To Sequestrate, or Not to Sequestrate: The Impact of Covid-19 on Military Budgets

The ongoing coronavirus pandemic combined with the resulting economic crisis is already affecting behaviors of most countries in the world, including leading military powers. Thus, the adjustment of state expenditures, such as military budgets, is almost unavoidable in this situation. At the same time, a number of countries will inevitably try to support their technology leaders, as a rule, major weapons and equipment manufacturers included. This article attempts to forecast possible reactions of the planet’s military leaders with a focus on their priorities in the event of a deepening crisis.

In case of positive developments (i.e. limited damages and the rapid economic recovery), military programs on all sides stay practically intact and more attention is given to the automation of some processes and further “depopulation” of the military sphere.

An interim option suggests that the global restoration will last a few years and only the United States can avoid serious revisions by taking advantage of its position as the issuer of the world currency; however, some plans will likely be revised in favor of more effective employment and development of the national industry.

A negative scenario involves a serious collapse, including a number of global financial corporations becoming bankrupt. Behaviors of the military leaders and countries of the Second or Third Echelon will differ dramatically: the latter will practically stop the procurement of new equipment and in some cases be forced to make substantial reductions in the armed forces; the former will consider the military industry, first of all, in the context of saving their own economies, which implies significant changes in priorities, the preservation of serial productions of equipment, albeit in reduced production volumes, and the slow-down of expensive and promising R&D, which in early stages mainly generates costs.

The USA: More Money for Each and Every One!

The U.S. behavior in financing military programs will generally be determined by its macroeconomic policy, which so far has been within the expected range: the Federal Reserve has already announced extensive new measures to support the economy, including the explicitly stated program of supporting a generous lending to businesses. US President Donald Trump, in turn, decides against the nation-wide quarantine in order to ensure the functioning of economy, though, a final decision on this issue is yet to be made.

Given statements made and the memorandum issued by Under Secretary of Defense for Acquisition and Sustainment Ellen M. Lord on the need to maintain the production of armaments and military equipment, it can be assumed that the United States, at least in the nearest future, intends not to reduce its military production programs.

Nevertheless, the memorandum outlines some priorities and the following areas were identified in this capacity: aerospace; mechanical and software engineers; manufacturing/production workers; IT support; security staff; intelligence support; aircraft and weapons systems mechanics and maintainers; suppliers of medical supplies and pharmaceuticals; and critical transportation.

Based on these priorities, it can be concluded that, most likely, all programs on upgrading the U.S. Air Force as well as space programs will be preserved. In addition, existing contracts concluded for the production of military equipment for other types of armed forces will be executed in order to provide support for production enterprises. At the same time, it is possible that some R&D expenses will be reduced in early stages of the cycle as they require substantial funds and not give a large number of jobs and man-hours in the short term.

This approach cannot be called new. A support for the economy through government spending, including the military one, was characteristic of the American leadership in the midst of the Great Depression in the early 1930s. The economic crisis did not obstruct financing of the construction of almost two dozen cruisers, four aircraft carriers, and a large number of ships of other classes for the U.S. Navy during this period; at the same time, the polit-military situation at that moment did not necessitate strengthened procurement; however, a few projects in initial stages of development were put on hold, which subsequently led to a shortage of modern equipment in the U.S. Army and military aviation in the first period of World War II.

The key difference with the current situation is the transition of priorities from the fleet to the Air Force and the space group. The fleet can still get its share in the form of increasing the production volume of existing types of ships and vessels. Previously announced plans to increase the number of U.S. Navy ships of main classification types to 355 are likely to remain in the category of intentions, especially taking into account the probable early disposal of various obsolete assets and the ability to order new ones to replace them.

Russia: Revising Priorities

Given the general economic environment, the situation for Russia is different: the ruble is not a world currency or a universal medium of exchange, which limits possibilities of supporting the national economy by emission methods, the way the United States is trying to do. A fall in budget revenues, due both to the collapse of oil prices and the reduction in tax revenues because of the economic downturn aggravated by the current pandemic, will inevitably require a revision of the state armament program priorities, even if nominal costs do not change.

Taking into account the traditional prioritization of the Russian military development in the post-Soviet period, objects of the defense spending sequestration are totally clear. Most likely programs for the Navy, which is already at the bottom of the military priorities pyramid, will be reviewed, including the development of new projects of capital ships (the new generation of aircraft carriers and Leader-class destroyers) and the reduction in infrastructure renovation costs in several districts, such as the Arctic. The program of modernization of ships and submarines built in 1980–1990s is also at risk, given the previous tendency to exceed funding figures and shift work timeframes. In face of quarantine measures, plans to construct new ships within the framework of the state defense order for 2020 are sure to be tilted.

Land forces are also among the likeliest victims. The high cost of finalizing and launching a series of new models of armored vehicles on promising ArmataKurganets, and Boomerang platforms has already forced lifting the large-scale production of these vehicles, and they again become the first in line for budget cuts in the current situation. At the same time, artillery weapon modernization programs will most probably be unaffected, given the growing role of long-range artillery systems equipped with the guided ammunition and the target designation from unmanned aerial vehicles, among other things.

The nuclear deterrence and aerospace forces remain as priorities for the Russian military construction, but a revision of expenditures is inevitable here too. In the area of strategic nuclear forces, projects for the revival of railway-based ICBM most likely will be canceled. They are currently represented by Barguzin ICBM, the need and serial prospects of which have repeatedly arose doubts. Developing the Burevestnik nuclear-armed cruise missile with a nuclear propulsion system will be certainly postponed (if not completely canceled). At the same time, serial productions of ballistic missiles Yars and Bulava, as well as Sarmat, all of which are in late stages of development, will continue per program.

As of procurement for the aerospace forces, the first to suffer will be early-stage developments: promising Long-Range Aviation and Transport Aviation branches (PAK DA, PAK TA). A reduction of funding is also possible for a number of other projects, such as the upgrade of Su-30 fighter aircrafts and Su-34 bomber/strike aircrafts, the development of a promising medium military transport aircraft, the new product family of Marine Corps helicopters, etc. At the same time, the military department and the industry leadership will probably strive to maintain the serial production of modern aircrafts, so the termination of the procurement of aircrafts under construction is implausible.

With respect to air defense and missile defense technologies, the S-500 missile system, encountering high expectations as a promising air defense/missile defense weapon in the theater of operations, will certainly go into serial production. A shift to the right is also possible for the large-scale delivery of S-350, a non-critical element in the Russian air defense system production line, as its range of operations is covered by other systems from above and from below.

Space vehicles will inevitably preserve, and possibly improve, their positions in the priority list, given the vital role of space reconnaissance, navigation, and communications in ensuring the country’s defense capabilities, as well as prospects for the deployment of anti-satellite weapons by leading global actors. In this regard, the development of electronic technologies for space military equipment almost unavoidably becomes a top priority, the procurement of imported equipment being even more complicated than ever before.

To the detriment of traditional weapon systems, the share of spending for unmanned vehicles, especially battlefield UAVs, will significantly increase on account of capabilities they have demonstrated in local conflicts, particularly in Syria. The availability of workable reconnaissance-strike systems, including reconnaissance-strike UAVs, space-based systems, long-range artilleries, and the aviation with high-precision weapons, can drastically reduce the number of traditional weapons systems needed to solve most tasks on the battlefield.

Europe: At Whose Expense?

Military budgets of European countries are very difficult to compare, primarily because expenditures of Germany, the top 5 world economy, for instance, and Estonia, one of the world’s smallest economies, are formed on the basis of completely different priorities. European countries in the Second or Third Echelon have already begun to reduce military spending during the ongoing crisis, for example, the Czech Republic envisages postponing the purchase of military equipment worth CZK 2.9 billion (about USD 120 million). Defense budget corrections are expected in other NATO countries as well. At the same time, Secretary General of NATO Jens Stoltenberg encouraged the member states not just to maintain but even increase their military spending.

Potential effects of the current crisis on the stability and prospects of the NATO Alliance as a whole is a separate topic worthy of reflection, but within the framework of this article a primary focus will be given to expected behaviors of European countries and leaders of the Alliance, whose military spending can be a tool to save their own and the pan-European economy.

From this point of view, one should await a reduction in expenditures for exercises, as not creating additional jobs their costs only bring losses in a crisis situation. The ongoing pandemic has already led to such a reduction by forcing to cancel scheduled series of NATO exercises, and given economic prospects, no one is expecting large-scale exercises the following year.

NATO leaders will also have to solve the complicated issue of supporting their arms and military equipment manufacturers, that is technology leaders of the European industry, and this pie will need to be cut for several eaters at once. The simplest case is Great Britain, which stopped being a EU member this year, as the support of BAE Systems is its, and partly the U.S.’s, national task; however, within the continental Europe the competition among manufacturers for a share in military spending and anti-crisis packages will sharply increase.

A substantial part of the military budgets will certainly be redirected to sustain Airbus. Provided the expected many-fold reduction in Airbus deliveries, the fall of the company, which was very likely to happen, will leave Europe without its own civilian aircraft manufacturer. The rescue of Airbus will require, among other things, the participation of Great Britain, whose industry is equally interested in maintaining the existence of a pan-European manufacturer of civilian aircrafts.

What is anticipated for combat aircrafts is, first, braking the work process on existing European perspective fighters (French-German FCAS, British-Italian Tempest) and second, a possible revision of current procurement plans by a number of countries, especially with regard to the U.S. 5th Generation F-35 fighter, shifting the timeline to the right: Europe’s participation in this program is not so extensive and makes no warranties in the period when belts must be tightened.

The work on the promising Franco-German tank project KANT, which has been underway since 2015, will be postponed as well. The project involves the creation of a single main battle tank for the armies of the two countries. At this stage, the project requires further investment, but hardly creates production orders or jobs, unlike serial armored vehicles.

Still, this is a longer-term prospect; for now the epidemic is slowing down the ongoing working process. Fincantieri (Italy) and Navantia (Spain) shipbuilding groups, for example, have already reduced their activities. Considering serious damages that the epidemic has already caused to both countries, especially in terms of declining tourism revenues in GDP, it can be assumed that further activities of the defense industries in Italy and Spain will be revised based on their states of the economy in the post-epidemic period. French shipbuilders, who have not yet stopped productions but have reduced their activities and changed some work protocols, too will have to revise their plans. The priority task for the Naval Groupi is to maintain the combat effectiveness of French nuclear submarines and the aircraft carrier Charles de Gaulle. That said, it is thus far difficult to say what kind of impact the crisis will have on the scheduled test program of Suffren submarine, the newest Barracuda class attack submarine.

Nonetheless, according to Petr Topychkanov, Senior Researcher at SIPRI, there is no reason to expect big changes: “The current crisis is another reason for NATO to urge its members to integrate more and increase military capabilities and expenditures. In addition to the traditional threat in the form of the eastern neighbor, whose name was mentioned in connection with the information policy allegedly pursued to spread disinformation and panic over COVID-19, there are now new threats like the virus itself, and the Alliance members were not quite ready for it (but who was ready?). While European countries are only approaching the peak of the epidemic, it is difficult to predict its long-term effect on military spending and the development of the defense industry. So far, we have not heard about the serious need to reduce military spending in favor of restoring the socio-economic sphere. The absence of such rhetoric, together with signals from NATO, suggest that the Alliance members will try to maintain or even increase military spending. Because of the crisis, they will have to adjust priorities, revise schedules, but these changes are unlikely to lead to a long-term decline in military expenditure or the withdrawal of large companies from the arms market”.

A Scenario Check

Any forecast should describe a future scenario that can later be checked for compliance with real events, further assessing the given forecast. The above outlined provisions can briefly be summarized as follows:

In case of positive developments (i.e. limited damages and the rapid economic recovery), military programs on all sides stay practically intact and more attention is given to the automation of some processes and further “depopulation” of the military sphere;

An interim option suggests that the global restoration will last a few years and only the United States can avoid serious revisions by taking advantage of its position as the issuer of the world currency. Some plans, tough, will likely be revised in favor of more effective employment and development of the national industry;

A negative scenario involves a serious collapse, including a number of global financial corporations becoming bankrupt. Behaviors of the military leaders and countries of the Second or Third Echelon will differ dramatically: the latter will practically stop the procurement of new equipment and in some cases be forced to make substantial reductions in the armed forces; the former will consider the military industry, first of all, in the context of saving their own economies, which implies significant changes in priorities, the preservation of serial productions of equipment, albeit in reduced production volumes, and the slow-down of expensive and promising R&D, which in early stages mainly generates costs.

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