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Despite Sanctions, Russian Defense Revenues Soaring

July 26, 2015 (Photo Credit: Russian Helicopters)
Editor's note: This article was updated with new figures on procurement.

MOSCOW — Despite the pressure of Western sanctions, the sharp devaluation of the Russian ruble and runaway inflation at home, Russian defense firms featured in this year's Defense News Top 100 ranking saw surging revenues as exports reached new highs and the government poured money into defense procurement.

Russia's largest defense firm, air defense concern Almaz-Antey, saw revenues rise 10 percent to $9.2 billion, up $883.5 million over 2013. The Tactical Missile Corp., maker of air-to-air systems, saw the most drastic increase with a 48.6 percent rise in revenue to $2.8 billion in 2014.

Other Russian firms that made the ranking were the United Aircraft Corp., which owns Sukhoi, MiG and Irkut, and saw revenues rise 7 percent to $6.2 billion; Russian Helicopters, which finished at $3.96 billion, up 16 percent over 2013; and the United Engine-building Company, which saw a 25 percent increase over 2013 revenues to $3.3 billion in 2014.

Other firms that made the ​ list were tank manufacturer Uralvagonzavod, which reported defense revenues of $1.54 billion in 2014 — a 1 percent rise — and electronics component manufacturer RTI, rising 15 percent to $947 million.

Russia's shipbuilding conglomerate, the United Shipbuilding Corp., declined to participate in the ranking.

The impressive rise in revenues for Russian defense manufacturers, despite the pressure of Russia's economic crisis and Western sanctions, was likely due to record-setting export revenues and government procurement expenditures as President Vladimir Putin's decade-long $350 billion military rearmament drive kicked into high gear.

Export and Procurement Surge

Russian firms exported a record $13.2 billion worth of military hardware abroad in 2014, continuing a nearly 10-year ​year-on-year rise in export revenues for Russia's defense industry.

Exports were largely unharmed by sanctions, as Russia's major trading partners are non-Western nations with close political ties to Moscow, such as China, India, Algeria and Venezuela.

At the same time, Russian procurement hit a new high, with about 2 trillion rubles (US $33.2 billion) spent on new equipment in 2014, Prime Minister Dmitry Medvedev said in April. This was a large increase over the 2013 state defense order, which Medvedev said was valued at around 1.5 trillion rubles.

Devaluation and Inflation

Although Russian firms saw soaring revenues, Western sanctions did have an impact on the industry, though their effects are not readily apparent from the revenue data.

Sanctions combined with a sharp drop in the global price of oil, Russia's main export commodity, ​ to send the value of the ruble plummeting by 40 percent and inflation soaring in 2014.

This is a bigger problem for the Russian Defense Ministry than it is for the defense industry, since equipment is now more expensive to produce and Putin's rearmament can afford almost half of what it was intended to two years ago, said Ruslan Pukhov, head of the Center for the Analysis of Strategies and Technologies, a Moscow-based defense industry think tank and analytics firm.

The impact of sanctions on the defense industry will take longer to manifest itself since sanctions were ​limited mostly to a loss of access to Western credit markets and advanced component imports.

"The industry was taking money from Russian banks and loans were guaranteed by the state, but the banks were taking cheap money from the West and selling them to Russian defense industry enterprises, and now the majority of these channels are cut," Pukhov said.

Russia has launched an import substitution drive to spur the creation of domestic alternatives to foreign procured components, but the process is expected to take two to three years.

The government is working to secure advances for defense enterprises working on import substitution to finance the research and development ​ and the investments needed to launch domestic production lines of components ranging from optics to ship diesel turbines, but not everything can be substituted.

Pukhov pointed to production equipment and machine-building tools as one area that Russia will struggle to replace, since much of the know-how was lost in the wake of the Soviet collapse in the 1990s.

The problems will take longer to manifest themselves, but they have had immediate impacts in the field of shipbuilding, pointed out Dmitry Gorenburg, a Russian military expert at the Virginia-based CNA think tank.

"The impact of sanctions on shipbuilding has been quite significant, because the gas turbines for a number of frigate classes were being manufactured in Ukraine," which imposed an arms export embargo on Russia shortly after Moscow annexed Crimea, Gorenburg said.

The loss of Ukrainian-made turbines has forced a production halt on the construction of around eight ships of the Admiral Gorshkov- and Admiral Grigorovich-class frigates.

But as Gorenburg notes, the EU arms embargo also deprived Russia of German-made engines being used to construct the new Gremyashchy-class corvettes. Only two of the ships have been built and the eight remaining ships ordered for the class have been canceled.

"In general, a lot of the problems caused by sanctions are disruptions to the supply chains," Gorenburg said. "Even if they can find new sources, they still have to set those up and they probably won't be identical to those found in Western Europe."


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