The Weekly Standard reports:
Traditionally, one of the more important arms shows for Russian industry has been the International Defence Exposition (IDEX) that took place late last month in Abu Dhabi, the capital of the United Arab Emirates (UAE). Despite the financial woes they are suffering, Russian industry has to participate to try and keep itself alive. However, no one could possibly reconcile the behavior of the Russian delegation at this expo with the dire situation that their industry faces back home.
The fortunes of the Russian defense industrial sector at present make AIG and Bank of America look like the financial picture of health. The Russian industrial conglomerate umbrella company, Rostekhnologia (ROT) that has monopoly control over the entirety of the nation’s defense industry is headed by Sergei Chemezov. He is also a life-long –and perhaps the number one– FOV (Friend of Vladimir Putin) in the Russian government, the two having first befriended one another when they served together in the former East German Democratic Republic (GDR) as KGB officers during the waning days of the Cold War.
Chemzov recently announced that 30 percent of Russia’s defense industry is on the verge of bankruptcy and that of the 70 per cent remaining only half of those may be categorised as “stable.” Those that are in danger of becoming insolvent include more than half of the enterprises in Russia that produce ammunition and explosives.
When ROT was officially formed last year–taking control of a total of 426 firms in one fell swoop–Chemezov looked like the all-time world champion of corporate raiders. Moreover, 118 of these firms had no connection to the defense sector, but were merely large, moneymaking enterprises that were ripe for the picking. “T. Boone Pickens, eat your heart out,” seemed to be the theme of the day for Russia’s number one FOV.
However, some seven months later, accumulating all of these industries into one basket does not seem like the smartest move any more. The 340 out of the 426 ROT-controlled firms that are defense suppliers currently owe 25 billion roubles (US $17.5 billion) of debt. In the aftermath of the global economic downturn, not only have Russian banks closed their doors to lending to these defense enterprises, but those banks that have remained open to lending have raised interest rates to 12 to 13 percent. These interest levels have caused ROT to open negotiations with western banks, although no one from the Russian arms export monopoly has been willing to reveal which banks they are actually in contact with.
“Credit is the most painful topic,” said Chemezov. “With such high [Russian banking] interest rates, we are simply unable to develop industry.” The current policies of western banks, however, are not encouraging due to their recently declared unwillingness to make additional loans to the east–even to those former Warsaw Pact nations that are now members of the EU.
Russian defense exports were at a record $8.35 billion in 2008, though industry officials have for more than two years warned that these levels of earnings would be unsustainable without significant state-funded investments in defense industrial technologies. In the last 12 months, senior Russian defense industry enterprise directors have stated that the condition of the industrial base in areas such as advanced miniaturized components, composite materials, and other technologies essential to maintaining competitiveness in the 21st Century now require national campaign-style programs on the order of the 1960s Sputnik race to moon if they are to be saved from collapse.
A long-time Moscow colleague who has analyzed Russia’s defense industry for the last three decades commented this month on these consequences of the Russian government’s many years of post-Soviet, chronic neglect of the need for technology investment in the defense sector. “Very simply,” he said, “we are now moving to the point where there will be no Russian defense industry that is on par with the front-line nations of the west that have a sizeable industry, and in some sectors or technologies Russian industry will even be inferior to Chinese industry.”
Which would make one believe that during last month’s IDEX show the Russian delegation would have behaved as though they were in a do-or-die situation–desperate to find new markets, new customers, new sources of investment, etc. Eager to please their customers and at the ready to respond to anyone’s interest no matter how small. What happened was just the opposite.
To begin with, ROT and its authorized arms export subsidiary, Rosoboronexport (ROE), decided to cancel approximately one-third of space that they had rented in the exhibition hall at the last minute–leaving a large space in the middle of the hall that was supposed to contain a number of Russian enterprises that did not end up attending. Having some Russian firms be no-shows for the event was bad enough, but the even worse advertisement for why not to do business with Russian industry came once the exposition was opened.
The second day of the IDEX show was 23 February, the same date as the traditional Soviet Army Day holiday. In post-Soviet Russia the holiday has been renamed the “Day of Service to the Fatherland,” but it still is celebrated in the old way with banquet tables laden with food and endless vodka toasts. That night, most of the Russian delegation went to the official Soviet Army Day celebration at the Russian Embassy in Abu Dhabi instead of the official opening reception hosted by the UAE royal family.
One of the IDEX participants from Moscow who witnessed the entire episode commented that
“the Russian delegation more or less committed a double faux pas by first of all ditching the Sheik’s party and not only offending UAE officialdom in the process, but they also missed the chance to hob-nob with some of their most potentially valuable Middle Eastern clients. Then, predictably and adding insult to injury, the next morning almost no one from the Russian delegation showed up at their exhibition stands because they were still back in their hotels sleeping off last night’s drunken bash.”
One of the officials who showed up that morning looking for someone to talk to from the Russian delegation was the deputy defense minister of Cyprus. When told why the Russian pavilion was virtually empty, my colleague related, he admonished one of the handful of representatives from Russian industry actually present, saying, “if you keep selling your weapons the way you are now in five years you will be out of business” and stalked off.
Back home in Moscow and one day after Chemezov’s announcement of the impending financial meltdown in the defense sector, the Russian government announced loans of $56 billion to provide some relief to these defense firms. Additionally, and following the example of the U.S. government’s bailout scheme, it was announced that the Kremlin would increase its control in RSK-MiG and other major arms producers by buying more shares in these enterprises. Whether these bridge loans will be enough to sustain these firms during the current economic crisis remains a large question, given that there are no solid prospects for major export or domestic orders in the near future.
Despite these handouts from the Russian state, there are still plenty of reasons to believe the Cypriot deputy defense minister was spot on in his assessment. First of all, explained a Moscow colleague,
“the record to date of money being loaned by the state central budget to defense industry is not a happy one. Examples of some of all of this money being diverted into peoples’ pockets are well-known, so it is questionable if even half of this $56 billion will end up where it is supposed to.”
“Additionally, it is impossible to deny that some parts of Russian industry are no longer capable of producing a full-up weapon system and never will be able to again. Sooner or later Russia will end up importing weapons–instead of making them as they have done for decades. It is already easier all the time to import foreign components that are incorporated into Russian weapon platforms for the simple reason that there are no longer any Russian analogues to these components in production. Moving from this situation to importing whole, final-production weapon systems to Russia is not such a small step anymore.
When Chemezov created ROT and acquired control of almost every Russian industrial enterprise worth owning he looked as though his corporate behemoth had also acquired that “too big to fail” label that we are hearing so much about in the United States during the current world financial meltdown. But, just wishing does not make it so. No one can undo the almost 20 years of neglect and zero investment that Russian industry has suffered. No matter how much is done now failure in the defense sector seems about the only option and drinking the night away in Abu Dhabi instead of tending to business is only going to accelerate that decline.