1. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 1 Russian Military Expenditures: What’s Behind the Curtain Vasily Zatsepin The Institute for the Economy in Transition

2. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 2 Objective To present an analysis of Russia’s current practice in military expenditures field based on experience accumulated by the Institute for the Economy in Transition (Moscow) The Institute for the Economy in Transition

3. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 3 Outline Russian military expenditures Russian military expenditures Underlying institutional factors Underlying institutional factors Prospects for the future Prospects for the future The Institute for the Economy in Transition

4. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 4 Part I Russian Military Expenditures The Institute for the Economy in Transition

5. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 5 Learning the Lessons of History The Institute for the Economy in Transition CIA Western Academia International Organizations The Soviet Defence Enigma

6. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 6 The Institute for the Economy in Transition Components of Military Expenditures

7. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 7 What Follows from This? The Institute for the Economy in Transition DefEx till1998 – MP till1998  DefEx 1999– 2004  DefEx after2004 + CTEx after2004, Conformity equation*: Conformity equation*: where MP – military pensions; CTEx – civilian-type expenditures. * Valid for any from index years at least since 1994. Civilian-type expenditures size problem: Civilian-type expenditures size problem: 1998 Military Health & Education  0.01% GDP 2006 Military Health, Sport & Education  0.26% GDP

8. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 8 Russian Military Expenditures in Current Roubles The Institute for the Economy in Transition ** * in 2004 budgetary classification. Average annual nominal growth rate 34.1% (DefEx)

9. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 9 Russian Military Expenditures in Real Terms (Base Year 1999) The Institute for the Economy in Transition ** * in 2004 budgetary classification, using GDP deflator for 2005 = 119.7%, for 2006 = 123.3 % (own estimate). Average annual real growth rate 11.3% (DefEx)

10. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 10 Russian Military Expenditures in Current US $ The Institute for the Economy in Transition * in 2004 budgetary classification. ** Calculated using official 1999–2004 purchasing power parity data Calculated using official 1999–2004 purchasing power parity data Own PPP estimates for 2005 = 13.09 roubles/$, 2006 = 14.34 roubles/$ Own PPP estimates for 2005 = 13.09 roubles/$, 2006 = 14.34 roubles/$

11. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 11 Russia’s Defence & Military Burden The Institute for the Economy in Transition * in 2004 budgetary classification. **

12. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 12 2005 Structure of Russia’s Military Expenditures Reported to UN The Institute for the Economy in Transition

13. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 13 Part II Underlying Institutional Factors The Institute for the Economy in Transition

14. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 14 What’s Under the Hood? The Institute for the Economy in Transition

15. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 15 Under the Hood are Federal budget and budgeting process Federal budget and budgeting process Secrecy problem Secrecy problem Defence planning Defence planning Quasi PPBS Quasi PPBS Actors and goals Actors and goals The Institute for the Economy in Transition

16. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 16 Federal Budget and Budgeting Process The budget system is a subject to annual changes in its legal framework Formal and openly published budget request of the Ministry of Defence is lacking Weak or lacking parliamentary control The Institute for the Economy in Transition

17. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 17 Secrecy Problem The Institute for the Economy in Transition

18. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 18 Secrecy in Russia’s Federal Expenditures in 2003–2006 The Institute for the Economy in Transition

19. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 19 Secrecy in Federal Expenditures for Public Order and Safety in 2003–2006 The Institute for the Economy in Transition

20. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 20 Defence Planning The Institute for the Economy in Transition

21. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 21 Russian Military Planning The Institute for the Economy in Transition

22. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 22 Quasi PPBS The Institute for the Economy in Transition

23. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 23 What is State Armament Program? Inherited from Soviet times Introduced in 1980s when Soviet leadership had to react to PPBS success in the US Instead being a means of control over military-industrial complex became a tool of special interest groups for control over considerable share of military expenditures The Institute for the Economy in Transition

24. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 24 Comparison of Two Military Programming Systems PPBES (USA) State Armament Program (Russia) Cycle duration, years2 (was 1)5 Depth, years4 (was 5)10 Moving time horizonYesNo AccountabilityTransparentOpaque SecrecyMinimalFull The Institute for the Economy in Transition

25. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 25 Actors and goals The Institute for the Economy in Transition

26. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 26 Actors on Russian Defence Management Stage Ministry of Finance; Ministry of Economic Development and Trade; and at last Ministry of Defence The Institute for the Economy in Transition Not only size of military expenditures but its structure are determined by:

27. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 27 One More Actor Chief of Russian General Staff Yuri Balouevski in November 2005: “All the world develops according to the outline: about 60 per cent is spent on procurement, research and development; and about 30–40 per cent—on salaries and matters, connected with logistics and combat training of forces”. The Institute for the Economy in Transition Source: Rossiyskaya gazeta, 1 st November, 2005, translated.

28. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 28 Goals Back in 2000 the Security Council of Russian Federation has set a prospective goal for the MoD to achieve 50% share of capital costs in defence budget by 2010 following “best international practices” In 2005 the goal was extended: to achieve 75% share of capital costs by 2015 The Institute for the Economy in Transition

29. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 29 Comparative Military Expenditures in 2004: Operating vs. Capital The Institute for the Economy in Transition

30. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 30 Part III Prospects for the Future The Institute for the Economy in Transition

31. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 31 Future of Military Expenditures in Russia Military expenditures in observable future will be determined not by level of threats or international environment but by interplay of group interests and inefficient defence management due to secrecy obsession and lack of high- grade military statistics i.e. by government failures The Institute for the Economy in Transition

32. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 32 Tail Wagging the Dog or Limited Control over Bureaucracy The Institute for the Economy in Transition

33. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 33 Russia’s Military-Industrial Complex Dreams The Institute for the Economy in Transition Prospective structure of RF expenditure for Armed Forces Source: Russian Military Review, 2006, № 1, p.18, translated.

34. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 34 …and Realization of the Dreams The Institute for the Economy in Transition Source: Military Industrial Courier, 2006, № 12, p.6, translated.

35. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 35 Pestilence 2005 or Limited Information The Institute for the Economy in Transition

36. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 36 Mysterious Disappearance of Russian Military Pensioners in 2005 The Institute for the Economy in Transition (according to publications in mass media) Sources: Rossiyskaya gazeta, 4 th May; Independent Military Review, 20 th May; Red Star, 19 th October; Red Star, 29 th December

37. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 37 Conclusion The Institute for the Economy in Transition

38. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 38 The Institute for the Economy in Transition Instead of Military Reform Still Trying to Be as Before Federal Assembly Chamber of Accounts Expert Community Russian Defence Enigma

39. 10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006 39 Any Questions? Vasily B. Zatsepin Senior Research Fellow Department for Military Economics Phone: +7-(495)-629-0971 E-mail: Zatsepin@iet.ruZatsepin@iet.ru www.iet.ru 5, Gazetny Lane Moscow 125993 Russian Federation The Institute for the Economy in Transition