A Russian Riddle: Procurement Policies Explained
“Russian Prime Minister Medvedev gave government backing [Moscow Times] to loans meant to finance the fulfillment of government orders by defense contractors such as MiG. We wrote that sentence and can’t make sense of it either. Do they mean that until that announcement the Russian government may not have paid for what it had ordered?”
Enter DID subscriber Iouri Synogatch to say yes, it does mean what we thought it said. But there’s also more to the story…
“In the past the MoD paid for orders upon delivery. This forced manufacturers to take loans, to cover production costs, which they would repay after receiving their MoD contract payment upon delivery. This often resulted in them losing money on the interest rates. It also left them in a bad place, if the MoD rethought the order, or delayed payment for some reason. In some cases even the inflation on costs of materials and labor ate their loan money, leaving them with a net loss on the product, upon delivery. However starting in the Serdyukov era, they have slowly been moving over to advance financing of the purchase, at the production stage.
This is not at 100% yet. So Medvedev is talking about government funds being used to make sure the industrial enterprises that still take out loans to pay for production costs, are able to get those loans at a reasonable rate. This will probably mean state banks providing the loans at better then market rates.
Interestingly enough, [the new defense minister] Shoygu has been pushing for a move away from advance financing… for certain projects, like military housing. He says that it puts the government in a vulnerable position if the construction company, for example, is late handing over the facility, or suddenly runs out of funds due to inefficiency, and demands more money to finish it.”
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