All For the Front, All for...What? : Russian Military-Industrial Production
Wartime Production Challenges and Export Markets
Dear Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways”on the main topic followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” will be follow-ups from previous publications and emerging events.
In the previous issue, I discussed Russia’s decision to abandon its security commitments to Armenia, ultimately contributing to Azerbaijan’s successful takeover of Nagorno-Karabakh – the Republic of Artsakh.
This week’s issue begins with the Russian defense budget as a background for focusing on Russia’s struggling military-industrial complex. The war has proven to be an unexpectedly large challenge for this sector, forcing the Kremlin to balance the supply of weapons between battlefield needs and traditional arms export demand. The former is a priority for the Kremlin’s survival and the latter represents Russia’s soft power and influence abroad – an important element in realizing the Kremlin’s desire for global standing.
My Takeaways:
DEFENSE BUDGET: Defense, inclusive of national security, spending in 2024 will be three times higher than 2021, with healthcare, education and other social spending frozen;
MARKETS: Russia’s military-industrial sector has lost 31% of its global arms export market share since 2017. This partly a function of export customers security of supply concerns;
CAPACITY: The sector’s ability to fulfill production orders for export as well as the war in Ukraine is questionable. This is evidenced by export back orders and delivery delays to export markets as well as the Ukrainian front;
SHORTAGES: Labor and critical parts shortages are two important factors constraining production capacity;
BATTLEFIELD PERFORMANCE: Russian weapons have not performed well in the Ukrainian battlefield, and this has not been lost on traditional export customers like China and India;
Wartime Economics and Balancing Priorities
Russian Finance Minister Anton Siluanov presented President Putin with the proposed three-year Russian federal budget with the Soviet wartime slogan, “All for the Front, All for Victory”
Putin appears to be preparing for a long war, based on the recently proposed three-year federal budget. Russia’s wartime 2024 defense budget is ₽10.7T ($107B), triple the 2021 pre-invasion amount and 30% of the total ₽37T ($370B) 2024 budget. And given that Russia has reportedly already spent its entire 2023 defense budget of ₽6.3T ($60B) in the first six months of the year, that number shouldn’t be a surprise. Meanwhile, don’t forget that the federal budget does not include spending by regional administrations and private-sector contributions to the war effort. For example, the Urals Battalion of Sverdlovsk is partly funded by Russian billionaire Igor Altushkin and the Potok PMC was created out of Gazprom’s security forces — just two examples of businesses (private and state-owned) contributing to Putin’s war but not accounted for in the federal budget.
In the spring of 2022, the Ministry of Finance (MOF) stopped publishing details of budget spending by chapters and sub-chapters – ministries and other government entities – only revealing the total monthly expenditures and revenues. In October 2022, Putin decreed (no. 763) the creation of the “Coordination Council for Ensuring the Needs of the Armed Forces of the Russian Federation, Other Troops, Military Formations and Bodies”(Coordination Council), chaired by Prime Minister Mikhail Mishustin. The members of the council are comprised of the manufacturers and users of defense equipment (e.g. uniforms, tanks, jets, ammunition, etc.), and the council’s purpose is to ensure the equipment needs of the armed forces and security services are met in light of the war. Mishustin is well suited for this task, given his 90s to late 00s experience monitoring private equity investments, as well as his success in monitoring and optimizing collection of tax revenues when he served as Director of Federal Taxation Service (FTS).
But even as the Coordination Council manages the matériel needs of the war, Putin must also consider the weapons export markets, and especially long-time clients, dating back to Soviet times. The Russian arms export market is small compared to the budget — roughly $15B annually — but it is important for Russia’s ability to project power and influence client states. This is particularly true as Putin claims, per his grievance filled Valdai speech this past week, that he wants to build a new world.
However, the Russian military-industrial sector now faces both short- and long-term challenges, from the shortage of labor (both skilled and unskilled), to impeded access to technology and parts amid western sanctions and the efforts of the country’s traditional weapons customers to produce their own weapons.
Markets and Market Trends
According to the Stockholm International Peace Research Institute (SPIRI), Russia’s largest export markets in terms of volume transfers (defined by SPIRI as Trend Indicator Value (TIV)) are India, China, and Egypt. These relationships and volumes date back to Soviet times. The table below shows Russia as the world’s second-largest arms exporter, but it also shows 31% loss in market share between 2017 and 2022.
The 12 Largest Exporters of Major Arms and Their Main Recipients, 2018–22
(Source: SIPRI Fact Sheet March 2023)
India, China, and Africa more broadly have remained important export markets since the Soviet collapse for a variety of reasons. First, the long history of use provides them with a level of comfort and familiarity based on generations of soldiers training on these systems, as well as easy repair and upgrade procedures. Second, Russian weapons systems are relatively inexpensive, compared to purchases from the US, France, Germany, Israel, etc., and come on favorable financing terms, particularly for the African countries. Purchases of Russian arms also typically lack transfer and use restrictions. Western arms typically cannot be resold without the manufacturer’s approval and often carry human rights conditions.
Russia’s primary exports have been aircraft, missiles, and armored vehicles. China has been the major purchaser of Russian-made jet engines for use in their jet fighters. However, since the second invasion, China has been concerned about Russia’s ability to produce and deliver engines in a timely fashion. This has accelerated China’s efforts to indigenize many sectors of its aviation industry. However, this Chinese process of “technological sovereignty” — to use Putin’s term for a national goal of reducing technological dependence on “unfriendly powers” — began in China as early as 2006. In 2019, Rostec, Russia’s state-owned defense company, accused China of copying jet engines and fighters (specifically Sukhoi) as well as missile technology. While China continues to source more than 80% of its arms imports from Russia – mostly engines and helicopters – China has now become an important source of western-made machine tools and microchips for Russia.
(Chinese Shenyang J-11, derived from the Su-27)
India, a long-time non-aligned state dependent on Soviet and Russia weapons systems, has moved to diversify its arms imports by purchasing French fighter jets. In June 2023, India signed a multi-billion Euro memorandum with France and Germany to jointly build submarines for the Indian Navy.
Traditional, established Russian arms export markets are also reconsidering their reliance on Russian arms due to their poor performance on the Ukrainian battlefield, concerns about the security of supply, and western sanctions — all these factors together have weakened the value proposition of Russian weapons.
The performance of Russian tanks on the Ukrainian battlefield has been mediocre at best. They have proven ineffective in the face of modern western anti-tank weapons. Reports of supposedly superior Russian fighter jets being shot down and missile failures are being documented and publicized. This creates a perception of lesser quality and inferior advanced technology. Much of this may be a function of improper training, but nevertheless the perception of questionable quality and function of equipment remains.
The security of supply issue is probably the most impactful. Russia has been repurchasing aircraft parts, armed vehicles, and other equipment previously sold to export clients in order to fulfill the equipment needs for Putin’s war. For China and India, this sets off alarm bells. With Russian military industrial factories unable to deliver the needed matériel for the war, how will they be able to fulfill existing and future export orders? They cannot and delivery delays and back orders have been building up since February 2022.
The Countering America's Adversaries Through Sanctions Act (CAATSA) was signed into effect in 2017 and has been reinforced since Russia’s second invasion of Ukraine in 2022. Traditional buyers of Russian arms are reconsidering their purchases given the CAATSA restrictions governing US dollar payments. For example, India has been reluctant to settle payments in US dollars because of CAATSA restrictions, yet Moscow has rejected India’s request to settle in rupees. (Russian companies already have approximately $60B in rupees stuck in India now.)
Follow-ups & Quick Bites:
Follow-Ups:
Why Did Russia Sellout Armenia
The fall of the Republic of Artsakh is not the end of the Armenia Azerbaijan conflict, it will continue. Watch this space for conflict by year-end.
The Turkish control of the Bosporus straits in last week’s issue: Reader JH correctly notes that the 1936 Montreal Convention in fact ties Turkey’s hands. Absent the transit of warships and/or hazardous material, there is little Ankara can do to leverage the Bosporus in its relationship with Russia.
Quick Bites:
Iron Felix Rehabilitated
I took the picture below in 1993. It is the pedestal in Lubyanka Square that once held the statue of the Bolshevik secret police chief Felix Dzerzhinsky “Iron Felix”. The statue at the time was appropriately replace by a cross. The building in the background is the Federal Security Service (FSB) Headquarters.
(Source: e8Q Technologies LLC)
(Source: The Moscow Times)
Sadly, the picture above is the reemergence Iron Felix in front of the Russian Foreign Intelligence Service headquarters in Moscow. It is a reflection of the Kremlin’s strategy to rehabilitate Soviet era leaders.
Vol 1, No 14 - BWR 08.10.2023
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.