The ongoing war on Ukraine and the impact of international sanctions have deepened existing weaknesses, failings, industry bottlenecks and other issues in Russia’s military-industrial complex. In this context, it is important to assess the push and pull factors affecting the OPK along the production value chain – especially how they affect the ability to sustain the war effort.
Although increased efficiency of OPK production remains an official goal of the Russian state, there are several constraining factors to contend with, including financial and economic struggles, workforce and labour market deficiencies, industrial over-concentration, and systemic problems such as corruption and poor quality control.
The ongoing war on Ukraine and the impact of international sanctions have deepened existing weaknesses, failings, industry bottlenecks and other issues in Russia’s military-industrial complex.
This reality is in sharp contrast to the regular optimistic statements published by the Kremlin that depict the OPK as the ‘most powerful in the world in terms of production volumes’ and state that the military has ‘become even stronger’ despite sanctions.
Financial and economic struggles
Defence procurement and military priorities for the armed forces are enshrined in the State Armament Programme (GPV), initially scheduled until 2027. In the context of the war, the next round of GPV will be earmarked for the period 2025–34, with discussions over its content already under way between the Ministry of Defence and the Ministry of Industry and Trade. The formation of the new GPV will undoubtedly fuel debate between those prosecuting the war in Ukraine, those enabling it from an industrial perspective and those financing it.
The OPK is in bad economic shape, and several structural factors are to blame. Even before the 2022 invasion of Ukraine, the OPK was struggling under international sanctions following the first invasion in 2014 and with the effects of the COVID-19 pandemic. Russia’s shift towards a war economy since 2022 has led to a so-called ‘military Keynesianism’, whereby the national economy is turned towards military spending, production and transfers.
The Kremlin argues this situation is only temporary and under control – President Vladimir Putin has himself warned that the Russian economy should not be ‘distorted’ overly towards the defence sector. The reality, however, is different: the war economy brings ‘good’ macroeconomic results, but is causing real-world problems such as increased inflation, decreasing wages and purchasing power, and a liquidity crisis in the banking sector.
Regarding the latter, OPK companies are suffering from a debt management issue. Because of the structure of state defence orders (GOZ), the government does not allow for pre-payment in advance of military production, which forces OPK producers to request loans. Over recent decades, many unprofitable producers were artificially propped up by the state to avoid disruptions in the production chain. Companies (mostly owned by Rostec, the largest state-owned defence conglomerate in Russia) on the verge of bankruptcy were therefore able to borrow money from banks through facilitated loans.
But unpaid loans and the emergence of ‘toxic’ assets led Russian banks to limit lending to OPK companies, which in turn were not able to meet the demands of GOZ production, import substitution and the conversion of the industry towards civilian and dual-use production. In the 2010s, relations between OPK producers and financial institutions soured rapidly as a result – so much so that the government intervened to streamline the process with banks involved in OPK loans (including Sberbank, VTB and others).
Before COVID-19, the government made the financial stabilization and recovery – or ‘normalization’ – of the OPK a priority. Several solutions were identified, such as the recapitalization of certain companies to pay off their debts or attempts at preferential restructuring of long-term debt through major Russian banks. But the full-scale invasion of Ukraine dashed hopes of achieving this goal. OPK companies are also complaining that government payments remain insufficient to cover production expenses in addition to interest and loan repayments.
The existing debt burden compounds the general lack of profitability among OPK companies. Russian military industrial producers are not profitable in the same way as their Western counterparts. Rather, they are supposed to be operating in a sustainable way, making only small, ‘manageable’ losses. Even major state corporations are suffering from significant losses and decry a lack of revenue. The absence of profit has long been a point of contention between producer companies and the Russian Ministry of Defence, with the latter pressing manufacturers to lower prices as much as possible while maintaining quality.
Unprofitability is further compounded by issues related to price fixation between the OPK and the Ministry of Defence. Traditionally a source of friction, price fixation within GOZ was usually discussed over weeks of negotiations, with a complicated formula used for profit calculation, and no flexibility or adaptability for producers – especially in the context of the demands of the war. The government recognized the difficulties this system caused and forced the creation of a new price fixation mechanism in 2018 to reduce production costs.
Based on an ‘incentive model’ to improve production efficiency and an ‘extended index’ approach to limit price inflation, the 2018 price regulation mechanism was, however, largely a failure. The government requested another round of discussion to address pricing issues in 2023. Meanwhile, OPK companies have complained that price fixation mechanisms offer no incentive to reduce production costs.
Under the continued stress of the war against Ukraine, the above factors have worsened the ongoing ‘military industry overheating’, with more than a third of Russia’s GDP now coming from the OPK but being immediately swallowed by the war effort. In the context of the shift to a war economy, OPK companies are paid more but are expected to expand their output to match the relentless demands of the war – a situation that does not significantly change their overall financial position for the better.
Since the war, the government has sought to solve this problem by increasing its oversight of the OPK. Previous talk of ‘privatizing’ some elements of the military industry to incentivize competition have now been overtaken by state-led efforts to regulate the sector by law. Furthermore, direct state control over OPK companies is increasing, with some enterprises deemed to have been ‘illegally privatized’ brought back under public ownership by force.
As production costs continue to rise, it will be harder for companies to reduce costs and boost production – especially with decreased input under current circumstances.
These ailments will continue to afflict the OPK. As production costs continue to rise, it will be harder for companies to reduce costs and boost production – especially with decreased input under current circumstances. Any efforts to meet the demands of the next GPV for 2025–34 will come at the expense of quality. It remains to be seen whether decisions by Andrey Belousov, who was appointed as defence minister in May 2024, will be able to reform or transform the state of Russia’s military industry.
Workforce and labour market deficiencies
Labour market issues have always affected the OPK and have been compounded by the international sanctions placed on Russia since 2014, as well as the COVID-19 pandemic. The OPK is not missing a workforce per se, but it is critically lacking in qualified and trained workers. The government acknowledges that it has a problem in the sector: official estimates of the workforce gap range from around 140,000 employees (including 50,000 highly skilled personnel) to 400,000 workers (roughly 20 per cent of all OPK employees).
Since 2022, recruitment has been further complicated by military conscription and mobilization for the war in Ukraine, the use of temporary contractors and the ‘brain drain’ (see below), as well as trade-offs within the economy, with other industries requiring an increased workforce. OPK companies are also competing against each other, offering incentives to attract recruits.
The personnel gap is compounded by an age gap in the industry. OPK workers are generally older than those in most other sectors. The disparity is particularly stark in design bureaus and research centers, where the average age is over 70. Younger workers are generally not incentivized to work for the OPK, as they favour other parts of the private sector or migration. Indeed, young people generally no longer perceive the OPK as a source of prestige or career development. To remedy the situation, the government is trying to incentivize college and university students to enroll in OPK companies. For example, the Ministry of Education and Science has created several programmes to entice young workers. Rostec has also been recruiting directly from universities.
In the context of COVID-19, the OPK also introduced more stringent working conditions to keep ever-increasing production quotas on track and boost labour productivity. These measures include cutting paid holidays, lengthening work shifts and mandating overtime, as well as the introduction of six-day working weeks or round-the-clock production. However, official claims that the OPK is working ‘almost around the clock’ must be tempered by reality. In most cases, companies cannot pay their staff for the extra shifts required, lack the necessary qualified workers or both. Sustained higher production rates are also putting pressure on production tools and machinery (see below).
More fundamentally, workforce productivity in the military industry has never been strong and remains generally low. Beside the initial boost from state-sponsored propaganda encouraging support for the war, OPK workers are given no genuine incentives to improve their productivity, motivation or skills. Instead, there are many disincentives such as non-competitive salaries, bad working conditions, an absence of strong management, secrecy around military-industrial production and corruption.
Finally, the OPK labour market is affected by the ongoing ‘brain drain’ of young workers from Russia. An exodus of young talent started before the 2014 invasion of Ukraine and a decade of war has only encouraged it further. The ‘brain drain’ affects many economic sectors in Russia, but particularly the IT industry and applied sciences. An estimated 70,000 Russian IT specialists have left the country since 2022. This situation is compounded by the general decline in the quality of higher and scientific education since the 1990s – a larger issue often referred to as ‘degraded science’ (see below).
These workforce deficiencies are a reminder that the OPK has a crucial social responsibility in Russia, as well as economic and military roles. In many cities across the country, the OPK remains a major (and sometimes the only) source of employment. Regardless of the war, OPK companies must stay operational – if just to guarantee social stability.
Industrial over-concentration
Partly to address the problems of pricing and OPK unprofitability discussed above, the post-Soviet military industry was restructured in the 2000s and consolidated around major state-owned consortiums and corporations. The main player to this day remains Rostec, which concentrates about 75 per cent of all military-industrial companies under its control. The initial goal of this restructuring was to boost Russian domestic and international competitiveness, decrease production costs, reduce duplication of effort and consolidate the industry at large.
However, in practice, the integration of companies within larger ‘industry champions’ did not meet expectations. Indeed, consolidation failed to address pre-existing industrial production bottlenecks, while companies in bad financial shape were absorbed by others without their problems being addressed (as, for instance, with the Almaz-Antey merger or the integration of Ilyushin with Sukhoi and Irkut with United Aircraft Corporation).
Industrial consolidation tends to diminish competition, as it reduces the pool of available manufacturers, especially small and medium-sized private companies. Furthermore, concentration often leads to hidden structural deficiencies, bureaucracy and corruption further away from official scrutiny.
Consolidation of the OPK has also led to the emergence of Rostec as a de facto monopoly within segments of Russia’s military-industrial production. This over-concentration started with the takeover of bankrupt UralVagonZavod and KurganMashZavod in late 2016 and continued with the acquisition of United Aircraft Corporation in 2018 to cement Rostec’s dominance in the aeronautical sector. Before the 2022 invasion of Ukraine, Rostec was also linked with the absorption of United Shipbuilding Corporation. Yet the emergence of Rostec as an industrial monopoly has arguably stifled not only competition in the OPK, but also its R&D capacity and innovation more generally.
The VPK gives President Putin a form of ‘manual control’ over major defence-industrial decisions by putting him in the powerful role of conflict mediator and arbiter between the main industry players and their grievances.
To help streamline decisions between key players of the military-industrial complex, the Russian government recentralized the decision-making process under the Military-Industrial Commission (VPK). The constant infighting between OPK leaders, the Ministry of Defence, and the Ministry of Industry and Trade over budget, price formation and lobbying forced the Kremlin’s hand in 2013, and the VPK was created to help defuse tensions. The commission also gives President Putin a form of ‘manual control’ over major defence-industrial decisions by putting him in the powerful role of conflict mediator and arbiter between the main industry players and their grievances.
The VPK serves several other functions, including reporting on the outcomes of key decisions, a discussion and lobbying platform between stakeholders and a decision-making function for anything linked to the GPV and the GOZ. The role of the VPK was strengthened in May 2023 with the nomination of new board members, including deputy prime minister Yury Trutnev, head of the Chief Directorate for Special Programs of the President Alexander Linets, Colonel General Vasily Tonkoshkurov as first deputy chairman, and head of the FSB scientific and technical service Mikhail Mikhailov. The presence of Security Council secretary (and former defence minister) Sergey Shoigu, Security Council deputy chairman (and former president of the federation) Dmitry Medvedev and Putin aide Alexei Dyumin further strengthens the Kremlin’s influence over the OPK.
Lack of industrial coherence and structural flaws
Before the 2022 war, the strategic imperative of the OPK was to realize a ‘conversion’ of the industry. Considering the above economic and financial factors, as well as the impact of the 2014 sanctions, the government had pushed the OPK to adopt a dual policy of ‘civilianization’ and diversification of production. The official pre-war objectives were to pivot towards civilian and dual-use production to generate more revenue for OPK companies – especially in the face of reduced state orders under GPV 2027. Initial targets from 2016 sought to increase the share of civilian and dual-use production to 30 per cent of the total OPK output by 2025 and 50 per cent by 2030.
Unsurprisingly, the ‘conversion’ of the OPK has so far been a failure. The onset of war and the subsequent shift to a war economy broke all hopes of achieving official targets. OPK companies do not have production chains adapted to the serial production of civilian goods, especially without initial capital investment or state subsidies.
Another structural deficiency relates to the OPK’s inability to fulfil the production surge to meet the demands of the armed forces in the context of the war. A key priority of GPV 2027 was already to prepare for surges in ‘serial and uninterrupted production of military hardware’. Yet the absence of investment to finance the expansion of production lines severely constrained manufacturers. Since 2022, the OPK has been struggling to match requests for ever-increasing production volumes and to modernize their production lines. Indeed, surge production has been degrading production tools faster than they can be upgraded, although certain segments of the OPK have been faring better than others – for instance, drones and armoured vehicles.
The current situation is compounded by the challenges of modernizing military hardware. Pre-2022, the OPK was busy carrying out the ‘modernization’ of the majority of Russian military systems in service in the armed forces. Modernization in the Russian context entails a combination of procuring genuinely new systems and upgrading existing and legacy platforms to make them look ‘modern’. In truth, modernization represents a ‘gap filler’ to compensate for the absence of new hardware. The modernization effort largely rests on upgrading Soviet-era systems in targeted increments and maximizing the active service life of legacy systems. This is in line with the current war effort against Ukraine, where mass is necessary to overcome existing deficiencies.
Due to the impact of sanctions and the war in Ukraine, the OPK is currently struggling to build genuinely new and technologically advanced systems. Instead, it is relying on Soviet legacy systems and research. Despite top–down pressure to build ‘new’ systems, the armed forces have less incentive to try out such systems than to rely on combat-proven hardware already employed in the war. This situation is discouraging military innovation and leading instead to a simplification of OPK production based on ‘proven’, basic and cheap systems.
The modernization effort largely rests on upgrading Soviet-era systems in targeted increments and maximizing the active service life of legacy systems.
The OPK is also fragilized by corruption. Endemic corruption is a defining feature of the OPK and, more widely, of the Russian military. Corruption facilitates the inner workings of the military establishment. The shift to the war economy since 2022 and the subsequent increase in defence spending have brought about more opportunities for corrupt business practices, therefore inevitably leading to spiraling production costs, delays and unmet quotas.
There is no genuine oversight or willingness in government to tackle this problem, with the exception of several ‘corruption cases’ affecting minor consultants and subcontractors to the OPK. Rather than acting as a deterrent, such cases – which invariably target small-scale operators and not the most influential ones – only serve as useful reminders for industry players to avoid being too greedy and to play by established rules. Recent high-profile cases must be seen as examples of political infighting, rather than genuine anti-corruption measures.
Finally, the OPK remains afflicted by quality control issues. Quality control standards were severely degraded after the end of the Cold War. The reintroduction of embedded agents of the Military Representation Bureau directly inside OPK companies does not seem to have solved the problem. Furthermore, the presence of military inspectors conducting random audits does not solve the wider issues of decrepit production tools, low workforce motivation and productivity, or the use of sub-standard components. The armed forces are now regularly experiencing faulty systems, resulting in accidents and misfires.
Quality control issues also extend to subcontractors, with coordination among them lacking. If subcontractors fail to meet production deadlines, there are few alternative inputs available to systems integrators, thereby provoking bottlenecks along the production value chain and delays in order fulfilment.
Outdated production chains and procurement difficulties
The existing weaknesses discussed above are compounded by inherent flaws in specific sectors of the Russian military industry. These sectoral ‘Achilles’ heels’ have been further fragilized by war and sanctions, and especially limited internal and external procurement alternatives. They are also a testament to the OPK’s general state of technological backwardness, outdated production chains and aging equipment along the industrial value chain. These failings are due largely to the inability of the OPK to meet the technological challenges of local production of materiel that were previously imported, to enhance domestic manufacturing capabilities, and to adapt and scale-up production lines.
Constant requirements for the war effort and cumulative rounds of sanctions have created shortages of specific components that the OPK often has to swap for lower-quality and less sophisticated alternatives. The list of industrial bottlenecks and critical dependencies have so far been recorded in the following sectors:
- Microelectronic components, especially optical systems and microchips;
- Metalworking machine tools and precision machine-building tools;
- Aircraft, helicopter and naval propulsion systems;
- Space-grade technologies and components;
- Special steels and reinforced metallurgical products for armored vehicles; and
- Bearings for armored vehicles.
Microelectronic components
Microelectronics are paramount to the production of military hardware. But Russia’s access to quality dual-use electronic components, microchips and microprocessors, advanced optical systems and space-grade components has been severely constrained by sanctions. The war in Ukraine has exposed Russia’s critical dependency on Western components for the ‘silicon lifeline’ of dual-use computer chips, semiconductors and electronics used in advanced systems.
Post-2014, the OPK failed to stockpile enough components to support continued warfare against Ukraine. Indigenous import substitution efforts failed to achieve the intended effects, not least because the national tech manufacturing industry remains underdeveloped. Western standards for the production of semiconductors and military-grade electronic components are higher. Components bought ‘off the shelf’ through third-party imports – the vast majority from China – also do not fully meet integration requirements for Russian hardware. The most advanced components remain, for now, Western-made.
As a result, the OPK is often left with no choice other than to reduce standards by retrofitting systems with less advanced electronic or optical technology. All these adaptations and workarounds lead to systems that are cheaper and more numerous, but less reliable, which causes errors, ammunition misfires and accidents – a particularly problematic feature in kill chains for target acquisition and precision strikes, as well as ammunition maintenance.
Machine-building tools
Machine-building tools are another critical ‘Achilles heel’ of the OPK. These include metalworking machine tools, such as laser-cutting tools and lathes, and other computer numerical control machine tools employed in military hardware manufacturing. Expert estimates vary somewhat, but between 70 and 90 per cent of machine tools and associated spare parts used in Russia across all sectors are imported from abroad (mostly from Germany, Italy and other European countries, Japan and the US). Furthermore, the OPK uses between 70 and 80 per cent of all machine tools available in Russia.
Expert estimates vary somewhat, but between 70 and 90 per cent of machine tools and associated spare parts used in Russia across all sectors are imported from abroad.
Under the impact of sanctions since 2014, the OPK has had to adapt by cannibalizing existing machine tools from the civilian industry, while timidly increasing domestic manufacturing. Mitigation policies started in 2014, with several programmes aimed at limiting foreign imports to reduce dependency in favour of internal manufacturing. These policies have mostly failed so far, and recent updates continue to set unrealistic short-term goals – such as internally producing over half of the machine tools used. Reverse engineering foreign-made machine tools also did not provide a solid alternative, not least because of the inability to produce components and parts to high standards.
The main solution has therefore been to acquire machine tools from abroad, mainly from China. But this approach has resulted in Russia replacing one foreign dependency with another: the share of imported tools from China grew from 13 per cent to almost 90 per cent in 2023. Russia is now seeking to diversify third-party imports to other sources. However, imported machine tools are generally of lesser quality than their Western counterparts and fail to meet OPK precision requirements and standards.
Another issue relates to the life cycle of Western-made machine tools. As the OPK stretches the operational life of existing imported machines, it needs to balance overuse with lack of access to spare parts and additional components required to keep machinery running. As high-standard machines wear out, production of existing designs will undoubtedly slow down.
The situation may force certain companies to scale down industrial production, which risks GOZ requirements not being met. Finally, as well as machine-building tools themselves, Russia is missing special steels and metallurgic products necessary to machine into military hardware – especially rail bearings.
The conflict against Ukraine has created a form of ‘bubble’, in which the OPK is evolving beyond economic rationality or industrial logic to meet the constant demands of the war machine, as well as provide a form of socio-economic stability for the Russian Federation. For the time being, the OPK will therefore regress in terms of quality of output but endure – although without addressing any of the chronic weaknesses affecting it.
The question of whether the government plans to address these long-term issues will have to wait until after the end of the war – although the OPK expects that the ‘volumes of military production will remain high for a long time’. Meanwhile, the OPK is adapting internally, and with the help of other partners and foreign countries, to sustain the war and cushion the impact of sanctions.
