Russia's Defense Industry Finds Itself in a Tailspin (excerpt)
(Source: Stratfor; posted April 29, 2019)
Russia's defense industry is face to face with a major foe, but it's not a foreign military power. The Kremlin has been striving to modernize all branches of the Russian military, but the country's defense industry is struggling thanks to decreasing volumes of orders, difficulties in attracting high-skilled talent and limits to its technological capabilities.

According to recent figures, the performance of Russia's aerospace sector is declining precipitously. In 2018, for instance, Russian aircraft and spacecraft makers produced 13.5 percent less than in 2017. And there's been no letup in 2019 either: In the first two months of the year, aerospace output plummeted 48 percent year on year.

The Big Picture

In its 2019 Second-Quarter Forecast, Stratfor noted that the West would impose more sanctions on Russia. But these sanctions — in addition to other factors such as Russia's overreliance on energy, its demographic decline and its weakening industrial capabilities — are impacting the country's ability to maintain its posturing as a great power. In such a situation, the future of the Russian military-industrial complex appears rather grim.

The decline in Russia's defense output raises concerns about the competitive strength of Russia's defense industry in general, whose health is critical if the country is to project itself as a military power in the longer term. Russian Deputy Prime Minister Yuri Borisov attributed the reduction in output to a slowdown of orders for military systems, but projections suggest the slowdown is not just a short-term fluctuation; in fact, it's expected to become even worse in the future. The downturn in oil prices has taken a bite out of Russia's bottom line, squeezing spending for the military — all at a time when the country's arms manufacturers have lost their competitive edge in the global arms market. Together, these factors ensure that Russia's defense industry will struggle to get out of its funk.

Suffering from a Dearth of Funds

This dire picture stands in stark contrast to Russia's frequent presentation of sensational new platforms. In reality, however, just a few of the big-ticket weapon systems — such as the T-14 main battle tank or the Su-57 fighter aircraft — find buyers, as the rest remain mere prototypes. Russia has prioritized some hardware, such as the Sarmat intercontinental ballistic missile, due to their strategic relevance to the country's overall military posture, but Moscow has failed to fully develop other programs or only introduced them on a limited scale.

Under pressure from a limited government budget, the Kremlin even started reducing its military spending in 2017 — a strong indicator that, despite the modernization push, Russia's financial challenges are taking a toll on the country ambitions. Economically, the plunge in oil prices at the end of 2014 hurt Russia's bottom line, depriving the country of essential revenue and forcing it to dip into its reserves to bridge the gap. Today, more than four years on, Russian oil revenues are rising, yet the country is continuing to deal with the consequences of the lean years.

Beyond that, low revenues from taxes, which have forced Russia to raise taxes and the retirement age, and Western sanctions over Moscow's activities in Ukraine and elsewhere, have shrunk the financial pool available to military planners. (end of excerpt)

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