Defense Economy: Sanction restrictions

Yegor Lebedok

Summary

Despite the imposed direct sanctions, defense enterprises increased their output in 2021, and operated at a profit thanks to both the export contracts in force and increased supplies to the Belarusian army. In the future, Belarusian defense sector’s output may also be boosted through the engagement in the restoration of Russia’s military capabilities affected by sanctions, and supplies to the domestic market.

Trends:

General description of the defense sector of the economy

Enterprises of the State Military-Industrial Committee (SMIC), the list of which was approved in 2009, remained the backbone of the defense sector of Belarus (the Minsk Research Institute of Radio Materials is off the list since 2021). A large number of enterprises subordinate to other agencies and ministries, as well as some private companies are part of the defense industry. More than 150 Belarusian entities are licensed to deal with products designed for military use.

Thirteen defense industry organizations and around a dozen economic entities of the defense sector were involved in the execution of government defense orders in 2021. The total number of employees of defense industry organizations is roughly estimated at 14,600 people (except for three special exporters). The average wage paid in the industry stands at around BYN 1,900.1 Wages and output grew by 12% during the year. The latter rose to the highest in the history of the industry, although four organizations were under European Union and United Kingdom’s sanctions last year. Exports of goods and services rose by 28.5% from 2020, mostly thanks to previously signed contracts, which will be in 2021 for the most part, as well as the increased amount of works to be performed in Asia, Africa, Azerbaijan and Russia.

The defense industry system includes nineteen open joint-stock companies, which must disclose business information. At the time of writing, data on eleven OJSCs were available (Table 1), and all of them made profits. Five companies reported a drop in profits, although only one – the 140th Repair Plant engaged in the upgrade and repairs of armored vehicles – was under sanctions.

“AGAT – Electromechanical Plant” (under sanctions) even managed to increase its profit, most likely thanks to a large volume of work ordered by the Belarusian armed forces. In 2021, the company supplied radio relay stations and artillery fire control command vehicles, which significantly enhance unit control. Also, this may explain the increased profit of “AGAT – Control Systems”, which supplied radios, hardware and communication units, and automated reconnaissance, control, and communication complexes.

OJSC Net profit, thousand rubles Revenues, thousand rubles Profit margin, %
2021 2020 2021 2020 2021 2021
Peleng 49,653 40,874 208,098 190,283 23.9 21.4
AGAT – Control Systems 21,350 15,524 175,492 110,072 12.2 14.1
Radar Design Bureau 14,353 21,884 62,951 56,217 22.9 38.9
ALEVKURP 7,375 4,127 24,018 17,332 30.7 23.8
2566th Electronic Warfare Systems Plant 5,013 5,795 35,741 31,447 14.0 18.4
Research Institute of Computer Systems 1,463 1,172 10,936 10,187 13.4 11.5
AGAT – Electromechanical Plant 1,020 85 55,489 46,066 1.8 0.2
Minsk Instrument Engineering Research Institute 368 698 6,683 7,528 5.5 9.3
140th Repair Plant 255 5,003 27,181 56,717 0.9 8.8
Orsha Aircraft Repair Plant 68 57 48,742 45,686 0.1 0.1
Communications Engineering 4 1,714 33,538 33,056 0.01 5.2
Minsk Wheel Tractor Plant 7,177 280,559 2.6
558th Aircraft Repair Plant 2,280 158,231 1.4

Table 1. Financial performance of some defense industry OJSCs in 2020–2021

Note. Highlighted are the enterprises under sanctions.

Source: Publicly available reports posted on the websites of the OJSCs, and author’s calculations.

“Peleng” OJSC increased profits by expanding space instrumentation engineering, and thanks to a larger number of orders placed by the Russian and Belarusian armed forces. For example, eighty Russian BTR-82A armored personnel carriers delivered to Belarus were equipped with optical instruments manufactured by “Peleng” and means of communication supplied by “AGAT – Control Systems”.

Radar Design Bureau, the producer of radar and electronic warfare systems, reported a decrease in profits due to a reduction in the number of foreign contracts. The company expected USD 5.5 million in exports in its business plan for 2021, whereas the actual exports amounted to USD 2.40 million. This may be due to both the saturation of the markets with this kind of products, and problems with entering new markets caused by direct and indirect sanctions.

Lines of business of defense sector enterprises

Manufacturers of defense products, especially for communications and electronic warfare, and unmanned aerial vehicles (UAVs), increasingly rely on development of new weapons and import substitution. At the MILEX-21 exhibition of armaments (Minsk, 2021), 148 prototypes were presented by organizations of the State Military-Industrial Committee, and 29 by other companies engaged in development of defense products, to compare with about 100 prototypes showcased at MILEX-19. During MILEX-21, twelve export contracts worth USD 140 million were signed against USD 200 million worth contracts signed during MILEX-19. This was partly due to the sanctions, and partly because a significant number of developments are not used by the Belarusian army, and are less attractive to the armies of other countries.

In 2021, defense enterprises also performed 205 R&D works to design finished prototypes of arms, military and special-purpose equipment, ammunition and components.

The first National Defense – New Technologies and Solution state program was presented last year. Its financing in 2021–2025 will amount to BYN 27.3 million, which will be allocated from the national budget. The government spending on the defense industry rose by 30.4% against the plan for early 2021. Only 85.9% of the funds were used, though, due to the customs clearance of equipment, which took longer than expected.2

Dmitry Pantus, Chairman of the State Military-Industrial Committee, pointed out six priority areas for 2021.

  1. Development of missile and anti-aircraft weapons. This particularly concerns Belarus’ own “Polonez” missile for multiple rocket launchers capable of engaging targets at the ranges of up to 300 km, and a Belarusian missile for the Buk-MB3 surface-to-air missile system (up to 70 km). Tests of these missiles will continue in 2022.
  2. Unmanned aerial strike systems of various types and small-size high-precision aviation weapons. No less than nine organizations in Belarus are one way or another involved in UAV production. More than 20 prototypes have already been designed, but only a small part of them (and a small number) are supplied to the army in the absence of a systemic approach to the combat application of some models, usability problems and some unsatisfying characteristics.
  3. Small arms and ammunition. Research tests of the SMAR-100BPM assault rifle and SCR-1200M sniper rifle (Kidma-Tech JSC) were performed. They are expected to replace Soviet models used by the Belarusian army. In 2021, Kidma-Tech supplied 406 VSK-100 rifles to the Pakistani police.3
  4. Advanced air target detection and tracking systems. Successful tests of low-altitude and small-sized target detection systems of Radar Design Bureau were carried out.
  5. Reliable mobility means. The Minsk Wheel Tractor Plant (MZKT) developed a truck train to replace the MAZ-537 tractor of Soviet manufacture. The MZKT-692251 chassis for the Buk-MB3K SAM command post were tested. The 2566th Electronic Warfare Systems Plant conducted preliminary tests of the MT-LBU chassis for the repair of a large number of army vehicles.
  6. Upgrade of armaments and military and special-purpose equipment used by the armed forces. The mounting of the specialized part of the Osa-2B SAM system on a Belarusian-made chassis is particularly important, since Belarus has about 95 complexes on Soviet-made chassis. There are serious problems with components for the old chassis and their repair. State tests of the Uragan multiple-launch rocket system on MAZ 6317 chassis were conducted with a view to replace the obsolete Soviet chassis. The BM-21B Belgrade-2 MLRS has been added to the armory, and 122 rocket launchers for the Grad MLRS are being upgraded to increase the fire range and increase the target engagement capability.

A number of defense sector enterprises were designing special-purpose software for the military, AGAT Holding, Kidma-Tech, Fortity LLC, Belfortex LLC among them. An IT unit (company) was formed at the Military Academy of Belarus to deal directly with software for military systems and training. This area is developing both in terms of the amount of works and the number of organizations involved. The main developments are aimed at creation of automated control systems, application software for military and specialized equipment, and combat management simulation. According to State Secretary of the Security council Alexander Volfovich, the share of armament of domestic design and manufacture in the Belarusian army was over 30% in 2021.4

Possible developments under sanctions

The operational environment for defense sector enterprises will noticeably change in 2022 because of the war in Ukraine and related sanctions, and not only for Belarusian companies, but also for Russia’s foreign economic activity in general. Belarusian and Russian small companies of various kinds were often used by Belarusian defense sector enterprises to circumvent the sanctions when supplying components and, to a lesser extent, services, and this becomes virtually impossible now.

A narrower corridor of supplies of products under sanctions can also be expected in other directions (Turkey, the UAE, and some Asian countries, such as Kazakhstan). This can seriously affect not only the development of new products, especially for export, but also the maintenance of Belarusian products that have already been exported. The latter circumstance puts new export contracts in question.

All consequences of direct and indirect sanctions are hard to predict. Promising export contracts become less and less possible over time, as the West consolidates its strategic position on restrictions against Russia, including by influencing China (one of the key suppliers of components for the Belarusian defense industry). Furthermore, China may question the expediency of providing Russia with military products and strengthening its neighbor. For Belarus, this risk is not that serious.

The sanctions will affect not only the purchase of components, but also the upgrade and uninterrupted functioning of defense enterprises that need software, new machines, components, etc.

In this situation, the stake is placed on greater cooperation with Russia and purchases of components from China. In 2021, LEMT Research and Development Center proposed to establish a joint venture to produce optoelectronic devices, robotic systems and UAV detection and control complexes, which would be localized in Udmurtia (Russia). Belarus and Russia are going to cooperate in repairing the Tor-M2K air defense systems for the Belarusian army. Some repairs will be performed in Belarus and some in Russia.

It is highly probable that Belarus will insist on involving its companies as much as possible in the modernization and supply of Russian military products to the Belarusian army by the example of the aforementioned BTR-82A armored personnel carriers.

In 2022, activities of defense enterprises will likely be ensured by the increased funding under the state defense order. The spending on national defense in 2022 is already planned to be 23.9% higher than in 2021. For the first time, the Republican Centralized Innovation Fund allocates BYN 14.16 million to finance defense-related R&D works in 2022. The defense sector development strategy provides for about 300 experimental and development works to be carried out in the next five years.

Belarusian defense enterprises will definitely benefit from Russia’s need to restore its equipment and compensate for its losses during the war in Ukraine. “Peleng” JSC, AGAT Holding, the Orsha Aircraft Repair Plant, 558th Aircraft Repair Plant (Baranovichi), 140th Aircraft Repair Plant, etc. can be actively involved.

Conclusion

The defense industry considerably increased output in 2021, and, in spite of the sanctions, worked with a profit, in many respects thanks to previously signed export contracts and increased supplies to the Belarusian army.

The spending on R&D related to development of new weapons increased substantially. Judging by similar works of late, the volume of financing will not decrease in the future, and may even increase. However, the direct and indirect sanctions can be a problem for defense enterprises.

The industry mainly focuses on designing missiles, UAVs and weapons for them, radar and communications systems, and mobility means.

In 2022, the need to restore Russia’s combat capabilities may become a driver of Belarusian defense industry’s output. However, Russian weapon supplies to Belarus will probably decrease due to the above factors, so Belarus will step up repairs and modernization of the military hardware that it already possesses, and work on new products, which means an increase in supplies to the domestic market and economic growth of the national defense segment of the economy.