The Bell, 6/5/22

This week our top story is a dissection of April economic data released by the Russian authorities that – while better than many expected – still suggests a sustained recession. We also look at why the founder of IT giant Yandex – Russia’s Google – was sanctioned by the European Union, and what it means for the company.

Russia’s economy is faring better than expected – but the worst is yet to come

Economic indicators for April released last week painted a surprisingly good picture: Russia’s economy appears to have shrugged off the initial effects of Western sanctions. But don’t be misled: the long-term effects of these sanctions are only starting to make themselves felt. Moreover, the EU last week announced a new round of sanctions: including an oil embargo that – as recently as a few months ago – was all but unthinkable.

What’s happening?

Analysts last week finally got a chance to see what’s going on with the Russian economy when the State Statistics Service (Rosstat) published data for April. Unsurprisingly, the figures showed Russia sliding into recession – but the fall was not as steep as it might have been, and some of the numbers even allowed for cautious optimism.

According to the Ministry of Economic Development, Russian GDP fell 3 percent year-on-year in April. GDP in March rose by 1.3 percent.

• Industrial output fell 1.6 percent year on year (manufacturing was down 2.1 percent). At the same time, energy production went from a 7.8 percent rise in March to a fall of 1.6 percent in April. However, according to unofficial figures published by state-owned news agency TASS, the situation for commodities improved in May – for the first time in two months oil production ceased falling and – in the first 29 days of May – was even up 1 percent compared with April.
• Metals, pharmaceuticals and agriculture also did relatively well. And the construction sector is still being supported by new orders for housing projects.
• State expenditure from January through April increased almost 15 percent (not least due to a rise in military spending that is currently running at 2.5 times pre-war levels). But the state can afford it: oil and gas revenues almost doubled (up 90.6 percent).
• Russian salaries were still rising in real terms in March (up 3.6 percent year on year). But the figures for April and the more significant data about real disposable incomes will be known only in July. Salary rises were strongest in the private sector (7.1 percent) while they were down 3.9 percent in the public sector, according to Dmitry Polevoy, the director of investments at Loko-Invest.
• The biggest falls in April were in logistics and consumer spending: wholesale trade turnover was down 11.9 percent, retail by 9.7 percent, freight transport by 5.9 percent, hospitality by 6.7 percent. Lending activity continues to decline, especially in the consumer sector (down 1.8 percent in March). The problems for retail are due to a correction from a March surge, a decline in real incomes that were hit by rising prices (annual inflation in April was 17.8 percent) and increased uncertainty, according to Sofia Donets, chief economist for Russia at Renaissance Capital.
• Automobile sales in April plummeted 79 percent year on year after a 63 percent decline in March. The automobile industry is more dependent than most on imports and suffered a greater price shock as a result of Western sanctions.

How bad is it?

The government and the Central Bank are most concerned by the fall in consumer spending. However, the reduction in April (8.8 percent) was only a third of that seen at the peak of the coronavirus crisis in April 2020 (26.8 percent).

The recent data is evidence that the current crisis will be very different from the pandemic: back then we saw a sharp fall and a gradual rebound; this time the fall will be steady and prolonged, according to Raiffaissenbank’s chief macro-analyst Stanislav Murashov. Consumer demand will likely continue to decline, firstly due to shortages arising from import problems, then due to a deteriorating labor market (although, for the moment, unemployment remains close to a record low of 4 percent).

What happens next?

Imports will continue to fall, dragging productivity with them as reserves of foreign raw materials and components are exhausted, according to Central Bank analysts. And until new suppliers and restructured supply chains can provide strong evidence of a recovery in imports, it’s too early to talk of any structural transformation.

The main economic downturn is still to come and will hit in the second half of the year, according to Polevoy of Loko-Invest. Donets was surprised by the promising data for April and would not rule out the possibility of a second slump for the Russian economy.

Guessing what might happen after the end of this year is even more difficult.

But, by the end of 2022, Russia will lose its largest oil market. The EU confirmed last week that it will implement an oil embargo to close Europe’s borders to 90 percent of Russian oil before the end of the year. By the start of 2023, it will also block trade in oil products.

The effect of the embargo

Estimates vary, but the embargo could cost Russia up to $60 billion a year in export revenue. Oil sales remain Russia’s biggest single source of revenue, with exports worth $180 billion in 2021 (by comparison, natural gas exports generated $64 billion).

However, the level of damage to the state’s finances will depend on global oil prices and the effectiveness of Russia’s “planned pivot to Asia”. Independent analysts believe that the Asian market can only absorb about 1 million of the 3 million barrels of oil per day that will have nowhere to go after the EU embargo begins.

Global oil prices are currently about $120 per barrel, a level that means the Kremlin has little to worry about in the short term. However, Russia’s Urals cruise blend is selling at an unprecedented discount due to sanctions. And that discount is increasing as the fighting in Ukraine continues. According to official figures, the average price in April for a barrel of Urals was $71, almost $20 less than in March ($89) or the first quarter average of $88. Prices for Brent also fell, but slower: from $117.3 in March to $104.6 in April. Bloomberg calculated that from April through mid-May, Urals was selling at a 32 percent discount against Brent.

The announcement of the European embargo again inflated global prices: in the middle of last week, prices for Brent touched $125 and at present they are about $120. But prices can change. Oil cartel OPEC+ unexpectedly decided Thursday to increase production for the first time since spring 2020.Why the world should care: Economist Oleg Itskhoki told The Bell in March that we were seeing “an experiment on the Russian economy and the Russian population on a never-seen-before scale”. He wasn’t wrong. Even now, economists insist that “specific” and “unprecedented” circumstances make it almost impossible to make forecasts. The only thing we can say with certainty is that things will continue to change unpredictably and that a recession is unlikely to last for less than two years (something even admitted by the Ministry of Economic Development).

Sanctions on the founder of ‘Russia’s Google’

One of the biggest sanctions “guessing games” is over: Arkady Volozh, the founder of Yandex, Russia’s biggest IT company, was hit by Western sanctions last week. A crucial gateway to Russian-speaking internet users, Yandex has long been under pressure from the Russian authorities and has become a vehicle for state censorship.

• Yandex founder Arkady Volozh was included in the sixth round of EU sanctions Friday. Alongside Volozh on the list was President Vladimir Putin’s alleged girlfriend Alina Kabayeva, metals billionaire Alexei Mordashov and controversial Foreign Ministry press secretary Maria Zakharova. Within half an hour of the news, Volozh announced his departure as Yandex CEO and Yandex board member. The company itself has not yet been sanctioned. Through a family trust, Volozh controls 45.6 percent of votes within Yandex’s shareholder structure.
• The official explanation for sanctioning Volozh was that there are state-owned banks among Yandex investors, Yandex has a “golden share” that allows the government to veto key decisions (such as changing shareholders) and the company’s role in promoting Russian state-owned media sources in its search results.
• As well as operating Russia’s most popular search engine, Yandex runs the largest aggregator of taxi and food delivery services, audio and visual streaming services, Russia’s most developed self-driving car project and much more. But the company has drawn the most ire for its news aggregator service Yandex.News (that, ironically, generates almost zero income).
• Yandex has never produced its own journalism. The company simply created an algorithm that selects the most popular news from Russian media, picks out major events and displays the ‘top five’ stories on the homepage for Yandex’s search engine. However, Yandex has such a huge audience that – since the early 2010s – Yandex.News has been the biggest news source for the Russophone internet. In March, Yandex.News was attracting 14 million users a day.
• The Kremlin has long understood the political importance of controlling Yandex.News. The first time officials pressed Yandex to tweak its algorithm came in 2008 after Russia’s invasion of Georgia. For several years, Yandex fought back and managed to stop political interference. However, after the annexation of Crimea in 2014, everything changed. Russia passed a law in 2016 obliging news aggregators to include only media sources officially registered in Russia. At the same time, Yandex was required to restrict itself to 15 Kremlin-approved sources when filling its ‘Top Five’. None of the chosen publications were critical of the government.
• At the same time, Yandex has spent years fighting attempts at nationalization. In 2008, metals billionaire Alisher Usmanov attempted to buy a large stake in the company with the Kremlin’s backing. Then another state-owned company, Sberbank, acquired a “golden share” in Yandex, allowing it to block any change of shareholder. Thus, the Kremlin ensured that Yandex could not be sold to a foreigner. In 2018, Sberbank’s growing ambitions led to speculation that it could bid for a large stake in Yandex. But Yandex fought back, and its “golden share” is currently held by a specially-established “Public Interest Fund,” which is under de facto Kremlin control.
• With the outbreak of war in February, Yandex faced a double crisis: not only the “golden share,” but also Yandex.News was toxic and made it at risk of sanctions. At the same time, any sudden moves perceived as anti-war in Russia raised the specter of nationalization. “If we remove news from the home page, we will get 10 minutes of fame. But nothing will change. Ten minutes later, everything will be back to normal and there will be no more Yandex,” the head of Yandex’s Russian office Elena Bunina told a staff meeting in March. Later that month the company agreed to sell Yandex.News to state-controlled internet holding VK. But it was already too late: three days earlier managing director Tigran Khudaverdyan was sanctioned by the EU and the United Kingdom. This week, Volozh joined him on the list.
• Yandex finds itself in a very awkward position. Most Yandex staff are young, educated IT specialists who do not support the war and are frustrated that Yandex.News has harmed their company’s reputation. About 10 percent of staff have fled abroad since the start of the war. Several senior managers have also left the country. Volozh himself has lived in Israel for several years. 

Why the world should care: While Yandex’s future remains unclear, its experience is a stark illustration of the ethical dilemma facing Russian businesses. Before the start of the war, making compromises with the government was relatively risk-free. After the war began it became clear that those compromises carry a very high price. But, by then, it was already too late.

By Gilbert Doctorow, 6/3/22

It has been my rule not to join the vast majority of my fellow political commentators at the scrimmage line in sterile debates of the one subject of the day, week, month that has attracted their full attention. Their debates are sterile because they ignore all but a few parameters of reality in Russia, in Ukraine. For them, ignorance is bliss. They do not stir from their armchairs nor do they switch channels to get information from the other side of the barricades, meaning from Russia.

I will violate this overriding rule and just this once join the debate over how Russia’s ‘special military operation’ will end.  Nearly all of my peers in Western media and academia give you read-outs based on their shared certainty over Russia’s military and political ambition from the start of the ‘operation,’ how Russia failed by underestimating Ukrainian resilience and professionalism, how Putin must now save face by capturing and holding some part of Ukraine. The subject of disagreement is whether at the end of the campaign the borders will revert to the status quo before 24 February in exchange for Ukrainian neutrality or whether the Russians will have to entirely give up claims on Donbas and possibly even on Crimea.

As for commentators in the European Union, there is exaggerated outrage over alleged Russian aggression, over any possible revision of European borders as enshrined in the Helsinki Act of 1975 and subsequent recommitments by all parties to territorial inviolability of the signatory States. There is the stench of hypocrisy from this crowd as they overlook what they wrought in the deconstruction of Yugoslavia and, in particular, the hiving off of Kosovo from the state of Serbia.

I mention all of the foregoing as background to what I see now going on in Russian political life, namely open and lively discussion of whether the country should annex the territories of Ukraine newly ‘liberated’ by forces of the Donetsk and Lugansk People’s Republics with decisive assistance of the Russian military. By admission of President Zelensky yesterday, these territories now amount to 20% of the Ukrainian state as it was configured in 2014.

In the past several weeks, when Russia concentrated its men and materiel on the Donbas and began to score decisive victories, most notably following the taking of Mariupol and capitulation of the nationalist fighters in the Azovstal complex, leading public officials in the DPR, the LPR and the Kherson oblast have called for quick accession of their lands to the Russian Federation with or without referendums. In Moscow, politicians, including Duma members, have called for the same, claiming that a fait accompli could be achieved already in July.

However, as I see and hear on political talk shows and even in simple political reportage on mainstream Russian radio like Business FM, a counter argument has raised its head. Those on this side ask whether the populations of the potential new constituent parts of the RF are likely to be loyal to Russia. They ask if there is truly a pro-Russian majority in the population should a referendum be organized.

This is all very interesting. It surely is a continuation of the internal debate in Moscow back in 2014 when the decision was taken to grant Crimea immediate entry into the RF while denying the requests for similar treatment from the political leaders of the Donbas oblasts.

However, there surely are other considerations weighing in on the Kremlin that I have not seen aired so far. They may be likened to the considerations of France following the fall of the Berlin Wall in 1989, when the possible reunification of Germany was the talk of the day. Sharp witted observers said at the time that President Mitterand liked Germany so much that he wanted to continue to see two of them. Today Vladimir Putin may like Ukraine and its brethren Slavs so much that he wants to see three or four of them.

To be specific, from the very beginning the number one issue for Moscow as it entered upon its military adventure in Ukraine was geopolitical: to ensure that Ukraine will never again be used as a platform to threaten Russian state security, that Ukraine will never become a NATO member. We may safely assume that internationally guaranteed and supervised neutrality of Ukraine will be part of any peace settlement. It would be nicely supported by a new reality on the ground: namely by carving out several Russia-friendly and Russia-dependent mini-states on the former territory of East and South Ukraine. At the same time this solution removes from the international political agenda many of the accusations that have been made against Russia which support the vicious sanctions now being applied to the RF at great cost to Europe and to the world at large: there will be no territorial acquisitions.

If Kiev is compelled to acknowledge the independence of these two, three or more former oblasts as demanded by their populations, that is a situation fully compatible with the United Nations Charter. In a word, a decision by the Kremlin not to annex parts of Ukraine beyond the Crimea, which has long been quietly accepted by many in Europe, would prepare the way for a gradual return of civilized relations within Europe and even, eventually, with the United States.

Link here.

This is a Russian-made documentary produced by Masterskaya Movie Company in 2022. I’ve been told that it originally aired on Russia 1 TV channel. The description from Rumble is:

Film traces the history of the Ukrainian tragedy from 1917 to some of the newest footage we’ve all been watching…

Introduction and English translation of May 30th RBC article via Memri.

As Russia has tightened its hold over information channels to the point of virtually criminalizing criticism of the “special operation” in Ukraine, Russia’s business dailies sometimes succeed in providing unwelcome information to the authorities. Perhaps the authorities do not fear the select readership of these dailies, perhaps it assumes that the readership has access to sources of information. In any case RBC media has provided an article proving that the sanctions imposed on Russia are taking their toll on Russia’s defense industry. It turns out that even the quintessentially Russian Kalashnikov has foreign components.  The absence of foreign components has caused extensive production delays, reliance on obsolete equipment, disruption of maintenance schedules and even layoffs.

The RBC report follows below:[1]

“Following the launch of Russia’s military special operation in Ukraine, the US and the European countries imposed a series of new sanctions against the Russian military industrial complex. Now defense industry complex plants are still assessing the risks, but it is already apparent that due to the new restrictions a number of contracts will be postponed. There are problems with the lack of marine diesel engines, import substitution of helicopter and aircraft engines, electronics, replacement of imported components installed in tank’s fire control systems, as well as aircraft repairs. Yet, defense industries claim that the state defense order will be fulfilled at the same level, as in the previous year.

“The industry doesn’t have the task of achieving a 100% level of import substitution for all products, as “Rostec” [corporation] and the Ministry of Industry and Trade emphasize. Reliance is being shifted to parallel imports. RBC has been taking with leading defense industry enterprises and experts to find out from them, how extensive are the problems caused by the new sanctions and what are the plans for resolving them.

“How Did The Authorities In Charge Of The Military-Industrial Complex React

“In early March, Deputy Prime Minister for the Defense Industry, Yury Borisov stated that ‘the full magnitude and depth of the current sanctions… was difficult to forecast.’ However, Borisov noted that in 2021 the state defense order was fulfilled by 98% and that ‘every opportunity for maintaining such indicators in the future’ exists.”

Yuri Borisov (Source: Rg.ru)

“At Rostec they explained to RBC that the corporation’s revenues are comprised of three elements: civilian goods, state defense orders and exports According to the corporation, the latter two accounted for about 55% of corporate revenues, while civilian products accounted for over 45%. ‘Naturally changes (considering today’s reality) are inevitable, the ratio will change. How exactly it will happen? We are now scrutinizing this issue. Approximately by the middle of the year the picture will become clear,’ stated Rostec. ‘Now the companies belonging to the state corporation adjust their plans on a number of projects, in consideration of the new inputs. Their deadlines have been objectively “shifted to the right” (that is, they were postponed to a later date),’ said the Rostec representative, without specifying what these projects are.

“Among the measures being taken, Rostec cited the following: development of new cooperation opportunities, fundamental changes in the suppliers, as well as intensification of import substitution programs in critical areas. For instance, regarding aviation, these concerns: propulsion systems (both for aircraft and helicopters), onboard systems and specialized software for production. Nevertheless, the task of producing absolutely everything [domestically] didn’t and doesn’t exist, the state corporation emphasized. “This is unreasonable, as there are alternative suppliers, there is also a mechanism of parallel import,” they summed up at  Rostec.

“The Ministry of Industry and Trade also told RBC that no country in the world is able to completely abandon the use of foreign technologies and components. ‘Statements about 100% import substitution are populist ones,’ argued the ministry. Regarding the decisions to support of the industry, the ministry recalled that during the COVID-19 pandemic the department generated the necessary measures, some of which were perceived as redundant at the time. Thus some measures, brought to a state of readiness, weren’t implemented. ‘And now we are applying these “drafts”,” summarized the ministry, without specifying what tools they were referring to.

“What’s Going On In The Aircraft  Industry

“A representative of the United Aircraft Corporation (UAC) stated in an interview to RBC that after the new sanctions were imposed ‘there is more work to be done.’ In the civilian segment [of the industry], the short term maintenance of the serviceability of the existing fleet of Sukhoi Superjet 100 aircraft is an important area of work for Russian manufacturers of planes, systems and components. The work is being performed with the airline companies and each [aircraft] operator has its own “road map” of joint actions. According to UAC, for the past period spare parts depots have been established including a pool of replacement engines. However, ‘there are of course sensitive positions’ regarding the Superjet 100 repairs, admitted the company.

“In early April, Yury Lapin, General Director of IrAero airlines, warned that due to the US and EU sanctions, airlines operating domestically-produced “Sukhoi Superjet 100” aircraft are unable to provide repairs and maintenance to assure the technical fitness of Russian-French SaM146 engines. Such a situation, according to Lapin, may lead to ‘a stoppage of [maintenance] on the fleet of Superjets in the short term perspective. Engine service problems were also reported by managers of three other airlines that fly Superjet planes. One of them noted that his airline will have to stop passenger flights on these planes as early as the fall of 2022, provided the engine tech support won’t improve.

“‘There are the two largest programs in civil aviation: manufacturing and exploitation of the short-haul Superjet 100 and of the medium-haul MS-21.’ Both programs presumed the utilization of a significant number of foreign-produced components, reminded Oleg Panteleev, Executive Director at the AviaPort industry agency. We are talking in particular about American-produced Pratt & Whitney engines for the MS-21 and Russian-French SaM146 engines for the Superjet 100 planes’, he specified. ‘The Americans stopped the supplies, in turn, the French side has also blocked the delivery of its component, i.e., of the generator module and other components. Therefore, it’s not possible to maintain production at the planned speed,’ elaborated the expert.

“‘Regarding combat aircraft, even if somewhere isolated foreign-produced components are being used, they belong to the category where their usage is allowed, because large warehouse inventories of them were created in advance, and they can be bought in the countries that don’t support sanctions’, noted Panteleev.

“At the end of March, the newspaper Kommersant reported that UAC had failed to receive the majority of the MS-21 engines from the American “Pratt & Whitney” company, due to which the commissioning and supply plan for this aircraft had to be reduced. Rostec plans to start deliveries of the MS-21 equipped with a home-produced PD-14 engine in 2024, but even these terms are considered way too optimistic in the industry, stressed the newspaper.

“Deputy Prime Minister, Borisov stated in mid-March that the Russian authorities at the background of sanctions were considering the prospects of increasing the serial production of IL-96 and Tu-214 passenger planes, which are currently produced in small batches for special customers. The UAC told RBC that they are already increasing the manufacturing of Tu-214 planes. ‘These planes will make it possible to support the air transport industry through a difficult period, stated the company.

“As for the helicopter-manufacturing programs, it’s necessary to replace imported engines for Ansat, Ka-62 and Ka-226 helicopters, Panteleev continues. ‘At the same time, there are more concerns about future maintenance and repair of Western-produced machines involved in the production of aircrafts. It’s necessary to purchase them in order to increase the production volume,’ concluded the expert.

“According to the Disclose investigative journalism portal, between 2014 and 2018, the French Thales group of companies equipped 60 twin-seat Su-30 multi-purpose fighters with the latest TACAN navigation systems. What’s more, similar TACAN systems were delivered to Russia for upgrading MiG-29 fighters, as well as special high-tech pilot helmets.

“Since 2014, Russian Air Force jets have been equipped with Sigma 95N navigation systems developed by the French Safran” company, which allow autonomous navigation without satellite signals. According to the Disclose website the target detection systems were supposed to be installed on Ka-52 helicopters.

“What Shipbuilders Say

Commenting on RBC’s question regarding the components, which are in short supply due to new restrictions, the United Shipbuilding Corporation (USC) stated that the volume of domestic production must be increased, first for all for marine diesel engines, for components of propulsion systems, for anchor-mooring equipment and ship systems (water circulation, waste water management, etc.).

“Russian shipbuilders today are going through enormous difficulties regarding the supply of engines for ships of all types: from boats to large warships, Ilya Kramnik Researcher at the Center for North American Studies of IMEMO Russian Academy of Sciences, and Navy expert, confirmed to RBC.

“For instance, multipurpose corvettes of ‘Project 20380′ equipped with guided missiles were initially fitted with engines made by the Kolomna plant. According to Kramnik, the practice of their usage demonstrated that the domestic diesels didn’t meet expectations. As the expert explained, there were complaints about engines’ reliability, power, and upgrade potential. It was decided to equip the improved corvettes of this type (project 20385) with German engines. However, due to the new restrictions the deal was derailed. Thus the fleet continues to use domestically-produced diesel engines, while for some projects the purchase is made in China, noted the expert.

“There are relatively few companies in the world that are capable of producing powerful modern diesel ship engines. And Russian companies aren’t among them, although Russia possess some competence in manufacturing diesel, stressed Kramnik. Regarding the propulsion systems and anchor-mooring equipment, traditionally the emphasis was put on imported components, and it remains unclear how promptly domestic developments can be introduced, summed up the expert.”

Ilya Kramnik (Source: Newprospect.ru)

“The USC has developed and is implementing import substitution plans for these types of equipment, as stipulated by the Shipbuilding Industry Development Strategy drawn up to 2035. It is planned to start serial production of cycloidal propellers for a series of river-sea vessels, in addition to domestic engines, whose [production] has been already mastered, and which are supplied en masse to such vessels. Besides, the Russian enterprises, which deal with engine production are upgrading them to the requirements of the register.

“The corporation has been working in this direction for some time, but now the magnitude of such work has grown considerably and at the USC they are sure that it aims to become a full-fledged business segment capable of generating proceeds. It will take about two years to work out tactical solutions. “From 2024 till early 2025, we expect to transform [our production] to be based entirely on Russian-produced piston machines and other systems that were traditionally bought from foreign countries,” explained the USC. ‘The situation demands, first of all, a tough stance of state customers with regard to meeting civil demand with Russian-produced ship equipment. This will provide the main support for shipbuilders, stressed the corporation.’

How Serious Are The Problems With Electronics?

“Deputy Prime Minister Borisov has repeatedly mentioned the ‘collapse of microelectronics’ in Russia and the need to restore this industry. In mid-May, he stressed again that the country is facing the task of acquiring technological independence.

“Ruselectronics holding told RBC that in the face of restrictions, the holding’s companies continue to fulfill contracts under state defense orders and produce civilian goods. In order to facilitate an uninterrupted work, the holding’s stocks of electronic components are being used, while cooperation chains are being reviewed

“‘In terms of exports, we record stable demand from foreign customers for a number of electronic components, particularly sealed magnetically controlled contacts. Thus, we expect export revenue in the first half of 2022 to remain at the level of 2021,’ Ruselectronics summed up.

“According to Kramnik, the company grossly underestimates the situation claiming that there are no problems. ‘There are big problems with microprocessor production, in particular in military, military- defensive and space areas. The equipment that we possess now allows for production of some things, but one has to be aware that such goods are already quite obsolete,’ explained the expert.

“When the issue concerns their introduction in modern arms systems with AI capability, for example, of real-time data transfer and support for tactical decision-making, it requires growing foundation capacities that are not always accessible via older solutions, stressed Kramnik. Especially when compact equipment is needed, added the expert. ‘If there’s some kind of ground facility, a building, it’s generally not that important whether to equip such a building with 100 or 500 kilograms of equipment, however, when it comes to a guided missile, the dimension and weight requirements increase dramatically. The product has to be light and small, which is difficult to achieve,’ explained Kramnik.

“There are also issues with modern optical and thermal imaging equipment, continued Kramnik. Russian plants enjoy their own matrices, but they usually cannot satisfy the demand and don’t meet the required characteristics, noted the expert. ‘Even enclosures, switches, and cables are imported. That is, we should start not with electronics, but with electrical engineering,’ concluded the expert.

“What Issues Is Russia’s Only Tank Manufacturer Facing?

“The press service of UralVagonZavod (UVZ) told RBC that the holding’s enterprises are operating steadily and are even increasing their production volume. The concern has been operating under sanctions since 2014, recalls the company’s representative. Import substitution doesn’t concern the holding’s products of both military and civilian use, stressed Uralvagonzavod.

“Meanwhile, at the end of March, as Kommersant reported referencing the plant’s press service, that “a small part” of the employees at the car assembly line were sent on short-term leave with 2/3 pay. The exact number of employees on leave wasn’t specified. However, the press service stressed that there are pending orders until the end of the year and with regard to a number of products -until the end of 2024.

“According to a statement of representative of the plant’s trade union, Alexander Ivanov made to URA.RU agency in early April, there are, actually no issues with the quantity of orders, however, there are problems with their fulfillment. Ivanov claimed that Uralvagonzavod is facing a shortage of components, because of the transition to import substitution. ‘The plant is searching for Russian suppliers; we are developing schemes of raw materials’ purchase from friendly states that haven’t joined the sanctions,’ said Ivanov. In addition, he claimed that the employees at the car assembly line are being laid off (with 2/3 of their pay intact) on a massive scale, rather than on a case-by-case basis, as the plant’s press office told Kommersant.

“On the whole, Uralvagonzavod fulfills the state defense order, but the components for the fire control systems (including those deployed at the Russian main battle tank T-90M) were purchased via Belarus from the French Thales company, recalled Colonel Victor Murakhovsky, the Editor-in-Chief of Arsenal of Fatherland. According to Murakhovsky, this concerns not the fire control system as a whole, but only its ‘night time module.’ It’s not yet known how critical this issue is and whether there is a potential for production of domestic substitutes, said the expert. The European online EU Observer’ magazine also reported that Russian T-72s are equipped with thermal imaging sight made by the French Thales company.

Tank assembly at Uralvagonzavod (Source: Kommersant.ru)

What is the Position of the Gunsmiths?

“On April 7, a meeting of the Board of Directors of the Union of Russian Armorers named after M.T. Kalashnikov was held. The meeting was chaired by Alan Lushnikov, a [major] shareholder of the Kalashnikov Concern. The meeting was dedicated to the issues of import substitution, simplification of export procedures for arms and cartridges, work on elimination of excessive administrative obstacles regarding the arms circulation [on the civilian market], as well as to state support measures of the [gunsmith] industry (according to the holding’s own statement).

“Vladimir Zhikharev, Executive Director at the Union of Russian Armorers, told RBC that the organization scrutinized the risks that may appear in connection with sanctions pressure on part of unfriendly states. He also concluded that some enterprises – that are part of Kalashnikov holding are at risk of not receiving many components, 70% of which (and sometimes more than 80%) were previously bought abroad. Also, there is the short-term issue of the repair and replacement of imported equipment.

“‘Many companies [of Kalashnikov holding] find themselves in a very difficult situation. The air guns production as well as that of cartridges of many civilian arms experience shortage [of materials and components?] Some companies of the holding have ceased production of certain types of civilian products,’ said Zhikharev. In addition, he stated that Kalashnikov holding may experience a twofold decrease in the export of civilian small arms due to the recent tightening of the sanctions regime.

“The Kalashnikov press service didn’t respond to RBC’s inquiry, the same is also true for RBC’s inquiries to ‘Russian Helicopters’ and ‘United Engine Corporation.’

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[1] Rbc.ru, May 30, 2022.