Streetwise Professor

I’ve made a few posts on the disconnect between bold pronouncements about revitalizing the Russian military emanating from the Kremlin, and the reality of the situation. Here’s an extended quote from Komsomolskaya Pravda by Victor Baranets:

On the other hand, it appears that the Russian defense industry is toiling by the sweat of its brow to enhance the military might of other countries – while our own Armed Forces are only getting crumbs in comparison to fat export contracts. This year, the Russian Armed Forces were supposed to take delivery of nine new fighter jets – but they have received only three. They were promised 91 tanks, but only 31 have been delivered. Over the past decade, the Russian authorities have made two attempts at re-armament: special programs were approved in 1996 and 2001. Both programs failed, for the same simple reason: not enough money. A new State Armaments Program for 2007-15 was adopted in 2006, with almost 5 trillion rubles in funding allocated to it: 4 trillion rubles of this will go to the Defense Ministry. That’s equivalent to around $160 billion. So the Defense Ministry will be able to spend $20 billion a year on military hardware! Plus a further $10 billion allocated for buying or upgrading arms, provided by the Defense section of the federal budget. What could the Armed Forces buy for that mount of money? Let’s look at our defense sector’s price list: $2 million for a tank, $450,000 for an infantry fighting vehicle, $17 million for a fighter jet, $8 million for a helicopter, $60 million for an air defense system (S-400), $85 million for a large ASW vessel, $110 million for a diesel-powered submarine, $1.5 billion for a nuclear-powered submarine.

It might appear that the unprecedented funding generosity would produce a rush of new hardware flowing into the Armed Forces. But it turns out that the top brass and the defense industry still haven’t managed to reach agreement on payment rules and procedures. The Defense Ministry isn’t satisfied with the laws of the free market: it demands that tanks ordered in late 2006 at 42 million rubles each should cost exactly the same in late 2007 or early 2008 (though the price has already risen to 57 million rubles). But defense enterprises don’t want to compensate at their own expense for the rising prices of metals, electricity, and labor. Meanwhile, the state can’t order the defense enterprises to operate at a loss – but neither does it want to cover the difference between old and new prices.

That’s why Russian defense enterprises find it far more advantageous to deal with foreign clients, who pay far higher prices for the same products.

This raises the question: so where has all the money previously appropriated gone?

And the next to last paragraph raises another issue. As inflationary pressures continue to mount, the “old” prices that the Defense Ministry insists on paying will fall further and further behind the prices that the firms find profitable. Thus, the problem will likely get worse, not better.