Putin Agrees to Major Write-Off of Russia’s Defense Industry Debt

Publication: Eurasia Daily Monitor Volume: 17 Issue: 22

(Source: Moscow Times)

In late December 2019, Russian President Vladimir Putin signed an ukaz (decree) detailing plans to write off a large portion of the debt collectively owed by the country’s defense industrial complex (Oboronnyi Promyshennyi Kompleks—OPK). The details are not publicly available since the ukaz was classified as “secret,” most likely to conceal the specifics contained in the write-off plans. The extent of the added support for the OPK came to light following an interview with VTB Bank chief Andrei Kostin at the World Economic Forum in Davos (January 21–24), leading to wider coverage by the Russian media. The known particulars concerning the debt write-off suggest it will amount to 700 billion rubles ($11 billion), though the total Russian OPK debt is estimated at around 2.3 trillion rubles ($36 billion), raising concerns about the knock-on effect to Russia’s banking system (Interfax, January 23). Some of President Putin’s comments in to the collegium of the defense ministry in December may point to the underlying aims of providing such a bailout.

During his address to the defense ministry collegium on December 24, 2019, Putin made clear the importance of meeting set targets for military modernization and highlighted the achievements of the Russian State Defense Order (Gosudarstvennyi Oboronnyi Zaka—GOZ) in 2019. Additionally, he outlined some priorities for 2020. In highlighting the fact that Russia possesses hypersonic weapons, Putin also stressed not only the importance of maintaining 70 percent modern or new weapons and equipment in the military inventory, but also the importance of the latest technology. “If we want to win,” Putin explained, these systems must be better than foreign versions. “This is not a game of chess, where a draw can suit us sometimes. This is a military organization of the state. Technology should be better. We can achieve this and achieve this in key areas of development. And so it is necessary to work on all components,” Putin added (Nezavisimoye Voyennoye Obozreniye, February 14).

The Russian president said the target of 70 percent new or modern weapons and equipment will be reached in 2020, having already attained 68.2 percent. Furthermore, he noted progress in introducing robotic systems, unmanned aerial vehicles (UAV), and command, control and communications (C3) equipment. Other statistics were provided to indicate the success of the OPK in fulfilling the plans in the GOZ for 2019. This included 624 tanks and armored vehicles, 143 modern aircraft and helicopters, 17 boats and support vessels, 8 surface ships, 4 coastal Bal missile systems, as well as finally entirely outfitting the Missile and Artillery Troops (Raketnyye Voyska i Artilleriya—RV&A) with the Iskander-M operational-tactical missile system (Nezavisimoye Voyennoye Obozreniye, February 14).

This year’s modernization targets appear even more ambitious: including the procurement of 565 tanks and armored vehicles, 436 models of missile and artillery weapons, 106 aircraft and 4 regimental sets of the S-400 air-defense system. In addition, 22 strategic launchers with Yars ballistic missiles and Avangard complexes, six upgraded Tu-95MS strategic bombers, and the first Project 955A Borey-class nuclear submarine cruiser, the Prince Oleg, will appear in the strategic nuclear forces. Russia’s navy, the Military-Maritime Fleet (Voyenno-Morskoy Flot—VMF), will receive 14 ships and vessels, 3 submarines, 18 boats and support vessels, and 1 Bal coastal-missile-defense system. Putin told the defense ministry collegium the priority has to focus on increasing the share of modern or new weapons and equipment in the Ground Forces, which, in his view, lag behind the other services. The Kremlin leader added, “This level—I mean 70 percent of new equipment for the troops—is important to achieve and to maintain stable in the future. I repeat: our task is not to rearm the army and navy once and forget about it for decades. They should always be equipped with the latest technology and equipment” (Nezavisimoye Voyennoye Obozreniye, February 14).

A detailed commentary in Nezavisimoye Voyennoye Obozreniye notes that production managers in the Russian OPK realize the defense ministry wants to cut costs, but the various factories involved in production can only offer cheaper prices in batch volumes, since that allows the share of costs per unit to fall. “But when they demand a reduction in price with a constant or even falling order volume, this contradicts all economic laws,” according to one of the manufacturers. Another OPK source suggested that a limited number of products is killing its economy. Defense industry managers note that when implementing the GOZ there is always a cash gap: “The standard when a plant received a contract and began to execute it with the customer’s money is a rarity.” One OPK executive explained that often “an advance has to be pulled out with teeth” (Nezavisimoye Voyennoye Obozreniye, February 14).

Another issue for Russian weapons producers relates to financing research and development (R&D). It is clearly profitable for the OPK to build new products. Yet, sources within the OPK complained that the customer (defense ministry) allocates too little money for R&D. Manufacturers in the OPK bemoaned that the position of the Russian state toward their companies seems to be: “You design, make a prototype, show it, and we will see; if we like it, we will order it; and if not, sorry” (Nezavisimoye Voyennoye Obozreniye, February 14).

As a result of the latest government-backed bailout of the OPK, sources told Interfax on January 23 that the “financial recovery of key defense industry enterprises had already begun.” The state-owned defense holding conglomerate Rostec stated that measures had been worked out to solve the defense industry’s debt problem: “Indeed, solutions have been found. The developed approaches allow for solving problems with toxic debts and for seriously reducing the cost of servicing problem loans. At the same time, new opportunities arise for developing cooperation with key national banks,” according to its press service (Interfax, January 23).

While President Putin and the political-military leadership remain committed to modernizing Russia’s Armed Forces, including reaching and continuing a target of “70 percent” new or modernized equipment and stressing the need for high-technology advances, the latest bailout of the OPK confirms ongoing issues facing its capacity to meet such demanding targets. Corruption may have lessened in recent years in this area, but price fixing and company profitability look set to endure and probably limit the Kremlin’s ambitions.