On State Guarantees to the Russian Military-Industrial Complex in 2014

On July 24, a number of the mass media, including the Rossiiskaya Gazeta, a state daily published the information of the official document to Resolution No.1060-r of June 16, 2014 of the Government of the Russian Federation (published on June 23) that the volume of state guarantees for enterprises of the Russian military-industrial complex (MIC) would amount to about Rb 380bn (to be more precise – Rb 377.8bn).


Neither D. Rogozin's elaboration at the meeting with vice premiers on June 23 that it was only the first "tranche", nor his statistics of provision in the 2011-2013 period of state guaranties to enterprises which fulfilled the state defense order did not attract anybody's attention.


Due to the above, one may fall under the impression that in 2014 the MIC's state guarantees will amount to the mere Rb 380bn which surely fails to comply with the volumes determined in Federal Law No.349-FZ of December 2, 2013 on the Federal Budget in 2014 and the 2015-2016 Planned Period and misrepresents the actual state of things. In Annex No.38 to the above law, for fulfillment by the state defense order of the Ministry of Defense by MIC enterprises it was planned to allocate Rb 497bn and another Rb 55.8bn to the same enterprises for development of projects of the Federal Target Program: The Development of the Military-Industrial Complex of the Russian Federation in the 2011-2020 Period, that is, the total of Rb 552.7bn.


The statistics of the volumes of guarantees presented by D. Rogozin only fits the 2013 official date which is available to us. According to it, on the basis of seven resolutions Rb 362.27bn was allocated for fulfillment the state defense order of the Ministry of Defense. As regards 2012, the difference amounts to Rb 1bn (by five resolutions Rb 189.28bn was allocated instead of "nearly Rb 188bn" stated by D. Rogozin ), while in 2011, according to our data, Rb 157.86bn was allocated instead of Rb 122.5bn by four resolutions, that is, the difference exceeds Rb 35bn. The reasons for such discrepancies may be both the quality of the published data and the double count of guarantees which were extended to enterprises that changed within a year their form of incorporation and failed to be cancelled by a subsequent resolution.


It is to be noted that there is nothing special in the practice of provision of state guarantees for loans of the national defense industry – that practice has existed for centauries and is not a Russian invention. So, it would be a mistake to make comparisons with well-known mechanisms of shadow financing of military expenditures, such as MEFO bills invented by the President of the German Central Bank in 1934.


However, there is national specifics. Firstly, on the basis of experience of the 2011-2013 period the above Rb 55.8bn (10.1% of state guarantees) will be distributed in 2014 by secret resolutions as funds allocated for the secret federal target program. Secondly, it is the doubtful quality of the statistics used by the government machine as was shown above. Thirdly, it is high interest rates on loans to MIC enterprises on the part of authorized state-run banks due to which situation they undoubtedly have an access to the easy money, but at the same time it is a factor behind abnormal growth in prices on military products. And, finally, it is high corruption risks in the MIC which risks are easily shifted on taxpayers: Despite the fact that there were discrepancies in the accounting statements of the ОАО Severnaya Verf for the amount of Rb 7bn in the 2011-2012 period – it received Rb 30bn worth of state guarantees in the above period – the earlier provided guarantee was increased to Rb 14bn by the above resolution of June 16 and extended until December 31, 2018.


Vassily Zatsepin, PhD (Military Science), Head of the Economics of the Military-Industrial Sector Department