Page 27 - RusRPTJul24

opaque pricing, and complex cross-subsidization within holdings (leading to chronic debt, and corruption). “Almost every factory has a boiler house, railroad tracks, a couple of sanatoriums and a bunch of real estate that has no value for production, storage or admin purposes. The company has to maintain all this, and it costs a huge amount,” said a source familiar with defense production.
State defense conglomerate Rostec estimates its profitability at 2.28%, but company head Sergei Chemezov has complained it should be as high as 10%. Without direct funding for R&D from the Defense Ministry, he said last month, factories are “on the brink of survival.” However, Chemezov also admitted that companies have little incentive to increase productivity, or reduce production costs.
5. Rise in global military spending
According to the Stockholm International Peace Research Institute, global military spending was up 6.8% last year to a record $2.4 trillion. Russia’s military spending was above average – growing 24% to $109 billion. The total military spending of NATO countries in the same year was $1.3 trillion — 55% of the world total. Of NATO’s 32 members, including newcomers Finland and Sweden, 23 countries met the requirement to spend at least 2% on defense, according to the alliance. That’s the highest number of NATO states to meet that requirement since it was introduced in 2014. Putin likely believes this shows his enemies are arming, and that means it is unlikely that he will reduce his own military spending.
Why the world should care
Under the slogan of “all for the front, all for victory” the state is flooding the inefficient defense sector with cash, driving itself into the trap of increased military spending. This has interesting consequences. The mostly-market nature of the Russian economy means a bloated defense sector causes “Dutch disease” – i.e. it gobbles up all the available labor and capital, to the detriment of other sectors. The lack of effective management and built-in inefficiencies compound the issue, much like what happened in the late Soviet Union.
And we even know how some of this increased spending will be financed: this week, the State Duma passed a tax reform bill on first reading. More than 1.6 trillion rubles will be generated when corporate income tax goes up by 5 percentage points. It’s likely that this money will go directly to the defense sector.
Via The Bell
27 RUSSIA Country Report July 2024 www.intellinews.com