THE DEFENCE SECTOR IN THE ECONOMY OF A DECLINING SUPERPOWER: SOVIET UNION AND RUSSIA, 1965-2000

ISSN 1471-0498















DEPARTMENT OF ECONOMICS

DISCUSSION PAPER SERIES






THE DEFENCE SECTOR IN THE ECONOMY OF A DECLINING
SUPERPOWER: SOVIET UNION AND RUSSIA, 1965-2000


Christopher Davis





Number 8

April 2000






Manor Road Building, Oxford OX1 3UQ

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Forthcoming Article in the Journal
Defence and Peace Economics
Draft (8/6/00)










COUNTRY SURVEY

The Defence Sector in the Economy of a Declining Superpower:
Soviet Union and Russia, 1965-2000






by Christopher Davis
Lecturer in Russian and East European Political Economy
University of Oxford
Fellow, Wolfson College

Address:
Department of Economics
Economics Building,
Manor Road,
Oxford OX1 3UL, England
Tel: 01865-271070
Fax: 01865-274132
e-mail: christopher.davis@economics.ox.ac.uk


Acknowledgements:
Research related to this paper has been carried out over the past decade and has been supported by
grants from the Ford Foundation, Economic and Social Research Council, Pew Charitable Trusts,
Volkswagen Foundation, and, most recently, the Centre for International Studies of Oxford University.
The author would like to thank the following people for helpful discussions and suggestions: Duncan
Allen, Roy Allison, Peter Almquist, Archie Brown, Julian Cooper, John Erickson, Keith Hartley, Chris
Hill, Timothy Laurence, Bobo Lo, Neil MacFarlane, Martin Nicholson, James Noren, Robert O’Neill,
Alex Pravda, Alastair Rankin, Adam Roberts, Jacques Sapir, Terry O’Shaughnessy and Digby Waller.
The Russian analysts who have assisted the author have been thanked privately.

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Contents

1.
Introduction
1

2.
The Defence Sector in the Soviet and Russian Economic Systems
1

3.
The High Priority Defence Sector in the Soviet Shortage Economy: 1965-85
4

a.
Organisation of the Soviet Defence Sector
4

b.
High Priority Status of the Soviet Defence Sector
6


c.
Defence Institutions in the Soviet Shortage Economy


7


d.
Soviet Defence Expenditures and Burden




9

e.
Developments in Soviet Defence Institutions, 1965-85

13

f.
Production of Military Power and National Security



17

4.
The Soviet Defence Sector During Perestroika, 1985-91:
From Reform to Disarmament to Collapse
17

5.
The Low Priority Defence Sector in the Russian Transitional
Economy: 1992-2000
19


a.
Organisation of the Russian Defence Sector




19

b.
Low Priority Status of the Russian Defence Sector



22

c.
Defence Institutions in the Russian Transitional Economy


22

d.
Russian Defence Expenditure and Burden




23

e.
Developments in Russian Defence Institutions, 1992-2000


28

f.
Production of Military Power and National Security



37




6.
Conclusions and Prospects
38

7.
Bibliography
41

8.
Endnotes
42

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Figures

1
Institutions and Markets of the Soviet/Russian Defence Sector
3

2
The Organisation of the Soviet Defence Sector in 1985
5

3
Soviet Defence Expenditure, 1965-91




11

4
The Organisation of the Russian Defence Sector in 2000
20



Tables

1
Priority Status of Defence Institutions in the Soviet Command
Economy and the Russian Transition Economy



7

2
Behavioural Characteristics of Defence Institutions in the Soviet
Command and Russian Transition Economies
8

3
Soviet Defence Expenditures, 1965-91




10

4
Developments in the Soviet Defence Sector, 1965-91: Personnel, Weapons,
Defence Industry Outputs, and Foreign Arms Sales




15

5
Russian Defence Expenditures, 1992-2000





24

6
Developments in the Russian Defence Sector, 1992-98: Personnel, Weapons,
Defence Industry Outputs, and Foreign Arms Sales
30

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Abstract

The Soviet Union was able to develop a large military-industrial complex and become the world’s
second superpower despite the small size of its malfunctioning planned economy because defence was
given high priority status and special planning, rationing and administrative mechanism were used to
ensure attainment of national security objectives. However, in the period 1976-85 the effectiveness of
priority protection diminished and defence institutions experienced more of the problems typical of the
shortage economic system. The heavy defence burden also created growing difficulties for the civilian
economy. The attempts by the Gorbachev government to reform the defence sector and improve
defence-economic relationships during perestroika (1985-91) uniformly failed. For most of the transition
period, the Russian military-industrial complex has been adversely affected by its low priority status,
drastic cuts in defence spending, instability of the hybrid politico-economic system, and negative growth
of the economy. The armed forces and defence industry have been reduced in size and their outputs of
military services and equipment have fallen to low levels. Nevertheless, the Russian armed forces still
have over one million troops, significant stocks of sophisticated conventional weapons, and a large
nuclear arsenal. Since mid-1999 the priority of the defence sector has been raised significantly, defence
spending has increased, and the new government of President Putin has adopted ambitious plans to
revive Russian military power by 2010. Economic factors will be of crucial importance in determining
the success of this effort.



Key Words

Soviet Union, USSR, Russia, defence economics, defence sector, military-industrial complex, defence
expenditure, defence budget, defence burden, arms race, armed forces, logistics, defence industry,
military RDT&E, arms trade, national security, conversion, disarmament, economic systems, defence
planning.

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1.
Introduction

Governments of the nation with Russia at its core (Tsarist Russia, Soviet Union, Russian
Federation) have been committed, over the past century, to achieving a strong defence capability due to
geopolitics, ideologies, historical experiences, and foreign military threats. However, the Russian
economy always has been backward relative to those of leading industrialised countries (Davis 1999). A
key challenge for Russian leaders therefore has been to develop economic institutions and policies that
could mobilise the nation’s limited resources to support a powerful military-industrial complex. The
Stalinist command economic system proved to be especially effective in generating military power. The
USSR industrialised rapidly in the 1930s, triumphed over Germany in World War II, and achieved
strategic parity with the USA during the Cold War. It reached the apogee of its upward trajectory as a
world power in the mid-1970s. Over the next decade, the USSR’s military capabilities increased, but its
economic growth decelerated and the gaps between Soviet and Western technologies widened (Davis
1990b). Reforms during 1985-91 failed to arrest this decline and the USSR fragmented after a terminal
systemic crisis. Since 1992 the Russian state has attempted to construct a new politico-economic
system and to reform a scaled-down defence sector to make it more effective and efficient.
This country survey addresses several questions about the Soviet and Russian defence sectors.1
How did the relatively small Soviet economy support a superpower military-industrial complex? What
factors determined the allocation of resources to defence? Why did the relationship between the defence
sector and the Soviet economic system become dysfunctional in the 1980s? How have systemic
changes associated with the Russian transition process, economic decline and reform programmes
influenced the military-industrial complex? What are the prospects for the revival of Russia as a
significant military power in the 21st century?
2.
The Defence Sector in the Soviet and Russian Economic Systems

The Soviet and Russian defence sectors are defined in accordance with the national accounting

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procedure of identifying an economic output (in this case, military services) and then assigning to the
branch the institutions engaged in producing it: armed forces, military supply (logistics) network, defence
industry, military RDT&E, military foreign trade and central defence bureaucracy (Davis 1990a). The
transactions of defence institutions with each other and civilian organisations are carried out in the
markets identified in Figure 1.2 The armed forces produce potential and actual military services.3 The
military supply network purchases goods from civilian and defence institutions and supplies them to the
armed forces through retail and wholesale markets (AFRM and AFWM). Military and civilian
commodities are produced by the defence industry and are sold in domestic and foreign markets, as are
the designs and prototypes of the military RDT&E system. The military foreign trade institution legally
exports and imports commodities and illegally obtains foreign military technology through espionage
programmes. The central defence bureaucracy controls the defence sector production process. The
vertical organizations of these defence institutions in the USSR and Russia are examined in sections 3.a
and 5.a.
In both the Soviet and transition period the allocation of resources to the defence sector and the
decision-making and behaviour of defence institutions have been heavily influenced by state priorities,
the characteristics of the economic systems, the geography of the defence sectors, and military alliances
(Warsaw Pact and Commonwealth of Independent States (CIS)). 4 These factors are discussed in
sections 3.a-c and 5.a-c.
Soviet and Russian national security (NS) is generated by a complex process that has external
and internal dimensions: NS = f (ENS, INS) (Davis 1992a). Changes in ENS and INS are caused by
interactions of external and internal final threats (EFT, IFT) and the external and internal military services
(EMS, IMS) produced by the armed forces: ENS= f (EFT, EMS) and
INS = f (IFT, IMS). Initial threats are lowered to final ones by diplomatic, espionage,

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Figure 1: Institutions and Markets in the Soviet/Russian Defence Sector


Civilian Goods
Military Services
DBLM
Central Defence
DBCM
Bureaucracy (DB)
DBIM
Allocation of Resources
AFLM
Armed Forces
1
(AF)
DILM
DIIM
1
2
3
4
5
6
AFRM
AFWM
DICM
Military Supply System
Defence Industry
Military RDT&E
2
DIWM
RDWM
(DM)
(DI)
(RD)
DMCM
FTDM
RDCM
DMLM
DMIM
RDLM
RDIM
Military Foreign Trade
FTWM
(FT)
FTCM
FTLM
FTIM


Notes: The defence sector markets, represented by the octagons, show the main flows of goods and services into or out of the defence sector and
between the six defence institutions, represented by the rectangles. They do not show payments for supplies or the return flows of tax or profits
from institutions to the state. The allocation of resources by the Central Defence Bureaucracy using plans and budgets is represented by the oval
and six circles.

AFLM
Armed forces labour market
RDLM
Military R&D labour market
AFRM
Armed forces retail market
RDCM
Military R&D capital market
AFWM
Armed forces military commodity market
RDIM
Military R&D intermediate goods market
DMLM
Military supply labour market
FTDM
Military foreign trade domestic market
DMCM
Military supply capital market
FTLM
Military foreign trade labour market
DMIM
Military supply intermediate goods market
FTCM
Military foreign trade capital market
DIWM
Defence industry military commodity market
FTIM
Military foreign trade intermediate goods market
DILM
Defence industry labour market
FTWM
Military fo reign trade world market
DICM
Defence industry capital market
DBLM
Central defence bureaucracy labour market
DIIM
Defence industry intermediate goods market
DBCM
Central defence bureaucracy capital market
RDWM
Military R&D military technology market
DBIM
Central defence bureaucracy intermediate goods market

Source: Prepared by the author on the basis of figures in Davis (1990a, 1992a).

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4

propaganda, and arms control institutions. Governments develop strategies to ensure that national
security status achieves a target level: NS ≥ NT. These involve allocating resources to threat reduction
and military programmes.
3.
The High Priority Defence Sector in the Soviet Shortage Economy: 1965-85
a.
Organisation of the Soviet Defence Sector


The Soviet defence sector was organised in a manner that facilitated the build-up of military
power in an authoritarian political system and a command economy.5 Its organisation in terms of the six
institutions and the vertical relationships of their components is described in Figure 2. Their horizontal
links are illustrated in Figure 1 and discussed in Davis (1990a).
The USSR’s traumatic experiences in World War II, nationalistic attitudes, and Marxist-Leninist
ideology caused the Brezhnev-generation elite to perceive amplified foreign threats and to adopt an
ambitious national security strategy that demanded large-scale production of threat reduction and
military services. The central defence bureaucracy approved Soviet military doctrine, which provided
guidance concerning the probability and nature of a future war, and the preparations necessary to fight it
successfully. Economic developments in the defence sector were governed by general plans and special
long-term weapons programmes.
The Soviet government distributed defence assets across the country to accomplish national
security objectives irrespective of costs. Conventional forces were organised to fight in three Theatres of
Military Operations (Western, Southern, Far Eastern) and were divided between 16 military districts
within the USSR, four Groups of Soviet Forces Abroad, and four fleets. In 1991 the 1,400 ICBMs in
the USSR were based in the Russian Federation (1,066), Ukraine (176),
Kazakhstan (104), and Belarus (54). Defence industry and military RDT&E establishments were
predominantly located in Slavic republics. Certain regions, such as Moscow and Perm, had heavy

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concentrations of defence industry and secret “closed cities” existed that were devoted to military

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