State Guarantees in the Defense Sector

From RIA Novosti.

Here is the latest news from Russia on domestic (government) support for the defense industry.  From PM Medvedev:

The provision of state guarantees is the first this year, Medvedev said, and stressed the beneficial effects it would have on the economy as a whole. 

“Everything invested in the defense industry has an influence on industry. Actually, the defense sector helps boost adjacent industries,” he said. 

State guarantees allow defense enterprises to obtain loans at a time when they face a shortage of working capital and have no other sources of financing, Medvedev said. 

Over a half of the state loan guarantees for defense producers this year will go to shipbuilders and developers of intercontinental ballistic missiles, according to the government resolution.

 In general there have always been arguments about beneficial spillovers from government spending on defense into the civilian economy.  This issue seems to be more important for the Russian economy. I often go back to the work of Gaddy and Ickes[1] that illustrates the distortions of Soviet Economy.

________________________________________
[1] Gaddy, Clifford G., and Barry W. Ickes. 2002. Russia’s Virtual Economy. Washington  D.C.: Brookings Institution Press.

Russia's Internal Arms Consumption

Russia is trying to re-equip its own army (LINK).  This has been going on for awhile.  P.M. Medvedev announced recently that the goal for new equipment in the Russian military is being raised to 75 percent new equipment by 2020.

There are a few implications for this, both internally and externally.  The first is that this is a move that is both about the military and about the militarized economy.  One of my favorite books about the subject of Russia's military economy is by Gaddy and Ickes (2002) [1].  This book talks about the distortions caused by the Soviet Union's militarized economy.  Russia's economy is still riding the oil and gas boom, but employment in those sectors is still small.  There are numerous factory towns (large and larger) whose existence and employment base was dependent on the militarized economy.

Vladimir Putin has elevated arms sales to the same level of state enterprise as the oil and gas industries.  The reasons for this are plentiful. One reason is that arms still are symbolically important.  The more states that use Russia's weapons, the greater Russia's perception of its own uniqueness and importance.  A second reason is hinted at above - Putin needs to employ individuals.  One way to do that is to continue to ride the distortions of the Soviet economy (to a lesser scale) by emphasizing the military industrial complex.

There have been some reports that Russian firms are unable to produce arms sufficiently to meet their obligations to external customers, let alone to fulfill such an ambitious rearmament agenda.  However, by emphasizing internal purchasing of weapons the Kremlin is sending a strong signal that these industries will have the continued support of the state - and that may goad them into ramping up production through hiring, streamlining processes, etc.

This will be an interesting phenomenon to keep an eye on.  To what degree will the Russian military re-arm itself in the coming years?[2]
____________________________________
[1] Gaddy, Clifford G., and Barry W. Ickes. 2002. Russia’s Virtual Economy. Washington  D.C.: Brookings Institution Press.

[2] I did not tackle the issue of corruption in this post. I have addressed it earlier (here and here). That will be an even bigger issue as more funds are funneled into the defense sector.

Note: It has been a while since I've posted anything here.  This is not a widely-read forum in general (and for now I'm okay with that), and has been more of a way for me to keep my thoughts together and to have a little fun doing side projects.  I have finished my dissertation and am in the process of moving to a visiting professor position at UNLV.  I may not be writing much over the summer either.