Russian military industry: should we worry?

The Russian military is hailed as the most danegrous threat to Europe, but the industry supporting it isn´t particularly healthy. A recap on Russia´s military capabilities.

One has to show respect where respect is due. Despite parading a total GDP comparable to the combined economic output of the Paris and London metropolitan areas, Russia appears to be once again a power to be reckoned with in international affairs. Propaganda efforts and military interventions have shown a country able to play above its weight and fully in control of its public image. Nevertheless, despite the Kremlin’s flirts with political radicalism, the prime objective of the Russian state is to preserve its ruling elite, from its apex down to the “middle management” of state enterprises. This is  reflected by the military and diplomatic posturing towards what the leadership considers its legitimate “sphere of influence” aimed to insulate it from a supposed NATO encirclement and dissuading foreign stirring of civil unrest that could spread to the Federation. The other face of this deterrence strategy is the strengthening of the state’s grip the over the economic situation, both to throw credible weight behind its military instruments and to avoid dangerous levels of economic dissatisfaction from ordinary citizen. No other sector combines all of the above needs more than the military industrial complex. Made up of approx. 1300 companies and representing 20% of the country’s industrial output, military needs and economic policy are deeply intertwined and characterized by tradeoffs.

The confrontations with Ukraine have taught much to the Russian armed forces.

The geography of Russia’s military industry, both literally and from a business perspective, shows a system still rooted in Soviet history. The vast constellation of subcontractors is spread around the Eurasian landmass and tends to the overspecialization of the workforce in the production of single components. Roughly speaking, this means that the manufacturing line of a weapon systems overwhelmingly depends on the ability of the different companies to deliver small but vital components. The preservation of the production line has thus led to the gradual acquisition of failing subcontractors by Rostec, one of the biggest state companies which employs over 900.000 workers (and is bizzaringly considered a “no-profit” by Russian law). The failure to effectively integrate these companies is symptomatic of an inability by Russian military industries to adapt to the market economy. A reason for this are the generous bailouts granted by the Kremlin to megacompanies considered “too big to fail”, but also because of the incentive to abandon a purely business-driven logic and start competing for political favors. The quest for lobbying power in Moscow has become even more important since the decline in tax and oil revenue has thrown the economy into stagnation, with important cuts to the budget expected for 2018-25. The companies who will lose the battle for funds allocation, a race run with policy papers often in the way of sensible strategy, will be the ones subjected to a painful process of reform and increased shift towards dual-use products for military and most importantly civilian clients.

The Russian navy is undergoing its first major operation in the Mediterranean since 1991.

The Russian leadership knows this will prove difficult for many. Issues of productivity and R&D represent the main challenges to overcome. The long production and research cycles cripple the capability of the Armed Forces to profit from the learned lessons of Syria and Ukraine, sadly the two biggest test sites for the military technology. The importance of this “pragmatic approach” is enormous for military researchers.  The experiences of the war in Georgia back in 2008 for example taught the importance of drones for target acquisition and reconnaissance, leading to the development of the Orlan-10 UAV and the establishment of Foundation for Advanced Research Projects in 2012 to rapidly harness the experiences gained on the field. The absence until a few years ago of such an agency, primarily focused on “pre-procurement projects” and preparing the ground for technologies that won’t be needed for another 10-20 years, is symptomatic of a general lack of innovation which has far-reaching consequences. And with the industry largely still relying on the legacy of Soviet designs and blueprints, the necessity to contain the brain drain of young engineers leaving for abroad or being “stolen” by the civilian sector is of paramount importance. The high average age in design bureaus and the absence of partnerships with the private sectors weight heavily on the capacity to innovate, especially in a country where the concept of “revolving doors” (easing the spread of know-how from public companies to the private sector by entrepreneurs) is virtually absent. To make things worse, some companies have been found to organize great PR stunts such as the design of the T14 Armata Main Battle Tank, a vehicle which even if truly functional would be far too expensive to be produced en masse.

If the current rumors on the upcoming State Armament Program will turn out to be true, the whole industry will be asked to adapt a more competitive stance. With the loss of the Ukrainian market and the hurdles encountered in the expansion of exports to India, the ongoing consolidation of the defense industry’s objective is not so much to give Russia a technological edge on its adversaries, but to attract investments able to sustain an ecosystem where 30% of the companies are operating at a loss. Mergers and serious audits are also measures designed to decrease non-tariff barriers necessary to attract private funds. Considering the endemic corruption (an average 30% of the defense budget is said to “disappear” every year) and discouraging investment environment created by arbitrary legal disputes such as the one between Rosneft and Sistema, one can doubt if these policies will be enough to reverse the decline.

The shift to a professional army under Serdukov´s tenure as minister, the push for more sophisticated weapon systems and the interventions in Syria and Ukraine show a country clearly shifting from a  policy of pure military deterrence, as epitomized by the 2008 invasion of Georgia, to a doctrine of “forward defense” by injecting itself in crises in which Russia has more indirect interests but can comfortably make use of deadly force on a wider and more refined spectrum. These diverse ways to wield power have required a structural change in the Industrial Military complex to which the country seems struggling to adapt, as is the case on wider economic terms. The success of this transformation will entirely rely on the decisiveness with which the Russian leadership will pursue economic and political reforms on a more global scale, namely tackling low productivity, corruption and opaqueness of the public sector.

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