Russia’s Defense Industry in Increasing Disarray as More Plants Set to Close

Publication: Eurasia Daily Monitor Volume: 16 Issue: 109

Workers assemble an Su-35 fighter (Source: Marina Lystseva)

Russian President Vladimir Putin constantly talks about how his country is building up its Armed Forces and supplying them with super weapons, but Russia’s defense industry is increasingly incapable of making those promises a reality. With growing debt (because the state has yet to pay for what it has ordered), increasing shortages of skilled workers and an inability to come up with domestically produced components (now unavailable because of sanctions), Russia’s defense contractors are in serious trouble. Deputy Prime Minister Yury Borisov says that ever more defense firms are “living from hand to mouth,” while others contend that the entire sector is “in crisis” and that many of the largest and most important plants will have to close down entirely (RBC, July 8). If that occurs, Putin’s words will ring increasingly hollow.

In early July 2019, Borisov shocked many when he declared that Russia’s military-industrial complex was seriously in debt. Additionally, he asked the government to take steps to write off 600 billion–700 billion rubles ($10 billion–$13 billion) in bank loans that the defense firms needed to take out because the government had not paid them for orders it had placed (RBC, July 8). The total indebtedness of the sector is now “more than two trillion rubles” ($30 billion), he acknowledged; yet, two-thirds of that, Borisov argued, is normal and still serviceable. The remaining third, however, threatens the survival of firms that are now barely able to keep their heads above water—not to mention their bank lenders and the economy as a whole.

The problem has been growing over the last year, officials on Borisov’s staff say; and their boss has been pressing the government to do something behind the scenes since at least 2017. The situation has become serious enough that the deputy prime minister concluded he had no choice but to go public with his warnings. The beleaguered defense manufacturing sector, he contended, threatens not only the ability of the Kremlin to continue its military buildup but also could harm Russian banks, many of which are owned by business interests close to the government. Among the defense firms in the most dire straits are Almaz-Antey, Uralvagonzavod, and the United Aircraft Construction Corporation, according to Viktor Murakhovsky, a retired colonel who edits the defense journal Arsenal Otechestva (RBC, July 8).

Neither officials at the finance ministry nor the major banks that hold the loans have been willing to respond to RBC’s queries as to how such a write-down of debt might work. Murakhovsky, for his part, suggested that almost the only way for this to happen is for the government to take money from the state budget and give it to the banks. If that occurs, it will have to come from somewhere else, forcing cutbacks in other sectors, deficit spending and greater upward pressure on inflation, and/or new taxes of one kind or another. No one thinks the banks will absorb the cost of bad loans: they have successfully resisted doing so in the past, and they will continue to do so now. Indeed, as the quality of the debts of the defense sector has declined, the banks have raised the interest rates they charge, making carrying costs even more burdensome.

As the politicians debate, the situation in the Russian military-industrial complex continues to deteriorate. Yesterday (July 29), Aleksandr Stepanov, a Versiya journalist who follows the sector, reported on conditions there with the alarming headline “The Military-Industrial Crisis” (Versiya, July 29). Given the problems he points to—on top of the debt problems Borisov raised—that article title does not appear to be an overstatement. Some plants in the sector have already cut their workweeks, while others are on the brink of doing so—something that threatens the livelihood of a significant portion of the two million Russians employed in the defense manufacturing sector. Certainly, if a large number of plants end production because of bankruptcy, the Russian military will fail to receive the aircraft, tanks, missiles and other equipment Putin has promised. But in addition, the country is likely to face new unemployment and underemployment and an increase in the number of decaying company towns (monogorody), which have often proved to be seedbeds of protest.

A major reason for the indebtedness in the Russian defense industry, Stepanov says, is that the firms have been trying to diversify their production because they cannot rely on state funding, nor can they acquire parts from abroad needed for military production. Yet, such diversification requires money—lots of it—and too many Russian defense manufacturers have had to take on additional loans that they cannot service. Declining government spending on certain defense goods has also exacerbated the problem, as has the government’s insistence (harking back to Soviet times) that it, rather than the firms, will set the prices to be paid, often keeping them far below the costs of production. Finally, massive systemic corruption has further aggravated these difficulties (Versiya, July 29).

Vasily Zatsepin, a military economist at the Gaidar Institute for Economic Policy, suggested to Stepanov that economic repercussions of this situation are bound to worsen in the coming months because the government does not want these firms to fail lest it lose the capacity to use them in the future. Consequently, he says, the Russian taxpayer will be asked to bail out these struggling defense companies. When that happens, the population’s purchasing power will decline further, making it even more difficult for the Russian economy to pull itself out of the current doldrums—only the latest way in which Putin’s militarism is harming the already hard-pressed Russian people (Versiya, July 29).