Why Moscow Sells Arms for Rubber, Fruit and Vegetables

Sometimes a story appears that seemingly makes no sense and cries out for an explanation. The following story is one of those cases: On July 15, RIA Novosti reported that Russia will trade $160 million worth of military hardware for Thai rubber, fruit and vegetables. In particular, Oleg Siyenko, the CEO of Russian tank and train maker Uralvagonzavod, said his company was ready to sell both civilian and military equipment to Thailand in exchange for fruit and vegetables.

There are many ways to try to make sense of this deal and why it is happening now. On the one hand, such trades evoke the period of the 1990s, when Moscow was so desperate to sell arms it would accept barter as a form of payment from its customers. But that has not been the case for years. Rather, this proposed deal could represent what businessmen call a “loss leader”: i.e., selling goods to a prospective customer at a loss with the expectation that the customer, in this case Thailand, will buy many more weapons in the future for hard cash, which Russia desperately needs. Indeed, this appears to be the rationale at present, as Trade Minister Denis Manturov indicated, noting that the deal would not be a “direct barter,” as Thailand is likely to buy more weapons than Russia buys rubber (RIA Novosti, July 15).

At the same time, this deal is clearly part of Moscow’s larger effort to increase its commercial and political visibility in Southeast Asia beyond Vietnam. Thus, Russia is also trying to expand its reach to Indonesia. Indeed, Moscow has been proclaiming Southeast Asia as a potentially large market for arms sales for years (Russiancouncil.ru, June 8, 2012). And in that case, the idea of offering a loss leader to Thailand might make sense. But it is by no means clear why Thailand cannot pay Moscow or why Moscow was willing to forgo monetary compensation at a time when its economy is hurting so badly. Therefore, the motives of trying to upgrade Moscow’s position in Southeast Asia and obtain another profitable customer for long-term arms trade only go so far in explaining this action at this time. After all, the ballooning regional debts of Russia’s regions now reach $42 billion, meaning that Russia could face default by 2018 (Minfin.ru, Bloomberg, July 20; see EDM, June 22).

Therefore one must look elsewhere for a fuller explanation of Russia’s curiously generous recent offer to Thailand. It is worth noting that Moscow regularly stated, in the 1990s and during the first years of Vladimir Putin’s tenure as president, that Russia would not replicate the old Soviet practice of lending other states money to buy Soviet-made weapons. All too often, Russia ended up finding out that when it came time for repayment, the customer’s treasury was empty and Russia was out several billion dollars in weapons sales with nothing to show for it. Yet, that is exactly what eventually happened—beginning in 2005, when Russia wrote off about $10 billion in Syrian debt to sell Damascus weapons (Dailystar.com.lb, January 26). And clearly that practice of selling arms for credit, or in return for access to energy assets in Syria, has continued right up to the present (Ya Libnan, December 27, 2013; see EDM, February 13, 2015). Nor is Syria the only example of Russia dictating to its businesses to accept a loss in order to subsidize foreign allies or potential clients. For example, Moscow is now lending Belarus $760 million, even though it is doubtful that Minsk will be able to pay that amount back in cash (Interfax, July 17).

Thus, at a time of mounting pressure on the Russian economy and rising levels of poverty and unemployment, Moscow continues, as a matter of high policy, to subsidize insolvent governments or make purposefully money-losing deals like the one with Thailand. Such evidence of systematic mismanagement of the economy for political purposes should suggest to observers that Putin’ version of state capitalism may be statist and dirigiste (as well as fundamentally corrupt and criminalized) but it can hardly be called capitalist or a market economy. The Russian state can too easily lay its hands on resources and waste them while chasing after political will-o’-the-wisps. At a time when Moscow has had to reduce spending on the World Cup and other extravaganzas and is cutting back on pensions and vital infrastructure (see EDM, June 29), it appears that the government has still not learned anything from Greece or other, similar cases.