The head of Rostec, Sergei Chemezov, said that the enterprises of the military-industrial complex (MIC) are facing a lack of funding when creating and launching the production of civilian products.
“Due to the low marginality of GOZ contracts [гособоронзаказа] defense industry organizations objectively lack their own funds, which are necessary to launch products into series. Debt financing is not always possible due to regulatory requirements and potential sanctions risks for financial institutions. Also, civilian projects of the defense industry are not very attractive for private investors due to the uncertainty of their payback periods, ”Chemezov said.
How true is the statement of the head of Rostec about the deplorable financial situation of the Russian defense industry? Let’s try to figure it out.
As reported by the Zvezda TV channel, the single day of military acceptance on January 29, 2021 “was marked by a grandiose and long-awaited event for our Armed Forces. The first in the series multipurpose fighter Su-57 was handed over to the Aerospace Forces. Board number one became part of the State Flight Test Center of the Ministry of Defense. It will train military pilots and technical engineers. And those who have already soar in the sky on a fifth generation fighter note “smart” control, cruising supersonic and low visibility. “
In June 2019, at the Army-2019 International Military-Technical Forum, the Ministry of Defense of the Russian Federation and PJSC Sukhoi Company signed a contract for the supply of 76 fifth-generation Su-57 serial fighters to the Armed Forces of the Russian Federation. The terms of the contract are up to 2027.
As part of the 2019 contract, the manufacturer, KnAAZ, is to deliver two Su-57 fighters in 2021. Without touching on the tactical and technical characteristics and avoiding the discussion of whether the Su-57 is a 5th generation fighter, let us consider a purely quantitative aspect.
In 2020, the military-industrial corporation Lockheed Martin, which produces the F-35, a hypothetical competitor to the Su-57, delivered 123 instead of the planned 141 fighters to the Pentagon and foreign customers. The reason was the delays caused by the coronavirus pandemic. The US Armed Forces received 74 aircraft, 31 fighters were supplied to the countries participating in the program for its creation, and another 18 – to foreign buyers.
So, the American military-industrial complex is capable of producing one and a half hundred fifth-generation fighters a year, while the Russian defense industry is capable of producing only two such aircraft. In the future, as it is easy to calculate, it is planned to increase the production of the Su-57 to about ten per year.
Recall that the increase in the supply of the Su-57 to 76 was achieved only after the direct intervention of the President of the Russian Federation. Vladimir Putin… “As a result of the fact that we have agreed with the industry, the industry has actually reduced the cost of both aircraft and weapons by 20%, we have the opportunity to purchase much more combat vehicles of this class and, in fact, a new generation,” the president explained.
Where the reserves could have come from to reduce the price of new fighters, we will analyze later. And now we are simply stating that the American defense industry is an order of magnitude more productive in terms of the production of combat aircraft than the Russian one. Approximately the same ratio of productive forces, as can be assumed, and for other items of the military-industrial assortment.
In this regard, the American magazine Business Insider notes that the Su-57 became the first victim of the budget crisis, which, in my opinion, cannot be agreed with, since the Armata tank became the first victim of the financial insufficiency of the Russian budget.
In July 2018, Deputy Prime Minister Yuri Borisov said that the Russian Armed Forces do not seek to massively purchase T-14 tanks due to their high cost, preferring to increase the combat potential of existing military equipment through its modernization.
In fact, the RF Ministry of Defense has de facto abandoned the previously conceived large-scale rearmament of the army, aviation and navy with new military equipment. There is a massive modernization of old samples. Russia really does not have enough funds to develop, purchase and maintain the latest weapons, some of which are really superior to foreign counterparts. But the reason for this is not only the impoverishment of the state budget, which it was decided to reorient towards ambitious infrastructure projects. Equally important is the fact that the creation and production of new technology has become much more expensive.
For example, the latest UET-1 electric torpedoes have been recently adopted and even loaded onto the Novorossiysk diesel-electric submarine based in Sevastopol. They were produced at the Dagdizel plant in Kaspiysk under a five-year contract that will be valid until 2023. The contract value is RUB 7.2 billion. The number of torpedoes ordered within its framework is 73. That is, the cost of one new torpedo is 100 million rubles. For comparison: the cost of the T-90 tank is about 120 million rubles.
It must be said that ten years ago torpedoes and tanks, and what to say – practically all military equipment produced by the Russian military-industrial complex, cost much cheaper. The same T-90 cost the budget only 70 million rubles.
The rise in prices for the products of the Russian defense industry complex, it must be admitted, is advancing at a faster pace than the growth of budgetary possibilities. This is due, among other things, to the cumulative rise in domestic prices for raw materials and energy, as well as infrastructure and utility costs, which we have already written about. Of course, there is also a corruption component, which, by the way, is also taking place in the decaying West.
The budget is getting scarcer, and prices for the products of the Russian defense industry are growing by leaps and bounds. Therefore, the Russian military has to abandon not only the latest fighters and tanks, but also the construction of a full-fledged ocean-going fleet. There is even no need to talk about the advanced development of autonomous weapons systems, which will become the “main caliber” of the wars of the future.
Since it is impossible to endlessly exploit even the modernized old military equipment, in a couple of decades Russia risks being left with a pile of old rusty tanks and aircraft produced in the 20th century and a small number of Armat and Su-57, which will not be enough even for the successful defense of Crimea. … Since the trend towards a steady rise in the price of new Russian military equipment has not disappeared anywhere, and is not going to disappear, in the future the Russian armed forces will simply collapse.
There is no hope that the export of Russian arms will sharply increase, and is not foreseen. The situation can be changed only by changing the thinking of the lobbyists of our defense industry. They need not to compete in extolling their corporate merits by singing the praises of our best tanks and aircraft in the world, but to seek systemic and structural economic reforms.
One of the competitive advantages of the Soviet economy was low domestic prices for raw materials and energy resources, primarily energy tariffs. Only they made it possible for the USSR to create and maintain a huge army and a navy comparable to the American navy. The current model of a “market” economy cannot provide such an opportunity under any circumstances.
Until recently, a stake was placed on the consolidation of defense holdings, but there was absolutely no sense in this, except for saving on management personnel. The sale of the non-core social sector of the Russian military-industrial complex also does not give a systemic effect.
But the merger within the framework of universal vertically integrated structures of enterprises of the defense industry, oil and energy could immediately reduce intracorporate expenses for fuels and lubricants, electricity and communal services, and at the exit – the cost of the final product – that is, the same tanks and aircraft.
This is just a part of those reforms necessary not only for the Russian defense industry, but also for the entire national economic sector, which it is time for the influential military-industrial lobby of the Russian Federation to think about. Most likely, on the way of systemic transformations, it will also be discussed the creation of regional multidisciplinary clusters that will organically combine the interests of industry specialists and regions, leaving the federal center with the important role of the supreme arbiter and strategist.
Structural reforms, however, will not be enough to revive the Russian defense industry. Three years ago, the Central Bank and Rosfinmonitoring published discouraging figures: more than 50% of the state defense order goes into cash, that is, is stolen. Banks working with the Ministry of Defense of the Russian Federation are involved in shadow operations, cashing out and withdrawing capital. This conclusion was reached by the Central Bank of the Russian Federation, having checked 27 credit institutions through which state defense order funds pass.
95% of funding for the defense industry goes to Sberbank, VTB and Gazprombank, a top manager of one of the defense industry enterprises told Vedomosti. However, then the money goes to the contractors in smaller banks and at this “secondary” level it irrevocably flows out of the system. We are talking about operations that “do not have an obvious economic meaning, schematic operations aimed at cashing out funds,” the Central Bank states.
From 50% to 70% of the state defense order goes to “cash”, said “a source close to the Central Bank and Rosfinmonitoring.”
Over the three past three years since the Central Bank and Rosfinmonitoring of the Russian defense industry, the situation has hardly changed, and the process of initial accumulation, as can be assumed, continues. Therefore, even systemic structural reforms of the Russian military-industrial complex can only have an effect in combination with a radical fight against corruption and shadow operations. If this is not done, then the Russian defense industry will soon turn into a workshop for minor repairs and modernization of Soviet military equipment and the production of rare new products for participation in military parades and presentations.