Russia's Navy has a Funding Problem
Last updated 09:18 PM EDT • Read time: 2m
Russia's gross domestic product is in distress, the ruble has been and will likely continue to deflate with minimal interference from the central bank, and oil and natural gas prices are falling. Russia is being forced by its budget to prioritize either military or domestic spending. But it is clear that the Kremlin is looking to increase exports of large military hardware such as naval vessels. Currently, 90 percent of the state export agency's defense-related contracts are "small orders," such as munitions and small arms. Russia's naval rearmament program will depend on these foreign orders to maintain certain economies of scale and to ensure revenues for the shipyards.
President Vladimir Putin also plans to redirect $3.3 billion in overseas investment into project bonds for infrastructure — ports included. Business leaders complain that the Russian government expects unusually short payback periods on their port investments, ranging from 3 to 5 years instead of the more standard 20 to 25 years. But the country's overarching financial crunch makes funding from overseas investors all the more vital.
Specifically, the government and the United Shipbuilding Corporation (USC) have prioritized six shipyards to support military construction activities: Yantar and St. Petersburg on the Baltic Sea, Sevastopol on the Black Sea, Murmansk in the north, and Khabarovsk and Vladivostok in the east. Of USC's nearly 60 shipyards, these six complexes have some unique advantages as a target for federal and foreign investment. With the exception of the contentious Sevastopol in Crimea, which has been subordinated to USC since March 2015 and was authorized in December 2015 to repair naval surface ships and submarines, the other five are all under a special legal status to boost investment and construction orders. St. Petersburg's Shipyard Cluster alone is responsible for 70 percent of all export-oriented shipbuilding in Russia and nearly 30 percent of total shipbuilding. The remaining four shipyards can help improve personnel expertise and achieve greater scale. Murmansk and Khabarovsk are classified as "port special economic zones," which reduces the tax and customs burdens on firms established there in relevant industries. Yantar, also a "special economic zone," is under an older regime meant to boost investment as a whole in Kaliningrad. And since October 2015, Vladivostok has been a "free port" to incentivize businesses through streamlined registration, reduced taxes and tariffs, and simplified immigration protocols.
This article originally appeared at Stratfor.
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