Why is the Russian defense industry in such bad shape?

In recent weeks, I have been writing about how the Russian defense industry has shown itself to be incapable of providing the military with high quality weapons, platforms and systems, despite the relatively abundance of financing for military procurement over the last few years. But why hasn’t the money been spent on modernizing plants and hiring experienced workers?

An article in today’s NVO describes one source of problems for the industry. It argues that modernization of these kinds of plants can only be carried out with secure government funding. And it further notes that there is plenty of financing available for this. The problem is that while money for the coming calendar year is usually allocated in November, it doesn’t reach the intended recipient until the end of the third quarter (i.e. August-September). And not all recipients receive all of the sums they have been allocated.

This uncertainty means that they cannot order new equipment until the money arrives. At this point, they are faced with a legal requirement to spend all allocated money in the current fiscal year (i.e. before December, as the fiscal and calendar years in Russia match). Since the complex (and often unique) equipment that is required for real modernization to occur needs several months to be designed and built, it cannot be ordered in August-September.

But the money that is received must be spent on something, or else it will not only be lost, but the recipient is likely to receive a reduced allocation for the following year. So the money is spent on cheap standard equipment, which is not strictly needed for modernization, but at least the money isn’t going completely to waste. And the recipient can send in reports to the government stating that new technologies have been purchased, the percentage of new equipment at the factory has increased, etc. But in real terms, no actual modernization has occurred.

The question of what this money is doing from November to August is left unanswered, though two options strongly suggest themselves — either there is corruption and the money is used to accrue interest for private individuals or there is bureaucratic incompetence in the administration and it just takes a long time for money to be transferred to the intended recipient. Most likely, both of these factors are at play.

If this analysis is correct, the implication is that improvements in the state of the defense industry are impossible without changes in the financing process. The easiest path would be to relax the restriction that requires allocated financing to be used in the current year. That would allow recipients to order needed equipment whenever the money does arrive, without worrying about having their future allocations cut. This seems to be much more realistic than actually eliminating corruption or increasing administrative efficiency in the Russian government.

(NOTE: I will be traveling for the next couple of weeks. Updates will resume sometime in early January. Happy holidays!)

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