THE SOVIET MACHINE-BUILDING COMPLEX: PERESTROYKA'S SPUTTERING ENGINE

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• Publication Date: April 1, 1988
• Content Type: REPORT

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The Soviet Machine-Building
Complex: Perestroyka's
Sputtering Engine
An Executive Summary
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Confidential
SOV 88-10018
April 1988
Copy 587
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The Soviet Machine-Building
Complex: Perestroyka's
Sputtering Engine
An Executive Summary
This paper was prepared by
Office of Soviet Analysis,
with contributions from analysts in the Defense
Industries Division and the Foreign Trade Branch,
SOYA
Comments and queries are welcome and may be
directed to the Chief, Defense Industries Division,
SOYA
Confidential
SOV 88-10018
April 1988
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t_ontmentiat
Increasing economic efficiency, carrying out the planned structural im-
provements, resolving social tasks, strengthening the country's defense
capability and its international prestige, increasing the attractiveness of
our economic example, and developing trade with foreign countries?all
these major problems are pulled together into a single tight knot by the re-
sults of the restructuring of machine building.
Lev Zaykov
Politburo Member
October 1986
11
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Key Judgments
Information available
as of 12 April 1988
was used in this report.
The Soviet Machine-Building
Complex: Perestroyka's
Sputtering Engine
At the center of General Secretary Gorbachev's economic revitalization
strategy is his sweeping program to modernize the critical, and heretofore
ignored, civil machine-building sector. After nearly two and a half years,
the modernization effort has made little progress and is far behind
schedule:
? Machinery production is below plan, with 1987 output no better than
1986 output.
? Product quality has improved but is well below leadership expectations.
? New equipment improves only slightly on the technical level of existing
models, and new designs have been slow to appear.
? Retooling has been plagued by inadequate equipment supplies and
problems in installing and operating new machines.
The challenges of rejuvenating a largely antiquated and stagnant sector
have been formidable, and contradictions in the program itself have further
stymied progress. Gorbachev insists that enterprises meet tough?often
countervailing?performance targets all at once. Moreover, measures to
reform the sector have often been introduced piecemeal, leaving machine
builders responsible for operating under new regimes without the benefits
of a supporting infrastructure. As a result, the sector has been thrown into
a potentially volatile state of flux. Machine builders, tasked with what they
believe to be unattainable goals and besieged by high-level criticism, have
begun to display a sense of desperation. Indeed, one machine-building
official reported in the Soviet press that "we are, to put it bluntly, being
skinned alive."
Gorbachev's immediate challenge is to ease pressure on the sector while
still moving forward with his program. He appears to recognize that
machine builders cannot be pushed to the extremes witnessed over the past
two years and has begun laying out a conciliatory course of action. At the
same time, the party chief does not want machine builders to interpret his
actions as signs of weakness and to begin resisting the modernization
strategy across the board. Therefore, he has not publicly backed off from
his reform schedule and exacting performance targets, even though most
plans for 1986-90 are beyond reach. To partially offset these shortfalls, he
is leaning heavily on defense industry and, to a lesser extent, on Eastern
Europe for increased equipment deliveries. Soviet orders for Western
machinery and equipment, however, have remained relatively low, suggest-
ing Gorbachev still adheres to his stated policy of limited reliance on the
West.
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In the near term, Gorbachev must forge a leadership consensus on the
viability of pursuing civil modernization into the 13th Five-Year Plan
(1991-95). A high-investment, high-growth strategy must, at a minimum,
continue through at least the first few years of the period to renew the sec-
tor's capital stock. We believe Gorbachev will argue strongly for this?even
if it means postponing some investment in defense production capacity. He
has taken steps to minimize a serious challenge from the military in large
part by replacing top military and defense industry officials with personnel
supportive of his policies.
Over the long run, Gorbachev's program will result in some improvement
in the quality and technological level of Soviet manufactured goods and in
a one-time modernization of the nation's production capital. However, it
will not achieve the more important goal of transforming civil machine
building into a sector characterized by the use of successive generations of
increasingly productive equipment and the continuous, rapid introduction
into production of advanced, high-quality goods. For this to occur, Moscow
would have to relinquish major elements of central planning and price
setting. Although existing decrees would allow for these reforms, their
implementation would overturn the basic working arrangements of the
Soviet economy, and the chances of such fundamental changes occurring
are small, particularly over the next few years.
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Figure 1
Gorbachev's Domestic Imperative
Reversing the Economic Slowdown
Trends in Soviet GNP, 1966-85
Average annual percentage growth, 1982 constant rubles
6
4
2
0
1966-70 71-75 76-80 81-85
Becoming a World-Class Exporter
A Comparison of Exports by Commodity, 1985
D Manufactures
a Foodstuffs
El Raw materials
United States
West Germany
I= Fuels
EJ Other
USSR
Malaysia
Meeting the Military-Technological Challenge
Soviet Lag in Key Technologies, 1985
Approximate length of US lead in years
Minicomputers
Mainframes
Supercomputers
Microelectronics
Numerically controlled
machine tools
Flexible manufacturing
systems
Robots
0 2 4 6 8 10 12 14
Note: US lead is based on projections of the time required
for the USSR to achieve series production of technologies
like those in series production in the United States.
Raising a Low Standard of Living
Soviet Consumption of Selected Goods and
Services, 1983
Total consumption
Durables
Household services
Health
Soft goods
Food
Education
Soviet as a peicentage of US
Ii
1.
0 20 40 60 80 100
Note: These data represent geometric means of estimates
in dollars and rubles.'
vi
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The Soviet Machine-Building
Complex: Perestroyka's
Sputtering Engine
Gorbachev's Objective: Routine
Product and Process Renewal
Even before Mikhail Gorbachev came to power, Sovi-
et leaders blamed the slippage in economic growth
and the USSR's technological lag on the fact that
Soviet industry was hobbled by an obsolete industrial
base, gross systemic inefficiencies, and a perverse
system of incentives. They believed that the econo-
my's problems placed the USSR's hard-won military
gains at risk, seriously threatened the legitimacy of
the country's claim to be the socialist economic model,
and weighed heavily on a population faced with poor
quality and chronic shortages of basic consumer items
(see figure 1).
Gorbachev has made economic revitalization?
perestroyka?a top policy priority, emphasizing that
it is essential for the regime's long-term viability. He
has argued, we believe correctly, that the key to long-
lasting improvement of the country's economic situa-
tion is continuing, self-sustaining product and process
renewal. In particular, he believes that:
? The routine infusion of reliable, technologically
sophisticated equipment into the nation's industrial
capital stock is crucial to securing long-lasting
productivity gains throughout the economy.
? The rapid development and production of high-
quality, advanced consumer goods will directly im-
prove consumer welfare and the USSR's export
position.
? Developments in critical technologies, such as mi-
croelectronics and computers, will foster advance
across industry, and?equally, if not more impor-
tant?improve the USSR's military capabilities.
Machine building is the sector of industry on which
Gorbachev is relying to ensure the success of his
strategy. The hub of Soviet industry, this complex
1
employs over 16 million workers at more than 9,000
research institutes, design bureaus, and production
enterprises, and is responsible for designing, develop-
ing, and producing over one-fourth of the country's
industrial output. Of the 17 industrial ministries that
make up the machine-building complex (detailed in
foldout at back of paper), nine?collectively referred
to as the defense industry?specialize in military
hardware. The other eight produce primarily consum-
er goods and equipment for investment in the civil
sector.
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The Soviets historically have striven to steer the
defense industry to the forefront of world technologi-
cal and industrial prowess through high-level over- 25X1
sight, top priority in personnel and resource alloca-
tions, and lavish investments of the best Western and
Soviet production capability.' Nevertheless, the Sovi-
ets have confronted ever increasing problems in the
production of sophisticated weapons. Despite exten-
sive efforts in the 1970s to upgrade these capabilities,2
rapidly advancing production technologies in the
West and Japan seriously threaten to outpace those of
Soviet weapons producers. By the early 1980s the
Soviet military leadership was well aware that, with-
out a comprehensive and responsive industrywide
infrastructure to support, if not lead, routine modern-
ization, defense plants would fall ever further behind
the West.
At the same time, civil machine-building capabilities
have fallen well behind the Soviet defense industrial
state of the art and woefully behind Western achieve-
ments. The sector has historically, in the words of
Gorbachev himself, "not been allocated sufficient
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contidentiai
resources for its development." Its personnel and
management have been recruited from what defense
could not hire away, and its priority for investment
and material allocations was typically overshadowed
not only by that of the defense industry but also by
those of other civilian sectors, such as energy and
agriculture. Most important, civil machine building
had little incentive to satisfy its customers and pro-
duce the best or most advanced equipment possible.
Thus, before it could be called upon to nurse the
economy back to health, civil machine building had to
be modernized
The "Kick-Start" Program: Administrative Measures
Gorbachev wasted no time in addressing the sector's
ills. He initially attempted to revitalize, or kick-start,
civil machine building using administrative levers. In
particular, he:
? Applied sanctions and introduced incentives to
boost production. To motivate machine builders to
increase production by 43 percent during the 12th
Five-Year Plan (FYP), Gorbachev tasked them to
work harder, introduced a better wage and bonus
system, and pushed them to use equipment during
more hours of the day and to employ materials and
equipment more efficiently. He fined the enterprises
and reduced worker bonuses when they failed to
meet production targets.
? Introduced a stringent quality control program. On
1 January 1987, the Soviets selectively introduced a
quality control system known as State Acceptance.
Ostensibly, the system acts on behalf of the buyer as
it reviews products for compliance with technical
standards and for visual appearance. State Accep-
tance is in effect at more than 1,200 civil machine-
building enterprises that produce a wide range of
the most important investment and consumer goods.
Roughly 80 percent of civil machinery production is
subject to it.
? Pressured machine builders to raise their rate of
innovation. By the early 1990s, Gorbachev expects
85 to 90 percent of Soviet machinery to correspond
to "world technical levels"?a lofty target given the
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Figure 3
USSR: The Percentage of Production
Equipment in Civil Machine Building That Is
New Each Year, 1980-90
Percentage in value toms
2
316925 4-88
USSR's position vis-a-vis Western machinery pro-
ducers (see figure 2). To force machine builders to
transfer existing technologies into production more
rapidly, the Soviet leader has required them to
produce only that equipment that their customers
ordered. He has also provided equipment designers
with monetary incentives and upgraded their ex-
perimental test bases to encourage them to create
new designs capable of reducing the Soviet techno-
logical lag. In particular, he has devoted considera-
bly more resources to the development of those
technologies that have been the key to effective
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Key Technologies: A Bear in Sheep's Clothing?
Soviet improvements in key technologies will benefit
more than just the civilian economy?they will un-
doubtedly help the military confront the technologi-
cal challenge looming on the Western horizon. The
highly capable weapons the USSR plans to deploy in
the late 1990s and beyond will depend on dramatic
improvements in manufacturing technologies. These
weapons will use more complex guidance, sensor,
computer, and communications subsystems, which in
turn require sophisticated microelectronics, comput-
ers, and automated manufacturing.
Automated machine tools, robots, and flexible manu-
facturing systems (FMSs) are particularly attractive
in weapons manufacturing because they are ideally
suited to batch production of highly complex and
precise parts. Moreover, the military places a premi-
um on minimizing leadtime between design and man-
ufacture and on high quality?and FMSs deliver
these features. The military applications best suited
for automated manufacturing include airframe and
engine part fabrication; milling and finishing of tank
hulls, turrets, and guns; and fabrication of mechani-
cal components and subassemblies of other ground,
air, and naval weapon systems.
The USSR's effort to develop microelectronics has
been driven by military concerns, and, consequently,
the military has been the main recipient of advances
in this area. The Soviets place a high priority on
including sophisticated microelectronics in avionics,
missile guidance, fire control, antisubmarine warfare,
and intelligence systems. Moreover, because advances
in automated manufacturing depend heavily on mi-
croelectronics, this technology is becoming more im-
portant in military production.
Finally, computers are essential to the performance
of many strategic and tactical military systems:
airborne, spaceborne, missileborne, and shipboard, as
well as fixed and mobile ground-based systems. In
fact, computers are involved in the entire life cycle of
military systems, from design, development, manu-
facture, and testing through operations, maintenance,
diagnostics, upgrades, and logistics. The Soviet mili-
tary recognizes these roles and is actively pursuing
indigenous computer technologies as well as exploit-
ing advances in the West.
industrial modernization and economic growth in
the West, as well as to advances in military capabil-
ities in the USSR (see inset).
? Dramatically shifted renovation policies to turn
over the sector's capital equipment. The sector must
more than quadruple its rate of withdrawal of
capital equipment by 1990. Simultaneously,
through the infusion of massive capital investments
in the form of advanced and highly productive
equipment, machine builders are to retool their
industrial base. By 1990 Gorbachev wants more
than 60 percent of the sector's production equip-
ment to have come on line during the preceding five
years (see figure 3). To achieve this goal, civil
machine building has first claim to its own produc-
tion and is receiving support from the defense
industry and equipment producers in the socialist
community and in the West.
3
The "Overhaul" Program: Systemic Change
The leadership realized that administrative measures
would be insufficient to bring lasting change to civil
machine building and that the sector would have to be
reformed. Thus, Soviet leaders looked for a way to
make product and process renewal routine rather than
forced. Their solution was to augment much of the
top-down, centralized push with a decentralized pull,
so that workers and managers would be continually
motivated to innovate (see figure 4). The leadership is:
? Decentralizing decisionmaking authority to the en-
terprise. To motivate workers and managers to work
on their own initiative, Gorbachev is giving them
more responsibility for their plant's operations
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Figure 2
USSR: The Share of Civil Machinery
Meeting World Standards, 1980-90
Percentage in value terms
100
Actual I Plan
80
60
40
20
1 i 1 1 i i i 1 1
0 1980 82 84 86 88 90
316924 4-88
and, hence, its success or failure. He is introducing
reforms that give enterprises greater authority in
deciding what and how much they produce, who
they purchase supplies and equipment from, and
how much they sell their products for.
? Removing deadwood at middle layers of the bu-
reaucracy. In an effort to ensure that ministries do
not interfere with enterprises' new responsibilities,
Gorbachev has reduced the number of civil ma-
chine-building ministries from 11 to eight and has
eliminated unnecessary bureaucratic layers. In ad-
dition, he is taking steps to consolidate machine-
building facilities into large organizations that are
designed to improve the innovation process and the
development-to-delivery cycle.
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? Adding coordinating bodies at the uppermost levels.
To break down departmental barriers and provide
national-level oversight, Gorbachev has created new
high-level coordinating bodies and expanded the
authority of existing ones. He created a Bureau for
Machine Building subordinate to the Council of
Ministers; introduced organizations to provide sup-
port to and direct technology development; reinvigo-
rated joint institutions and programs with Eastern
Europe; and authorized joint ventures between Sovi-
et and Western firms.
The Pressure Builds: Limited Success
With Mounting Frustration
The program for restructuring civil machine building
has been impressive in its range and intensity, if not in
results. The initiatives and reforms implemented over
the past three years have addressed the most pressing,
significant issues at each level of the sector?from the
research and production work at institutes and plants
to high-level planning and administration in Moscow.
The effect of many of these initiatives, however, has
been to threaten the sector's stability. By altering
traditional objectives and priorities and severing long-
established lines of authority and communication, the
leadership has thrown machine building into chaos.
In large part, machine builders have been troubled by
contradictions in the modernization strategy. Gorba-
chev insists that enterprises meet an entire range of
tough, often countervailing, performance targets all at
once. For example, the sector must increase produc-
tion sharply while improving product quality and
pulling down antiquated production lines to retool.
Moreover, measures to reform the sector have often
been introduced piecemeal, leaving machine builders
responsible for operating under new regimes without
the benefits of a supporting infrastructure. For exam-
ple, enterprises must turn a profit, but they have not
received authority to set prices that would cover costs
and yield a return.
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Figure 4
Modernizing Civil Machine Building:
The Initial Push and the Long-Term Pull
>11>
MBMW DC
?,/
Program Elements
To Revitalize MBMW
Actions To "Kick-Start"
the Sector
Desired Effect
Actions To "Overhaul" the Sector
and Perpetuate the Desired Effect
Boosting production
and reducing costs
Imposition of strict manage-
ment accountability, tough la-
bor discipline, and stringent
targets for resource saving.
Plant-level concern for the eco-
nomic cost of poor manage-
ment and waste,
Decentralization to the enter-
prise of responsibility for plan
preparation.
Authorization for plants to
keep more profits.
Improving product
quality
Imposition of a tough quality
control program administered
by an outside authority.
Worker motivation to produce
high-quality goods.
Giving customers their choice
of machine-building suppliers.
Linkage of profits and wages to
sales.
Renewing product lines
Mandating aggressive targets
for the introduction of existent
and new designs into production.
Orienting the thinking of man-
agers and workers away from
"production for production's
sake" and toward the variation
of product lines and satisfaction
of consumer demand.
Innovation in the workplace.
Production that can quickly ad-
just to changing demands.
Introduction of limited compe-
tition for suppliers and for pro-
duct designs on major projects.
Reduction of departmental bar-
riers between research and pro-
duction.
Upgrading production
technology
Demanding massive writeoffs of
old, and the rapid introduction
of new, capital.
Setting up panols to review
projects.
Efficient use of production po-
tential.
Continual growth in productivity.
Creative application and ex-
ploitation of technology.
Decentralization to the enter-
prise of profit distribution.
Authorization for plants to set
prices for products.
5
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Although we cannot precisely gauge the impact of any
one reform on any other reform or on performance
indicators, the Soviets have on occasion admitted that
the conflicting targets and new reforms have com-
bined to limit modernization progress. Indeed, the
sector's performance to date has not met expectations:
? Production levels are below plan. We estimate that
civil machine-building output grew by about 5
percent in 1986?better than in recent years, but
still short of the 6.6-percent target. In 1987, howev-
er, we estimate that civil machine-building produc-
tion was at the same level as in 1986, despite
planned growth of 7.3 percent (see figure 5). In
addition, equipment supplies from the defense in-
dustry, Eastern Europe, and, to some degree, the
West have fallen short of Soviet targets (see inset).
? The quality control program has solar proved to be
too much for civil machine builders. During the
first several months of 1987, the program was
highly disruptive and resulted in production stop-
pages at several plants. Soviet press reporting indi-
cates that inspectors rejected an average of 20
percent of all the products they checked. Equipment
deliveries fell sharply, and Moscow was forced to
relax some of the standards.
? New products represent only slight improvements,
and new equipment designs are slow to appear.
During 1987, civil machine builders reportedly
made headway in introducing new product lines-9
percent of their output was new, more than the
planned 7.6 percent. Open-source reporting sug-
gests, however, that many enterprises are making
minor adjustments to machines and classifying
them as new, while others have little regard for the
machines' productivity or reliability. Moreover, the
sector has fallen behind on targets for equipment
designs. In mid-1987, Gorbachev criticized it for
insufficient progress and stated its work "remains
unfavorable as yet."
? The retooling effort has run into difficulties at each
step. The supply of new equipment is not large
enough to support planned investment; those ma-
chines reaching the plant are not being quickly
installed; and equipment that is installed is not
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Figure 5
USSR: Estimated Growth in Civil Machinery
Production, 1981-90
Average annual growth
El Actual
Needed to meet 1986-90 targets
15
10
5
0
1981-85 86 87 1988-90
316927 4-88
being brought on line ("commissioned") as sched-
uled. Last year alone, the sector fell 20 percent
short of targets for commissioning new equipment
(see figure 6). In June 1987, a senior machine-
building official acknowledged that the replace-
ment of obsolete equipment in the machine-build-
ing complex was being conducted at a "snail's
pace."
Although the leadership realized that its sweeping
reforms and exacting demands for production, quali-
ty, innovation, and retooling would disrupt the sector,
it was almost certainly surprised by the extent of the
impact. When performance dropped sharply at the
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Tapping Additional Resources:
More Difficult Than Expected
Besides squeezing more output from civil machine
builders, Gorbachev has tapped the defense industry
and equipment suppliers both within the socialist
community and in the West. So far, however, results
have not met expectations.
Defense Industry. The leadership has tasked the
weapons producers to boost production of consumer
goods and machinery for investment.
they are not meeting these
obligations:
? At the June 1987 Central Committee plenum,
Gorbachev attacked three defense industry minis-
tries for having a "formal attitude to consumer
goods production as something secondary."
? During a May 1987 Central Committee conference,
several defense industry ministries were criticized
for failing to meet commitments for food-processing
equipment.
? In October 1987, a planning official speaking before
the Supreme Soviet warned the defense industry
that it would be held "strictly to account" for
failure to make its expected contribution to light
industry.
Eastern Europe. Moscow wants to double imports of
equipment from Eastern Europe during 1986-90. To
date, however, trade figures show that the East
Europeans are far off the pace needed to meet this
demand. The steady growth in East European equip-
ment deliveries was interrupted in 1986 as exports
actually fell. Perhaps most distressing to Moscow is
that the countries on which it is relying the most?
East Germany, Czechoslovakia, and Hungary?led
the downturn. Preliminary data for 1987 suggest that
equipment deliveries from Hungary and Czechoslova-
kia picked up, but those from East Germany contin-
ued to stagnate. This slow growth may continue, in
large part because Eastern Europe is stretched to the
limits. East Germany already ships 80 percent of its
machine-tool production to the Soviet Union.
The West. Although Gorbachev has stated that he
does not want to rely on the West for equipment
imports?preferring instead to develop indigenous
production capabilities?he does need to purchase
key advanced Western machinery for specific indus-
tries, such as machine-tool building, oil, metals, and
chemicals. Evidence is mixed, however, on how much
input the West will have to these sectors. Imports of
equipment from Western countries in real terms
picked up in 1986 but, according to preliminary data,
declined in 1987. In the wake of the oil price decline
and the resulting loss of hard currency, Moscow
probably was forced to make some tough investment
decisions among competing demands for Western
imports. In addition, reduced hard currency earnings
will most likely limit Soviet equipment imports from
the West during the next few years.
beginning of 1987 and showed no signs of improving,
the leadership was forced to ease up on quality
standards and on implementation of some of the
reforms. Moscow probably thought this would cause
performance indicators to rebound rapidly. However,
only marginal improvements were made as the
months passed by
7
When performance did not recover as expected, Sovi-
et leaders became impatient and unrelenting in their
criticisms of the sector (see figure 7 ). The Central
Committee held three conferences on machine build-
ing during 1986-87, all of which were highly critical
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Figure 6
USSR: Growth of Commissionings in
Civil Machine Building, 1981-87
n Actual
n Plan
Average annual growth
60
50
40
30
20
10
1981-85., 1986 1987
Only actual data for all machine building were
available for 1981-85.
of the sector's progress. Summing up the extent of the
pressure being levied against them, one machine-
building official complained in early 1988 that "we
are, to put it bluntly, being skinned alive. ..
Besieged by high-level criticism and tasked with what
they believed to be unattainable goals, machine build-
ers began to display a sense of desperation. For
example, in October 1987, both Soviet and Western
media reported a three-day strike at a major bus
factory. Workers who were losing income because of
attempts to increase quality and to retool simulta-
neously refused to resume work until a more realistic
approach to modernization could be worked out.
Perhaps the most telling description of the strife that
had crept into the sector was reflected last fall in a
Confidential
front-page Pravda article that claimed machine-
building managers had succumbed to "sentiments of
hopelessness," a situation it described as "extremely
alarming."
The Immediate Task: Easing Pressure
While Pushing Forward
Moscow appears to recognize that it cannot push the
sector to the extremes witnessed over the past two
years. Indeed, Soviet leaders have already begun
laying out a more conciliatory course of action by:
? Implementing a discreet retreat in a reform measure
that attempts to make machine-building enterprises
financially self-sufficient. The leadership has an-
nounced that it will provide financial help to enter-
prises having difficulty adjusting to this reform.
? Easing up on its criticism of the sector. In recent
months, the leadership has become more upbeat
about machine-building performance and is accent-
ing the positive.
? Leaning heavily on defense industry and, to a lesser
extent, on Eastern Europe for above-plan equipment
deliveries, and looking to the West for help in key
technologies. Even the most optimistic leadership
elements realize by now that most five-year and
remaining annual machine-building targets are be-
yond reach and that additional support will be
needed to partially offset these shortfalls.
At the same time, however, the Kremlin does not
want machine builders to interpret its moves as signs
of weakness and to begin resisting the modernization
strategy across the board. Therefore, the announced
program for 1988 includes stiff performance targets
for civil machine building and introduces several new
reforms and expands existing ones
8
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Figure 7
Soviet Criticisms of Machine-Building Ministries in
Monthly Industrial Performance Reports, 1985-87
Number of criticisms
M Social/housing
Eli Retooling
Quality/
technical level
Quantities
250
200
150
100
50
0 1985
86 87
The Near-Term Challenge:
Holding Leadership Consensus
316929 4-88
Although Gorbachev has been forced to relax a few
key elements of his modernization program, his eco-
nomic revitalization agenda as a whole has yet to be
called into serious question by the leadership. Indeed,
Gorbachev himself has asserted on numerous occa-
sions that his policies reflect a consensus within the
ruling councils (see inset). Still, he appears to be
working under a definite schedule for proving the
viability of his strategy. In an early 1987 speech, he
noted that the next two or three years would be
crucial for his program, and in January 1988 he
9
The Soviet Leadership: Committed to Perestroyka
Since the introduction of his modernization agenda,
Gorbachev?usually at times when performance was
suffering?has often taken the opportunity to remind
foot-dragging bureaucrats, cautious party officials,
and concerned Soviet citizens of the imperative of
perestroyka and the high-level consensus on it:
If! were told that we must now stop peres-
troyka . . . then, in the first place, I would never
agree to that, and I do not want to link myself
with any other policy. Therefore, for me there is
no other course; and for the comrades who work
with me in the Politburo and the government
they have also made the same choice. It is our
common position, our common line... . We'll
see it through to the end.
Speaking before crowd in Tallin
19 February 1987
No retreat is permissible from the program
outlined for [civil machine building's] develop-
ment. There will be no turning back.
Central Committee Machine-Building
Conference
24 July 1987
If we stopped the emerging processes, got fright-
ened by them, this would have most serious
consequences, for we will not be able to mobilize
our people for an undertaking of this scope one
more time.
Speech before media chiefs
12 January 1988
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acknowledged that over this period the fate of
perestroyka would be decided. Barring a crisis in
East-West relations or a wide-scale collapse in ma-
chine-building performance, most Politburo members
probably are willing to give him this much time to
prove the effectiveness of his program.
However, Gorbachev's window of opportunity may
close sooner than he expects. At the All-Union Party
Conference in June 1988, progress in modernization
will almost certainly be discussed. Gorbachev could
use the conference to claim a partial victory for his
modernization program and emphasize the positive
achievements made to date to deflect opposition to
reform, strengthen his power base, and set the tone for
formulating the 13th FYP (1991-95). On the other
hand, he could become even more aggressive and
critical of machine-building performance to rout out
resistance. Whichever tactic he chooses, when Soviet
leaders decide early next year on control figures for
resource allocations during the 13th FYP, they will
have to confront the unpleasant reality that the
modernization program is far behind schedule and
that most 12th FYP targets are already beyond reach.
Leadership reaction to these likely shortfalls in ma-
chine-building performance will be critical to the
support for Gorbachev's economic revitalization strat-
egy. At issue in the high-level debates that could
affect the party chiefs political future will be whether
civil machine building:
? Will continue to be the focal point of the Soviets'
economic agenda and, thereby, continue to receive
investment resources to the probable detriment of
the defense industry and other industrial sectors.
? Will be able to "turn the corner" in an acceptable
time frame, if it continues to receive such attention.
Our analysis of the performance data suggests that,
because the retooling program is behind schedule,
much of the sector's capital equipment will still be
outdated by 1990. At a minimum, to modernize
production capital in the sector, a high-investment
strategy must be pursued into the 13th FYP.
Because Gorbachev has based much of his political
future and long-range plans for sustaining the
USSR's superpower status on his economic agenda,
Confidential
we believe he will want to give the civilian economy
the investment resources it needs?even if this means
forgoing or deferring some investment in defense
production capacity. The General Secretary's task,
therefore, will be to hold the consensus on the need for
civil modernization and build agreement in favor of
pursuing his agenda in the next five-year period.
Interference with defense needs would most erode
support for modernization. Gorbachev probably origi-
nally tried to convince the defense establishment to
support civil modernization by arguing that doing so
would not jeopardize the USSR's military security?
and in fact would enhance military strength over the
longer term. However, in light of civil machine buil-
ding's slow progress and the need to begin serious
resource commitments to support production of the
Soviet weapons we expect to see near the turn of the
century, the military sector may not be easily con-
vinced to continue its support of civil modernization.
We believe Gorbachev has tried to minimize the
possibility of a concerted challenge from the defense
lobby by:
? Appointing Gen. Dmitriy Yazov as Defense Minis-
ter and replacing other military leaders and defense
industry officials.
? Trying to put the military on the defensive by
declaring that it must be more efficient and that in
the future military requirements will be based on
the principle of "reasonable sufficiency."
? Pushing for further arms control accords that would
slow the pace of US weapon programs, especially
SDI.
The leadership probably will decide to continue the
priority for civil modernization through at least the
first few years of the 13th FYP. Indeed, we have
evidence that the defense industry will be a major
contributor to the civil program during this period.
Gorbachev has asked the weapons producers to step
up production of consumer durables and has managed
to impose on them a program for reequipping light
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industry and food-processing plants. Defense industry
has also taken over many of the 260 enterprises
orphaned after the dissolution of the civil ministry
responsible for producing the equipment needed for
that program.
If the modernization program runs into further diffi-
culties, we will be able to gauge the leaders' commit-
ment to it by their willingness to accept shortfalls in
other policy areas. Indications of such commitment
might include:
? Such intense pressure on Eastern Europe to supply
machinery and equipment that those countries' own
economic programs are impeded.
? A surge in orders for and imports of Western
machinery and equipment?despite the leadership's
stated policy of limited reliance on the West.
? A further dilution of the defense industry's focus on
weapons production by assigning it responsibility for
additional civilian projects.
? Large transfers of workers, materials, and output
such as microelectronics and communications equip-
ment from weapons production to the civil sector.
? Postponement of some investment needed to create
the capacity to produce new weapons near the turn
of the century.
Although we believe Gorbachev and the rest of the
Soviet leadership will continue to press the modern-
ization program, we are much less certain how much
they will push the pace and extent of reform. While
stressing that reform must go forward quickly, Gorba-
chev will have difficulty maintaining that position if
other members of the Politburo get cold feet. If the
situation in machine building does not improve mark-
edly, overall economic growth continues to falter, and
workers become more restive, the balance in the
leadership could easily shift in favor of more conser-
vative policies. In this situation, the reforms most
likely to be weakened would be those that call for a
major decentralization of economic decision making.
The Long-Term Necessity:
Building in Systemic Responsiveness
Although plan goals for 1986-90 will be underfulfilled
by a considerable margin and the reforms will still be
under way when the 13th FYP begins, the real test of
11
the modernization program's success over the long run
will be whether civil machine building becomes a self-
regulating "economic mechanism" capable of routine
product and process renewal into the 1990s and
beyond.
The modernization program will result in some im-
provement in the quality and technological level of
Soviet manufactured goods and in a one-time modern-
ization of the nation's production capital. Gorbachev
recognizes the importance of market information and
decisionmaking authority at the enterprise level to the
success of his revitalization strategy, and his program
attempts to create such an environment. We believe
that purchasers of Soviet machinery and equipment
are better off under Gorbachev than they would have
been if Brezhnev were still in power. Machine build-
ers have begun to provide the Soviet industrial and
agricultural sectors with a better selection of more
reliable equipment. As a result, some improvement
can be expected in production technolo y and, hence,
productivity.
Gorbachev's program as currently envisioned, howev-
er, is not sufficient to induce self-sustaining product
and process renewal. It retains major elements of
central planning and price setting and, hence, does not
go nearly far enough in creating conditions that will
encourage machine builders to respond to demands
for new products and to improve production processes.
They will not be motivated to supply the rest of the
Soviet economy with the advanced equipment needed
to achieve self-sustained growth. Consequently, pro-
ductivity gains will be short lived.
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We believe that, although Gorbachev is moving in the
right direction, the reforms he has introduced so far
will not transform the sector into an effective engine
of perestroyka. In addition, his program probably will
be insufficient to close the gap in advanced, military-
related technologies and will fail to address the
USSR's other domestic and international challenges
(see inset). For this to occur, the Soviets would need to 25X1
implement further, more radical reforms that create a
market environment, including freeing up prices and
further decentralizing the planning system. Although
existing decrees allow for these reforms, their full
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implementation would overturn the basic working
arrangements of the Soviet economy, and the chances
of such fundamental changes occurring are small,
particularly over the next few years.'
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Civil Modernization:
Waiting for the Return
Gorbachev is looking to civil machine building to
help him surmount the military, international, and
domestic challenges the Soviet Union is facing. We
believe his modernization program will go part way in
addressing these challenges but will not give him the
boost to overcome them:
? Maintaining military parity. In the near term, civil
modernization is not likely to hinder or help the
USSR's defense industry or military forces. The
changes in the civil sector and the assignment of
new responsibilities to the defense industry have
had no discernible effect on weapons production,
and we see little likelihood that the capital goods
and raw materials required to support moderniza-
tion will be drawn from ongoing military produc-
tion. Similarly, the defense industry probably will
receive limited benefits from high-priority civil
programs to advance key technologies during this
five-year period; in fact, defense industry experts
have been tasked to bring civilian researchers up to
speed. Over the longer term, the impact of civil
modernization on military capabilities will proba-
bly be mixed. To the extent that it is successful, the
program will boost the USSR's capability to pro-
duce the advanced weapons that we expect to
appear near the turn of the century. We believe,
however, that gains will be limited by the leader-
ship's decision to centrally manage critical technol-
ogies, which could make the USSR less able than
the West to pursue new technological opportunities.
Moreover, if the Soviets encounter severe difficul-
ties in pursuing civil modernization into the next
decade, the defense industry may be required to
defer planned investment, which could delay pro-
duction of some military systems.
? Improving consumer welfare. Soviet consumers will
undoubtedly be able to choose from a wider selec-
tion of more reliable and high-quality household
appliances and other consumer items. The new
quality control program has improved, and will
continue to improve, the quality of consumer
goods. In addition, the above-plan rates of product
renewal to date and the new equipment recently
installed in enterprises suggest that additional
quality gains and technological advance will occur
over the next several years. Moreover, if the Sovi-
ets are successful in retooling the light and food
industries, consumers can expect to see further
improvements beginning in the early 1990s. Howev-
er, the benefits realized from the increased avail-
ability of better consumer goods must be weighed
against the costs. Because Soviet workers are being
pressured to work harder and within a less secure
environment, it is not clear that?on balance?
workers will favor this new social contract.
? Improving international prestige. Glasnost and the
positive image Gorbachev portrays will probably do
more than anything else to improve the USSR's
international prestige. The Soviets will become
more familiar with international trade and finan-
cial activities, but we are confident they will not
achieve their stated goal of attaining recognition as
a major economic and trading power during this
century and hence will not radically change their
trading position vis-a-vis other countries. We pro-
ject that the Soviets will not be able to boost
exports across the board as they originally planned,
but will be forced to focus on select areas. More-
over, leaders of many socialist and Third World
countries will probably be hesitant to look to the
"new" Soviet economic system as a model for their
own countries. Some leaders have already indicated
they will not follow in Moscow's footsteps because
they refuse to reject the "Stalinist" model as the
Soviets have done. Others may be reluctant because
they do not have the control and determination that
is clearly required to push the reforms through.
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The Soviet Machine-- Building Complex
Civil Machine-Building Ministziesa
Key
C: Known production of consumer durables.
I: Known production of machinery for investment.
M: Known production of military hardware.
Automotive Industry
Number of enterprises: 389
Nikolay Pugin, Minister
,
C: Personal automobiles and trucks.
I: Bearings and rotary-conveyor lines.
M: Industrial sewing machines, trucks, armored per-
sonnel carriers, and equipment transporters.
Construction, Road, and Municipal Machine Building
Number of enterprises: 170
Yevgeniy Varnachev, Minister
C: None known.
I: Excavators, ditchdiggers, bulldozers, scrapers, and
machinery for the construction materials and timber
industries.
M: Military construction equipment.
Heavy, Transport, and Power Machine Building
Number of enterprises: 144
Vladimir Velichko, Minister
C: None known.
I: Power, energy, metallurgical, mining, hoist-trans-
port, railway, and printing equipment.
M: Armored vehicles, diesel engines, and generators.
Machine Tool and Tool Building Industry
Number of enterprises: 378
Nikolay Panichev, Minister
C: None known.
.40
I: Machine tools, automated lines, robots, metal-
processing equipment, and forge and press equipment.
M: None known.
Chemical and Petroleum Machine Building
Number of enterprises: 94
Vladimir Luk'yanenko, Minister
C: None known.
I: Compressors; pipeline equipment; pumps; and
equipment for the chemical, oil, gas, pulp, arnd paper
industries.
M: Missile propellants.
a Three civil machine-building ministries were recently disbanded
or merged with other ministries. They are:
? Ministry of Machine Building for Animal Husbandiry and
Fodder Production, which was merged with the Ministry of
Tractor and Agricultural Machine Building in July 1987.
? Ministry of Machine Building for Light and Food Industry and
Household Appliances, which was disbanded on 1 March 1988.
Its assets were distributed to defense industry and (miler civil
machine-building ministries.
? Ministry of Power Machine Building, which was merged with
the Ministry of Heavy and Transport Machine Buildling in July
1987.
.041tCW
Electrical Equipment Industry
Number of enterprises: 365
Oleg Anfimov, Minister
C: Light bulbs.
,10,7?'`:?tOr
nt:: ?
rt:W.ii?'?ets
I: Equipment for electrical plants, electric motors,
generators, cables, light bulbs, electrical insulation,
and batteries.
NI: Batteries, electrical and radar components, com-
munications equipment, and biological/chemical war-
fare detectors.
Instrument Making, Automation Equipment, and
Control Systems
Number of enterprises: 287
Mikhail Shkabardnya, Minister
C: Watches and clocks.
I: Computers, control systems, instruments, and opti-
cal and medical equipment.
M: Computers and instrumentation control systems.
Tractor and Agricultural Machine Building
Number of enterprises: 244
Aleksandr Yezhevskiy,
Minister-
C: None known.
I: Agricultural machinery, tractors, combines, and
machinery for animal husbandry and poultry farms.
M: Tanks and tracked vehicles.
141P,---10
,
.GAL:
lel** ?????e6::6-:
2...?.? "1. ..f.;???
? 6 ? . 1-?
zaPjI
'11"! ? ?
14+,7
5.4
}4,
Defense Industrial Ministries
? .44
Aviation Industry
Apollon Systsov, Minister
C: Cameras, refrigerators, washing machines, tape
and video recorders, vacuum cleaners, clocks, baby
carriages, utensils, and snowmobiles.
I: Commercial aircraft, robots, machine tools (includ-
ing numerically controlled machine tools), rotary
lines, and knitting machinery.
M: Aircraft; spacecraft; and aerodynamic, defense,
antisubmarine warfare (ASW), air-to-air, and tactical
air-to-surface missiles.
General Machine Building
Vitaliy Doguzhiyev, Minister
C: Televisions and refrigerators.
I: Tractors, tramcars, and machine tools (including
numerically controlled machine tools).
M: Liquid- and solid-propellant ballistic and surface-
to-surface cruise missiles; submarine fire control sys-
tems; lasers; space launch vehicles; and spacecraft.
Communications Equipment Industry
Erlen Pervyshin, Minister
C: Tape recorders, televisions, and radios.
I: Intercoms, facsimile equipment, outside-broadcast
cameras, studio equipment for television stations, and
radio receivers.
M: Communications, electronic warfare, and facsimi-
le equipment; radar components; and military
computers.
Machine Building
Boris Belousov, Minister
C: Bicycles, refrigerators, washing machines, tape
and video recorders, electric razors, clocks, and
samovars.
I: Machine tools and textile machinery.
M: Conventional ordnance munitions, fuzing, and
solid propellants.
Shipbuilding Industry
Igor' Koksanov, Minister
C: Pleasure craft (sail and power), washing machines,
and tape and video recorders.
I: Radio receivers and machine tools.
M: Naval vessels and weaponry, submarine detection
systems, naval acoustic systems, and radars.
v.
44*
A
.04 6.?"..:6?Pi-
?
Defense Industry
Pavel Finogenov, Minister
C: Passenger cars, washing machines, refrigerators,
fishing gear, cameras, and motorcycles.
I: Tractors, railway freight cars, machine tools (in-
cluding numerically controlled machine tools), lasers,
drilling rigs, and light industrial and optical
equipment.
M: Conventional ground force weapons; optics; la-
sers; and antitank guided, tactical surface-to-air,
ASW, and mobile solid-propellant ballistic missiles.
Medium Machine Building
Lev Ryabev, Minister
C: None known.
I: X-ray equipment.
M: Nuclear weapons and high-energy lasers.
Electronics Industry
Vladislav Kolesnikov, Minister
C: Radios, televisions, tape and video recorders, and
1
c ocks
I: Telephone equipment.
M: Electronic parts, componentts, and subassemblies.
Radio Industry
Vladimir Shimko, Minister
C: Television, refrigerators, radios, and tape
recorders.
I: Telephone equipment, radio receivers, and
computers.
Mt Radars, communications equipment, special-pur-
pose computers, guidance and control systems, and
lasers.
tr
!i?
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