On 27 March 2016, Kommersant published an article claiming that Russia’s military action in Syria is likely to lead to windfall sales of military equipment. The article claims that Russian can expect upwards of $6-$7 billion in new arms contracts this year as a result of what some have referred to as Russia’s “advertising” campaign in Syria.
While these numbers are indeed impressive, especially in the weak economic environment in which the Kremlin currently finds itself, the fact is that most Russians will never see a kopek of the money earned from these sales and, if the current trajectory continues, the average Russian’s life will only continue to worsen. Those Russians may be proud from the news reports, but pride doesn’t bring home much bacon.
First off, is it possible to believe the numbers as reported by the Kremlin? Putin claims the Syria operation only cost Russia about $464 million, though many analysts believe that the real number is somewhere between $1 billion and $1.5 billion. Second, the reported contracts remain potential, to a degree. It is likely that Russia will sell much more than it did last year, though $7 billion may be a bit of a stretch.
This isn’t to say that the Kremlin isn’t telling the truth that its potential arms sales contracts far outweigh the amount spent on the Syria campaign. Rather, it’s to say that the gap between expenditures and potential sales is likely more narrow than officially presented. That being said, the difference, at least in terms of national economies, is probably only a few billion dollars, so the real impact of the difference is likely negligible.
Many Russians tend to believe that arms exports are a linchpin of the Russian economy, when, in reality, in 2015 those exports only accounted for approximately $15 billion out of the total $1.24 trillion GDP, a mere 1.21%. If we assume that the government does reach a full $7 billion in sales in 2016, for a total of $22 billion in sales, that will still only equal approximately $1.87% of the projected $1.179 trillion total GDP. Granted, the weaker ruble will certainly help, but the aggregate effects will remain limited.
Furthermore, some of the sales are contract renewals by the Kremlin itself, so the state will be able to recoup some of its expenditures via tax revenue, but the state will ultimately lose some money from the purchases.
Second, will these arms sales really help the Russian economy? At an approximate increase of 0.6% of total GDP (even if GDP is smaller and that 0.6% equals more in absolute dollar terms), an increase of $7 billion dollars isn’t going to go very far . It is true that the Kremlin needs as much cash as it can get, but what can $7 billion increase really do?
Of course, the scope of the article is too small to discuss the potential effects of corruption, the loss of weapons components from eastern Ukraine, and a potential manufacturing backlog, such as backlog of military contracts at Sevmash and other warship production facilities.
First of all, the Kremlin will only see a portion of that money via tax revenue - the government will not receive that money directly and will only receive what it can via taxes. Even in a perfect world where the government would receive all $22 billion, that’s still a drop in the bucket for a country the size of Russia. The government is also unlikely to invest all of the money that it receives in one place, meaning that each individual sector will only receive fractions of the total amount. It is hard to believe that health care, education, infrastructure maintenance, and the pension fund will receive enough money for meaningful effect. Whereas a single sector could benefit greatly, dividing across multiple sectors will not boost the economy much on the whole.
Second, the companies that produce the weapons will undoubtedly see increased profits, which will theoretically translate to higher wages for regular employees and even higher employment rates due to hiring temporary employees. This should see a boost in consumer spending in the cities which have the factories which produce the weapons as well as a slight boost in tax revenue from higher incomes, although this boost may be negligible, especially with Prime Minister Medvedev’s recent announcement that Russia would not raise taxes in 2016. The effects of increased consumer spending will be limited, however, to small pockets around the country, and many in Russia will probably continue sliding into poverty.
Last but not least, what will these arms sales do for the average citizen? Russia has a poor history of transferring military technology to civilian sectors, which will limit future usage of any new technological developments to military functions only. A few innovations may find their way into consumers’ homes, but history does not paint an optimistic picture.
As mentioned above, if the revenue earned by the government is spent on social needs, it is unlikely that all of the money will go to one place, meaning that only fractions will reach the average citizen. Most likely, the government will take this money and reinvest it into defense spending, such as military research and development.
Perhaps the most “important” aspect of these announcements is that Russia can present these new contracts as yet another victory over the West to Russian citizens. Russian weapons systems are often cheaper and some countries now have a new alternative provider for their military hardware needs. Some Western manufacturers will see this as a defeat, but, then again, that’s how competition works - you win some, you lose some.
But the average Russian will still be proud. Russian weapons will finally take market share away from American weapons! It’s just too bad that fighter jets and missiles don’t provide medication, education, and food.
Blake Holley holds a Masters in Governance and Global Affairs from the Moscow State Institute of International Relations (MGIMO) and currently works as an intelligence analyst and specialist on Eurasian security issues based in Atlanta, Georgia. His primary focus is on North Caucasus terrorism and strategic forecasting.
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