Pyotr Butrin
Prime Minister Vladimir Putin said yesterday that he might reschedule budgeted defence spending. Although the state defence order for 2009 (1 trillion roubles) was left unchanged, both the Prime Minister and Deputy Prime Minister Alexei Kudrin said money could be re-directed from low-priority defence spending items to key defence projects. In addition, the White House, which has failed to make banks issue more loans to industry, is planning non-bank lending for the defence sector and the Central Bank's "special refinancing rates" for defence-friendly banks.
Yesterday, Mr Putin chaired a meeting on state support for the defence industry. Attending on behalf of the Government were Deputy Prime Ministers Sergei Ivanov, Igor Sechin and Alexei Kudrin, Economics Minister Elvira Nabiullina, and Central Bank Chairman Sergei Ignatyev. To give more emphasis to the event, it was held at a Tactical Missile Weapons Corporation plant in Korolev, outside Moscow. The corporation's General Director, Boris Obnosov, told those present that in 2008, 80% of the plant's output was exported, while in 2009 the same percentage would be devoted to fulfilling the state defence order.
Mr Obnosov supported the suggestion made by Deputy Prime Minister Sergei Ivanov at a January 11 meeting with President Dmitry Medvedev that the federal budget subsidise the defence sector's contribution to special federal programmes. As a true lobbyist, Mr Obnosov went even further: he also suggested a re-introduction of profit tax exemption for investments, a property and land tax holiday, and a cut in loan interest rates to Western levels.
Some of the corporation's proposals have already been adopted (the Korolev meeting discussed interest rate subsidies for the defence sector - they will now amount to 100% in some cases - and there will also be state loan guarantees and an express refund of export VAT), but the participants made no secret of their misgivings: the situation in machining and engineering, of which the defence industry is a part, could be remedied only by a miracle or a massive injection of state funds through a defence order.
Although Deputy Prime Minister Alexei Kudrin said that the Government would revise the budget in February (he did not even rule out state budget co-financing of special defence programmes), there would be no growth in state spending. Any specific expenses could be increased "only by distributing funds among existing programmes". Mr Putin said the same. "It is necessary to optimise the special federal programmes and re-channel the funds thus released into the completion of projects critical for the improvement of technological standards in the defence sector," he explained.
Mr Putin strongly hinted that re-allocation of funds from weaker to stronger defence companies would be a way of keeping the industry on its feet. He said that under-achieving managers should be sacked and that he did not very much like an Industry and Trade Ministry recommendation to compensate the defence sector for some of the losses it suffered in fulfilling the state order. The Prime Minister encouraged further efforts to build up large defence holdings. "They should be made really competitive," he advised. To do so, the Prime Minister proposed that the companies invest, rather than pay out, 2008 dividends. Where budget aid was concerned, Mr Putin said it should be limited to sums already approved by the Government, namely: 1 trillion roubles for the 2009 state defence order, 100 billion roubles in state loan guarantees and 50 billion roubles in interest rate subsidies.
Unlike the commission led by First Deputy Prime Minister Igor Shuvalov that monitors 294 strategic companies, the White House has not yet come up with a similar list for the defence sector. Perhaps the selection is already under way, and plants not qualifying for the list might fall victim to the re-allocation of budget funds.
In terms of loan availability, all defence companies are now more or less in the same position: loan rates are high for all of them. Mr Putin said yesterday that the White House might use direct budget loans for the defence complex, bypassing all banks. The Central Bank was asked to assess the use of export contracts as loan collateral. In the meantime, the White House considers loan subsidies issued through banks.
Direct loans, however, could create a dangerous precedent (similar initiatives are planned, according to Kommersant, by the Industry and Trade Ministry for "priority investment projects" in 14 branches, including the Eastern Siberia-Pacific Ocean pipeline). Now the Government is prepared to create another precedent - this time in banking. According to Mr Putin, banks lending money to the defence sector could obtain refinancing and loans at Central Bank auctions at lower rates than their rivals.
"True, this is slightly out of tune with competition requirements," the Prime Minister said, "but these rules are observed in normal conditions, while in the midst of a crisis [...] we must give priority to key industries," he said.
There is no doubt that the "special refinancing rate" will be popular far outside the defence industry sector.