Error in defense. The price - 100 billion.

05.04.2012 — Analysis

The Russian government intends to write off some taxes payable by the military industrial complex of the country. The officials explain the tax arrears by the breach of the obligations regarding placement of the government's defense order in 2011, which put the survival of a number of enterprises in jeopardy. Experts were puzzled by the government's intention: The machine-building sector is increasing deductions into the budget; therefore, there is no need in writing off debts. The RusBusinessNews columnist was also perplexed after he had found out that some companies were allowed to accumulate debts and take loans against the government's security, while other companies had to pay for that.

The RF Ministry of Finance, according to mass media sources, has prepared a draft of the government decree on restructuring and writing off tax debts of companies operating in the national defense industry. The officials, who prefer to keep their names in secret, informed that the military industrial complex has accumulated a debt totaling 100 billion rubles.

No one can say anything definite what has caused this debt. RusBusinessNews asked the RF Ministry of Finance if the debt at issue is limited to 2011 or combines the debts of the previous years, but no answer was given. This problem has not been discussed by the committees of the Russian State Duma. Deputy Oksana Dmitrieva assumes that the issue may be related to the government-secured loans given to manufacturers due to delayed placement of the government's defense orders. The government might have come to conclusion that the companies will not be able to repay the debt owed to the budget, and has decided to write it off.

Defense enterprises were also of no help in clarifying the situation. Vyacheslav Mikotin, the deputy general director for economics and finance at NPO Avtomatiki, a federal state unitary enterprise, does not understand at all where the issue of debt writing off has come from. The restructuring, payment installments and tax amnesty helped this Ekaterinburg-based enterprise to repay its debts remaining from the before-previous decade three years ago. Nothing that would be deemed extraordinary happened in 2011: "We had no problems with the government's defense order, and we received the advance payment on time. Our only concern is the absence of a unified approach to product pricing. However, in the customer and contractor relationship we can observe the ongoing meeting of minds: Now we understand the future rules of the game".

Kurganmashzavod, OJSC, paid all the outstanding debts accumulated in the rough 1990s long time ago. Maria Sevastyanova, the economics director, assures that the enterprise has no accounts payable. There are situations when the Ministry of Defense delays payments under government's orders for several months; however, the resulting cash deficiency is covered through commercial contracts and related loans.

The debt to the budget of the Vector Production Association, OJSC, was 6.7 million rubles as of the end of December 2011. Sergey Vorontsov, the deputy general director of the company, says that these "penny trails" drag from the 1990s. The principal has already been repaid; there is only the penalty to pay, and Vector is trying to get rid of it through the court. The production association has had no overdue tax payments for about three years. Therefore, there is no connection between placement of the government's orders and payment of taxes.

The representatives of the Sverdlovsk Regional Minister of Industry and Science told RusBusinessNews that several regional enterprises took loans against the government's security, but there was no problem regarding payment of taxes. On the contrary, it may be assumed that the debt amount became smaller, taking into account the government's defense order that was increased by 17%. The Administration of the Federal Tax Service for the Sverdlovsk Region confirmed that in 2011 the machine-building sector of the region paid taxes exceeding 1.7 times the amount paid in 2010. Within the last years there has been no rise in overdue tax debts in the Sverdlovsk Region.

The employees of the Russian Federal Tax Service say that they do not treat the previous and current debts separately. The analysis of the total debt results in the conclusion that the debtors include both bankrupt factories and strategic enterprises (for example, the United Aircraft Corporation, OJSC, where the debt amounted to 34.2 billion rubles as of the middle of March 2012), which are able to manufacture competitive products. The government's decision on writing off the debt of the latter companies remains a complete mystery.

The experts say that the government provides a guarantee only to those enterprises that operate in line with the programs adopted by the government authorities as priority projects of development of the Russian military industrial complex. Viktor Kiryushkin, the deputy general director for economics at the Machine-Building Design Bureau, a federal state unitary enterprise, says that the requirements to documentation are very stringent: Officials not only check balance-sheets of enterprises, but also verify qualification of managers. Therefore, the position of the government looks out-of-the-way when it first demonstrates a very scrupulous approach to selection of candidates for receiving loans and then acts fast and loose in "tearing down" their economy by giving them no target orders or delaying payments for them.

Logically, there is no sense in furnishing the government's guarantees to those companies whose products are not interesting to the Ministry of Defense or cannot be paid from the budget due to the lack of money. If such companies are not able to survive through commercial contracts, they must be modernized. However, there is no logic in this case at all, for the Russian government is not monolithic, and some authorities see the sense in providing guarantees and subsequent writing off debts, which looks very much like putting money from one pocket into another, allowing for substantial "shrinkage losses" during the process.

The Ministry of Finance is responsible for government guarantees; the Ministry of Defense is responsible for target defense orders. The military department is given a free hand in the production sector: It can change the rules of the game at any time by ordering, say, 1,000 machine guns and purchasing only 100. Then the Ministry of Finance comes in with guarantees to banks willing to receive their share. As a result, the "defense" sector is drowning in delinquency, and the government is writing off its tax debts.

According to V. Kiryushkin, the government does not admit its mistakes and never passes losses on to the budget. The government authorities will definitely find the way to recover the current loss of 100 billion rubles. He is sure that manufacturers traditionally will be given the part of "a whipping boy". Apparently, in the near future the RF Ministry of Defense will request lower prices for products to be manufactured under its orders. Eventually, everything will be as usual: Some will have their debts written off, others will pay for this.

Vladimir Terletsky