Russia Rushes $13 Billion Debt Relief as Defense Strains Budget

  • Government to repay $12.7 billion of state-guaranteed loans
  • Move allows defense companies to borrow more, Siluanov says

Russia’s government is easing the debt burden of defense companies, jettisoning the 2016 deficit target as the nation’s relations deteriorate with the U.S. and its allies.

The government will increase expenditures in this year’s so-called black budget, the portion of the spending plan that’s authorized but not itemized and typically covers security, by 800 billion rubles ($12.7 billion), Finance Minister Anton Siluanov told lawmakers in Moscow on Monday. The move will help pay back state-guaranteed loans for Russian defense contractors and create an opportunity for them to take on extra debt next year, he said.

“We see an opportunity to repay loans taken by the companies, to relieve them of the debt burden and make it possible reduce debt relative to revenue in order to give them an opportunity to raise loans again,” Siluanov said. That would also allow them to shift some capacity toward civilian production, he said.

The Kremlin is giving defense manufacturers a break at a time when the nation’s relationship with its Cold War foes has sunk back to a deep freeze, following the collapse of the Syrian cease-fire and allegations of Russian attempts to influence the U.S. election. One result will be an even wider budget gap this year, with the deficit already on track to be the widest in half a decade after a slump in oil prices undercut state revenue and sent the economy into a two-year recession, adding to the pain from international sanctions.

“It’s not clear what the situation will be next year,” Ruslan Pukhov, head of the Center of Analysis of Strategies and Technologies in Moscow who advises the Defense Ministry, said by phone. “Some of the companies that get state defense contracts have a rather large debt burden and the government has found a way to help them.”

The shortfall may now exceed 3.7 percent of gross domestic product, Siluanov said, pushing his forecast beyond his previous estimate range. The deficit has been widening all year, compared with the original plan to keep it within 3 percent as ordered by President Vladimir Putin last December. It was 2.6 percent in the first nine months, the Finance Ministry said Monday.

The 800 billion rubles of debt repayments were initially planned for in 2017-2018, Siluanov said. The government will pay the remainder of such obligations, more than 200 billion rubles, in 2020, he said. In an attempt to rein in the burgeoning deficit, he has been calling for fiscal discipline and suggested a three-year spending freeze at 2016 levels. The government has also been selling state assets, including preparations to offer a stake in Rosneft PJSC, Russia’s biggest oil producer. Russia also opted against a pension increase and cut some spending.