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Russian Armsmakers Take Off on Their Own

With the Russian government unable to bankroll weapons orders or finance defense conversion, state-run arms suppliers are seeking hard currency earnings abroad. AFTERMATH OF THE COLD WAR

AS they enter the ugly concrete-walled complex on Leningradsky Prospekt, the workers of the Mikoyan-Guryevich design bureau walk under a huge red sign still bearing its Soviet-era exhortation:

"Strengthen by your labor the might of the beloved Motherland!"

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Only these days, the "motherland" is Russia, not the Soviet Union. And the designers and engineers of the famous MIG fighter jets are more worried about where their next paycheck will come from than defending the nation against potential enemies.

At a nearby Moscow airfield, 60 top-of-the-line MIG-29 fighters, built especially for export, are lined up waiting for a buyer. Orders from the Russian Air Force have fallen sharply, part of a more than 60 percent cutback in purchases of military hardware in 1992. At the MIG design bureau, the best and the brightest are leaving to make their living elsewhere. Money-earning solution

Anatoly Belosvet, the MIG design bureau's vice president and chief designer, has a solution to this crisis: Sell the aircraft to almost any country that wants them. "We are searching for foreign buyers and they are searching for us," he says. (US industry's solution, Page 12.)

As Russian armsmakers and defense factories struggle with plummeting subsidies and a collapsing economy, they are roaming the world in a desperate search for buyers. In many cases, the collapse of central controls has unleashed the armsmakers to pursue clients on their own, often without the backing, or even against the wishes, of the government.

But the scramble for arms sales begins with encouragement from the highest levels of government, from President Boris Yeltsin on down. It reflects the reality that an impoverished Russian government cannot afford to sustain the huge Soviet military-industrial complex nor finance its conversion to civilian production.

Russian officials warn that they cannot deal with the political and social consequences of collapse in an industry that employs tens of millions of people.

"The situation we are in forces us to penetrate the international market," says Mikhail Malei, Yeltsin's adviser on defense conversion. "The lives of people depend on it. This winter will be cold and the spring will be hungry.... If we have to choose between the life of a child and the sale of a cannon to [Libyan leader Muammar] Qaddafi, we will choose the life of the child."

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Such arms sales have generated considerable controversy, most prominently American protests over the sale and delivery of three diesel submarines to Iran. Earlier this year, the United States protested the sale of rocket engines to India and more recently the reported sale of antimissile defense systems to China.

Russian officials have rejected charges that these sales are destabilizing or are in violation of any international agreement. They suggest that in many of these cases the US is motivated by commercial competitive interests in the arms market as much as by security concerns.

Mr. Malei also argues that arms sales overseas are the only way to finance the eventual shift of the monster armsmakers into more peaceful pursuits. "The military-industrial complex has to earn money on the international market from the sales of weapons, no less than $5 billion to $7 billion a year," he told the Monitor in an interview in his Kremlin office. "There is no other source of financing for conversion left."

The signs of an official imprimatur are everywhere. Red Star, the once-stodgy newspaper of the Soviet, now Russian, Defense Ministry, carries practically daily, bilingual display advertisements from armsmakers offering everything from shotguns to self-propelled artillery. Arms firms regularly hawk their wares at international shows, from the Paris Air Show to defense fairs in Athens. Exhibitions are now taking place in Russia as well: the latest, from Nov. 6 to Nov. 8, in Vladimir, a major arms-producing

center east of Moscow. Military officials from countries such as the United Arab Emirates were guests at mid-October maneuvers in the Kazakh steppes, designed to show off the latest in Russian air defense systems.

The Soviet Union is no stranger to the international arms bazaar. During the 1980s, the Soviets sold an average of $20 billion a year in weapons, a level comparable to the US, according to figures released by the Ministry for Foreign Economic Relations. The peak year was 1989 when $23 billion in arms was sold.

But officials point out that much of these sales were de facto grants, reflecting weapons sold to former communist ideological allies such as Vietnam, Afghanistan, or Cuba. Out of the $14 billion sold in 1990 Mr. Malei says, as an example, only $4 billion was actually received. Arms credits constitute more than 40 percent of the $146 billion which is still owed the Soviet Union, according to a report Nov. 20 in the daily Komsomolskaya Pravda. Most of it is uncollectable debt.

The Russians have lost many of their "old" markets. Russian officials gently carp about the money they forsook by following United Nations embargoes against Libya, Iraq, and Yugoslavia - more than $7 billion in potential sales in 1992 alone, Malei claims. Shipments to former Soviet satellites in eastern Europe have also almost disappeared although some sales continue to Hungary, Czechoslovakia, Poland, Bulgaria, and Germany, Foreign Economic Relations Ministry officials say.

The search for new customers has yielded little fruit so far. The ministry for foreign trade data claimed that arms sales in 1991 dropped to $1.55 billion, the bulk of them to Iran. The independent news agency Interfax, citing official sources, reported Nov. 18 that arms sales were $7.8 billion for 1991, dropping to $3 billion this year. Chaotic controls

Russian activity on the arms market is considerably complicated by a chaotic relationship between the arms firms, which are all state-owned, and the government. In theory, the Ministry of Foreign Economic Relations is in charge of arms sales, in cooperation with the Ministry of Foreign Affairs and the Ministry of Defense. The economic ministry has at least four major state trade companies specializing in arms, including Oboronexport, Spetsvneshtekhnika, and Gusk.

But in the recent period, in response to pressure from armsmakers, the Russian government has given the producers the right to find clients and make contracts. These contracts must receive government approval, at the highest level by an inter-agency state commission headed by deputy premier Georgy Khizha.

In practice, contracts are signed which have not been approved, admits Pyotr Litavrin, head of the Foreign Ministry's division of export control and conversion. Information is totally sectionalized to the point that the Foreign Ministry does not know the value of any arms contract.

The armsmakers complain that the government is standing in their way, yielding to Western pressures or placing unnecessary foreign policy and bureaucratic obstacles in their path.

Take the Mikoyan design bureau. According to Mr. Belosvet, eager customers had been ready to seal deals in Taiwan and South Africa, both enemies of the former Soviet Union, as well as in India, a longtime buyer of Soviet arms.

All three deals have been blocked or stalled, though for different reasons. In the case of Taiwan, the Foreign Ministry stepped in only after serious talks were well under way. The MIG executives had already held talks with Taiwan, gaining agreement on their intent to purchase large numbers of aircraft, Belosvet says. The Foreign Ministry moved only when MIG sought permission to fly its aircraft to Taiwan for demonstration flights.

In the meantime the US signed a deal to sell 150 F-16s to Taiwan, ironically citing an earlier sale of 28 Sukhoi-27 fighters to mainland China as one justification for the deal. "Why can the Americans sell F-16s to Taiwan, when we were prohibited," Belosvet complains, even coyly suggesting that their planes would be a better match for the aircraft produced by the rival Russian firms.

"We didn't want to ruin our relations with China," answers the Foreign Ministry's Mr. Litavrin. China is a major trading partner, and one with thousands of miles of common border. Moreover, President Yeltsin is due to visit China in December. Chinese defense minister Qin Jiwei visited Russia in September, sparking rumors that larger arms deals are being negotiated. US officials have charged that sales of sophisticated missile defense and other systems are in the works, a charge Chinese officials deny. US intervention charged

MIG's Belosvet also assails the Foreign Ministry for bowing to US pressure to halt a deal with South Africa. "We had direct discussions but our Foreign Ministry forbade us to have negotiations," he says. "At the same time, the Americans told South Africa that if they buy F-16s, America will lift the embargo [on arms sales]."

The initial contacts with South Africa were carried out without the government's knowledge, says the Foreign Ministry official. "We blocked it because we believe this deal would hurt our relations with black Africa.... We should be cautious and lift the embargo step by step." He denies US pressure though he admits there were "general discussions" with the US on this issue.

Arms executives like Belosvet agree with the need for government controls as they exist in the West, but say they should be simplified to getting the approval of the defense and foreign ministries. Now the signatures of at least eight organizations are needed, he says, effectively blocking lucrative sales. Like other arms-makers, he directs particular ire at the Ministry for Foreign Economic Relations.

Belosvet cites India as an example of the ministry's role. India is a long-time buyer of Soviet weapons and one of the few reliable paying customers the Soviet Union had. As with all trade, these sales were conducted in rubles and rupees; the Soviets used rupee receipts to buy Indian products. This year the foreign economic relations ministry insisted that all weapons be paid for in dollars or other hard currencies, bringing arms sales to a halt, including sales of spare parts.

Russian arms-makers and officials insist they have no problem with continuing past payment deals, confident they can find Indian products to use or sell on the world market. Indian Defense Minister Sharad Pawar visited Moscow in September to try to resolve the problem but apparently failed (although talks are continuing prior to a January visit by Yeltsin to India). He went the next month to Ukraine hoping to find what he needed there, reportedly reaching an agreement on a partial barter deal.

"The system of selling weapons hinders the producers," says Mr. Malei, who participated in the talks with India. "It is not a system to control sales but rather a totally bureaucratic procedure."

In 1992, the Ministry for Foreign Economic Relations accounted for 32 percent of the government's defense orders, according to deputy minister Vladimir Shibayev. Senior ministry officials made the orders on the assumption that they could export $7.5 billion worth of arms, he told the Nezavisimaya Gazeta Sept. 30. Instead, hundreds of tanks and aircraft, including the 60 MIGs, and other weapons, are piled up without buyers, and the enterprises have yet to be paid.

Acknowledging the problem, the ministry later sacked the official who placed the order but it also accuses the arms producers of messing up deals with their frenzied sales activity. Mr. Shibayev gives the example of Malaysia, where a tough competition with American and British firms was apparently won by the MIG-29. The deal would open up a potentially rich new market in Southeast Asia.

"When the contract was all ready to be signed, `mediators' flew in to gather commission fees," Shibayev recounts. Altogether, about 18 would-be middlemen turned up in Malaysia. Even the plant which produces the planes, the Moscow Aircraft Production Group, made a separate offer. "The Malaysian authorities were brought to a state of complete confusion," he says, with the deal probably lost to their American competitors. Arms to Asia

This is by no means a singular example. Japanese officials protested to the Russian Foreign Ministry, Litavrin reports, over arms plants located in the Russian Far East peddling their wares in Asia. For example, sales representatives of a plant that makes Su-27 fighters in Komsomolsk-on-Amur have visited India, Sri Lanka, China, and the Middle East, the independent Interfax news agency reported Oct. 19. The plant needs clients: It now can afford to make only two planes a month although it has the capacit y to produce 10.

The disarray extends to competition between the actual manufacturers and the design bureaus, which in the Soviet structure are separate. Officials of the Moscow plant making MIGs denounce the design bureau as interlopers and recently reached a deal with the Ministry for Foreign Economic Relations to have a joint monopoly over export deals.

"We don't have a law regulating arms trade policy," Litavrin says, "only administrative acts." Without an established system, he admits, they cannot guarantee full control over the Russian rush into the arms bazaar.

* First of two parts. Part II on arms conversion appears in Friday's daily Monitor, and in next week's World Edition.

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