Crisis survival for the military-industrial complex

The Russian defense sector spent many years relying on exports for survival, but this situation has changed since the global financial crisis broke out. The new solution is a combination of state arms procurement, arms exports, and state aid.

The Russian defense sector spent many years relying on exports for survival, but this situation has changed since the global financial crisis broke out. If the trend persists, defense sector enterprises will have a real chance of not only surviving hard times, but even starting to grow.

Some specific anti-crisis measures are also being planned. The government has reserved 100 billion rubles in state guarantees for loans to defense enterprises, 3 billion rubles for preventing bankruptcy at strategic enterprises, 15 billion rubles for partially reimbursing credit costs, and substantial sums for raising the capitalization of defense sector enterprises. The state will also provide one billion rubles in subsidies for defense industry sectors working on innovative high-tech projects.

Obviously, the announced amounts of anti-crisis aid won’t be enough for the whole defense industry. The Unified Aviation Corporation (OAK) alone has asked the state for 200 billion rubles; and this money would probably be used to compensate for losses due to ruble depreciation, to pay off debts, to work on current contracts and so on. Presumably, less than a quarter of that sum would be invested in new technology. And funding long-term projects – such as a fifth-generation fighter – would demand an additional budget. There is also the difficult situation at MiG Corporation (with its debt of 44 billion rubles), which isn’t part of OAK yet, but also needs bailing out.

Then there are all the other holding companies in the defense sector – such as Russian Technologies, which has requested an equally impressive amount of state aid: 262 billion rubles.

In other words, industry is asking for much more aid than the state can provide. What is to be done?

Exports have been the defense sector’s salvation in the past. In aviation, the best-seller was and remains the Su-27/30 fighter family. Successful sales of these fighters largely account for the relative prosperity of Sukhoi Aviation, the aircraft plants in Komsomolsk-on-Amur and Irkutsk, and their subcontractors. But new major export orders are an unlikely prospect now, since many countries are cutting defense spending due to the crisis.

Under the circumstances, domestic state arms procurement offers the best hope for the Russian defense industry in this crisis.

The arms and military hardware procurement situation for the Russian Armed Forces started changing about five years ago. State arms procurement has more than tripled since 2004; funding will amount to 1.5 trillion rubles between 2009 and 2011. This may not be all that much, when spread across the whole sector, but 500 billion rubles a year is still more than the state’s anti-crisis aid package or Russia’s arms exports (210 billion rubles in 2008, at the year’s average exchange rate). Taken together, these three components – state arms procurement, arms exports, and state aid – could provide a good bulwark for the military-industrial complex during the crisis.