order exhibiting considerable coherence and, as a result, possessing resistance to reform initiatives. For Kornai, fundamental was the ideological commitment to the state ownership of the basic productive assets of a society, considered superior, economically and socially, to private ownership. Given the predominance of state ownership of enterprises and organisations, it was necessary to create an administrative framework for their management, usually taking the form of hierarchically structured ministries. Preference for state ownership was accompanied by a profound distrust of the spontaneous functioning of the market. Material resources were allocated by administrative, non-market, means. Only labour, recognising the need to permit freedom of choice of occupation and workplace, was allocated to some extent by market means in most socialist economies, labour being the sphere of a highly regulated quasi-market. In this system prices played a secondary role and were not determined by the free play of supply and demand, but were fixed by administrative means, usually according to a relatively primitive form of cost-plus pricing, including a profit element varied by branch of economic activity in an arbitrary manner, influenced to a large degree by the needs of state budgetary policy. This was a redistributive economic regime: the state reallocated resources from ‘profitable’ branches of the economy to other activities having higher priority for the Communist Party leadership. This was possible because of the discretion of the state in fixing prices and the very substantial role played in the economy by the state budget, which funded a large proportion of investment plus diverse subsidies to both producers and consumers. 3 This redistribution took a non-transparent form, not the least those forms of redistribution relating to the military economy. 4
See Kornai (1992), The Socialist System. The Political Economy of Communism, Oxford: Clarendon Press.
See Kornai (1992, pp. 134–8). In this discussion we here leave out of account the informal ‘second’ economy, which operated on market principles, supplementing the official economy.
The term ‘military economy’ is used here to cover the economic dimension of all aspects of military power, including military expenditure, the defence industry, procurement of armaments and arms exports.
Following the conceptualisation of Kornai, certain fundamental characteristics of the socialist economic system can be identified. 5 Firstly, state property predominated; if a private sector existed then it was on a modest scale and restricted to economic activities not regarded as having priority. Secondly, the predominance of bureaucratic coordination, with ‘planning’ and hierarchical, vertical, relations as opposed to the horizontal relations of an economy subject to market coordination. In such a system there was a total absence of competition in the domestic economy, the creation, rise and (very rare) fall of an enterprise was entirely a matter of a government policy decision. Thirdly, the ‘politicisation’ of the economy in the sense that the Party and state were actively and inseparably involved in real economic activity at all levels from the ministries and other economic agencies at the apex of the system to the enterprises, mines and farms at the bottom. These relations were associated with certain interests and behaviour of the actors involved. For the leadership, output maximisation was the overriding goal, quantity valued more, on the whole, than quality. Bargaining relations were universal, whether over plan targets, investment allocations, or the volume and type of resources available for current production activity. But central to the behaviour and performance of the system were soft budget constraints at the enterprise level. While enterprises were expected to minimise costs and earn a profit, with profitability a plan indicator influencing the scale of managerial bonuses, all understood that there were never be any question of bankruptcy, losses would be covered by intra-ministerial cross subsidisation or direct budget allocations. More generally, losses could be avoided by softening budget constraints to permit profitable operation and here multiple avenues were available for bargaining between the enterprise management and superior authorities, over plan targets, prices, taxes, subsidies, etc. In Kornai's view, many behavioural characteristics of the system stemmed directly from the existence of soft budget constraints in the production sphere, but not for households, which experienced hard budget constraints: investment ‘hunger’, quantity drive, neglect of quality and innovation, excess demand for resources of all kinds, including labour, and the fact that the socialist economy was one of all pervasive shortage (and, also, slack, as underutilisation of resources coexisted with scarcity). But another significant feature of the ‘planned’ economy was the existence and functioning of a priority system. Although never stated formally in any Party or government document, it was generally understood that certain sectors of the economy were considered more important than others and, as such, would be provided with more favourable conditions, including softer budget constraints than typical of lower priority sectors.
See Kornai (1992), pp.360–79.
Kornai's understanding of the Socialist economic system in general can be supplemented by the insights of another talented economist, who advanced his own theory derived from his attempts to understand the specific features of the Soviet economic order, in particular its characteristic structural features. This was the late Yurii Yaremenko (1935–1996), perhaps the most innovative of all economists working in the USSR in its final twenty years, from 1987 director of the Institute of National Economic Forecasting of the USSR Academy of Sciences. In his major work, Yaremenko (1981), originally published in a heavily censored and abbreviated form, he analysed the Soviet economy in terms of a hierarchical, multilevel system, with each level having access to resources, human and material, differentiated by quality. The qualitative heterogeneity of resources became firmly institutionalised. An individual enterprise, or entire branch of production, could rise up the hierarchy and secure access to higher quality resources only by a policy decision of the political-economic authorities. Lower level sectors habitually deprived of high quality resources compensated by resort to larger quantities of lower quality inputs, e.g. inferior grade materials, inferior production equipment or less skilled labour. In the absence of prices determined by market forces, the authorities were able to set prices that failed to reflect this qualitative heterogeneity of resources: quality inputs consumed by the select high grade sectors were often underpriced. At the upper levels, occupied by the defence industry and some priority civil sectors, higher quality resources permitted the use and development of more advanced technologies, but innovations possible in these privileged conditions were unsuited to diffusion to lower levels of the economy, lacking an appropriate resource environment for their application. In Yaremenko's view, this structural deformation of the Soviet economy developed as central control of the economy weakened in the post war years and ‘departmentalism’ became ever more pronounced, the most powerful administrative interests being those of the defence industry and the sectors supplying its needs. Over time, these priority sectors became increasingly separate from the rest of the economy and able to pursue their own interests relatively unchecked by central state power.
Yaremenko's argument was taken further by a leading Soviet/Russian authority on military matters, the late Vitalii Shlykov (1934–2011), a former military intelligence officer. It was Shlykov who coined the term ‘structural militarisation’ to characterise the state of the Soviet economy (Shlykov, 1995). He worked for over thirty years in the GRU (Main Intelligence Directorate of the General Staff) as a specialist on the defence industries of the USA and other NATO member countries and was the first in the USSR to focus public attention of on the extraordinarily elaborate system of mobilisation preparation that had developed in the country from the 1930s. In the USSR countless enterprises, military and civilian, were obliged to maintain substantial spare production capacities to be engaged rapidly in the manufacture of armaments or other military-related goods in the event of war or national emergency, the so-called ‘special period’. In order to undertake such production, enterprises were also required to stockpile materials, components and other inputs, and to ensure that workers were properly trained to switch to military work if required. In the European part of the country, these reserves had to be sufficient for three months of wartime production; in the Asian part, six months. This extraordinarily elaborate and costly system was shrouded in almost total secrecy. 6 As Shlykov persuasively argued, this system had an impact on the whole economy, not just the defence industry. Mobilisation plans could involve preparation for potential increases in military output of ten times or more. In order to supply this production, the metals industry, civilian machine building and the energy sector, and other industries providing inputs, also had to maintain spare capacities and in some cases keep them in day-to-day operation in the event of need. This was an extraordinarily wasteful system, giving rise to massive spare capacity and low levels of productivity, over time deepening the structural distortions of the economy. In Shlykov's opinion this ‘structural militarisation’ played a significant role in the weakening and eventual failure of the Soviet economic system. 7
Significantly when a fuller version of the defence budget was eventually published in 1989, it did not include spending on mobilisation preparation of the economy. The system still exists in present-day Russia, albeit on a reduced scale, but the modest amount of funding allocated to it is now included in the budget chapter ‘national defence.’
Shlykov (2002), p.149 (‘…the economic collapse of the USSR was a consequence in the first instance of the system of mobilisation preparation of the economy.’).
In the Soviet economy from the early 1930s the highest priority sector was the military economy and within that the defence industry, like the rest of Soviet industry entirely state owned. 8 By 1990 it employed over 8 million people, including almost 1.5 million in research and development (R&D). This was over 19 per cent of total industrial employment. Its output represented 12 per cent of the total output of industry as a whole. But the defence industry also manufactured many civilian goods, in particular those of a relatively high technological level. Indeed, almost all high technology manufacturing in the USSR was undertaken within the defence sector; in 1990 half the industry's total production was of civil goods. In the same year almost 80 per cent of all industrial R&D undertaken in the country was performed by the defence industry and almost 70 per cent of this was for military purposes. 9 Over decades the industry enjoyed top priority in resource allocation, not simply in terms of quantity, but crucially in term of quality, being the recipient of the best available material and equipment inputs and, as the favoured sector, secured with financial resources permitting the payment of relatively high salaries and wages. The attraction, training and retention of skilled personnel, from designers and engineers to machine tool operators, was vital to the industry's relative success and to make this possible the enterprises of the industry were resourced in such a way as to permit the development around them of housing, educational, medical and cultural-sporting facilities of an unusually high standard in Soviet conditions. Notably in the nuclear industry, but also in other ministries, there were special distribution networks making available to employees food products and consumer goods scarce in the normal state shops. There was also a bias to the creation of very large enterprises, sometimes employing tens of thousands of workers, often with a high degree of self-reliance, minimising the possibility of the supply breakdowns so characteristic of the Soviet economy. Some large enterprises even had their own steel works and produced their own specialised production equipment. In this respect the defence industry was not unique. A distinctive feature of the Soviet economy was the extraordinarily low level of sub-contracting. Especially in the engineering industry, enterprises made in-house many components and systems that in a typical market economy would have been supplied by independent, specialised, companies, often small in scale. 10 This is a major reason why in the Soviet economy there were very few small and medium enterprises (SMEs).
See Cooper (1991).
Data from Cooper (2006), p.132–3.
This phenomenon dates back to the 1930s, when the administered supply system was first adopted; for a classic analysis see Granick (1967).
Not only were many defence enterprises very large, but quite a few dominated the local economies of entire population centres and in some cases were the centres of so-called ‘monotowns’, with only a single or very limited number of employers, often located, for security reasons, in remote areas of the country. In the case of the nuclear weapons industry, in particular, some of these towns were ‘closed’, i.e. they had highly restricted access and their inhabitants had strictly regulated contact with the rest of the country, though they were usually compensated by relatively good housing and pay.
The Soviet economic system was a producer-driven order, with very weak customer power. It was a sellers' market in which even goods of inferior quality found buyers. This state of affairs was also typical of the military economy, even though the customer, the armed forces, was granted some consumer powers not available in other sectors. The defence industry was to a large extent able to determine the types of weapons supplied to the armed forces and their volume. However, the military were involved in establishing the specifications of new armaments and were able to exercise some influence over the quality of their manufacture through a system of so-called ‘military representatives’ located at enterprises and R&D organisations to monitor their work on behalf of the armed forces customer. But this system had many problems and only in the late Gorbachev years were the military able openly to voice their discontents with this one-sided arms procurement system. Unlike the rest of the economy, however, the defence sector was subject to a form of competitive pressure: for the Party and military leaderships it was considered essential to match the technological innovations of potential adversaries. To this end, efforts were made to provide the defence industry with conditions and incentives that would make this possible, including generous rewards, monetary and non-monetary, for successful scientists, designers and engineers.
Since the beginning of 1991 the Russian economy has been transformed to a very significant degree. The large-scale privatisation campaign of the early to mid-1990s ended the predominance of state ownership in industry, prices were freed to find their own market level and many market-orientated institutions were established. The military economy was not immune from these reforms; indeed, they had a major impact on the defence industry and its performance. Looking at today's Russian economy from the perspective of the theoretical insights of Kornai and Yaremenko, can it be said that market transformation has been fully achieved? Or are there survivals and legacies of the communist past that still shape the economy or exert an influence on current practice? These issues will now be explored, drawing to some extent on the current state of the military economy and its mode of functioning in the new Russia.
Statistics on the overall share of the private sector in the Russian economy is unsatisfactory and contradictory, making it difficult to establish the true situation at present and trends over time. However, the evidence suggests that the state share has actually increased since the late 1990s. Thus, according to the European Bank for Reconstruction and Development, the share of the state sector in GDP increased from 30 per cent in 1997 to 35 per cent in 2010. 11 The ‘Expert’ ratings agency undertakes an annual review of Russia's largest companies. According to their analysis of the 400 largest companies in the country at the beginning of 2008, the state ownership share amounted to 40–45 per cent. 12
European Bank for Reconstruction and Development, Transition Report, 1997 and 2010. Note, in other ex-communist economies the state share in 2010 was much lower, e.g. only 20 per cent in Estonia, Hungary and the Slovak Republic; 25 per cent in Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Kyrgyzstan, Lithuania and Poland.
http://2020strategy.ru/g15/news/32589616.html, Presentation, 19 July 2011, slide 4.
Taking the defence industry, in 2007 no less that 49 per cent of enterprises and organisations were fully state-owned, 27 per cent had state ownership participation and only 24 per cent were fully private. 13 Given that almost all very large enterprises are fully state owned and private companies tend to be of a smaller scale, the state share of employment and output is probably larger than these figures suggest. Indeed, the available data indicate that 58 per cent of defence industry employees work in the ‘state sector’, undefined, but apparently meaning at fully state-owned enterprises. 14 While state participation in West European defence industries can be quite substantial, the extent of state predominance in Russia is exceptional. Since about 1997 the state presence has actually increased, partly because a number of private companies have withdrawn from military work and also because there has also been a process of state consolidation, reflecting more general trends in the economy.
http://www.vpk.ru, accessed 15 June 2009 (Information Agency Ts VPK).
Ibid.
In another respect the defence industry retains features of the Soviet past. It remains a sector in which soft budget constraints are still very much present. This raises an issue that has been rather neglected by researchers, namely the extent to which in the Russian economy in general soft budget constraints still have prevalence. Certainly, during the years 1992–1998, prior to the August financial crisis of that year, Russian enterprises exhibited extraordinary ingenuity in maintaining soft budget constraints, resorting to diverse forms of non-monetary transacting, generally summarised as ‘barter’, which permitted unprofitable enterprises to survive without facing bankruptcy and closure. 15 It is also a surprising feature of the present-day Russian economy that quite a large proportion of enterprises are reported to be loss-making, a proportion that remains high and leads to a suspicion that by various means they are allowed to remain in operation regardless of their lack of financial viability.
For a good analysis of this phenomenon, in which the government was perhaps complicit in so far as it reduced the danger of outbreaks of social discontent, see OECD (2000), Section II.
Thus in the first half of 2011 34.7 per cent of all enterprises and organisations were loss making, including 33.7 per cent of those in manufacturing industry. 16 This compares with 36.4 per cent and 36.6 per cent respectively in 2005, indicating some progress, but it is still a surprisingly large proportion. 17 At first sight, the performance of the defence industry appears to be superior: in 2005, 24.4 per cent of enterprises were loss-making (excluding nuclear industry), and 20.8 per cent in 2008. 18 Of loss-making enterprises in 2007, over 65 per cent had been in that state for two years or more. The largest losses were made by two well known enterprises, ‘Sevmash’ of Severodvinsk, the country's sole producer of nuclear submarines, and the ‘MiG’ corporation, producing combat aircraft. 19 However, the fact that the share of loss-making enterprises in the defence industry is relatively low probably has a simple explanation: as enterprises considered ‘strategic’ by the state, they have access to means of support not available to others, i.e. they experience relatively soft budget constraints. Indeed, the defence industry has a number of channels by which support is made available.
http://www.gks.ru/bgd/free/b04_03/Isswww.exe/Stg/d02/187.htm, accessed 12 September 2011.
Finansy Rossii – 2008 g. (http://www.gks.ru/bgd/regl/b08_51/Main.htm).
http://ia/vpk/ru/localfonds/vpk_struct_demo/2005/page_8_html, accessed 9 November 2011 and http://www.vpk.ru, accessed 16 February 2011.
http://ww.vpk.ru, accessed 13 September 2011.
Firstly, the defence industry is eligible for direct budget subsidies and other forms of financial support from the centre. As of 2011, there were twelve basic forms of budget support for defence industry enterprises. 20 They ranged from budget funds to boost the capital of enterprises fulfilling state defence orders, beneficiaries of which have included the ‘United Aviation Corporation’ and the Nizhnii Tagil’ ‘Uralvagonzavod’, the country's sole producer of tanks. Some munitions producing enterprises are so-called ‘treasury’ enterprises, surviving on direct budget handouts. Enterprises engaged in export activity are eligible for budget subsidies to cover part of the interest charges imposed by credit organisations, as are some enterprises acting as prime contractors in fulfilling state defence orders, enterprises engaged in certain innovation and investment projects involving high-technology, and producers of aircraft and aero-engines undertaking technical re-equipment. In addition, the above mentioned ‘Sevmash’ received special subsidies in 2006–08 to reduce interest payments incurred in fulfilling state defence orders. Finally, there are now at least three different channels by which defence industry enterprises can obtain state guarantees when obtaining credits relating to their military work. 21 The total budget funding involved is not insubstantial: excluding the substantial recapitalisation allocations associated mainly with the countering the impact of the global financial crisis, in 2008 subsidies amounted to over 5 billion roubles and in 2009 over 20 b.r. Data for 2010 are incomplete, excluding export subsidies, in 2009 over 6.5 b.r., but amounted to over 9 b.r. In 2009 143 b.r. budget funding was used to recapitalise enterprises; in 2010 57 b.r. 22 What is not clear is the extent to which there are also various forms of budget support at a sub-federal level, from republican and regional budgets.
http://www.vpk.ru/cgi-bin/uis/w3.cgi/CMS/Item/2540032, accessed 13 September 2011.
Ibid.
Calculated from data of Ibid.
Secondly, there is a less transparent means by which soft budget constraints can be maintained. It has been official policy for a number of years to form so-called integrated structures' in the defence industry. In 2003 there were 18 such structures, by 2011 55, with more to be created. 23 The declared justification for the creation of corporations and holding companies has been the need to match the large international companies of the USA and Europe in the international armaments market. However, it is generally understood that such corporate structures have another benefit: they create a framework in which cross subsidisation of enterprises can take place, moreover in a non-transparent manner. The most striking example is the state corporation, ‘Rostekhnologii’, created at the end of 2007. This brought together into a single structure no less than 442 enterprises, approximately one third of which were bankrupt of in a dire financial state. Now the corporation has over 590 enterprises employing some 600,000 people, including 330 in the defence industry, accounting for almost a quarter of the industry's total output. 24 However, ‘Rostekhnologii’ also includes the highly profitable state arms export company ‘Rosoboroneskport’, which gives ample scope for cross subsidisation to keep the financially non-viable enterprises in operation. The combination of loss-making and profitable firms in this way also applies to other large corporate structures, including the ‘United Aircraft Corporation’, the ‘United Shipbuilding Corporation’ and ‘Almaz-Antei’, Russia's producer of air defence systems. 25 In this respect they resemble the former ministries of Soviet industry; indeed, ‘Rostekhnologii’ is even of a scale comparable to that of a large ministry of the Soviet era.
Karavaev (2012).
http://www.rostechn.ru/archive/3/detail.php?ID=7403 (interview with Sergei Chemezov, general director); http://www.rostechn.ru/upload/content/strategy.pdf (strategy to 2020, p.5) and http://www.rostechn.ru/company/about/, accessed 13 September 2011.
However, by international standards, Russia's defence industry corporations are of relatively modest scale in terms of their volume of sales. SIPRI's listing of the top 100 arms-producing companies of the world (excluding China) in 2009 by arms sales, included only six Russian companies, the largest being‘ Almaz-Antei’, ranked 23rd with sales just over 10 per cent those of the leader, Lockheed Martin (SIPRI 2011, pp.257–61).
The discussion has focused on the defence industry but it relates to a broader issue, the extent to which soft budget constraints are a feature of the rest of the Russian economy. In the author's view they are probably quite pervasive, and not always in obvious forms. Then Russian economy is dominated by a relatively small number of very large corporations in the fuel-energy sector, metals and other resource-based activities. These companies are usually highly profitable and as a matter of course, in the name of ‘corporate social responsibility’ (CSR), are generous in their funding of various social and cultural projects and, it is generally believed, are willing to fund political initiatives of the government on the understanding that this will ensure a supportive stance by the state towards their corporate activities. 26 In the words of Guriev and Tsyvinskii, ’…for companies CSR is becoming an instrument of forming relations with the state.’ 27 For these companies budget constraints are hardly an issue; for all practical purposes they are soft. This relates to the federal level but there are grounds for suspecting that a similar situation also applies to larger, profitable, businesses at the republican and regional level. This may also permit regionally-focused cross subsidisation, whereby ‘donations’ from profitable firms end up being used to support less viable companies considered worthy of support at a local level on social or other grounds. To this extent the Russian economy probably still possesses a significant characteristic of its Soviet forebear, albeit on a less pronounced scale. But it is not a shortage economy as it was in Soviet times. Most households, but by no means all, still experience hard budget constraints. It is not daily shortages that are experienced but inflation, eroding real purchasing power, which has been a persistent feature of the post-1991 economy. Perhaps this is at least in part the ‘price’ paid for the Russian government's acceptance of the survival of soft budget constraints. 28
On the specific nature of corporate social responsibility in Russian, see Mizobata (2011).
Guriev and Tsyvinskii (2011).
The author is grateful to Silvana Malle for this insight.
In the author's view, the prevalence of soft budget constraints helps to account for other striking features of the present-day Russian economy, namely the low level of competition and the modest scale, by international standards, of innovation. 29 For many Russian firms competitive pressure is weak, limiting the incentive to adopt new products or cost-reducing processes. According to the World Economic Forum, Russia's position in their global competitiveness ranking has remained low over the past decade and shows little sign of improving. In the latest 2011–12 ranking, Russia was placed 66th of 142 countries covered, below such comparators as China, Brazil, Turkey and Mexico, not to speak of the Republic of Korea, in 24th. 30 As for innovation, the interim report of the group of economists engaged in developing a revised strategy of socio-economic development of Russia to 2020, looking to the future sums up the situation as follows, ‘the level of innovativeness of the economy as a whole and the innovativeness of concrete branches, in particular, will be determined by the general level of competition in the economy and concrete branches.’ But the authors of this document also show a keen awareness of the problems of the high-technology sector, ‘…in the framework of the planned economy these sectors (armaments, space, nuclear power, aircraft building – jmc) developed in a situation of high competition (the requirement was the achievement of world leadership or parity with the USA), but – simultaneously – extremely soft budget constraints (priority financing “on demand”). With these have been linked significant difficulties of the transition of these sectors to market rails and inclusion in present-day international competition, which is competition not only of quality, but also of costs. In the 1990s these sectors suffered from a lack of financing, however the 2000s showed that the growth of financing did not lead to a proportional improvement of competitiveness. 31 However, the authors fail to acknowledge that even today the budget constraints in these sectors are not always hard, i.e. one of the two identified Soviet characteristics is still to some extent present, although the other, constant pressure by the (communist) political leadership and state for new achievements, no longer functions, to the frustration, one senses, of the current political elite. The fact that the Russian economy is still not very innovative and has considerable technological backwardness in many fields will offer plenty of scope for foreign exporters and investors in the years ahead, provided the Russian government maintains an open policy towards such external acquisition of technology.
This is a central conclusion of the expert group responsible for revising the government's strategy of socio-economic development to the year 2020, see Strategiya-2020 (2012).
http://www3.weforum.org/docs/WEF_GCR_CompetitivenessIndexRanking_2011-12.pdf, accessed 12 September 2011.
Strategiya-2020 (2011), pp.52–53.
In Soviet times, as noted above, enterprises strived to minimise their dependence on outside suppliers over which they had no control. This led to a very low level of sub-contracting, few small enterprises, and much in-house provision of production inputs, or at least their supply by enterprises of the same ministry, as this raised the possibility of exerting administrative pressure to ensure reliable supply. The latter applied in particular to the defence industry, which in general exhibited a higher degree of discipline in its economic behaviour than the rest of the economy, as all understood that the sector had top priority for the country's leadership. In present-day Russia the situation is in many respects different but there are continuities, not always evident at first sight. The powerful administrative structures of Soviet times have gone, as has the unwavering political support which the defence industry formerly enjoyed. Now, responsibility for fulfilling the annual state defence order rests with prime contractors. They receive the budget funding for new armaments and have to manage relations with lower tier suppliers and provide payment for their deliveries of systems and components from the funding they have been allocated. But there is now a new factor leading to an aversion to external supply, price flexibility and unpredictability in market conditions. Many of the lower tier suppliers are now private companies and military-related work often forms only a small part of their activity. However, in many cases they are the sole Russian producers. According to the prime contractors, they often charge elevated prices over which they as buyers have little, if any, control. Being obliged to pay more for inputs than originally envisaged but faced with a pre-determined total contract price, the prime contractors find that their profit margins are depressed to the extent that contracts are frequently fulfilled with little or no profit, a situation that can lead to lengthy and difficult negotiations with the Ministry of Defence for additional funding. This situation leads to an outcome not dissimilar to that of Soviet times, but motivated by price, rather than supply, uncertainty. In the words of a leading manager of the defence industry, the deputy director for military production of the vast 'Uralvagonzavod' plant in the Urals, the Ministry of Defence's price policy is leading to ‘a return to a “natural economy” of the Soviet-feudal type, in which gigantic factories by their own efforts made practically all parts for the final product.’ 32 Prime contractors have an interest in maintaining in-house supply or controlling external suppliers by incorporating them into corporate structures. In present-day Russia there is another consideration that has to be taken into account. Whereas in Soviet times transport costs were extremely low, heavily subsidised by the state, now they are much higher, largely, if not entirely, determined by market forces. This is a factor pushing up costs in manufacturing and motivating interest in alternative, lower cost and less unpredictable, options.
Cited in Murakhovskii (2012).
In the defence industry other continuities with the Soviet past can be seen. The system of pricing of weapons as hardly changed. Basically, a system of cost plus pricing is employed, with a certain percentage of profit, for state defence orders limited by government decree, usually to 15 per cent. In recent years there has been much discussion of adopting new pricing principles but with to date no new methodology has been adopted. The evidence indicates that within the prices of weapons overhead costs can be extremely high, now a constant source of complaint by the MOD as customer. One of the basic reasons is that many enterprises still keep Soviet-era social infrastructure, sometimes on a substantial scale and charge its maintenance to overheads, which MOD representatives claim can reach over 1000 per cent. 33 Another legacy of the past, relating to the underdevelopment of specialised sub-contracting, with a tendency towards very large ‘universal’ enterprises, are very low levels, by international standards, of labour productivity. These two factors alone help to explain why the MOD is increasingly concerned that domestically produced armaments are of high cost, at times now being more expensive than foreign equivalents, usually of better quality; hence a growing interest in importing weapons. Another continuity with the past is the continued existence of mono-towns, often experiencing considerable economic difficulties in market conditions, and the ‘closed’ towns of the nuclear industry, now somewhat more open than hitherto, which require quite substantial budget support in order to maintain their viability. Finally, although research needs to be undertaken to establish the fact, the author's impression is that a large proportion of defence industry enterprise directors are members of the ruling ‘party of power’, United Russia, just as in the past they were invariably members of the Communist Party, almost all positions of responsibility in the Soviet defence industry being covered by the nomenklatura system.
Russia's sole builder of nuclear submarines, the federal unitary enterprise ‘PO “Sevmash”’, Severodvinsk, provides a good example. On the books of the enterprise as formal branches are a sanatorium in the Crimea, another in Sochi, a pig farm and two construction organisations, but it is likely that there is also extensive housing, sporting and other facilities (http://www.sevmash.ru/rus/korp/ustav.html, accessed 12 September 2011).
It is perhaps not surprising that the military sector still possesses many features having their origins in the Soviet past, partly because it was the part of the administered economy that was the most successful – here ‘planning’ worked in the sense that the USSR was able to produce modern weaponry on a substantial scale and was able to maintain strategic parity with the US, but also because the very nature of armaments production and procurement, in any economy, does not take a directly market form. But over the past two-three years there have been serious attempts in Russia to adapt the arms procurement process more to the market reality of the economy. As noted above, the Soviet arms procurement system was producer-driven, with the MOD a relatively weak customer. Now, under civilian defence minister Anatolii Serdyukov, with his background in the tax service, the procurement process is being civilianised, with the creation of a special federal agency for arms acquisition headed and staffed by civilians (Rosoboronpostavka) alongside a separate agency, also civilian, for licencing contractors and monitoring the implementation of contracts (Rosoboronzakaz). 34 At the same time, the MOD is adopting a much tougher stance as a customer, no longer accepting without question the prices charged by producers but negotiating lower prices when possible, obliging contractors to find means of lowering costs. The model here is clearly the acquisition system of the United States. In addition, the entire logistics system of the armed forces is being reform, with civilianisation, the development of out-sourcing and the adoption of practices normal in most developed countries. If the present momentum of reform is maintained, Russia could have a more market-orientated military economy within the next five years. To that extent, a significant Soviet inheritance will have been overcome, marking a further step in the progress of general market transition of the country.
See http://rosoboronpostavka.ru/and http://www.fsoz.gov.ru/ (note, there are only Russian versions of these websites).
Finally, in considering the military economy, it is worth noting that Russia is now experiencing more severe competition in another sphere, arms exports. The USSR was a large-scale supplier of weaponry to other countries, but a major proportion of these arms transfers were of a political, not a commercial, nature, taking the form of free grants or financed by extremely generous credit terms with little expectation of repayment. Since the end of the Soviet Union Russia has steadily expanded arms sales and by 2010 had reached an annual volume of over $10 billion. However, almost all the arms exported are Soviet-era systems, admittedly usually modernised, and the cost advantage Russia has benefitted from is beginning to be eroded, with new competitors rapidly emerging, not the least China, but also other ex-USSR countries such as Ukraine. From now on this enhanced external competitive is likely to supplement the increased pressure being experienced on the domestic market.
It is worth reflecting on the analysis of Yaremenko to see whether it may still capture some aspects of the Russian economy twenty years after the communist collapse. Central to his conceptualisation of the Russian economy was its structural segmentation according to the quality of resources available at each level, the higher the priority of the activity, then the better the quality of resources allocated to it by administrative means through the ‘planning’ system, with the defence industry at the top of the hierarchy and some purely consumer-orientated activities at the bottom. At the same time, prices set by administrative means did not reflect the actual scarcity or quality of the production inputs allocated. The establishment, implementation and monitoring of the priority ranking was essentially a political matter, decided by the top Communist Party leadership. Clearly, in the present-day Russian economy resource allocation and pricing are matters of market determination, suggesting that Yaremenko's understanding no longer has relevance. However, it could be argued that this is not the case: Russia still has a relatively segmented economy in which political priorities still play a significant role. A feature of the Russian economy is the existence of a leading sector in which the state takes a very close interest and also has a sizeable ownership stake, with a marked fusion of business and political-state interests, no longer, of course, the Communist Party, but now to a large extent the ‘party of power’, United Russia and those closely associated with it. This leading sector, regarded by power as ‘strategic’, embraces some of the country's largest companies and export earners in resource-based sectors such as energy, metals and chemicals, plus a number of leading banks. According to the annual Expert-400 ranking of the respected Expert Ratings Agency, as of 1 September 2010, the 50 largest Russian firms by market value (capitalisation) included 22 in the fuel-energy industry, 8 in metals, 4 banks, 2 in chemicals and 2 in transport (both of near-state status), with a large proportion of these 38 companies having a state share holding. The remaining 12 firms were overwhelmingly privately owned, in telecoms, food, pharmaceuticals, construction and retail. In 48th and 50th places only were two machine-building companies, ‘Silovye mashiny’, the leading manufacturer of power generation equipment, and finally (with a value of 55.5 b.r. compared with the 1st, ‘Gazprom's 3788 b.r.) the ‘United Aircraft Corporation’, the sole representative of the defence industry, well reflecting the fact that this sector is no longer a dominant actor in the Russian economy. In fact, of the 200 largest companies by market value, only 9 were defence industry enterprises engaged in military work. 35
Returning to the Yaremenko framework, other segments of the economy can be identified. There is a sector of relatively large-scale business, overwhelmingly private, in activities not regarded as ‘strategic’ by the state, including the food industry, most telecoms, and the retail sector and building materials. These companies, some clearly competitive both in domestic and international markets, are able to operate without much state involvement, but it is reasonable to assume that the larger such companies become the more likely they are to encounter pressures from the state, perhaps in the form of ‘corporate social responsibility’ obligations. Thirdly, there is a quite large sector of smaller and medium scale businesses, equivalent to the mittelstand companies of Germany and other West European countries, which may well have thrived precisely because the state has not hitherto shown interest in their activities. These businesses are often found outside the resource sector of the economy. They have a very active association, ‘Delovaya Rossiya’, which has become quite influential as a source of ideas for improving the performance of the economy. 36 It is in this sector that can be found such innovative and dynamic firms as those in the Russian internet business, which have succeeded in keeping the big US actors such as Google and Amazon at bay. 37 Finally, there is the sector of much smaller companies, the true SMEs and sole trader businesses, the development of which has been stunted in Russia, not so much by the actions of federal authorities, but by local governments and agencies which have subjected these business to disruptive monitoring and pressure, often motivated by bribe seeking. Thus Russia's present-day economy, like that of the USSR, is segmented, this segmentation being shaped, as before, by political-state priorities, but of a different character than before. In the post-1991 world concern about military security is not as pre-eminent as it was in the Cold War years, though still an important consideration. Now there are more general concerns about Russia's economic strength and standing in the world, accompanied by commercial and monetary motivations, including, for at least some of the ruling elite, personal access to wealth for themselves and their families. However, the very fact that the political leadership regards the economy in this way may well reflect inertia of thinking and psychology in which ‘strategic’ and ‘security’ considerations still loom large.
See Cooper (2012), p.13.
See Bradshaw and Weaver (2011).
A further parallel between the Soviet economic system and that of Russia today is the large scope for the state in redistributing resources. In the USSR administrative control of the domestic economy, plus the ability to shape the nature and volume of foreign trade flows, gave ample possibilities for channelling resources, in non-transparent ways, from profitable, but lower priority, activities to costly, priority, activities, above all enhancing the country's military capability. In the Russian market economy these direct instruments of intervention and control are not available, or only to a limited extent, but substantial rental incomes from the export of hydrocarbons and other resource-based goods again gives large scope for non-transparent redistribution: the present day Russian state, like its Soviet predecessor, is one that exercises considerable command over resources and this power may well be associated with not dissimilar mentalities characteristic of political leaders in both systems. In such a situation personal rent seeking and appropriation are unlikely to be absent.
One structural determinant of the Soviet past is still present, but in a much weaker form. This concerns the ‘structural militarisation’ identified by Shlykov. The system of mobilisation preparation in the event of war or other major national emergency still exists, and is still shrouded in secrecy, but on a more modest scale. The limited evidence available suggests that mobilisation reserves are now mainly restricted to the defence industry and that the reserves maintained are on a smaller scale than in the USSR and therefore have less impact on the rest of the economy. However, while there is an annual federal budget allocation to fund the mobilisation system, it appears that many defence industry enterprises incur costs in keeping mobilisation capacities, costs which are charged to overheads.
In the Soviet economy long-term plans were considered important and much time and effort were mobilised in order to elaborate them. Not only was there a five-year plan, but also ‘perspective’ ten-year, and even twenty-year, planning documents and programmes. Yet, paradoxically, Soviet enterprises and the system of economic management in general worked in reality to very short-term time horizons. As Kornai has argued persuasively, day-to-day economic management often amounted to ‘putting out fires’, resolving one crisis after another. 38 The commitment to long-term perspectives clearly had ideological significance for the Communist Party, conveying a sense of control and purpose to the population and the outside world, but it may also have provided some sense of security to the ruling elite. The situation in Russia is not dissimilar. Faced with the spontaneity and unpredictability of a market economy in a globalised world, the Russian government has a considerable commitment to preparing long-terms programmes and strategic documents for almost all aspects of life, from national programmes of socio-economic development, as the current one to 2020, to regional equivalents, to ten-year state programmes for armaments, energy, transport, innovation, science and technology, etc. There is also much talk of the need for ‘strategic planning’ and this has become an increasingly central concern under Putin's leadership. 39 This commitment may represent in part inertia of thought from Soviet times, perhaps even some nostalgia for the apparent certainties of the past, but may also reflect a need, in new conditions, for reassurance and security for those in power. And today, when serious problems arise, the top leadership also engages in a form of ‘fire fighting’, resort to what has become known in Russia as ’hand control’, with personal intervention at the enterprise level and the immediate issuing of orders to relevant government agencies.
Kornai (1980), pp.217–33.
See Cooper (2012).
This article has explored the extent to which the present-day Russian economy still possesses features inherited from the socialist economic system of the USSR, with a focus on the military sector, which has remained the least changed by overall market transformation. But, as argued, in some other respects the Soviet legacy lives on in the new post-communist order. This is not surprising. The socialist ‘planned’ economy existed for over sixty years and became profoundly institutionalised and those today in leading positions of power in Russia are products of that system and to some extent bearers of mentalities associated with it. Amongst economists there has been much discussion of whether market transition has been completed in the ex-communist countries. While there is a good case that it has been in some countries of Eastern Europe, now established members of the European Union, it is more debatable with respect to Russia and other member countries of the Commonwealth of Independent States. For Russia, the undisputed principal actor of the military economy of the former Warsaw Treaty Organisation, the phenomenon of protracted transformation is the least unexpected. A strong case of path dependency is not being asserted, rather a matter of political-economic institutional inertia.
A final consideration arises from the fact that it is now twenty years since the collapse of Soviet communism and during that time there have been many significant changes in the wider world. The process of globalisation has gathered pace and major new actors have emerged in the world economy, challenging the dominant powers of the post Second World War settlement. More recently, there has been a severe global financial-economic crisis which, at the time of writing, has not fully run its course. These processes have led to changes in the market model itself, making more problematic the criteria by which the present-day Russian economy should be assessed. It has become evident that soft budget constraints are not a phenomenon of the Socialist economic system alone, but can exist in the most developed market economies, where companies considered ‘too big to fail’ can be subject to budget support by governments, even by those with a strong ideological commitment to free markets. 40 Perhaps, after all, notwithstanding the reservations outlined in this paper, Russia is now much nearer to becoming a ‘normal’ market economy.
Kornai himself has commented on this phenomenon of the growing propensity to soften budget constraints under capitalism, see Kornai (2008).