The Foreign And Domestic Forces That Keep Russia's Military-Industrial Complex Turning

Budget subterfuge

That money will be directed to organizations promoting Russian state ideology to schoolchildren, including one organization working in occupied Ukrainian territory.

Through economic support programs, over $2.1 trillion will be allocated to the budget of the Russian Federation for Roscosmos, which is part of the Russian military industry. The company produces military satellites and supports GLONASS, the Russian satellite navigation system, which is used to guide missiles, and also has its own armed forces.

Local budgets throughout Russia were also partly allocated to social spending on the military. Part of social costs, for example, monthly pensions for disabled veterans, will be paid from the All-Russian Social Fund, which is sponsored by the state.

This is not an exhaustive list of military expenses for which funds were found in the Russian budget. More money has been mobilized from the accounts of private and state companies. A BBC investigation revealed that state-owned Gazprom recruited employees for the war and has already formed several units. Roscosmos is also recruiting employees to its own battalion.

The Akhmad Kadyrov Foundation, which equips Chechen volunteer groups, is financed by levies from businesses. Local businesses also support a private military company operated by the head of occupied Crimea, Serhii Aksyonov.

Raising taxes

An increase in military spending should lead to significant cuts in other programs and destabilization of the economy, but so far Moscow seems to have managed to avoid this.

To cover military needs, tax officials have begun to “shake” businesses harder.

Although federal budget expenditures exceed revenues, the deficit is still not critical. The National Welfare Fund (NWF) has stepped in to fill some of the gap. Its accounts contain $147 billion, which the Kremlin has collected from oil revenues in recent years.

The Russian government is raising additional money by borrowing rubles from its own citizens and banks, and by increasing business taxes.

In 2022, the Kremlin increased the tax on mineral extraction. The 2023 budget includes an additional almost $11.7 billion revenue just from coal, oil and gas companies.

The Ministry of Finance also plans to make a "one-time collection" from the profits of private companies, which will bring $3.2 billion to the budget. Authorities will also increase the excise tax on tobacco products.

To cover military needs, tax officials have begun to “shake” businesses harder, and the number of tax audits has increased by 80% since 2021.

The tax hysteria also affected Western companies that still remain in Russia. Authorities accuse the French companies Auchan, Leroy Merlin and Decathlon of tax evasion, and are preparing inspections. About a thousand Western companies remain in Russia, generating tens of billions of dollars in revenue and paying taxes to the federal budget, which allocates more and more money to war and less and less to social programs and development.

The proposals for the 11th package of sanctions of the European Union included the idea of stimulating the exit of Western companies from the Russian market, but it did not receive sufficient support.

Another source of funding from the West for Russia’s military budget is ordinary trade. The sanctions regime allows Russian companies to sell certain goods to the U.S., EU and UK and increase profits.

In 2022, Russia received over €20 billion from the sale of metals and diamonds to Western countries alone, and continues to make money, because these goods did not fall under the ban.

A leaky embargo

Finding several trillion dollars is only half the battle. To wage war, Russia needs access to Western electronics, without which it cannot produce modern missiles, planes, drones, radar and tanks.

In 2022, Western countries failed to block Russia's access to its technological components. There are still ways to bypass the embargo, which are enough to produce some equipment.

The first method is legal: Russians are able to get some electronics by disassembling household appliances. Ukrainians have already found parts from refrigerators and industrial equipment in Russian tanks.

The second method is semi-legal. Deliveries to Russia take place through neutral countries. The export of semiconductors to Russia from Turkey, Armenia, Kyrgyzstan, Kazakhstan and Serbia increased tenfold – but none of these countries produce microchips.

It is difficult to control the resale of critical components, because it is impossible to determine the end user. Moreover, depending on the level of technology control, the Russians mask their tracks in every way.

Ukrainian Strategy XXI center and the Institute of Black Sea Strategic Studies tracked how EU citizens with Russian surnames created a company in Switzerland, re-registered it in Silicon Valley, and then founded a joint venture with the defense company in the UAE.

If you cut off one head, three will grow in its place.

The new enterprise develops drones and anti-drone technologies. In this way, the top management of the company with Russian and Belarusian roots got legal access to critical components from Western countries and a theoretical opportunity to send them to Russia via the UAE.

As a last resort, there is an illegal way. Since 2012, dozens of high-profile trials of Russian agents involved in the smuggling of tens of millions of dollars worth of goods for the Russian military industry have taken place in the U.S.

One network controlled by the FSB, the Russian state security agency, exported 22 tons of German equipment, while another shipped microprocessors for satellites and missiles to Russia through intermediary companies in Germany and the UAE.

Smugglers were also caught in Estonia trying to smuggle 20 boxes of American cartridges for sniper rifles – and these are just some of the high-profile cases in 2022. What to do with it is a big question.

"Introduction of sanctions against individual companies leads to the effect of a Gorgon: if you cut off one head, three will grow in its place. Shell companies appear in droves every day, and the space for such activity cannot be closed. The idea of white and black lists of companies with which operations can or cannot be conducted will not work either. Only a complete ban on the export and re-export of these goods to Russia will have an effect," Olena Yurchenko, adviser to the Economic Security Council of Ukraine, told Ukrainian publication Ukrainska Pravda.

Vladyslav Vlasyuk, advisor to the Ukrainian President's Office, explained that because lists of dual-use goods in the EU and the U.S. are different, goods prohibited in the U.S. may be legal for export from the EU, and vice-versa.

High-tech aid

Sanctions have made it more difficult and expensive for Russia to produce military equipment. Still, data from Ukraine’s Ministry of Defense indicate that during a year of war, Russia was able to produce more than 500 cruise missiles.

"Russians need Western technologies mostly for high-precision weapons and equipment. For more primitive weapons or defense equipment, Russia has always had a full production cycle," said Archil Tsintsadze, a defense expert who served as Georgia’s military attaché to the U.S.

In the first quarter of 2023, the production of binoculars, monoculars and other optical devices in Russia increased by 73% compared to the same period in 2022.

The production of radar, radio navigation products, remote control equipment, computers, electric motors, generators, batteries, special clothing and footwear increased by 40-110%.

This may indicate the replacement of products previously imported from Western countries, and an increase in production for the army. Other indicators also point to growth of military production. For example, the plant for the production of drones in Dubna increased to three shifts, and the Smolensk Aviation Plant, which produces cruise missiles, plans to increase the number of employees from 2,000 to 4,300.

Legalized smuggling

Meanwhile, some Western companies are helping the Russian military industry. An investigation by Insider revealed that German companies Jakob KECK Chemie GmbH and Salamander SPS GmbH and Italian company Tacchificio Campliglionese supply goods for the production of military boots to the Russian company Donobuv.

Italian company Minelli Carmello supplied machines for the production of body armor, and the French company Marchante provided equipment for the Kurganpribor company, which produces detonators for rocket artillery.

Sanctions and war are draining the Russian economy, but only in the long run.

Western firms have often taken advantage of the fact that many Russian military enterprises did not fall under sanctions.

For example, the French company Radiall SA supplied components for Roscosmos because the main contractor was under American sanctions, but not under European ones. This problem is still relevant.

Japan, Australia, New Zealand, Canada and the UK also have shortcomings in their sanctions policy against Russian enterprises.

A sudden increase in the activity of defense factories will not only arm Russia, but also support the Russian economy during the downturn – but only temporarily.

"Statistics in this case are deceiving. On the one hand, the Russian economy is creating jobs and GDP in the defense sector. On the other hand, industries that could make real profits are losing money and workers. The military industry mostly spends budget funds instead of generating new ones. During the Cold War, high military costs became one of the reasons for slowing down the development of the USSR and its disintegration," Gonchar said.

So, sanctions and war are draining the Russian economy, but only in the long run.

In order to prevent Russian missiles from attacking Ukrainian cities at one of the decisive moments of the war, it is necessary to hit the revenues harder and cut off the helping hand from Russia-friendly countries and companies, which are still numerous even in the EU and the United States.