Page 10 - bne IntelliNews magazine February 2025

10 I Companies & Markets bne February 2025
Military-industrial growth
As a result, these initiatives are already making themselves felt. Ukraine's military-industrial complex saw production capacity surge by 500% in 2024 after the government invested over UAH39bn ($1bn) in weapons production. A preferential lending programme for defence manufacturers – offering loans at 5% interest, subsidised by the state – was a major driver of growth.
The Zbroyari campaign, a financing initiative that attracted $1bn with the help of international partners, further underpinned this expansion. Additionally, the government launched the Iron Polygon service that provides testing facilities for drones and other weaponry free of charge.
Ukraine's drone production saw a dramatic increase in 2024, largely due to a combination of strategic investments, international cooperation, and the government's prioritisation of the defence sector.
In 2024, Ukraine's drone production reached unprecedented levels, with over 1.5mn first-person-view (FPV) drones manufac- tured. Domestically produced drones accounted for 96.2% of all unmanned aerial vehicles (UAVs) used by Ukrainian forces in 2024.
These drones have proven to be instrumental in the war and filled in for shortages of artillery shells. Although each drone can kill only a few soldiers, their accuracy and high success rates make them lethal and have prevented Russia following through on military successes slowing its advance.
This achievement was part of a broader initiative to produce a total of 2mn drones, including various types such as medium-range attack drones and long-range drones capable of reaching targets over 1,000 kilometres away, that puts Ukraine’s drone production on a par with Russia’s.
Key projects for 2025 include a planned production ramp-up of 30,000 long-range drones and 3,000 cruise and drone missiles, as directed by President Volodymyr Zelenskiy.
The Ukrainian defence sector’s growth underpins a broader goal of boosting production capacity to $30bn annually, reflecting a strategic effort to secure long-term military readiness.
Ukraine also developed its first long-range cruise missile the Palyanytsia and put them into serial production at the end of last year, according to Zelenskiy.
Russia's hidden war debt and a looming credit crisis
Ben Aris in Berlin
Moscow has been quietly pursuing a two-pronged strategy to finance its escalating war costs. In addition to the publicly scrutinised defence budget, it has set up a system of state-directed off-budget soft
loans where the Kremlin badgers banks into making easy credits to defence sector companies to fund its war machine unofficially. But with the soaring cost of borrowing that is now becoming a problem that could end in a debilitating crisis, according to a report from the Davis Centre.
This lesser-known mechanism, instituted shortly after the invasion of Ukraine, has mushroomed, with the volume of loans running into hundreds of billions of dollars. Companies that were forced to take out these loans are starting to squeal from the pain servicing the rapidly rising interest payments after interest rates climbed into double digits.
Inflation took off forcing the Central Bank of Russia (CBR)
to reverse its loosening of monetary policy in the second quarter of 2023. Since then, prime interest rates have climbed relentlessly to the current all-time high 21% imposing crushing interest payments on Russians corporates that have traditionally avoided credits, preferring to make the majority of their investments from retained earnings.
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Interest payments eating into profits
The debt burden is now eating up one ruble in four, according to Sergey Chemezov, and is leading some analysts to predict
a wave of bankruptcies later this year, although other economists have argued that Russia’s economy is a lot more robust than it looks.
Since mid-2022, this off-budget financing has led to a record $415bn surge in corporate borrowing, with an estimated $210bn-$250bn (RUB21-25 trillion) as compulsory loans to defence contractors, said Craig Kennedy, a former investment banker and now an associate of the Davis Centre at Harvard, in a social media post.
Given the total Russian defence spending was just over RUB10 trillion in 2024, this informal state-directed lending to defence companies, according to these estimates, is double all the official military spending – a substantial amount.
CBR Governor Elvia Nabiullina has been struggling to bring down inflation as interest rate hikes are clearly not working, so at the end of last year she teamed up with the Ministry
of Finance (MinFin) to introduce a series of non-monetary policy methods. Amongst these was effectively reducing retail