Performance of the military industrial complex in 2018: the problems remained behind the scenes

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On February 7, 2019 a meeting of the Board of the State Military and Industrial Committee of Belarus (SMIC) on the results of performance in 2018 was held. In the public part of the event SMIC enterprises and organizations preferred to demonstrate achievements and talk about victories. Fortunately, there is something to show and what to boast of. But the devil, as usual, is in the details. Let’s elaborate on them.

Financial performance of SMIC. It is worth noting that the performance of the national military industry as a whole were not voiced, the SMIC just assessed the results of its own activities.

At the end of 2018, for the first time, SMIC overcame the level of USD 1 billion USD (1.027 billion) for the export of goods and services. The volume of industrial production grew by 2.2% last year, the volume of exports — by 7.3%. Profitability of sales in industry amounted to 20.4%, and in the whole SMIC system — to 23.6%.

It is necessary to recall that by the end of 2017, exports of military products and services in the industry as a whole exceeded USD 1 billion. And far from all enterprises of the military industry are included in the SMIC system. But taking into account the fact that SMIC exercises export control on deliveries of military products, it is possible by simple means to calculate the share of SMIC in exports of Belarusian military-industrial complex — over 94%. Thus, the total exports of products and services in the industry as a whole may approach USD 1.1 billion.

At first glance, everything looks not just good, but very good. But the look and the real state is not always the same. Let us dwell on the known data on the dynamics of growth of Belarusian military industrial complex and the structure of sales markets.

Dynamics of growth. In 2018 industrial output grew by 2.2%, export volume — by 7.3%.

In 2017, industrial organizations of the SMIC system produced industrial products (works, services) for 128.4% of the amount in 2016. Exports of military products by the industry as a whole in 2017 amounted to 115% compared to 2016. The growth rate of exports of goods and services of SMIC organizations was 110.6% compared to the amount of 2016.

In 2016, industrial production increased by 1.5 times compared with 2015. But it is not clear, whether these are data on the national military industrial complex as a whole or, more likely, only on SMIC organizations.

It is worth noting that SMIC doesn’t like to publish even the generalized data. Often there are indicators for certain periods of the calendar year, but not always — annual data.

Therefore, the picture is generally incomplete, many (and often most) parts of the puzzle are lacking. Nevertheless, the trend of growth attenuation over the past three years is evident. It is worth noting that in the same three years, SMIC was managed by three different heads. There is hardly any direct connection, just an interesting coincidence.

It is a big issue that the main share of SMIC industrial production (about 75%) is provided by 5 large companies (with the first two producing at least 60% of products), which have a narrow specialization and operate on highly competitive arms market segments.

Export geography. During the February board meeting it was stated that the geography of exports of Belarusian military-industrial complex is balanced: approximately 1/3 of exports fall on Russia, the CIS countries and far-abroad countries. This allows Belarusian military industrial complex to feel quite stable and not to depend on the situation in separate countries. At the same time, the SMIC head Raman Halouchanka stated that the peak of product supplies to Russia had already been passed. But what did the Belarusian military industrial complex see after the Russian peak: a plateau or a steep slope?

Russia traditionally acts as a major consumer of Belarusian military industry. The reliable volume of exports to this country is unknown, but unofficially, according to the results of 2015, Russian experts mentioned the amount of USD 500 million. Thus, over the past three years, exports of military products and services to Russia decreased by no less than 40%. Which is quite an optimistic assessment.

The fact is that exports consist of 5 groups of operations: trade in new goods, services for repair and modernization of customer’s equipment, trade in services, trade in goods from stocks, intermediary operations. On October 29, 2018 the SMIC Collegium on the performance for the first 9 months of 2018 was held. The SMIC organizations produced industrial products amounting to about USD 405 million, which amounted to 102% over the same period last year. It is unlikely that Belarusian military industry produced more products in the last quarter of last year than in the first three quarters. Therefore, an assessment of industrial production of SMIC enterprises at USD 600 million seems close to the possible maximum output for 2018. It is worth recalling that in Belarus, industrial production includes not only the manufacture of new products, but also the overhaul and modernization of old equipment. At the same time, a part of industrial production is absorbed by the domestic market.

This means that:

— Belarusian military industry has already lost half of the Russian market of military products from the peak supply volumes;

— half of the export of SMIC is provided by the export of services (largely due to the Belintersat satellite communication system), intermediary activities (export of products of non-Belarussian origin) and sales of equipment from stocks.

In this regard, it is also clear that the diversification of export markets has been among the priorities of Belarusian military industry in recent years. SMIC had to take the emergency measures to prevent some of its enterprises from bankruptcy. In this case, according to the assessment of SMIC itself, the fact that the situation is not worsening is already a positive achievement.

Further, speaking of exports to the CIS countries, it should be recognized that basically we are talking about Azerbaijan. Moreover, there is a steady impression that according to the results of 2018, Azerbaijan became the number one market for the Belarusian military industrial complex and Russia fell to the second position. However, this situation will not continue indefinitely and exports to Azerbaijan will begin to decline as Baku’s requests, which are significant but not unlimited, are met.

The need for money. It is worth noting that the SMIC head Raman Halouchanka, commenting on the results of performance in 2018, didn’t take on increased obligations for new export achievements. The main task is to keep the achieved results. Which will be very difficult.

The assessment of the situation in Belarusian military industry on the part of the country’s top leadership is nothing but surprise. Aliaksandr Lukashenka already enthusiastically demands from SMIC to double the financial results of the activity. MIC is regarded as a hen that lays golden eggs. But at the same time kind of a hen one doesn’t need to feed.

The inadequate assessment of the possibilities and the existing potential of Belarusian military industrial complex by the political leadership may create more significant problems than the market situation. For example, if the Belarusian ruler does not see either USD 2 billion of exports or a home-made combat UAV with a payload of a ton or more. According to the good old tradition, there will be a search for the guilty of not fulfilling the expectations of the ruler at first in the SMIC management, then in the enterprises subordinate to it. Which only disorganizes the industry.

Conclusions. Two key challenges for the Belarusian military industrial complex will remain on the list of priority tasks for a long time.

Firstly, the development of the new products. It is obvious that the potential of the existing base is close to exhaustion. One or two breakthrough projects (such as MLRS “Polonaise” or “Belintersat”) are not able to provide long-term sustainable prospects for the entire military industry. We need a really serious qualitative breakthrough. Here the government could help, directing resources from supporting ineffective state-owned enterprises of the civil industry to the developing companies of the national military-industrial complex.

Secondly, export diversification. Of course, Russia will remain a major consumer of Belarusian defense products for the foreseeable future. But it will not be the driver of growth in the industry. Even to maintain current performance, more and more new consumers are required: military equipment has a long service life, during which, however, you can earn money on service and modernization. There are certain plans for the Kazakh market, the markets of the Arabian monarchies, Egypt, Vietnam, Myanmar, Pakistan. But this is not an easy task, given the high competition in the arms market.

The country’s political leadership should show more realism and not set goals unattainable in the current conditions. It is time to understand that the financial performance of exports is only an external manifestation of the result, and not the result of the work of the national military industry. The main achievement of the national military industry is that new technologies are being developed and mastered, the range of products is constantly becoming more complex. Scientific and engineering schools (by the way, with minimal state support) are created specially for this. In conditions when the civilian industry of the last 20 years mainly degrades and loses its competence (just look at the change in the structure of exports), Belarusian military industrial complex really develops and increases its potential. Moreover, almost without financial investments from the budget.

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