Overall output trends

The machine-building sector produces a wide array of products from machine tools to automobiles and missiles. For decades, the industries in this sector played the leading role in the Soviet economy as measured by both output and the number of employees. Russia had about two-thirds of the Soviet machine-building capacity in its territory, so it inherited this large industry with the Soviet breakup.

The machine-building industry manufactured many products demanded by the military. Approximately 29% of the Russian machine-building sector was devoted to producing defense products. This share was nearly double the US share (15%) dedicated to defense products and more than the Russian combined share of consumer goods and equipment for services (Table 4.4). Because of this military orientation Russia’s machine-building sector was not ready for an economy that emphasized the demand for civilian goods. The situation was further aggravated by the fact that an overwhelming part of technologically sophisticated durable goods (except for passenger cars) were produced by defense industry enterprises.

From 1990 to 1993, the decline in output was slower in the machine-building sector than in industry as a whole. The momentum of the machine-building de-velopment program introduced in the late 1980s continued into the 1990s, and was aided by a powerful lobby that supported the machine-building sector after the collapse of the USSR.

In late 1993, the decline in output drastically accelerated. This acceleration was associated with a considerable rise in the prices of domestic machinery prod-ucts, making them comparable to the prices of imported items of higher quality.

Simultaneously, demand by military and agricultural sectors decreased. Machinery manufacturers were slow to respond to changes in demand, so their products often did not meet the needs of consumers (for example, a surplus of heavy-duty trucks and a shortage of light-weight vehicles).

In addition, many low-quality Russian machinery products continued to be unattractive in export markets. The share of machinery products exported was 19 percent of the total output in 1991 and 10 percent in 1993. Imports of these items increased, and by 1994 the balance of trade in machinery was negative with a deficit of US$7.5 billion, making the Russian economy strongly dependent on imports for machinery. The quality of many domestic products which needed advanced technology was considerably lower than imported products (e.g., personal computers, consumer electronics, and pharmaceuticals).

Automobiles and Machine Tools

Some industries in this broad sector fared relatively well during the transition because these enterprises were manufacturing products that were in demand. The automobile industry is an example. From 1992 to 1994, the production of trucks decreased by 65 percent, but the output of passenger cars and buses fell by only 17 percent and 3 percent, respectively. From January to August 1995, the output of automotive parts was 2.7 percent above its 1994 level; this recovery was due to the fact that prices of domestic products were lower than prices of comparable imports. The production structure of the automobile industry is being changed to increase competitiveness. Production of light-duty trucks has increased and new engines have been introduced. Measures are being taken to add new passenger car and bus models (Khoroshilov, 1995). In the majority of the other machine-building sectors, however, output has continued to decline, mainly because of low levels of investment in many industries. Limited demand particularly affected machine tools because these products were intended to re-equip the machine-building sector itself.

Under centralized planning some types of technologically advanced equipment were produced and used in manufacturing even though they were more costly than alternatives. The higher costs were not reflected in prices, so the equipment was considered affordable. After the centralized system with its distorted prices was abolished, output of advanced equipment sharply declined. Less drastically affected were the output of universal machine tools and production of inexpensive equipment that was not linked to specific production methods. Still the declines were pronounced from 1991 to 1994: there were declines in output of metal-cutting machine tools from 74,000 to 19,000 (by 74 percent), forge and press machines from 27,000 to 3,000 (88.6 percent), digital-programmed machine tools from 16,700 to 500 (by a factor of 33), and automated lines from 556 to 49 units (by a factor of 11.3). The share of metal-cutting digital-programmed machine tools decreased from 22.6 percent to 2.8 percent of the total machine tool output; for comparison,

current output of these types of tools ranges between 50 and 75 percent in the United States, Japan, and Germany (Centre for Economic Conjuncture, 1994).

Manufacturing of rotor and rotor-conveyor lines and industrial robots has virtually stopped. Output of machine tools continued to decline in 1995 by 12 percent; this decline is a major factor hindering modernization of Russian industry.

Electrical and Construction Machinery

Output of heavy engineering and construction machinery has also decreased. From 1990 to 1994, declines were evident in the production of turbines (by a factor of two), excavators (by a factor of four), and bulldozers (by almost a factor of seven).

In 1995, as demand stabilized or grew in some sectors (metallurgy, oil extraction, polymer, and paper production), the output of some enterprises in construction machinery increased. Increases in demand for these recovering industry sectors, as well as the projected rise of investments for modernization of agriculture, the food industry, and industrial construction, may result in the revival of the production of electrical machines, instruments, and automation equipment.

The Defense Sector

In this subsector, output decreased 2.6 times from 1992 to 1994. The decline in output was particularly sharp for military machine products, but this was offset by a rise in the share of civilian products in the total output of defense-industry enterprises reaching 64 percent. During 1994, there was a sharp reduction in orders and investments for the conversion of military enterprises to civilian industries. Of R1,400 billion earmarked in the preliminary federal budget for conversion programs in 1994, less than half were made available to enterprises (Volkov, 1995).

In spite of their difficult situation, defense-industry enterprises retained con-siderable potential as demonstrated by their exports of high-quality military and civilian products. A number of enterprises have mastered the manufacturing of new types of industrial products, including articles that earlier were imported such as equipment for the fuel industry and medical equipment (State Committee on Statis-tics, 1995a). The sale of these products is the reason for the output stabilization of civilian products from the defense industry in 1995.

All these changes led to greater specialization of defense-industry enterprises.

On the one hand, 13 percent of former military enterprises manufactured only civilian products by 1996. On the other hand, the number of enterprises in which military products were more than a half of their output increased by 17 percent from 1993 to 1995 (Centre for Economic Conjuncture, 1995, p. 6).