Russia’s defense industry at a crossroads

The sector is facing numerous hurdles in the long term

A year and a half since Russia began its invasion of Ukraine, Russian forces still have not achieved their main objectives and are now fighting yet another Ukrainian counteroffensive.

Such a protracted campaign requires substantial military equipment and artillery, not to mention funding, for all parties involved. A major advantage for Ukraine is that it can depend on external sources for military and financial support.

Russia, however, must rely on its own ability to supply its war effort. And given that the Russian economy is under ever-increasing sanctions pressure, Moscow has to face the possibility that it may experience a shortage of weapons in the future, limiting its ability to continue to wage war and possibly pushing it into negotiations to settle the conflict earlier than it would like.

Russia’s defense industry therefore finds itself at a crossroads, pushing to scale up production while struggling to develop more modern weapons systems for the country’s long-term needs.

Ramping Up Production

Speculation has been mounting for months about whether Russia is facing a weapons and equipment shortage. It began after Russian private military company the Wagner Group started gaining ground in Ukraine. Beginning in May, when the battle for Bakhmut was at its peak, Wagner leader Yevgeny Prigozhin repeatedly complained about diminishing supplies of ammunition for his troops. There have also been reports that Russian officials have met with their North Korean counterparts to try to secure more ammunition – though neither side has confirmed as much so far. Russian Defense Minister Sergei Shoigu’s trip to North Korea in July and Kim Jong Un’s visit to Russia’s Far East region in September were believed to be part of this effort.

For the Kremlin, the benefit of going to the North Koreans is that Western sanctions have no impact on trade with Pyongyang and North Korean arms are mainly Sovietdesigned

or similar systems that will be compatible with Russian supplies. The downside, however, is that North Korea has limited weapons stocks and a narrow ability to replenish its supplies.

But it’s becoming increasingly clear that Moscow is concerned about an ammunition shortage, in part because of its own recent statements in Russian media boasting about sharp increases in defense production.

There have been reports in the Russian press that defense firms have added shifts to their production lines and increased production volumes, sometimes by as much as 10 times over previous rates.

Despite the apparent boost, Russia hasn’t seen any significant gains in Ukraine. This discrepancy reflects the fact that the war isn’t the only reason for the ramp-up in production. On some level, the war is just the impetus for the current defense development push – which has much broader, long-term objectives. On the security front, Moscow needs to protect its borders and maintain its standing as one of the biggest military powers in the world.

On the economic front, Russia’s defense industry is a network of research organizations and roughly 2,000 industrial enterprises, which are often merged into large holding companies. It employs more than 2 million people and contributes to the budget through overseas sales. Despite Western sanctions, Russia still accounts for about 16% of global arms supplies, with its top buyers being India, China, Algeria, Egypt and Vietnam.

Indeed, the Kremlin set out two decades ago to bolster its weakened but once powerful military-industrial complex, which had been in decline since the collapse of the Soviet Union and a sharp reduction in state defense orders in the early 1990s.

The war in Ukraine has certainly introduced a new sense of urgency, however. Russia has employed in Ukraine every branch of its armed forces and practically every weapon at its disposal, except of course its nuclear triad. It has, for example, deployed for the first time MiG-31K fighterinterceptors, which carry hypersonic airlaunched ballistic missiles.

At the end of 2022, Shoigu announced a 50% increase in funding for state defense orders in 2023. Russia also last year began mass production of a whole line of products, including the Tornado-S multiple-launch rocket systems and the S-500 Prometheus anti-aircraft missile system. In March, President Vladimir Putin said Russia would produce three times more ammunition than the West will give to Kyiv.

To maintain its position on the international arms market, Moscow also needs to be able to fulfill existing contracts and accept new orders, which it has continued to do throughout the Ukraine war.

At an expo this year called the Army Forum, Russia’s Rosoboronexport signed several arms export contracts worth about $600 million.

The boost has ultimately helped offset downturns in other industries, brought on by Western sanctions and isolation efforts. Indeed, thanks in large part to growth in the defense sector, Russia’s manufacturing

industry declined by just 0.7% in 2022, according to Bloomberg. It’s expected to grow by 2% in 2023, again due to gains in the defense industry.

But supplying Russia’s war machine in Ukraine isn’t just about producing more. It’s also about developing modern, effective weapons that will help Russia sustain the fight for as long as possible and defend the homeland in the long term. While it appears to have sufficient raw materials to supply the current level of production, its capacity for further expansion and development of more advanced weapons systems is questionable. This will require substantial modernization, restructuring and replacement of imports that are no longer accessible due to the Western sanctions regime. So far at least, Moscow hasn’t been able to achieve these goals.

This is in part an issue of financing. In its draft 2024 federal budget, Moscow plans to spend more on national defense than any other category – 10.7 trillion rubles ($112 billion), equivalent to 29.3% of the total budget and 6% of gross domestic product. But the boost will come at the expense of support for other key expenditures.

Spending will be the lowest on the national economy since 2007 and on social policy since 2011. The Kremlin can divert funds from its economy and social spending for only so long. And considering the state of the Russian economy, it’s unlikely that organic economic growth will be able to support the substantial investments that are required to modernize and restructure a defense industry like Russia’s.

It’s also an issue of technology. Russia’s technological self-reliance remains limited, despite the fact that there has been a push within Russia for two decades to achieve selfsufficiency, including by using only domestic materials and components in defense production. The opening up of Russia’s economy following the Cold War led to increasing use of high-tech goods from other nations and, in turn, dependence on foreign technologies. Russian industry relies on imports for about 40% of inputs, and certain sectors, including the automotive industry and pharmaceuticals, are still highly dependent on foreign goods.

The Kremlin doesn’t release official figures on the defense industry’s import dependency, but more than 800 types of Russian military equipment use U.S. and European parts. In addition, the severance of relations with Ukraine in 2014 was a serious blow to the industry, considering that until then some of Russia’s ship and plane engines, as well as other aviation equipment, were produced by Ukrainian firms.

Without access to Western technology, producing advanced, effective weapons will be exceedingly difficult. Officials have repeatedly stressed that Russia has arms but not enough modern weapons.

So far, it has developed upgraded versions of the Ka-52M helicopter, BTR-82AM armored personnel carriers and T-80 and T-72 main battle tanks. It still has a couple of avenues through which it could access critical technology, including parallel imports and its few remaining foreign partners, including China, which a recent U.S. intelligence report accused of “probably” supplying Moscow with key dual-use technologies like drones and fighter jet parts.

According to a report released by Russia’s Ministry of Education and Science, achieving technological sovereignty by 2030 would require a 45% increase in funding for R&D. The report also says a transition to innovation-oriented economic growth requires a doubling in innovation activity in industry and other areas, with a 50% increase in associated costs. By 2030, the number of innovative goods and services and patent applications should roughly double.

In 2022, however, patent applications actually declined, though increased filings were seen in some high-tech areas, including aircraft (2.1%), iron production and processing (6.4%), and computer programs, databases and integrated circuit topologies (16.3%).

Another major hurdle for Russian innovation is personnel. Qualified workers are in short supply in the defense industry. According to the Ministry of Industry and Trade, in 2023, more than 16,000 highly qualified workers were needed for manufacturing of the most popular weapons and equipment.

Russia’s defense industry has made progress in ramping up production. In July, the country’s minister of industry and trade said more munitions were being delivered in one month than all of last year.

But import substitution takes time, and the Kremlin wants to avoid investing in high-tech products that may not have sufficient demand to warrant the cost. Thus, it has implemented changes slowly, prioritizing development of a sustainable defense industry that will remain competitive after the Ukraine conflict is over.

The question remains, however, whether it will be able to supply its defense needs outside of Ukraine and whether it can continue to innovate if the war continues to drain its financial and human resources.