On the occasion of the meeting of the commission on “military-technical cooperation between Russia and its international partners” on July 24, 2019, Vladimir Putin spoke of the positive results of the export of Russian arms. Thus, according to the Head of State, foreign currency profits have “increased by 45%” and exports, in constant growth over the last four years, “are around $16 billion”, even though the order book is d 'around $54 billion[efn_note]МедведевГригорий, Putin is a Russian military exporter, accessed August 4, 2019. [/efn_note].
However, the SIPRI report published this year presents a more nuanced situation[efn_note]Global arms trade: USA increases dominance; arms flows to the Middle East surge, says SIPRI | SIPRI, accessed August 4, 2019. [/efn_note]. Indeed, over the period 2009-2018 Russia retained second position in the world ranking of the main exporters of major weapons systems, however its share of exports on the world market declined by 17% between 2009-2013 and 2013. -2018. This poor performance is partly explained by the decline in sales to traditional importers of Russian arms such as India and Venezuela. Between 2013-2018 the latter reduced their imports by 42% and 96% respectively compared to the period 2009-2013, the 19% growth in sales to the Middle East not having been able to stop this trend.
These signs of weaknesses brought to light by the Swedish Think-Tank, also contested by Rostec[efn_note]BrokešFilip, “Russia's declining arms exports | | Central European Financial Observer”.[/efn_note], add up to an incontestable reality as its scale has become worrying. Despite generally good export results and the massive rearmament of the Russian army, the main industrialists in the defense sector are drowning in debt, with the Russian media citing the figure of 2,3 trillion rubles, or around 35-36 billions of dollars. In addition, annual internal orders for military equipment, currently amounting to 1,5 trillion rubles ($23 billion), are decreasing [efn_note]Long-term protection bank, accessed August 4, 2019. [/efn_note], de facto precarious the position of industrialists[efn_note]Долгироссийской “оборонки” покредитамдостиглиастрономическихвелич in— URA.RU, accessed August 4, 2019. [/efn_note]. As a reminder, in 2018 Russia spent between 46 and 61,4 billion dollars on its defense (depending on sources and estimates)[efn_note]NATO Members Drive Fastest Increase in Global Defense Spending for a Decade, Jane's by IHS Markit Reveals | IHS Markit Online Newsroom, accessed August 6, 2019. [/efn_note][efn_note]ВоенныйбюджетРоссиив2018 годусоставит$46 млрд, accessed August 6, 2019. [/efn_note], the need to pay off part of this debt will therefore weigh heavily on its future defense budgets. Russian citizens were already called upon in 2016 when the government decided to take on part of the obligations of over-indebted industrialists by paying $11 billion, thus leading to an increase in the defense budget of 7,2%[efn_note ] TianN, FleurantA, KuimovaA, WezemanP and WezemanS, “Trends in world military expenditure, 2018”, coll. “SIPRI Fact Sheet”, p. 12.[/efn_note]. However, since the beginning of the year, there have been signals announcing a new restructuring of industrial liabilities, with Deputy Prime Minister Yuri Borisov citing the need to lighten the burden on the defense sector by buying back 700 trillion rubles of debts to private banks ($10-11 billion).
This new rescue operation, however, is not to the taste of the Ministry of Finance and a section of public opinion which does not understand how such a situation is possible when the media and the government constantly highlight the performance of the Russian military-industrial complex. Specialists in the finance and industry sector explain that this overindebtedness is as much the result of systemic problems as it is cyclical.
The origin of the current difficulties dates back to the end of the 1990s when banks were lending at annual rates of around 22-23%. The lack of alternative sources of financing forced manufacturers to take out such credits, the accumulation of which over the years ended up producing a dead end. The trap in which the main companies in the sector find themselves is all the more devious since at present almost all of the profits must be devoted to repaying interest alone.
Added to this inconvenience is the so-called problem of price formation, with experts affirming that there is currently no longer an adequate mechanism in Russia for the formation of prices for military equipment, which is causing a conflict. constant between the Ministry of Defense (the purchaser) and the suppliers (the industry). Indeed, today the prices of military equipment are set by state bodies such as the Federal Service for the Fight against Monopolies or Roscosmos and Rosatom. The problem being, according to Novaiya Gazeta[efn_note] sourcesВседляфронта, всеподпроценты, accessed August 4, 2019. [/efn_note], that staff specialized in this area, previously working for the Federal Tariff Service dissolved in 2015, have not been re-employed within the new competent bodies. Furthermore, the Ministry of Defense is also known to be quite stingy when it comes to advancing funds for the development of prototypes. Thus, even when the order comes from the ministry itself, the companies responsible for carrying out the studies are often only paid once the work has been carried out.
Furthermore, in 2012 a revision of the law relating to state defense purchases rigidified the financial management of arms producers, thereby creating completely artificial constraints. This law aimed to ensure that defense funds could only be allocated to this sector, which made it possible to restore order and limit abuses. However, one of the related effects of this measure is the impossibility for defense manufacturers to use the resources of these accounts as freely as they wish, even though they need them, thus pushing them to contract new credits. The result is a rather curious situation where companies with billions of rubles are forced to borrow at high rates in order to meet the needs of production [efn_note] Названыпричиныскойоборонки, accessed August 4, 2019.[/efn_note].
The lack of skills of managers is also highlighted as one of the sources of debt, with some of them being accused of embezzlement or abuse of power. The Ministry of Defense is aware of this reality and has asked the Federal Anti-Monopoly Service to carry out investigations, the latter having carried out 46 checks in spring 2019[efn_note]Russian Defense Force, accessed August 4, 2019. [/efn_note]. Additionally, an informant working within the Russian defense industry claims that the lack of qualified managers leads to inefficiency in the overall operation of defense sector holding companies. As an example, he cites Rostec, which despite the billions of rubles invested since its creation in 2007 has not managed to improve the economic health of the companies that make it up. According to the expert, the creation of this state corporation had certain positive effects, but in the long term it contributed to the development of dependence on state funding.
Finally, sanctions from the United States and the European Union are forcing Russian manufacturers to devote significant resources to diversifying their supplies and, above all, to producing themselves the materials that they had previously purchased from Westerners. while having reduced access to foreign sources of financing. The Russian President has also made import substitution in the defense sector a priority for his country's industry.
Faced with these obstacles, the government undertook to transfer the debts of the military-industrial complex to a state bank whose main objective would be precisely to finance this sector. This approach was endorsed in 2018 when the Russian President ordered the transformation of the “Promsvizbank” bank, nationalized in 2017, into a public bank for financing defense industries. Ultimately all of the credits must be transferred to this institution, which will not only make it possible to refinance overindebted companies, but also to protect the Russian banking sector from American sanctions, the latter particularly targeting the Russian defense industry. Vice President and former Minister of Finance Anton Siluanov also raised the possibility of writing off part of the debts when transferring credits to Promsvizbank. However, this process is clearly not likely to take place in the near future since according to Pyotr Fradkov, director of Promsvizbank, as of July 2019 only 100 billion rubles of credits from the military-industrial complex have been transferred to this bank. .
Thus, despite Moscow's efforts, the debt of the main companies in the military-industrial complex will continue to weigh on the health of its BITD as long as structural reforms are not carried out. In addition, the need to refinance its industries will have a heavy impact on Russia's budget; the next substantial increase in defense spending will therefore likely be, just as in 2016, consumed by the repayment of the debts of industries in the military sector.
Oleg Lypko – Russian and CIS Defense Industry Analyst