Why dozens of Russian enterprises are bankrupt, or heading that way

MOSCOW — Russia’s economy has not shrunk to the point some Western governments and experts predicted following the country’s invasion of Ukraine.

Indeed, since Feb. 24, 2022, the more than 11,000 added restrictions aimed at pressuring the Russian government have “not delivered as much hell as originally expected,” according to a report released a year later by the Center for Strategic and International Studies.

But despite the Kremlin’s ability to defy “apocalyptical forecasts,” as the think tank put it, and the government’s growing defense budget, dozens of Russian defense plants are undergoing bankruptcy proceedings or have claims for bankruptcy recognition. Some have received contracts to support Russia’s invasion of Ukraine and are still operating, while others have turned to selling their property.

“One of the main reasons for bankruptcies is the [inconsistency of] state defense orders,” according to Sergey Tolkachev, an economist at the Moscow-based Financial University. “Further, [there] is an irregular allocation of funds for the fulfilled state order.”

For example, imagine a defense plant buys metal to fulfill a state order, but the cost this year is 15% higher than last year. According to government regulations, the state would cover a bit less than half of that additional cost, while the company would have to use its own capital to pay for the remaining amount.

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Even worse for the business, the Russian state might delay the delivery of funds, forcing the company to seek a loan to cover costs in real time. The bank providing the loan reviews the company’s application, assesses its financial situation and, finding it risky, sets a high interest rate.

Out of desperation, the defense company enters debt bondage, tightening the fiscal knot around an already struggling business.

‘Nothing here to save’

Russia’s national register of bankruptcy information lists data on dozens of domestic organizations and their debt. One of those is the Radiopribor plant, a producer of maritime electronics in Vladivostok that declared bankruptcy in 2018.

Radiopribor was in debt for 398.2 million rubles (U.S. $4.9 million). Its production capacity was then leased to Dubna Machine-Building Plant to complete work on a state defense order, which ended in 2021.

Ultimately, Radiopribor’s main property was sold in 2022 — 10 plots of land in total.

Another example is the Sibselmash plant, an artillery ammunition manufacturer in Novosibirsk, which declared bankruptcy in 2012 with a debt of more than 1 billion rubles. In 2021, the plant’s main complex was sold to the company Merkas. Despite the fact that Merkas pledged to maintain the defense production lines, it ended up demolishing its workshops and buildings throughout 2022.

And the Kalinin plant, which makes fuses as well as components for satellites in St. Petersburg, declared bankruptcy in 2021. The plant’s creditors claimed about 1.047 billion rubles. In May 2023, a plot of land once owned by the plant was sold for 300.3 million rubles.

Several bankruptcy procedures are also taking place, according to Russia’s national register of bankruptcy information. Examples include the Moscow-based Elektropribor plant, which produces navigation instruments and has a debt of 42 million rubles.

There is also the Podolsk Electromechanical Plant, which makes components for anti-aircraft and ballistic missile systems and has a debt of 1.3 billion rubles. And the Yekaterinburg-based Radio Equipment Plant, which makes radar components, has a debt of 741 million rubles.

Sergey Gebel, the chief executive of the Russia-based Gebel and Partners law firm, said some defense industry enterprises, following years of downtime and debt, are unable to build weapons.

For those organizations, “there is simply nothing here to save,” he told Defense News.

Survivors (somewhat)

Meanwhile, some enterprises are trying to solve their financial problems by selling all or part of their ownership shares. One example is the Kazan Synthetic Rubber Plant, whose products are used in the creation of sponge, which goes toward making aircraft parts.

In 2019, with a debt of 5.3 billion rubles, Kazan was declared bankrupt. However, it quickly found an investor in Industrial Technologies, which plans to invest 4.2 billion rubles in the plant by 2025. Production has already been restored.

United Shipbuilding Corp., which produces military vessels, has proposed that 51% of shares of the Baltic Plant, which constructs surface ships under its purview, be transferred to Rosatom State Corp. The Baltic Plant is experiencing economic problems and is under external management; 90% of its contracts come from Rosatom. United Shipbuilding Corp. hopes that, with Rosatom’s help, the plant will become profitable.

In 2021, the Sverdlov Plant, which produces explosives, sought to be declared bankrupt. At the end of 2022, an order was issued to transfer the plant from the Ministry of Industry and Trade under the control of the state-owned conglomerate Rostec and, accordingly, implement the plant’s corporatization, which can take up to five years.

In addition, 12 plants that repair vehicles and fall under the purview of the company Spetsremont have gone bankrupt. The parent organization has been bankrupt since February 2020. In total, Spetsremont oversees more than 30 repair plants.

In a response to a report on the financial situation at Spetsremont, Rostec noted that around the 2017-2018 time frame, when the process of transferring Spetsremont from the Russian Defence Ministry to Rostec took place, 90% of the holding’s repair plants were experiencing fiscal troubles.

Now the government is creating two new armored car factories in the Moscow and Rostov regions.

Siemon Wezeman, a senior researcher with the Stockholm International Peace Research Institute think tank, said these investments can work out well for the state.

“New plants are a high investment, but in the end they are more effective producers and immediately able to outcompete the companies” that produce older equipment and are in debt, he told Defense News.

International pressure

Years of sanctions that precede Russia’s full-scale attack on Ukraine in February 2022 may have contributed to the current state of Russia’s defense-industrial base.

“Sanctions — also those from before 2022 — may have made the situation worse, especially as they can lead to delays in delivery or the need to find more costly substitutes for the sanctioned parts. This increases costs for contracts where a fixed price was already agreed, or delays payment for contracted goods. Both cost increases need to be covered by the companies from their own pocket,” Wezeman said.

Members of the Committee on Economic Policy and Property within the Legislative Assembly of the Primorye Territory concluded the shipbuilder Vostochnaya Verf was a victim of sanctions. United Shipbuilding Corp. showed interest in buying the plant, but no decision has been made.

Tom Waldwyn, a research associate for defense procurement with the London-based International Institute for Strategic Studies, told Defense News any additional sanctions on Russian companies will negatively impact both defense and civilian sales in terms of product exports and the import of key subcomponents.

“As Russia also experiences high inflation and a brain drain, the Russian defense industry faces a difficult future despite massive increases in defense spending in 2022 and 2023,” he said.

From 2013 (the year before Russia annexed Crimea from Ukraine) to 2022, Russia increased its defense budget by 15%, according to the Stockholm International Peace Research Institute.

And from 2021 to 2022, its military spending grew by 9.2% to $86.4 billion — the equivalent of 4.1% of Russia’s gross domestic product, the Swedish think tank reported.

Government action

In realizing the need to bolster the production and repair of equipment during the ongoing war, the Russian government has tried to simplify contractual procedures. It has shortened the terms of state orders and improved the process of agreeing to costs and contractual requirements. The state has also taken steps to provide advance payments to defense enterprises.

In addition, banks have started lowering interest rates and increasing the amount of a possible loan for defense companies. In July 2022, the preferential rate was reduced to 3%, and the maximum loan amount was increased to 3 billion rubles.

And on April 1, 2022, a moratorium on bankruptcy was introduced for six months to give businesses additional time to negotiate with creditors and adapt to new circumstances, such as sanctions and the disruption of supply chains. The moratorium was lifted six months later.

Since then, 10 more Russian shipbuilding and naval repair enterprises have received bankruptcy claims from creditors or filed for insolvency themselves. Among them are both small factories and large companies, including Vostochnaya Verf; the Khabarovsk Shipbuilding Plant; and the 10th Labor Ship Repair Plant, a subsidiary of United Shipbuilding Corp.

At the same time, six more shipyards were declared bankrupt and have moved into bankruptcy proceedings.

In September 2022, Russian President Vladimir Putin amended the criminal code so that the failure to fulfill obligations in defense contracts for the state would result in fines of 1 million rubles to 3 million rubles and/or imprisonment for up to 10 years.

“Under these conditions, declaring bankruptcy can be a way to reduce the risks of prosecution and punishment for [those managing] plants,” according to Pavel Luzin, a senior fellow at the Center for European Policy Analysis think tank.

“In addition, this is a signal to the government about the need for cash injections,” he told Defense News.

Indeed, government support and increased spending on the Army during the 2022-2023 time frame helped some bankrupt enterprises continue operating.

The Motovilikha Plants holding, part of NPO Splav, was declared bankrupt in 2018. This is the only full-cycle enterprise in Russia that produces multiple-launch rocket systems, and it has its own foundry. The company owes more than 17.6 billion rubles. Some of the holding’s enterprises have been sold off.

But in 2021, it received a defense order from the state worth 40 billion rubles that is to last until 2027. In 2022, the plant delivered to the Army combat vehicles with the Tornado-G and Tornado-S multiple-launch rocket systems. That same year, the plant’s mechanical and assembly production lines increased its shifts to three, and the plant began hiring.

In March 2023, the Perm region’s prosecutor’s office challenged the company’s bankruptcy status. Regional authorities have said they anticipate Rostec and the federal Ministry of Industry and Trade will invest 20 billion rubles to help modernize the plant.

Currently, the Remdiesel plant — Russia’s newest manufacturer of special, purpose-built equipment — is applying to purchase the Motovilikha Plants holding.

“The purchase of this plant is attractive because of the large state defense order,” Ivan Kostin, a former director of Motovilikha, told the Kommersant daily.

Another plant with a state order is the Miass Machine–Building Plant, which produces components for ballistic missiles as well as control equipment for missile systems. It has a debt of 2.38 billion rubles, and was declared bankrupt in 2022. The bankruptcy trustee, Anatoly Selishchev, was going to sell the property, but in May 2023 the creditors refused to sell. As the plant’s management reported, work will increase in 2023, the contracting rate will be 15% higher than in 2022 and the plant will hire new employees.

But the state defense order will not save the business, according to Alexander Abramov, an economist specializing in bankruptcy, who described such contracts as “an obligation” rather than “a lifeline.”

“It is impossible to refuse a defense order contract,” Abramov told Defense News.

Furthermore, if a company does not participate in the development of a product, but only produces it, the business typically won’t received the majority of funds allocated for the technology, according to Sergey Smyslov, an independent defense industry expert and an engineer by trade.

“This became possible due to the fact that, since the Soviet era, many enterprises have [duplicative] capacities. And when [the state had an option] to produce a product at a functioning plant, ‘A,’ or a half-empty plant, ‘B,’ a fully equipped plant was chosen,” Smyslov told Defense News.

Next steps

After the bankruptcy moratorium ended in October 2022, State Duma Deputy Sergei Mironov petitioned Prime Minister Mikhail Mishustin and chief military prosecutor Valeri Petrov to help stop insolvency among defense enterprises.

As a result of the petition, Mironov told Defense News, “some of them [defense enterprises] were reorganized — restructured to prevent the closure and termination of production.”

Other deputies of the State Duma — the lower chamber of Russia’s legislature — proposed the assets of bankrupt companies be transferred to enterprises that successfully fulfill state defense orders during military mobilization and wartime.

“In the execution of [a] defense order, there is a large pyramid of cooperation. Even if small enterprises — or enterprises that are [in the third or fourth tier] of suppliers and only indirectly relate to the state defense order — fall under the bankruptcy procedure, then a huge risk is created for the disruption of the state budget,” Vladimir Gutenev, who leads the Duma Committee on Industry and Trade, warned in October 2022.

The Russian government created a plan to return state-owned enterprises to the private sector during the 2022-2024 time frame. None of the companies under consideration are undergoing bankruptcy proceedings, but most either had claims from creditors for bankruptcy or are financially unstable.

The effort includes more than a dozen defense plants. For example, 20% of shares of the Kartsev Research Institute of Computer Complexes, which develops hardware and software, including the Shershen drone, are for sale by the state.

Also on the list are the Simbirsk Cartridge Factory, the Scientific-Technical Center for Electronic Warfare, the Zvezda electromechanical plant, the Space Communications Co., and several ship repair plants.

Some have already tried selling themselves in whole or in part, but haven’t found buyers. That’s likely because only Russian organizations without foreign shareholders, that have permits to work with classified information and that have licenses to make weapons can purchase the property of defense enterprises. Often buyers need to commit to maintaining production and fulfilling existing state defense contracts.

The government’s plan may backfire, according to Wezeman, who warned any temporary support state-owned enterprises received from the government could help them outperform companies that have had to survive on their own.

“Those companies may in their turn fail,” he said. “However, a level of corruption may also play a role: Orders may go to companies that have ‘friends,’ and those without will have to solve their problems without much support.”