Military industry of Belarus: deep drawdown

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The national defence industry is going through hard times. The situation is so bad, that they prefer not to talk about it officially.

On February 1, 2021 State Military Industry Committee (SMIC) summed up its performance in 2020. As usual for such events, many numbers were announced. Many, but not all of them: for the second year in a row, SMIC refrains from announcing export indicators and, traditionally, the volume of industrial production of defence products.

Achievements are rarely hidden. As well as facts of stable activity. Hence one can make a disappointing conclusion: the crisis has seriously affected the military-industrial complex of Belarus. But how serious it is?

It is impossible to get an exact answer to this question from open data. But the scale of the problems can be somehow assessed.

In order to do this, we will take into consideration several indicators (openly published):

— 10 organizations out of 25 that are part of SMIC participated in the implementation of the State Defence Order in 2020;

— 83% of SMIC organizations carry out research and development;

— 78% of SMIC industrial organizations are innovative;

— 37% of SMIC organizations’ employees belong to the category of scientific and technical personnel.

Further, by the end of 2020, the net profit of SMIC organizations amounted to BYN 270.6 million. The profitability of sales reached 16.8%. The growth rate of employees’ wages amounted to 106.2% compared to the level of 2019. In 2020, SMIC organizations used BYN 74.2 million investments in fixed assets.

In relation to the size of the net profit, the investments do not even reach 30%. So, here the following question arises: where are the profits received by the state-controlled enterprises of the military-industrial complex (the majority of SMIC organizations are owned by the state)?

The growth rate of wages is lower than the inflation rate in Belarus for 2020. Which means that for the first time in a long time, wages in the defence industry began to decline in real terms. It is worth recalling that as of October 1, 2020, 21.1% of the wages fund of SMIC organizations was provided by loans: every fifth BYN of paid wages was borrowed. In March 2020, the volume of the salary fund, provided by loans, amounted to 6.6%. If it were not for credit resources, the wage drawdown in the defence industry would have happened even in nominal terms.

Further, knowing the amount of net profit and profitability, you can determine the maximum amount of revenue from the main activity. Why the maximum? Because:

— In Belarus, in addition to the general income tax rate of 18%, there is also a preferential taxation system. For example, some enterprises producing innovative products are subject to a corporate tax rate of 12%. There are also tax preferences for enterprises operating in special territories. Therefore, the real average income tax rate for SMIC system is below 18%. But it is impossible to say how low it is. So we will proceed from the assumption that military-industrial complex enterprises bear the maximum tax burden.

— Some other taxes and fees are paid from the profit, some of taxes is paid according to certain privileges;

— Profit is obtained not only due to the main activity. Sale of unused property, royalties, etc. income is also taxed. But it is impossible for an outside observer to determine the scale of such income.

Thus, based on the fact that all profits by SMIC enterprises are formed at the expense of their core activities and are taxed at the maximum income tax rate, neglecting other taxes and fees on profits (taking into account their insignificance and the fact that they are compensated for by tax incentives), we can put forward a hypothesis on the maximum amount of SMIC’s revenue for 2020 in the amount of BYN 1.964 billion, i.e. about USD 806.7 million.

It is worth recalling that SMIC enterprises are not the entire military-industrial complex of Belarus. But in past years they generated about 94% of exports. In 2018, the export of SMIC enterprises amounted to USD 1.027 billion, while the total export of defence products reached USD 1.1 billion. After 2018, export figures were not reported, i.e. most likely they began to fall.

However, in addition to export supplies, there is also a domestic market for defence products and services (including R&D). According to optimistic estimates, we are talking about an amount of up to USD 200 million.

Thus, the total revenue of military-industrial complex enterprises of all forms did not exceed USD 1.3 billion in 2018. Which means that in 2020 the revenue decreased by at least 30% in comparison with 2018 (provided that the military-industrial enterprises outside SMIC system retained the same revenue volumes, which is too optimistic).

The defence industry revenue consists of 4 groups of operations: the sale of industrial products, services excluding those included in the industrial production indicators, the sale of surplus military goods, and intermediary operations.

The problem is that accurate annual data for any of these indicators there has never been published. It can be assumed with a high degree of confidence that the maximum volumes of industrial production of defence products amounted to USD 600 million in the military-industrial complex as a whole. Which is up to half of the proceeds. The rest is various kinds of services (mostly intermediary ones). Most likely, the drawdown occurred in all spheres. But it hit the producers hardest of all because of the specifics of costs and the scale of employment at industrial military-industrial complex enterprises. This is evidenced by the share of loan resources in the wages fund.

Officially, the SMIC management explains the difficulties with the situation in foreign markets. But this explanation is inappropriate: defence spending, despite the Chinese coronavirus pandemic, continued to grow in 2020.

After 2017, there was a decline in the growth rates of both exports and industrial production of the Belarusian military-industrial complex. The problems are: the high concentration of production, an insufficient range of products and the dependence of the volume of revenue on several large customers. In order to overcome these vulnerabilities investment is needed. But as we saw above, money is rather withdrawn from the military-industrial complex in larger volumes than is invested there.