The Russian Military-Industrial Complex and the Dark Trail of Western Money

​The recent Russian invasion of Ukraine has recast Western perceptions of Russia and its president Vladimir Putin.  History now scrutinizes past Western investments in Russia as the West implements draconian sanctions to dissuade Russia from further warfare.  Of course, people in the West have long understood enterprises such as McDonalds and Starbucks.  What is murkier is Western investment in Russia’s defense industry.  Through a complex confluence of bond purchases, stock sales, joint ventures, and licensing of weapons manufacturing, Russia has been able to bolster its defense capabilities with outside money.  Much of that has come from firms headquartered in nominally liberal Western democracies.

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In the 1990s, after the collapse of the Soviet Union, the Russian government transferred most assets to private companies.  In the transition from a centralized command economy to private commerce, innovation and value chains disintegrated, and the output of the manufacturing sector, in particular its high-tech branches, cavitated.  
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This signaled the restoration of a state-controlled command economy led by state-owned companies.  For the last 15 years, under Vladimir Putin-led ‘state capitalism,’ Russian state-owned corporations have had the responsibility for manufacturing in Russia.  Roughly contemporaneously, the Russian government formed a military-industrial conglomerate called Rostechnologii (Rostec), including the state arms exporter, Rosobnoronexport, 450 other entities, and 180 state corporations.  Most of these operated in the defense, machine building, aviation, auto manufacturing, and metallurgy sectors.  Rostec’s portfolio now comprises over 800 subsidiaries. 

Russian MiG-35

The president of the Russian Federation appoints Rostec’s CEO, so the organization is under the direct oversight of Putin.  Rostec is larger than similar international corporations like Airbus, Boeing, General Electric, and Samsung.  The corporation’s annual arms exports total about $13 billion, up to 70% of Rostec’s revenue.  

With its fighter jets and helicopters, the aviation sector represents the majority share.  Russia consolidated its shipyards into the United Shipbuilding Corporation and its aircraft industry (such as the MiG, Sukhoi, and Tupolev companies) into the United Aircraft Corporation, later incorporated under Rostec.

Rostec generates revenues of between $21 to 25 billion annually from government contracts, military equipment exports, raw materials, and state subsidies.  In addition, periodic Rostec subsidiary joint-stock companies issue stock to provide additional financing.

Russia is now the world’s second-largest arms exporter, behind the United States.  Russia exports arms to over 45 countries and has a 20% share of global arms sales since 2016.  Some of Russia’s arms clients back to the Soviet Union days.  

Five countries buy most Russian arms exports: Algeria, China, Egypt, India, and Vietnam, with India being the largest importer of Russian weapons since 2016.  Russia is attempting to broaden its client base and aggressively pursues new markets in the Middle East, Asia, and Africa.
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Russia exports military aircraft, air defense systems, naval vessels and submarines, radars, missiles, tanks, armored vehicles, small arms, and artillery.  Aircraft make up 50% of Russian arms exports.  Russia’s main sales pitch is that their weapons are less expensive to capitalize and more reliable because they are simpler and cheaper to maintain.

Indian Su-30

In 2019, Russia and India launched a dedicated joint venture, Indo-Russian Rifles Private Limited, to mass-produce AK-203 assault rifles in northern India.  In addition, in mid-2020, India’s Defense Research and Development Organization signed a technology development contract to develop rocket ignition systems, rockets, and missiles.  India and Russia jointly manufacture the BrahMos missile system, and India builds the Sukhoi Su-30MKI aircraft and T-90 tanks under license. 
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India and Russia assemble the Ka-226T light-weight multipurpose helicopter, designed by Rostec subsidiary Russian Helicopters, under license to India.  India and Russia had a joint development program of the Sukhoi Su-57 military aircraft.  However, India terminated the relationship ostensibly because Russia refused to share software and computer codes to operate the military aircraft.

​The Ural Works of Civil Aviation is a subsidiary of Rostec and supplies helicopter engines and drones for the Russian military.  Diamond Aircraft Industries (DAI) is an Austrian-based manufacturer of composite aircraft.  The two operate a light aircraft manufacturing facility in Yekaterinburg (Ural) to provide aircraft for Russian civil aviation.  

Ural Boeing Titanium Plant

The Boeing Company (Boeing) created a titanium production joint venture with Rostec to provide the metal for the Boeing 787 Dreamliner, the 737 Next Generation, and the 737 MAX.  The Ural Boeing Manufacturing is located about 1,100 kilometers east of Moscow in a region of the Ural Mountains called the Titanium Valley.  

​The Boeing Commercial Airplanes chief Stan Deal said the Russian company had been a ‘reliable and valuable partner’ for nearly a quarter of a century.  Boeing determined the long-term contracts would meet about 35% of Boeing Commercial Airplanes’ need for titanium.  But, of course, the Russian military also uses titanium as a raw material for its defense industry, so Boeing’s support helped the Russian military develop capacity.

​France's Safran SA, one of Europe's biggest aerospace firms, produces the engines, landing gear, and engine covers for the Sukhoi Superjet 100, a regional passenger jet, as part of a joint venture with UEC NPO Saturn, a Rostec subsidiary.  Safran also has 24 plants with over 8,000 employees in America and is a major military supplier to every branch of the United States military.  As a result, the Russian military benefited from the profits of these enterprises and technology transfer and manufacturing ability and knowledge.

Leonardo is an Italian multinational technology and defense firm with 7,000 employees in the United States.  Leonardo DRS is a United States defense contractor and operates in Russia with a joint venture called HeliVert in the Moscow suburb of Tomilino has led to the creation of the AW-139 multipurpose helicopter. 

​HeliVert is a joint venture between Leonardo and two companies controlled by the Russian government - Russian Helicopters and Rosneft, with each Russian business owning a 30% stake in the venture.  Russian Helicopters, a subsidiary of Rostec, mainly manufactures heavy helicopters for the Russian military, and Rosneft is a Russian energy company.

Vladimir Putin

Novikombank is the core financial institution for Rostec, as it is a subsidiary.  In addition, Novikombank assists in various fundraising activities for its parent and subsidiaries, issuing bonds and stock shares.  The participation of Western investors is unknown, but one is inclined to speculate that wealthy investors, hungry for returns on stale capital, have significant investments in these enterprises, thereby helping to fund the Russian military-industrial complex efforts.

Western financial firms are still promoting investments in Russia, despite sanctions and the resultant uncertainty after the Russian invasion of Ukraine.  For example, in early March 2022, after the Russian invasion of Ukraine, JPMorgan Chase strategists promoted the bonds of Russian companies with significant international operations as an investment strategy.  In addition, western investors can still trade in the bonds of Russian companies that are not on the sanction list and have dollar bonds.
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Money has no flag, and the picture of Western support for the Russian military is unknown and likely unknowable.  Regardless, the situation is analogous to buying one’s murder weapon.  Western sanctions will further tighten the pipeline of goods and technology and make it much more difficult for the Russians to garner technological imports necessary to make truly advanced weapon systems comparable to American standbys.  That development presages further movement of alignment of Russia with China, if only for technical goods.  Knowing China’s stomach for strengthening a historical rival requires a crystal ball and may only be a function of its desire to hobble the United States.