Category Archives: Military Budget

OPK Write-Off

President Vladimir Putin has apparently agreed to a major write-off of Russian defense industry debt. It’s a significant story not receiving much attention.

Putin with VTB chief Kostin in August 2019

Putin with VTB chief Kostin in August 2019

The decision came in a secret presidential ukaz at the end of 2019. VTB chief Andrey Kostin broke the news in a late January interview with Rossiya 24 television at the World Economic Forum in Davos. The most coherent rendering of what Kostin said came from Interfaks-AVN:

Everything’s decided. At the end of last year the President met with all interested parties, the President’s ukaz was received, it’s true it’s secret, therefore I wouldn’t begin to comment on it. [But then he does, at least generally.]

But on the whole the problem’s solved, there is active participation of the [federal] budget and preferential restructuring on the part of leading banks is also provided, but it is so feasible, it is reasonable, it really takes into account, of course, that risk the banks took, therefore on the whole we’re satisfied with this decision. I think the government is too. So the program is being effected. I believe we won’t return to this issue again.

According to Interfaks-AVN in late December, Deputy PM and arms tsar Yuriy Borisov said measures to improve the financial state of key OPK enterprises were worked out and there would be a clearing of loans amounting to 700 billion rubles [$11 billion]. The main troubles, he indicated, were at OAK, OSK, ODK, and Roskosmos.

In early December, Borisov proposed writing off 400-450 billion of the debt and restructuring the remaining 300-350 billion for 15 years with a five-year initial payment holiday and a preferential two percent interest rate, according to a report in Rbc.ru.

Borisov and Russian bankers other than Kostin haven’t commented.

Borisov’s proposal may be the plan contained in Putin’s ukaz, but we don’t know since it’s secret. And it’s most likely secret to keep normally docile Russian citizens from learning that the government is bailing out weapons makers, not them. Russian household debt has increased steadily in recent years with little or no economic growth.

In July, Borisov said Russian defense industry’s large debt load was forcing it to “live hand to mouth, servicing financial institutions that don’t produce anything,” Interfaks-AVN reported. He indicated then that 90 percent of the debt belonged to OAK, OSK, Uralvagonzavod, Almaz-Antey, and Precision Systems (Высокоточные комплексы).

He called for writing off all or part of the debt at that time. But the biggest OPK creditors Sberbank and VTB opposed it.

Yuriy Borisov

Yuriy Borisov

In September, Putin directed then PM Dmitriy Medvedev to investigate problems with the profitability of defense enterprises. This came after the Military-Industrial Commission session in Izhevsk at which Putin blamed “unused capacity during a reduction in order volumes and the requirement to finance development work, the costs of which aren’t included in planning documents.” The president didn’t say anything about contract prices being too low or funding lost to waste or corruption. 

Novaya gazeta reported in July that 700 billion rubles represents non-performing defense industry loans. Total OPK indebtedness, however, is 2.3 trillion rubles ($36 billion). A write-off of 700 billion rubles (or part of this amount) would be a significant hit to the working capital of major Russian banks (and OPK creditors).

Borisov said corporations and enterprises were making only interest payments on the most troubled loans, according to Novgaz. Experts told the paper that more than half of the OPK’s profits are going to debt service leaving most producers with net profits of only 3-4 percent or even losses. Defense enterprises say they are frequently paying 22-23 percent on loans accumulated over many years. Meanwhile, the Russian banking sector is earning record profits.

Based on the recent history of OPK debts, Novgaz concluded the most likely scenario is partial write-off, partial restructuring, and recapitalization of affected banks by the Finance Ministry. Promsvyazbank (PSB) — bankrupt and nationalized in early 2018 — is also being turned into a specialized bank for handling state defense orders and problem loans to the OPK. PSB might insulate healthy parts of the Russian banking sector from bad OPK debt, and possibly from U.S. economic sanctions.

Defense producers say price formation — agreement with the MOD on contract prices — remains a substantial problem, according to the Novgaz report. Its source said:

Everyone is right — both the customer can’t pay a lot, and the contractor can’t operate at a loss. But there’s no arbiter for a compromise, and the customer is always stronger.

This OPK debt write-off is pretty much like earlier ones. It may take care of the most immediate and acute symptoms but it won’t cure the causes of the ailment, including price formation, theft, and cumbersome rules about handling GOZ funds.

Shamanov Disputes Defense Spending

Shamanov addressing the Duma in 2018.PNG

Shamanov addressing the Duma in 2018

Former VDV commander General-Colonel Vladimir Shamanov’s Defense Committee has criticized the RF government in advance of the first Duma reading of the federal budget for 2020 (and plan for 2021-2022). The committee accused the government of steadfastly “ignoring the army’s needs” — pay for MOD civilians, military pensions, housing, and fuel specifically — in its spending proposals.

Russian media reported the committee’s complaints were spelled out in writing. The legislature will discuss the government budget on October 23.

Committee chairman Shamanov addressed the low wages of the MOD’s 900,000 civilian workers. 

Civilian workers of the MOD march for worthy pay in 2018.jpg

Civilian MOD workers march for “worthy” pay in 2018

As numerous as uniformed officers and soldiers, civilian defense employees are critical to Russia’s military but their pay only averages around 30,000 rubles ($470) per month against 46,000 rubles ($718) elsewhere in the economy, Gazeta.ru reported.

They received a three percent increase on October 1 but, coming so late in the year, it offset only a quarter of this year’s inflation (4%).

The Defense Committee claimed the current average military pension in 2020 will be 23,500 rubles ($368), and has declined 20 percent in recent years because it hasn’t always been adjusted for inflation, wrote Rossiyskaya gazeta.

[NB: Cumulative inflation for the period 2012-2018 in Russia was over 60 percent.]

The committee reminded the government that President Putin promised retirees in 2012 they would get inflation plus two percent to preserve their buying power. It asked for a 6.3 percent pension increase next year.

The MOD’s mortgage savings system for servicemen was lacking 92 billion rubles ($1.4 billion) at the start of this year, the committee said. The mortgage system depends on government contributions and won’t function without this financing.

The military budget also did not contain enough money for other servicemen and their families who depend on MOD rent subsidies.

According to Gazeta.ru, the committee proposed adding 145 billion rubles ($2.3 billion) to close the gaps in the provision of military housing in 2020. But the RF government did not include this funding in the budget bill.

The Defense Committee also reported the MOD owes 7 billion rubles ($110 million) for fuel this year, and the draft three-year budget contains money for only 1.57 million tons against the 2.1 million tons the military will need. Shamanov and company say the MOD will need an extra 20 billion rubles ($314 million) for this, according to Interfaks-AVN.

Speaking to Voyenno-promyshlennyy kuryer, conservative military commentator Konstantin Sivkov said:

It’s easy to find resources for these needs. Even if we don’t cut their pay, but just the bonuses of the top managers of state corporations, we’d find money for military pensions, and for medicine, and for housing subsidies. According to official data, they amounted to 67 billion rubles [$1 billion] for just the one year 2018.

Why Mr. Shamanov and his committee took on these particular issues isn’t clear. They didn’t tackle pay increases for active duty servicemen who are still several years behind the rate of inflation. They didn’t challenge spending on weapons systems, but then large parts of the defense budget are still secret.

They challenged the government (an easy target) rather than President Putin (a dangerous one). Shamanov and the majority of his committee are members of the party of Putin — United Russia.

Kind of a curious moment for the Russian legislature to offer some checks and balances to Russia’s executive branch.

Sleight of Hand

The Russian MOD is performing some financial sleight of hand on military pay. Having announced indexation of military pay and pensions over several years beginning in early 2018, the MOD has now adjusted the schedule so that any rational Russian officer or NCO has to question the MOD’s real intentions.

The MOD increased pay and pensions by 4 percent on January 1, 2018 and promised similar raises in 2019 and 2020. Russian military personnel likely anticipated 4 percent on January 1, 2019.

However, on October 22, Deputy Defense Minister Tatyana Shevtsova told Krasnaya zvezda the MOD will now raise pay and pensions on October 1, 2019, October 1, 2020, and October 1, 2021 by 4.3, 3.8, and 4.0 percent respectively.

Шевцова Татьяна Викторовна

Survivor Shevtsova will reach 9 years in the MOD next May

So instead of 12 months, it becomes 22 months between raises. Then presumably they will become annual (and the military even gets a bonus year in 2021). But likely no one is holding his breath for that.

Ms. Shevtsova didn’t have as much joy for the MOD’s roughly 900,000 civilian workers. She said certain categories of civilians in military-scientific institutions are making 95,000 or 84,000-86,000 rubles per month. The pay schedule for the lowest-earning MOD civilians has been increased four times during the past three years, she said. But it must be so insignificant that she didn’t deign to illustrate with examples of how pay for those workers has been raised.

Northern Fleet civilians ask for respectable wages

Recall, until January 1, no indexation for inflation had been provided since the Russian military salary structure was revamped and increased in 2012. Cumulative inflation in the interval has amounted to 50 percent. While tame right now, annual inflation for 2018 is still running at 2.5 percent which eats some of this year’s pay increase.

Kremlin Raising Military Pay

Deputy Defense Minister Tatyana Shevtsova told journalists on Friday that military pay and pensions will increase four percent per annum in 2018, 2019, and 2020. RIA Novosti reported that the defense budget will include 18, 22.6, and 41.2 billion rubles each year for that purpose.

Kremlin Raising Military Pay

Shevtsova said a lieutenant serving as a platoon commander will make 66,100 rubles on average this month. That’s roughly 2,500 rubles more than he earned each month in 2017. A lieutenant colonel battalion commander will add 3,400 rubles making his pay 88,700 per month.

It’s sounds like four percent is being applied to the entire pay package — to rank and duty pay and to supplements [надбавки] that not all serviceman get. If this is the case, four percent won’t have the same monthly impact for officers and contractees not receiving supplemental pay. Past pay increases have typically applied only to rank and duty pay.

Shevtsova’s 18 billion would provide an extra 30,000 rubles a year for 600,000 officers and contractees, but 41.2 billion in 2020 won’t cover that year’s bill. A lieutenant might get an extra 8,000 per month or 96,000 in 2020. Multiply that times 600,000 and the MOD will need 57.6 billion rubles.

Shevtsova says a retired battalion commander will receive an extra 947, 1,932, and 2,956 rubles in his pension every month in 2018, 2019, and 2020. That means the pension for that lieutenant colonel is 23,675 rubles at present. The increase reportedly will go to 2.6 million military pensioners, according to RIA Novosti.

As NVO noted, in June 2017, Russian Federation President Vladimir Putin addressed military pay publicly for the first time since 2012. It hasn’t been indexed for inflation once during the interval according to NVO.

But Putin said he wants to improve the “material stimulus” for the MOD, MVD, FSB, and SVR. With another presidential election looming, he wanted to show he’s still concerned about men in uniform.

This isn’t easy when the federal budgets scarcely have money for it and economic recovery is weak.

Still four percent raises will be welcome. But they won’t make up for the eroded purchasing power of military pay. The CPI in Russia has increased more than 50 percent since May 2012. 

Military men are doing reasonably well in the Russian economic context now.

Shevtsova claimed the average monthly military salary in 2014 was 62,000 rubles, roughly the same as in 2017. She said that was 10 percent more than average pay in Russia’s oil and gas sector, according to RIA Novosti. It also appears to exceed what’s paid to the average worker in defense industries.

As long as that pay arrives on time, their housing needs are met, and their work is the focus of national resources and attention, servicemen should be satisfied with their lot. So it’s interesting that Putin still felt a military pay increase was needed in an election year. But, as some say, campaign promises are made to be broken.

OSK Cries Poor on Knyaz Oleg

A Borey-class SSBN (photo Sevmash Press-Service)

A Borey-class SSBN (photo: Sevmash Press-Service)

Russia’s United Shipbuilding Corporation (USC or OSK) is reportedly experiencing a shortage of funding for Borey-class SSBN Knyaz Oleg. OSK President Aleksey Rakhmanov told RIA Novosti on November 16, “Everything depends on issues of the shortage of financing which has somehow formed for us. We hope that [the launch of Knyaz Oleg] will be on schedule.”

Rakhmanov reportedly told the official news agency that the schedule for launching Knyaz Oleg has been pushed back several times.

Knyaz Oleg is the fifth Borey SSBN overall, and the second Borey-A boat. Like the first three Borey ballistic missile submarines, the Borey-A is expected to carry 16 Bulava SLBMs.

First-of-class Yuriy Dolgorukiy is assigned to the Northern Fleet. Aleksandr Nevskiy and Vladimir Monomakh are part of the Pacific Fleet.

Like Knyaz Oleg, unit four — Knyaz Vladimir — the first Borey-A is also destined to reinforce the Russian Pacific Fleet’s strategic nuclear force.

Rakhmanov’s public cry for more money is somewhat unusual and harks back to 2011 when OSK railed at the MOD for adequate financing to produce modern nuclear submarines.

Russia planned to have eight Borey boats in its order-of-battle by 2020. But with Sevmash taking six, seven, or eight years to lay down, launch, and commission them, Knyaz Oleg might be the last to reach the navy this decade. And Rakhmanov pretty clearly linked money to sticking to his SSBN production schedule.

Slicing the GPV

Soon something like a final draft State Program of Armaments (GPV) 2018-2025 will go to Russian President Vladimir Putin. He’ll almost certainly affix his official approval prior to the end of 2017.

Many observers bet the new GPV will contain 17 trillion rubles for the MOD to procure weapons and other military equipment. GPV 2011-2020 was a little higher at 19.1 trillion. But the new GPV will disburse its rubles over fewer years. However, Russia’s high inflation rate (e.g. 11% in 2014, 13% in 2015) means a trillion rubles in 2011 bought more guns than it does today.

Last week, Deputy Editor Vladimir Gundarov published a pithy piece in NVO describing how the new funds might be distributed among Russia’s armed services. He sees a shift in favor of the Ground Troops and VDV which will force the Navy to “curb its appetite.” 

It happened already in GPV 2011-2020, writes Gundarov. It originally envisaged 4.7 trillion for the Navy, but this was reportedly cut to 2.6, while the army and airborne went from 2.6 to 4.2 trillion.

The rationale, he says, is multifold. The Ground Troops face the expensive prospect of fielding new generation armored vehicles on the Armata chassis. Given its involvement in wars in Ukraine and Syria, Russia faces a “complex situation” in the southwestern strategic direction requiring more attention to the army’s modernization.

But the main reason for rewickering MOD procurement is economic. GPV 2011-2020 was formulated with oil at $100 per barrel; it’s now half as much.

Gundarov concludes that Russia:

“. . . can’t spend money to buy arms and military equipment in the previous amount, particularly for such expensive systems as those for the Navy. So only the budget for strategic nuclear systems will be preserved whatever the price of oil.”

He doesn’t say where he got his numbers for this article, but it sounds like he based it on some expert opinion and off-the-record comments.

Declining Defense Orders

Smaller military budgets and delays in putting GPV 2018-2025 into place will apparently trickle down into reduced orders for Russia’s defense-industrial complex (OPK) in coming years.

According to TASS on June 15, Deputy Chief of the Main Armaments Directorate Boris Nakonechnyy said the MOD can’t fully “load” OPK enterprises with orders during the next GPV.  “As the primary customer for weapons and military equipment, the Defense Ministry can’t fully support the work of enterprises,” he told the news agency.

There may be some reduction in defense orders during the new arms program, Nakonechnyy said.  But he indicated the MOD would still support the scientific work (presumably the RDT&E) of Russian defense-industrial enterprises.

Nakonechnyy said the MOD doesn’t expect global military threats to decline, but it’s not possible to increase substantially the funding needed to counter them.  At the same time, he emphasized it’s important for Russia not to lose the current tempo of development in its OPK, and not to allow itself to lag behind world leaders in military technology.

Welding parts for BMP-3 at Kurganmashzavod

Welding parts for BMP-3 at Kurganmashzavod

TASS provided no context for Nakonechnyy’s comments.  Other media outlets ran the TASS story as is.  Utro.ru, however, provided its own interpretation of his remarks.

While perhaps somewhat alarmist, Utro writer Andrey Sherykhanov puts Nakonechnyy’s statements in the context of the continuing battle between the defense and finance ministries over future military spending.

Sherykhanov recalls the recent Vedomosti report putting likely appropriations for GPV 2018-2025 at 17 trillion rubles, three times less than the original MOD request.  The peak of defense orders, he concludes, is already past.  The military will have no orders for production enterprises, which will close and send their workers on indefinite furlough as they did in the 1990s, he writes.

But maybe, Sherykhanov opines, this won’t be necessary since President Putin has said the OPK’s potential should be harnessed to the needs of cutting-edge, science-intensive sectors like medicine, energy, aviation, space, and information technology.  Last year the Supreme CINC himself said 30 percent of OPK production has to be for the civilian market by 2025, and 50 percent by 2030.  Massive state defense-industrial holding company Rostekh has already announced that half of its output will be civilian by 2025.

Sherykhanov writes that there’s no real concern about this new program of conversion to civilian production at present:

“In the upper echelons of power, they spoke about it just a year and a half ago. There’s a gathering sense that the leaders of Russian defense enterprises aren’t beating their heads with this, concentrating as they are completely on military orders which OPK enterprises are provided until 2020.  That is, they act according to this scheme:  we’ll handle this, and then we’ll see.”