Russia’s military-industrial complex has become a key driver of the Russian economy in recent times, ensuring that the country enjoys technological sovereignty despite harsh sanctions imposed on it by the US-led collective West. While the defence industry’s production has been increasing manifold due to Moscow’s special military operations, there is also a growing need for dual-use products.
A special session, held on June 6th, during the ongoing St Petersburg International Economic Forum (SPIEF) 2024, “A Dual-Purpose Task: The Role of Organizations of the Military-Industrial Complex in Ensuring Technological Sovereignty” discussed the challenge of balancing the defence industry’s capacities and future production of goods needed for the real sector.
Defence industry can free up the capacity to produce civilian goods
The session at the SPIEF discussed the challenges and concluded that after Moscow completes its special military operation in Ukraine successfully, several of the defence industry enterprises will be able to free up the capacity to produce civilian goods.
Russian Federation’s First Deputy Prime Minister Denis Manturov highlighted that even though the defence industry’s production has increased manifold in the last several months, it’s a concern for the government over what’s to be done with these production capacities in the days to come.
“The numbers have increased multiple times over a wide range of products – ammunition, aviation equipment, radio-electronics, and everything in between. But at some point we have to ask ourselves: What are we going to do with these production capacities in the future?”, Mr Manturov asked.
“Over the past two years, a huge number of private civilian companies—some 860 or so—have got in on the act and are now included in the list of defence industry companies,” said Mr Manturov.
“We decided for ourselves that civilian enterprises need to be integrated into the defence industry. The money is there, and they pay on time. In addition to the 16 defence industry enterprises, there are another 48 civilian organisations manufacturing products for industrial enterprises,” noted Omsk Region Governor Vitaly Khotsenko.
Focus on defence exports
Mr Manturov underscored the need for defence production even after the successful completion of the special military operations, citing the current geopolitical scenario.
“The world has entered a phase of military confrontation. After we achieve victory in the special military operation, we will need to resume or continue more active supplies of products through military-technical cooperation,” Mr Manturov said highlighting Russia’s ambition to supply more defence products to its allies.
“Believe me, many countries, having heard about how our products are performing on the battlefield, are interested in purchasing them. The interest has always been there, but nowhere near the level we are seeing today,” Mr Manturov said adding, “We imagine that defence industry enterprises will use the experience they have gained since 2016, when, on the instructions of President of the Russian Federation Vladimir Putin, they started to use their production capacities to manufacture civilian products to meet the needs of the real sector of the economy.”
“I think that humanity has entered an age of drawn-out military confrontations. And the defence industry will have to produce ever-increasing volumes, which means we need to combine public and private approaches,” noted journalist and host of his politics show, Vladimir Solovyov.
The key problems of the Russian defence industry
One of the key problems of the defence sector in Russia has been the high interest rates on loans for defence industry enterprises and pricing issues.
“The production cycle for aircraft is extremely lengthy, and this requires financing. So, looking for loans for longer than a year at 20% APR is pretty much killing the economy,” said Yuriy Slyusar, the chairman of United Aircraft Corporation’s (UAC) executive board.
“There are two challenges we have to overcome: we know how to make the equipment, but we don’t know how much it costs. This was how it was done in the Soviet period when the motto was ‘we have to do it, no matter the cost,’” Mr Solovyov said.
“Pricing is a very real issue. There are questions, and they’ve been building up over time […] I hope that by working together we can come to some kind of agreement. We also need to find a solution to the problem with our main customer – the Ministry of Finance and Industrial Enterprises. I’m talking about reducing costs and optimising expenses while paying due attention to modifying the model range,” Mr Manturov stated.
“The defence industry is turning into a driver of growth that should work not only for itself but for the economy as a whole […] By giving a jolt to related industries, we must try and ensure that the defence industry—new plans and financing volumes notwithstanding—develops from the point of view of a normal internal economy. And we don’t want large financial injections to increase this imbalance to exacerbate the problem of the incorrect structure of the defence industry. This means pricing, profitability, and so on,” said PJSC Promsvyazbank Chairman Petr Fradkov.
“The relationship between customer and contractor is unequal. Margins are razor thin, and the mechanism for distributing resources and setting the cost structure is broken,” said the Chairman of the State Duma Committee on Industry and Trade Vladimir Gutenev.
What are the solutions?
The session at the SPIEF 2024 concluded by presenting some of the solutions to the key challenges for the Russian defence industry. The participants agreed that by changing the defence industry’s financing system, with the help of long-term financing, the challenge can be met.
“The structure of the defence financing system needs to change. We need to create a system in which the Russian financial market works to secure investment resources for the defence industry […] And financial institutions need to be willing to take risks,” Mr Fradkov said.
“Under the existing system, everything is geared towards banks—assuming they are law-abiding and act in accordance with the regulations —are limited when it comes to taking on those long-term investment risks. So, the issue of interest rates is important but not as important as the issue of providing long-term financing,” Mr Fradkov added.
The session also highlighted the usage of the reduced-rate mortgage mechanism to attract people to work in the defence industry and cooperate with small and medium enterprises (SMEs).
“We have come up with a solution: we are building cheap housing for employees at tank-production factories. Promsvyazbank’s loan terms are as low as they possibly can be – we provide the land, and the developer builds the housing […] It works out 30% cheaper for defence industry employees,” noted Governor Khotsenko.
“We need to get the entire chain of cooperation involved – meaning small and medium-sized enterprises […] If we focus primarily on extrabudgetary funding for the defence industry, this will prove to be a systemic solution,” Mr Fradkov underscored.