Russia's Defense Sector Is Running On Overdrive — But Firms Are Warning Of Bankruptcy

Russia has injected billions of dollars in military spending but its military companies face mounting borrowing costs.ALEXANDER NEMENOV/AFP via Getty ImagesRussia almost tripled its defense spending to finance its invasion of Ukraine.Defense firms are busy — but high inflation and interest rates past 20% have left them struggling.Russia may end up having to bail them out or nationalize them.In Russia's defense sector, demand is surging — but its companies are struggling all the same.The Kremlin is seeking ever more weapons for its attack on Ukraine.But sky-high interest rates are leaving companies struggling to turn a profit, a prominent CEO recently said.Sergei Chemezov, CEO of the defense conglomerate Rostec, sounded the alarm in an address to Russian senators in late October.He said "record" interest rates were "eating up" the profit from its orders.Debt trapHe said clients tended to pay 30%-40% of an order's value in advance, leaving the firm to borrow the rest.That debt, he said, was so expensive that it canceled out any profit on the work."If we continue to work like this, then most of our enterprises will go bankrupt," he said.A few days after he spoke, Russia's central bank hiked its main interest rate further still, from 19% to 21%.Rostec is not alone in its predicament, economic analysts told Business Insider.Rising interest rates and export bans were eroding Russian defense companies' profits across the board, they said, making the Russian state the only guarantor of revenues.Sustaining the war machineSince launching a full-scale invasion of Ukraine about two and a half years ago, the Kremlin has taken a slew of measures to keep its defense sector pumping out tanks, ammunition, drones, and missiles.It restructured its economy to prioritize the war, imposed export bans, tapped its national wealth fund, and strengthened trade with non-Western countries.Its defense budget soared, from $59 billion in 2022 to $109 billion in 2023.It's heading for an estimated $140 billion in 2024, with a draft budget forecasting $145 billion for 2025.That figure would represent 6.3% of Russian GDP, the highest share since Soviet times.That spending has consequences, said Roman Sheremeta, an associate professor of economics at the Weatherhead School of Management at Case Western Reserve University."The government pumped enormous sums of money to support the war efforts," he told Business Insider.