The first five years of a large rearmament program are coming to an end with overfulfillment of plans. However, now the Russian military-industrial complex will have to get used to working on the state defense order on new conditions: the credit scheme will be replaced by full budget advance payments, and authorized banks will be endowed with control functions.
The recently held MAKS air show in Zhukovsky, whose general sponsors were Rosoboronexport and VTB, once again fueled public interest in defense topics. There really is something to discuss here. This year we can draw a line under the first results of the implementation of a large rearmament program. This program, we recall, has been launched in 2011 and, according to plans, should be fully implemented by 2020.
The first results of rearmament are encouraging. The program was marked by an explosive growth in the volume of state defense orders. Already in 2011, its value amounted to 750 billion rubles against 450 billion a year earlier. And this year the volume of the state defense order, despite the economic difficulties, should amount to 1.8 trillion rubles. At the same time, not only the nominal expenditures are growing, but also the physical volume of deliveries of defense products.
However, the end of the first five-year rearmament plan was not just a formal date, but a really turning point. 2015 will be the last year when, against the fulfillment of the state defense order, it is practiced to guarantee bank loans for enterprises of the military-industrial complex at the expense of the federal budget and subsidize interest rates on these loans. From 2016 this will not happen. The state is switching to full advance payments of contracts for state defense orders, already without attracting credit instruments. At the same time, the most important banks of the country will be involved in monitoring the monetary operations of the executors of the state defense order.
It should be noted that next year a new state armament program for 2016–2025 is to be developed, which will be formed under new conditions. The defense will have to get used to living in a new way.
Overfulfilled the plan
Seven years ago, a large-scale military reform began in Russia, an important point of which was a large rearmament program. In 2010, it was decided to allocate 20 trillion rubles for its implementation until 2020. According to its results, it was planned to bring the share of new weapons in the troops to 70%. In 2011, the program was actually launched.
The first results are already evident. If in 2010 the share of modern weapons in the army was estimated by the Ministry of Defense at 15%, then in 2015, according to Deputy Prime Minister Dmitry Rogozin, it has already exceeded 42%. This is even more than the plan: initially, in 2010, it was assumed that by 2015, new types of weapons in the troops would amount to 30%.
The state defense order has grown steadily in recent years
Over the past five years, the quality of the execution of the state defense order has also significantly improved. In 2010, the troops received less than a third of the ordered weapons and equipment. At the beginning of the rearmament program, the state defense order was fulfilled by 82–84%. And already in 2014, as noted by Deputy Defense Minister Yuri Borisov, the implementation of the state defense order was 95%. Of these, 61.6% were for the purchase of new equipment and weapons, 19.9% for repairs and maintenance, and 18.5% for R&D.
Good results were achieved due to the explosive growth of military spending. So, from 2010 to 2015, the volume of the state defense order in Russia increased 3.6 times at par and 2.4 times in constant prices (see Graph 1).
Bank loans have been an integral part of the mechanism for implementing the state defense order all this time. The enterprises of the military-industrial complex applied to the bank for a loan to fulfill the state defense order. The state provided guarantees for the fulfillment of obligations of military-industrial complex enterprises to return 100% of the loan amount. The interest rate was also subsidized. In our conditions, this is important: on average in the country, lending rates are too high for machine-building enterprises.
In 2014, the government spent about 497 billion rubles on providing guarantees for "defense" loans. The largest creditors of the military-industrial complex were the largest "state" banks. VTB, for example, estimated its share in the total volume of lending against government guarantees at 39%.
The bank also showed growth this year. “In total, industrial enterprises, including dual-use ones, accounted for about 200 billion rubles in new loans during 2015,” says Valery Lukyanenko, a member of the VTB Management Board. Right at the airshow, the bank signed a number of long-term contracts with military-industrial complex enterprises, such as NPO Basalt and Rosvertol.
The total loan portfolio of VTB to the enterprises of the military-industrial complex, thus, increased to 600 billion rubles and by the end of the year, as the bank expects, will grow by another 30 billion rubles. At the same time, by the beginning of this year, such loans for 105 billion rubles had already been repaid.
It is important to note that this result was achieved against the backdrop of sanctions and problems with the exchange rate.
According to Ruslan Pukhov, Director of the Center for Analysis of Strategies and Technologies, “the sanctions and the exchange rate affect, and affect negatively. The enterprises of the military-industrial complex received loans from banks, which themselves attracted cheap loans in the West. In the new conditions, this is much more difficult. After all, enterprises receive funds under the state defense order in rubles, and they need to pay for equipment, often imported, in currency, which has become expensive. This is often not possible at all. After all, we are pursuing an independent foreign policy, which not everyone in the West likes. It is hard to imagine that the West will give us loans and sell equipment, and on it we will make missiles, which we will direct at them”.
Valery Lukyanenko, however, claims that all problematic issues related to payments between domestic enterprises and foreign customers have been resolved, including through the active development of relations with financial institutions in China and India.
Lender's Controller
After the transition to a fully advance financing scheme for the state defense order, the demand for credit resources on the part of dual-use enterprises predictably began to decline. It would seem that the banks are the losers. However, when switching to an advance scheme, the state decided to assign a control function to specially selected authorized banks - they will have to guarantee targeted payments. Authorized banks will have to meet the following requirements: direct or indirect participation of the state in the amount of 50% or more, authorized capital from 100 billion rubles and an extensive service network. There are not many such banks in Russia. Most likely, the role of authorized banks will be assumed by those of them that are already working closely with the military-industrial complex enterprises, already due to the established relations between the companies and the successful, as can be seen from the results of the implementation of the state defense order, interaction experience.
Military budget parade: we and our "friends"
“In general, in the current environment, we expect a slowdown in lending in the segment of dual-use enterprises with a simultaneous increase in the share of transactional business products associated with the new law on banking support for the state defense order,” said Valery Lukyanenko.
Under the new scheme, the enterprise, having received a contract for the state defense order, applies to an authorized bank, where it opens a special account, separate for each "defense" contract. At the same time, a unique identification code is indicated, which will be assigned to each contract by the Ministry of Defense. All information passing through an authorized bank will be accumulated in the National Defense Management Center.
Earlier, this spring, Rosfinmonitoring has already obliged all banks in the country to report on transactions with securities of enterprises carrying out state defense orders.
Banking control will be part of a broader set of measures aimed at tightening control over the execution of the state defense order. In addition, for example, a ban is established on the actions or inaction of the prime contractor that lead or may lead to an unjustified overpricing of products, non-performance or improper performance of a defense contract.
What about financing?
The share of military spending in 2014 in Russia, according to the Stockholm Peace Research Institute (SIPRI), amounted to 4.5% of GDP, or 11.2% of all government spending. This is a high indicator (see graph 2). For comparison: in the US, 3.5% of GDP, or 10% of government spending, is spent on military needs, in China, respectively, 2, 1 and 8, 3%. NATO spends an average of 2.6% of GDP on defense. However, it is not interest that is at war, but people and weapons. And in absolute terms, our military budget looks less impressive: $ 84.5 billion in military spending in 2014 versus China's $ 216 billion, the United States $ 610 billion, and NATO as a whole $ 950 billion.
At the same time, the international situation is complex and will continue to escalate. At a NATO summit in Wales this spring, the Alliance's heads of state agreed to raise their military spending to no less than 2% of GDP each. At the same time, a fifth of all military appropriations will be directed to the acquisition of new weapons. A simple calculation shows that the hypothetical growth of military spending by up to 2% of GDP in the now "lagging" European NATO countries is $ 88 billion in additional annual military spending, mainly for the purchase of new weapons.
In these conditions, it seems untimely to hide the sword in the sheath. We need to take measures to develop our defense potential.
According to Maksim Shepovalenko, an expert at the Center for Analysis of Strategies and Technologies, “the modernization of military-industrial complex enterprises is necessary, and it should be systematic and continuous in connection with the acceleration of scientific and technological progress. The severity of the sanctions risks should not be underestimated, but it should not be exaggerated either. There is a reorientation of the logistics of the domestic military-industrial complex towards building scientific and industrial cooperation with countries that are not participating in the sanctions regime. With rare exceptions, there is nothing that we cannot buy from these countries. Yes, it comes with additional costs, but it is quite acceptable."
Now in our defense industry there are still many bottlenecks: electronic component base, machine tools (production of heavy and precision machine tools, metalworking tools, multi-axis machining), composite materials and additive technologies, engines for helicopters and cruise missiles. And this means that if we want to preserve the possibility of developing our military-industrial complex by attracting credit resources, we must do something with the availability of their interest rates even when switching to a fully advance scheme of work. In the end, I would like the next five-year rearmament plan to be just as successful.
