Politics Limiting Russian Manufacturing

Russian flag flying on a flagpole on top of a building

Jul 24, 2017

About ten years ago the BRIC countries were a hot topic when discussing industrial and economic growth. This related to the growing consumer markets in Brazil, Russia, India, and China, and the strategies companies were employing to capitalize on them. For many larger enterprises, this meant investing significantly in manufacturing facilities or expanding supply chain capabilities to properly operate in these countries.

While China and India continue to grow, and Brazil has experienced its share of ups and downs, the country most difficult to get a current reading on is Russia. While the country has vast amounts of natural resources and human capital, its industrial sector is continually plagued by government “support”. More specifically, recent news shows how this dynamic has impacted Russian manufacturing on a couple of fronts.

Although not spoken aloud in many circles, one of the darkest secrets of the U.S. aerospace sector is that Russian rocket engines have been superior to their U.S. counterparts for decades. However, despite offering a higher quality product, Russia’s NOP Energomash has been limited in the number of engines it can sell to the U.S. due to restrictions imposed by the U.S. due to Russian military involvement in places like the Ukraine and Crimea.

While the company recently stated it would provide its largest order to the U.S. in the form of 15 engines for Atlas V and Antares rockets, that business is facing new competition in the form of Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin. Both U.S. companies are developing advanced rocket launch capabilities in making access to space more affordable.

U.S. companies are not the only ones responding to Russian political decisions. Germany-based Siemens recently announced that it would stop delivering power plant equipment to Russia after four gas turbines were found in Crimea, which violated a contractual agreement. This follows a Russian customer complaining about an electrical generator going to Crimea instead of the intended destination in southern Russia.

Crimea has been starved for power since Russia annexed the territory in 2014, interrupting the flow of electricity from Ukraine. By diverting resources to the controversial location, the Russian government has essentially eliminated the country’s access to Siemens power plant equipment.

In the future, Siemens said, it would deliver only equipment that its workers can install themselves.

Finally, the MiG line of fighter jets made famous by a Hollywood Maverick, are made by a Russian manufacturer of the same name. The company, which sells its planes to more than 30 countries, recently announced that its line of MiG-35 Fulcrum-F fighters will be ready within the next six to eight months for production and export.

The problem for MiG is that one its most prominent customers, the Russian government, has yet to announce its procurement plans. The current order is fluctuating between 40 and 260 of the combat jets. The creates obvious challenges in not only allocating the proper resources, but managing cash flow, investing in additional technologies, and pursuing new business. Until the Russian government places its order, MiG is in a holding pattern.