Faced with an acute loss of advanced components and industrial equipment as a result of Western sanctions, the Russian defense industry will simply be unable to compensate for its losses in the foreseeable future. The Kremlin is adopting measures to restore some of its lost military power by giving priority to quantity instead of quality in its arms manufacturing efforts. Yet increasing the productivity of domestic defense corporations is hard, if not impossible.
Much is revealed by examining Russia’s defense budget. The planned 2022 national defense (ND) budget was 3.51 trillion rubles ($57.4bn), which rose to 3.85 trillion rubles after the all-out invasion began. In addition, 2.82 trillion rubles were planned for national security and law enforcement (NSLE.)
This latter element plays a significant role in the analysis of Russia’s military spending, because the Russian national guard (Rosgvardia) including its Chechen units, plus some units of the FSB and other law enforcement agencies, are directly involved in the war. Presumably, Russian mercenaries like the Wagner group are indirectly and at least partly funded by this element of the budget, which may amount to a third of the NSLE spend. The rest, some 60%–65%, is usually earmarked for the ministry of internal affairs (police, migration service, etc.), the ministry of justice, emergency providers, prisons, prosecutors, and other services mostly absent from Ukraine.
In ruble terms, the budget is higher than in previous years and inevitably so; that is due to the huge materiel losses in Ukraine, continuing defense industry financial losses and the Kremlin’s decision to make Russia more authoritarian in economic as well as political terms.
The aggression has changed the fragile balance of the defense budget. Monthly updates of defense and national security spending have been classified since June, but before this national defense spending in January-April alone was 1.6 trillion rubles, around 500 billion rubles monthly in March–April. This was significantly higher than in previous years and its extrapolation gives an annual total of at least 5.5–5.6 trillion rubles by the year’s end. Despite a recent leak from the Russian government indicating national defense spending would reach 4.68 trillion rubles this year, additional spending for arms procurement alone was officially estimated to be at least 600bn–700bn rubles (pre-war, the share of arms procurement was to be 1.8 trillion rubles for all of 2022.) Russia’s real national defense spending will inevitably be much higher; it is equally reasonable to suppose that the national security and law enforcement spending will be much higher too.
This financial turbulence may become even worse as the budget deficit grows. Fiscal revenues were originally planned to be 25 trillion rubles, with spending at 23.69 trillion rubles. Yet in November, planned revenues were unchanged while total spending is now planned to be 29 trillion rubles.
The Kremlin’s budgetary planning for 2023 shows no improvement. In October, the budget proposal assumed 4.98 trillion rubles for national defense and 4.42 trillion rubles for national security and law enforcement, huge increases on the 3.5 trillion rubles and 2.97 trillion rubles in the 2023 preliminary planning a year ago. By November, planned national defense spending for 2023 had exceeded 5.1 trillion rubles, a rise of 46% on the original figure.
The share of arms procurement here is significant, but it cannot become a “game changer” in restoring Russia’s military power.
Officials and defense sector managers declare that the defense industry is ready to make up all losses as the government increases its arms procurement budget.
Sources: Official statements, expert estimates, and SIPRI
In 2022, arms procurement will total at least 2.5 trillion rubles after all known budgetary corrections, and may even exceed this figure. Arms procurement in 2023 will be no less than 2.5–2.6 trillion rubles according to current information, and may also be higher. However, part of this spending will have to compensate for probable declines in arms exports.
In August, Rosoboronexport, the subsidiary of the Rostec state-owned defense corporation and the country’s arms trade monopoly, was expecting less than $11bn in arms sales by the end of 2022 (for comparison, it was $13 billion in 2020), and total arms exports will barely surpass $12 billion.
Moreover, Russia supports arms exports through subsidized loans, offering its customers the opportunity to delay payments for years, while converting export contracts from less stable national currencies (actually, into rubles.) Therefore, annual figures for arms exports do not translate into real revenue.
Meanwhile, the Russian defense industry has been generating net losses for years. For instance, the volume of the industry’s non-performing loans surpassed 1.7 trillion rubles in 2016–2020, with the ultimate responsibility lying with the government. There is no evidence that defense companies improved their economic efficiency in 2021–2022. Consequently, even if the arms budget rises, it changes little in the economics of Russian defense manufacturing ⸺ it merely plugs the holes in the industry’s already dismal financial balance sheet.
Officials are now traveling intensively from one defense factory to another trying to manage multiple problems arising on production lines. The main challenge is how to maintain productivity; any hopes of actually raising it look almost impossible. The only way to do so would be to simplify manufacturing and give priority to obsolete armaments. Thus, Russia is going to modernize 800 T-62 battle tanks in the next three years. These tanks were first introduced in 1961, the same year that construction began on the Berlin Wall.
This same approach is a hypothetical possibility only for battle tanks and armored vehicles, not for combat aircraft, helicopters, missiles, artillery, and other systems. For example, if Russia can produce 15 Ka-52 combat helicopters annually, it cannot rapidly raise this figure to 20–25 helicopters to cover losses in Ukraine (which total at least 27.) This is especially true considering Russia’s continuing dependence on supplies of Ukrainian-made helicopter engines.
Nevertheless, the problem here is not only a lack of imported components, technology, and industrial equipment, but also a lack of human capital. The Russian authorities estimate the total current workforce deficit in the defense sector at 400,000 people.
As a result, the losses of Russia’s military during its invasion of Ukraine are irreversible.
Pavel Luzin, Ph.D. in international relations (IMEMO, 2012), is a visiting fellow at the Fletcher School of Law and Diplomacy, Tufts University, and a senior fellow at the Jamestown Foundation with a focus on research of Russia’s foreign policy and defense, space policy, and global security issues. In 2017–2018, he was a consultant on the armed forces, law enforcement agencies, and defense industry issues for Alexei Navalny’s presidential campaign.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.
