The collapse of the Soviet Union left the Russian Federation with the majority of the ailing defence industry. In 1991, 70-80% of the Soviet defence industry was based on Russian soil. However, key aspects of the Soviet Union’s integrated defence system became unavailable. Missile early-warning systems and air-defence capabilities, for instance, had been sited outside Russian borders. Also, certain vital defence industries were lost to newly independent countries. Ukraine, for example, had been a major producer of non-nuclear missiles, the T-64 tank, and its shipyards had been the sole producer of Soviet aircraft carriers. Furthermore, Russia was deprived of many of the most battle-ready forces that had been situated along the Soviet Union’s western borders The challenge for the government has been to privatise as much of the industry as possible, while retaining control over the more sensitive, high-technology sectors. At the same time, the industry has struggled to adapt to a new capitalist market. The end of the Cold War era led to a reduction of nearly 80% in defence industry funding from the government Russia’s active armed forces presently number approximately 777,000, comprising some 80,000 strategic deterrence forces, 395,000 army personnel, 142,000 navy personnel and 160,000 air force personnel. In 1990, at the end of the cold war, there had been 3,300,000 members of the armed forces. Since that time there has been a move away from mass forces towards a smaller, professional military. The armed forces were reduced by 200,000 in 2005, for instance, as part of the program to professionalise the Russian army.

A shift to developing and increasing the number of special forces indicates that Russia is well aware of the spreading insurgency to Ingushetia, Dagestan and Karabardino-Balkaria. The change in emphasis was reflected in the 2006-2008 procurement plan, with the national security procurement budget increasing from RUB132bn (US$4.7bn) in 2006 to over RUB200bn (US$6.9bn) last year.

We now believe that the recession will trough by Q309. Nonetheless, we maintain that unemployment is likely to rise much further through the second half of the year, and hold to our end-2009 forecast of 14.0%. We stress that jobless rates are traditionally a lagging indicator and also that while the recession may trough, negative growth is likely to continue through the remainder of 2009.

At the strategic level, although relations with China are currently friendly, the economic expansion of the country (and therefore its military expenditure) and its regional power aspirations may prove a concern for Russia in the future.

Russia already regards the eastern expansion of NATO to include former Warsaw Bloc countries as a worrying development on its western border. The discovery of large oil reserves in Azerbaijan over the past 30 years has led to a growth of US influence in the region. The US has given aid to Azerbaijani and Georgian security forces. In response, Russia offered to train 150 Armenian ‘specialists’ and continues to provide material and political support for the separatist regimes that control much of Abkhazia and some regions of South Ossetia within Georgia.

In Q108, Russia successfully tested the RS-24 intercontinental ballistic missile at the Plesetek space centre, Arkhangelsk. The new missile will replace the older RS-18 and RS-20 intercontinental ballistic missiles. It is expected that the new RS-24 missile will enter into service in 2010 and will be operational until 2050. The new missile can carry a heavier payload and could, as noted by the Russian government, target US missiles based in Poland and the Czech Republic. Also, the Russian Northern Fleet tested the Sineva submarine-launched ballistic missile.

Russia maintains a massive defence industry that, despite the pain associated with modernisation, restructuring and excess capacity, supports a thriving export industry. Russia is at least challenging, if not surpassing, the US in terms of total defence industry exports. In 2008, Russia exported US$7bn worth of military items, and the government arms-exporting agency Rosoboronexport expects foreign military sales to remain at that level through the next several years.