02/04/2025 

Moscow is pouring huge sums of money into its defense industry, both officially and covertly. However, corruption is sapping these efforts, and the industry is unable to fulfill defense orders, writes SERA.

The text in the original language follows.

Not so long ago, economists Sergey Aleksashenko , Vladyslav Inozemtsev , and Dmitry Nekrasov released a report in which they claim that with current military expenditures, the Russian economy has enough margin to withstand the war for at least a few years. According to them, the consequences of the war and sanctions, such as high inflation and degradation of production, will manifest themselves years later, while at the moment they do not pose a threat to the economy.

However, the data provided by the former financier of Morgan Stanley and Bank of America Craig Kennedy in his newsletter are not so rosy for the Kremlin.

The expert notes that the Kremlin has created a parallel shadowy system of financing the war against Ukraine at the expense of preferential lending. This made it possible to achieve a sharp increase in corporate borrowing by 71%, or up to 19.4% of GDP already from the middle of 2022 – more than the total income from oil and gas and the expenses of the defense budget for the period from the fall of 2022 to the fall of 2024.

Up to 250 billion dollars of this amount went to finance war-related and often non-creditworthy enterprises, which became the main trigger of inflation. According to Kennedy, soon the government will have to take on obligations to save the loaned enterprises, which in total can “eat” up to half of the entire budget. After that, the Kremlin will not be able to finance rearmament of the army unless the West softens the sanctions. This information largely explains how Moscow manages to finance the war all these years. In addition, the majority of defense enterprises began to work in three shifts, and some even switched to a round-the-clock working mode and work even on holidays.

However, even taking into account all these efforts, the production of military products is not as successful as planned. Even in the year before last, independent journalists published data that defense plants in Russia increasingly began to disrupt supplies due to a shortage of components, corruption, and other problems.

As of September 2023, at least 419 heads of workshops and factories failed to meet the tasks of the Ministry of Defense of the Russian Federation and were fined. Journalists emphasize that they took into account only the appeals of employees on FAS decisions, while the actual number of failed orders may be much higher. For example, “Construktorskoe buuro pribrostroeniya” produces almost all high-precision weapons for the front. Two months before the war, the plant presented a new development – a guided missile for X-UAVs. They promised to deliver ammunition there by April 2022, but as of the end of 2023, they have not appeared in service.

Journalists call the lack of Western components, personnel shortages and corruption the main reason for supply disruptions. Its scale became roughly understandable when, under the new Minister of Defense Andrey Belousov, large-scale purges in the department began. Then, colossal embezzlement was revealed in the areas of rear support of the army, construction and even disposal of weapons that had gone out of circulation. Thus, at the end of last year, the military prosecutor’s office approved an indictment against the ex-head of the disposal service of the main armored personnel carrier of the Ministry of Defense of the Russian Federation, Colonel Ilya Timofeev.

The main “military utility” is accused of receiving bribes in the amount of almost 3 million rubles and extorting bribes. It is interesting that Alexey Zolotarev, a contractor of the Ministry of Defense of the Russian Federation close to the Kremlin, who is directly responsible for the disposal of weapons, not only earned billions from this business in Russia, but also purchased a luxurious villa on the Cote d’Azur in France, as well as Maltese passports for himself and his family. It is him that the company “Translom” receives from the Ministry of Defense scrap metal and non-ferrous metals without any competitive procedures.

At the time, while Zolotarev’s former partner is under investigation, he himself remains at large and has not even come under European sanctions. The example of the businessman is only one of the few signals that the thefts in the military department will continue.

Back in the summer of last year, the report of British intelligence noted that the purges are unlikely to lead to the eradication of corruption in the Ministry of Defense, since it “is endemic in the Russian defense industry, and it is tolerated within certain limits and as long as the persons involved in it use the necessary level of political patronage”. The same opinion is held by independent Russian experts, who believe that the entire system of power in the country cannot exist without corruption. Observers also note that over the years, Belousov will create his own clan, uniting other influential groups in the Kremlin, and all of them will claim the distribution of corruption flows, which means that the theft will continue. At the same time, the financing of the war, both from the budget and through hidden schemes, will be impossible to sustain indefinitely without a serious blow to the well-being of the Russians.

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