Thread by @RALee85

Thread on the Russian defense industry's debt. Two weeks ago, Deputy Prime Minster Yuri Borisov raised the alarm regarding the heavy debt load facing the OPK, which is 2.3 trillion rubles ($36.4 B), and suggested writing off 700 B RUB ($11 B) of debt.
novayagazeta.ru/articles/2019/…

The OPK is the 4th most indebted part of the Russian economy after financial services (3.9 T RUB), wholesale trade (2.8 T RUB), and real estate (2.7 T RUB). However, the credit risk is more concentrated for the OPK because only a few banks service them. 2/
rbc.ru/economics/08/0…

Of the 2.3 trillion total, more than 90% is from the debt of the United Shipbuilding Corporation, Almaz-Antei, United Aircraft Corporation, Uralvagonzavod, and High Precision Systems (the latter 3 are part of Rostec and all are state-owned enterprises). 3/

The most indebted privately-owned OPK enterprises are AFK Sistema (part of RTI), Kalashnikov, and the Zelenodolsk Shipyard (part of AK Bars). RTI and Kalashnikov's debt issues are due to delays in deliveries as part of the GOZ, so they haven't received payment from the MoD. 4/

Borisov said, "The industrial sector that manufactures products is starving as it services financial institutions that produce nothing and are only meant to ensure the process of manufacturing process management and product introduction." 5/

He said the main body of the loans would never be repaid, but, in the meantime, the OPK spends ~200 billion rubles a year making interest payments. But 600-700 B RUB of debts is 6–7% of the total capital of the entire banking system, which would have a significant effect. 6/

According to Novaya Gazeta's sources, Borisov's comments were designed to show that he is protecting the OPK and as a signal to financial officials to prepare for such an eventuality. They noted that Borisov would not have said this publicly unless he had received approval. 7/

Apparently, most OPK enterprises spend more than half of their gross profit on interest payments, causing many to face a loss (or only 3-5% net profit). While Russia's banks received 1 trillion rubles of net profit, almost half of which (444 billion rubles) went to Sberbank. 8/

As Vasily Zatsepin notes, there is no expert opinion of the quality of the loans Borisov proposes writing off, as these details are kept classified. Such an action would also deter Russian banks from offering loans to the OPK in the future. 9/

During a meeting with Putin this week, Sergei Chemezov said Rostec was requesting more than 300 billion rubles from the government for the "financial restructuring" of its enterprises. He said Rostec inherited a # of loans from the 1990s-early 2000s. 10/
en.kremlin.ru/events/preside…

He said "Of course, we are servicing these debts and repaying the interest, but we will have trouble repaying the actual loans themselves." Chemezov said these funds were needed specifically for the MC-21 and other civilian programs. 11/

According to a source close to OAK's leadership, there funds are needed ASAP, and they are expected to come from the gov budget. Rostec previously said it would invest 50 billion rubles into the MC-21 program by 2025. 12/
vedomosti.ru/business/artic…

These funds will specifically be spent upgrading OAK's production facilities so that it can build up to 70 MC-21 each year (only 10 are expected to be built in the first year once serial production begins). 13/

A source close to OAK said that its military production needs 200 billion rubles with the other 100 billion likely to go to civilian programs. A Rostec source said at least half would go to military programs, in particular RSK MiG and Sukhoi's Novosibirsk and KnAAZ factories. 14/

Another source says MiG, Sukhoi, and Irkut need funds as they are waiting on state contracts for the MiG-35, Su-35S, Su-30SM, and Su-34 (the latter 3's current state contracts are coming to an end). The low profit margin for GOZ orders (3-5%) won't help revenue issues. 14/

MiG, in particular, is 100 billion rubles in debt, and has little chance to pay it off as it has no export contracts (and the VKS is only procuring enough MiG-35 to keep its production line alive). NAPO is also struggling w/out an export contract for the Su-32/34.15/

In 2016, the government decided to pay off 800 billion rubles worth of OPK debt to avoid further interest payments, which pushed spending under Russia's National Defense line to 3.78 trillion rubles (and led to many exaggerated comments about a jump in defense spending). 16/

In 2017, a further 200 B RUB of OPK debt was paid off. These loans were taken with state guarantees in 2011-2014 to ensure the OPK could complete GPV-2020. This totaled 1.22 trillion rubles: 542 B RUB to Sberbank, 541 B RUB to VTB the rest to Gazprombank and VEB. 17/

However, Borisov was seemingly proposing something different that wouldn't have such a large affect on the fed budget, especially give than Putin has consistently said that defense spending was decreasing. And OAK was moved to Rostec to avoid direct budget subsidies to OAK. 18/

During an interview last week, Borisov seemed to walk this back some by saying that he wasn't suggesting a large-scale write-off, but that some of the loans that are to be transferred to Promsvyazbank, the new OPK bank, could be written off though. 19/
militarynews.ru/story.asp?rid=…

He suggested a partial write-off, partial financial restructuring, or possibly a recapitalization of the large integrated OPK enterprises. Promsvyazbank's (PSB) current OPK loan portfolio is only 270 billion rubles, but it is supposed to receive 70% of total OPK loans. 20/

Anton Siluanov estimated this could be up to 1 trillion rubles. But PSB still hasn't received all of these loans until it meets the Central Bank's requirement to have a sufficient debt-to-capital ratio. 21/

Novaya Gazeta gives 3 reasons why the OPK debt problem has gotten so bad: 1) Loans were taken out decades ago which now require substantial annual interest payments (22-23%). State subsidies weren't sufficient to compensate for these payments. 22/

2) Prices set by the MoD and other government organizations. The Federal Tariff Service and Rosoboronzakaz both set prices for state contracts, but they were disbanded in 2015 and 2014. FTS's responsibility was passed to the Federal Antimonopoly Service but had no background. 23/

And FAS didn't take on any FTS employees so it lacked competence in this field. This was after the infamous "price wars" under Serdyukov. Since then, the MoD's position is much stronger than the industry's, which leads to preferential prices for the military. 24/

3) New amendments to the 275-ФЗ “On State Defense Order” stipulated that funds from certain accounts can only be used for specific contracts, which decreased flexibility for OPK enterprises. This meant they had to take out loans. 25/

OPK companies have also lost an undisclosed amount of funds from banks that faced problems or lost their licenses to work with the OPK (used to be 150 banks but now only 10). Lastly, sanctions/import substitution have also had an effect but officials rarely say this publicly. 26/