BOFIT Viikkokatsaus / BOFIT Weekly 2019/44

Russia’s military industrial complex (Oboronno-promyshlennyi kompleks, OPK), which comprises over 1,300 firms, accounts for roughly 3 % of Russia’s GDP according to analysts at Promsvyazbank, which was formed specifically to provide OPK financing. The OPK revenues of 65 billion euros last year correspond roughly to 2 % of total revenues of all Russian firms and organisations. The OPK provides nearly 2 % of Russian jobs.

Nearly half of OPK revenues in 2018 came from government defence orders, while another fifth came from civilian products and about 30 % from exports of defence products. For meeting the goal set to increase the share of civilian products to 30 % by 2025 requires increased financing from company revenues and banks.

Russia’s OPK is currently quite heavily indebted, with its domestic bank debt at 2 % of GDP. OPK debts account for about 5 % of loans extended to the entire corporate sector by the domestic banking sector, but for significantly much more of the bank debt of the manufacturing sector. The ratio of bank debt to revenues in OPK is about 40 %, which is much higher than in the rest of the manufacturing industries. About 3−4 % of OPK revenues go to paying interest on bank loans.

According to deputy prime minister Yuri Borisov, who was raised to his new post last spring, about a third of OPK bank loans need to be restructured, an amount that corresponds to over 0.5 % of GDP. The situation resembles that of late 2016, when the government doled out from the federal budget in one go an amount corresponding to nearly 1 % of GDP in order to help OPK firms repay their bank loans.

OPK bank debts (including problem loans) are largely held by three big state-owned banks, i.e. Sberbank, VTB and Gazprombank. Part of their OPK loans have been transferred to Promsvyazbank, which currently holds about 20 % of OPK bank loans.

President Putin has asked all concerned to find solutions to OPK financing problems. Now the plan is to combine several approaches to deal with the problem loans. The government and creditor banks are considering the proportions to be used in combining remedies such as e.g. extensions of repayment times, recapitalisation of OPK firms with government budget funds and debt forgiveness.