In defence of Russia

By bne IntelliNews September 30, 2011

Ben Aris in Moscow -

Russian Prime Minister Vladimir Putin loves a macho photo-op, so on a recent trip to a Russian weapons exhibition in Nizhny Nagil he barely hesitated when being shown the new T90C full battle tank before whipping off his jacket and jumping down inside to take the controls. He emerged a few minutes later and promised the director of the tank's maker, state-owned Uralvagonzavod, the country's largest producer of railcars and armoured vehicles, an extra RUB10bn to bring the government's commitment to the plant up to RUB64bn ($2.2bn).

Putting bravado aside (it is election season after all), the Kremlin's investment in its burgeoning weapons sector is not a bad punt. Arms production and exports is actually one of Russia's more profitable industries and growing fast. Uralvagonzavod earned RUB6.2bn last year and says its order book is full for the next three years. The same story is repeated at several other military facilities like Sukhoi Jet and Kazakh Helicopter.

A legacy of the Cold War means Russian arms are still top quality - and thanks to the collapse of the Soviet Union they are cheap. It is a winning combination. The state-owned military export agency says: "Rosoboronexport's portfolio is about $38.5bn; this is the target we hope to meet in three years." And leading military think-tank CAST predicts that Russian arms exports are expected to stay at record levels of about $10bn a year until at least 2014 as top customer India continues to beef up its armaments.

Defence is also one of few places where Russian technology remains world class. The cash-strapped US cancelled the production of its Raptor super jet, a so-called fifth generation fighter, leaving Russia's T50 fighter the only game in town. These are the badass next generation of super-fighter that are supposed to give their owners dominance of the sky.

Investing in the defence industry is not only good business, but also an important political and social priority, as the military-defence sector was never really dismantled and entire towns and regions remain dependent on the production of arms. In the new 2012-2014 budget, spending on defence was hiked to 1.3% of GDP, or some $650bn, while total defence-targeted investment amounts to a mind-boggling RUB20 trillion ($650bn) to complete re-equip all three branches of the military. That's 20-times more than the state is planning to invest into Russia's infrastructure.

That's the plan anyway. And the government has been making a lot of spending promises lately. However, Deputy Prime Minister and Finance Minister Alexei Kudrin embarrassingly pointed out in the middle of September that this massive spending was unfunded and would probably have to be scrapped or at least scaled down after the elections slated in December and March are passed.

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