How COVID-19 and sanctions harmed Russian defense biz — and how the country could recover
Russia’s weapons exports agency increased foreign sales despite delays in shipments and a fall in net profit.
In 2020, “the volume of export supplies through Rosoboronexport exceeded $13 billion. The portfolio of foreign orders for Russian weapons reached $53.8 billion,” Rostec CEO Sergey Chemezov told President Vladimir Putin in June, per a report by state news agency Tass.
Rostec is a large Russian conglomerate that controls both civilian and military enterprises, and it oversees the operations of Rosoboronexport.
Chemezov noted that the pandemic “affected many areas of activity” for Rostec, but that the company was able to fulfil 99.5 percent of state orders.
Revenue for Rostec in 2020 reached 1.878 trillion roubles (U.S. $2.6 billion), 6 percent more than in 2019. However, the company’s consolidated net profit for 2020 decreased almost 38 percent from 2019, having last year seen about 111 billion roubles, Tass reported, citing company figures.
In 2020, Russian military sales abroad decreased $2.1 billion, or 16 percent compared to the year prior, according to customs service statistics, as reported by the RBC newspaper. The head of the Federal Customs Service, Alexander Fomin, told reporters that Egypt, Algeria, China and India were among the customers most affected by Russia’s difficulty in fulfilling orders.
Retired Col. Mikhail Khodaryonok, a senior military analyst at Gazeta.ru daily, told Defense News that the “pandemic has clearly influenced the number of projects in the defense sector” and that, with “caution,” he predicts a 10 percent decline in defense production profits for 2021.
Russia is entering another wave of COVID-19: On June 1, 2021, there were 9,500 confirmed cases, according to the World Heath Organization. By press time, the WHO recorded 20,538 confirmed cases on June 27.
In the capital Moscow, city authorities ordered 30 percent of those employed in the area work from home. But the defense industry and the Rosatom state nuclear agency, which has both civilian and military portfolios, are excluded from that order.
Ruslan Pukhov, the director of the Center for Analysis of Strategies and Technologies, a think tank in Russia, said COVID-19 served as a pretext for some countries to avoid buying Russian weapons.
“The pandemic became a plausible excuse not to purchase Russian arms,” he said, citing the example of Indonesia, which pointed to the pandemic as the reason it reallocated money meant for Russian Su-35 jets.
Western sanctions also negatively impacted Russia’s defense sector, with the U.S. having placed sanctions on dozens of Russian companies, including Rostec. In response, Russia is moving away from the international payment system SWIFT and is avoiding the use of U.S. dollars when selling weapons to foreign customers.
Malaysia, Taiwan and China are among the biggest suppliers of microelectronics to Russia, although it’s unclear how much of those are used by the military sector. And despite China’s willingness to supply Russia with such technology, the quality is not always to standard.
Pukhov pointed to problems with Chinese-made diesel engines installed on Russian military ships. One of them, the small missile cruiser Vyshny Volochyok, suffered mishaps in 2018 involving a Chinese-made diesel engine.
Since March 2014, when Russia annexed Crimea from Ukraine, the concept of import substitution has served as a mantra for the Russian defense sector. Russian businesses began replacing Ukrainian-made spare parts and engines in the armed forces. The endeavor was mostly successful: In 2019, United Engine Corporation replaced Ukrainian-made gas turbine engines with domestically produced versions. Russia was also able to replace Ukrainian-made Motor Sich helicopter engines for the Mi-38 with the locally produced ТВ7-117В.
Putin’s order in 2017 to diversify the defense sector — so that companies dedicate 30 percent of their businesses to making civilian products by 2030 and 50 percent by 2050 — is being implemented, albeit slowly, Deputy Prime Minister Yuri Borisov told RBC in December 2020.
The task of converting the defense industry is a hard one, Borisov noted.
“Try to rebuild the economy and the technological chain, which took [decades to shape] and were sharpened to ensure defense and security, and [then try to] enter the civilian market with competitive products. The rules of the game are different ones.”Alexander Bratersky