The Hidden Challenges of Modernizing Russia's Military

5 MINS READMay 6, 2015 | 09:07 GMT
The Hidden Challenges of Modernizing Russia's Military
Russian Msta-M self-propelled howitzers ride through Red Square in Moscow during the Victory Day military parade night training on May 4.

The Kremlin will show off some new military hardware at its annual Victory Day parade on May 9. On display will be a number of new military vehicles developed by the domestic defense industry — the symbolic cornerstones of a modernized Russian military. This pageantry, however, belies the significant challenges the Kremlin faces in its efforts to update and improve its defense capabilities. Chief among these is the Ukraine crisis, which has put Russia's access to vital military components in question. Western sanctions triggered by Russian actions in Ukraine and the resulting drop in oil prices have weakened the national economy, further constraining the industry. These restrictions have forced Russia to promote joint manufacturing abroad and to boost domestic production to make the Russian defense industry more competitive.

Ukraine has long played an important role in Russia's defense industry as a supplier of subcomponents. Under the Soviet Union, Ukraine was critical to the manufacture of helicopters, aircraft and ships as well as space hardware and strategic weaponry. These ties endured even after the end of the Cold War in 1991. The ouster of pro-Russia President Viktor Yanukovich and the ensuing crisis have had direct and far-reaching effects on Russia's ability to produce military hardware.

Dependence on Ukraine

Since Russia's annexation of Crimea in 2014 and the start of its involvement in eastern Ukraine, this relationship has become fraught. Russia now faces potential disruption to the supply of critical subcomponents. The conflict in Ukraine has also damaged deals with suppliers outside of Ukraine, delaying, for example, the delivery of Mistral amphibious landing ships from France. Unreliable supply chains have forced Moscow to develop new production capabilities to support its military needs.

One key Russian loss during the crisis has been Ukraine's production of turboshaft engines for Russian-built helicopters. The once-reliable delivery of these engines to Russia is now in question, and Kiev is actively seeking alternative markets. In response, Russia has been moving toward import substitution for these particular components. Returning the helicopter supply chain to Russia would guarantee reliable supplies to the Russian military and also secure the vital export of helicopters.

Russia's push toward import substitution is critical to mitigating the risk of subcomponent supply disruption. Even before the Ukraine conflict broke out, Russia was on a trajectory toward limiting import dependence in the defense industry. Between 2007 and 2010, the share of Russian helicopters bearing Ukrainian engines dropped from 95 percent to 70 percent. The conflict in Ukraine forced Moscow to speed up this process. In doing so, it has been forced to tailor its military modernization to prioritize the development of certain sectors or weapon systems to both limit cost and maintain self-sufficiency.

Rethinking Military Spending

Recent drops in global energy prices, however, have weakened Russia's resource-dependent economy. The government has already been forced to delay new development programs. Even with an expansion of the defense budget by 20 percent, the government has had to delay a decadelong $70 billion arms investment program for the third year in a row. It has also scaled back a deal with India for the joint development of the T-50 stealth fighter and abandoned nearly half the sectors within the Russian defense industry because of their lack of competitiveness. This drop-off in defense spending reduces the amount of money feeding into the domestic defense industry and magnifies the industry's dependence on revenue from foreign sales. Moscow's plans to make the defense industry more competitive are meant to help boost that revenue.

For now, Moscow has largely managed to maintain military spending. However, to maintain a robust defense sector going forward, the government will have to balance its need for certain levels of production and its need to modernize and update its systems. By limiting the scope of some programs or the number of systems under production, the government can ensure that its most useful programs stay productive enough both to supply its military and provide material to sell overseas. Meanwhile, it can allocate funds and production capacity to the development of new technology, so that the Russian defense systems remain competitive on the global market both in terms of quality and price. To execute this financial balancing act, Russia may have to cut funding for systems that are becoming outdated or that were once buoyed by export deals financed by Russia itself. 

The biggest driver behind the defense industry has been the Russian military's ambitious modernization plan, which was in motion long before the crisis in Ukraine and the ensuing economic malaise. This has included both the development of new weapons systems and a large procurement drive. These have added up to a massive flow of revenue from the Russian state into the defense industry.

Reliance on this revenue, however, presents a risk for the defense sector. These ambitious development programs may not be as successful as anticipated, and the military's promised procurement volumes might not pan out when the military is forced to make spending cuts next year. A major problem would emerge were the military to cut purchases of aircraft, tanks or other systems. Reduced demand would increase the unit cost for the remainder, producing what is referred to in the defense industry as the "death spiral," in which price efficiency rapidly erodes. To avoid this outcome, Russia must bolster its export industry to maintain an economy of scale and offset development costs. 

New Partners

To offset development costs and guarantee foreign markets for Russian weapons systems, Moscow has pursued joint development deals with reliable partners. In the past, India was a logical partner for these programs. Significant delays in development and production and quality concerns have challenged some of these projects. India is considering backing out of the T-50 stealth fighter program, for example. Were it to do so, Russia would need to shoulder the combined development costs and find a new buyer for the orders.

As a result, Russia has moved closer toward cooperation with China, particularly in the development of missiles, warships, engines, transport helicopters and aircraft. China offers a number of capabilities that Russia has yet to master, including specific ship engine components Russia acquired from Ukraine in the past. Cooperation with China also opens the Russian defense industry up to development through Chinese financing, offsetting budgetary concerns.

In the end, the longevity and competitiveness of the Russian defense industry depends on its ability to sustain itself. This is especially true because many of the countries it has partnered with also compete for a share of the export market. Russia's ability to maintain a substantial defense budget and meet modernization objectives will determine the success of its defense sector. Its ability to remain competitive in export markets, however, will depend heavily on the ability of the Russian defense industry to strike a balance between minimizing production costs and restructuring its capabilities to limit dependence on subcomponents produced overseas.

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