A short retelling of an article by Pavel Luzhin.
Russian defense industry largely belongs to the state, de facto if not always de jure. Russia’s large defense corporations and their subsidiaries compete not in a free market but within a so-called administrative market — an ongoing redistribution of government resources, mostly via Moscow, among players important to the political system and its sustainability. The industry bolsters Russia’s modern-day authoritarianism not only by projecting power but by providing a major part of the system’s social base—from the ordinary Russians who benefit via employment to the political elite involved in managing the industry or reliant on its contributions to local coffers.
When considering Moscow’s policies toward the United States and NATO, the Russian defense industry’s influence can only be understood in the context of this administrative-market-driven feedback loop: In its foreign policy, the Kremlin relies on asserting its military might and on continued legitimacy in the eyes of Russian citizens; consequently, it needs to keep the defense industry afloat, covering the constantly growing costs and sometimes making up work for enterprises that would be redundant in a true market.
Within Russia’s current model of governance, the defense industry’s influence flows from the priorities on which Russia’s authorities have based their legitimacy: catch-up modernization and restoring Russia’s military power and greatness.
Russian defense companies do not need to spend money on lobbyists (as their U.S. counterparts do) because key individuals working for them simultaneously hold senior political posts and already take part in high-level decision-making. Thus, Russia’s defense-industry lobbying, such as it is, focuses on access to the federal budget—funds distributed by the government with the active participation of the presidential administration and Putin himself for arms procurement, R&D and industrial modernization programs.
The industry includes about 1,300 entities, most of which fall under the aegis of the state-owned corporations Rostec, Almaz–Antey, Roscosmos, Tactical Missiles Corporation, United Shipbuilding Corporation and the nuclear weapons division of Rosatom. The sector’s roughly 2 million employees amount to about 2.7% of Russia’s labor force.
Russian ministers, deputy ministers and presidential administration officials sit on the corporations’ boards of directors, while FSB officers work in management. Regional officials play a comparatively minor role here, but they want defense manufacturing in their regions for reasons not unlike those in the U.S.: It means more jobs, additional investment into infrastructure and a plumped-up tax base. These boons, in turn, improve such officials’ standing within the Russian political hierarchy.
In developing policy toward the defense industry Moscow faces an inherent contradiction: On one hand, Russia’s leadership needs on efficient defense sector that acts as a source of the country’s power and legitimacy, producing arms for export and advanced high-technology civilian goods; on the other, the domestic political and economic order—with its bureaucratic over-regulation and the absence of private initiative in defense manufacturing—contributes to an inflation of costs and general economic inefficiency in Russia’s defense industry. Thus, the Russian leadership is forced to maintain a money-guzzling sector despite limited resources and sometimes contrary to its own strategic goals. This, obviously, leaves less money for other types of public spending and hinders economic modernization overall.
The most significant evidence of the Russian defense industry’s economic inefficiency is the sector’s growing debt burden, which highlights rising costs but also foreshadows continued increases in military spending. Between 2019 and 2020 the defense industry’s total debt burden increased from 2 trillion to 3 trillion rubles—or nearly $31 billion to $41.6 billion—up from 1.2 trillion rubles ($19 billion) in 2016.7 Moreover, the defense sector has been incapable of paying off these loans: In 2019 the deputy prime minister overseeing the sector recommended writing off up to700 billion rubles of debt; the following year, 350 billion rubles were completely written off and 260 billion more were restructured; in 2016, the government paid off 800 billion rubles ahead of schedule to free itself of mounting interest payments. Thus, the Russian leadership will be forced to increase its defense budget in the coming years, regardless of current financial planning.
Despite the fact that Russia’s political elite tries not to repeat the mistakes that led to the Soviet collapse, the risk of economic overstretch is growing. The defense industry’s rising debt burden and the government’s intense spending on the sector—on procuring arms and civilian goods, investments into defense manufacturing itself and diversification of the defense corporations—suggest that balancing between market and command-administrative sectors within the Russian economy will become increasingly challenging. This in turn raises the question of the economy’s overall sustainability and, consequently, the question of the long-term sustainability of Russia’s political system.