The Faster Times: Russian Arms Exports: Camouflage for an ailing Defense Industry?

The Faster Times: Russian Arms Exports: Camouflage for an ailing Defense Industry?

Daniel Darling

Despite confronting a sour global economic environment, last year Russia witnessed a continuation of arms sales growth with more such expansion expected through the near future. On January 28, Russia’s state-owned arms exporter, Rosoboronexport, reported that its sales grew by 10 percent in 2009, jumping from $6.7 billion to $7.4 billion. Rosobornexport accounted for around 80 percent of all Russian military exports in 2009, while Russian defense companies offering up spare parts, maintenance and other essential services accounted for the difference. Altogether Russia’s arms exports reached between $8.5-8.9 billion for the year. Better yet for the Kremlin, Rosoboronexport’s contractual agreements grew by $15 billion, bringing the total arms portfolio to over $34 billion.

These figures represent a sharp turnaround from the difficulties experienced by Russia during the decade following the breakup of the former Soviet Union. Perhaps more importantly, they represent a ray of light for a defense industry viewed by some as teetering on insolvency. The continuing growth in sales of Russian military-related exports serves notice to those predicting Russia’s defense industrial demise that at least for now such prognostications remain premature.

During the Soviet-era the Kremlin had cultivated an enormous military-industrial complex that came to represent between 15-25 percent of the entire Soviet GDP. After the dissolution of the USSR, however, the Soviet-built defense industrial infrastructure began to crumble under its own weight. Some weapons factories were converted for the purpose of producing consumer goods and the industry as a whole suffered from a sharp decline in state orders.

Challenged by the shift from the Soviet-controlled economic system to the rigors of competing in a market economy, the Russian defense sector was left scrambling without the former stream of state funding so vital to keeping technological development and assembly lines humming. Military production facilities and design and research institutes started to fall behind their competitors in the West, while many of the high-skilled engineers and other workers joined the growing Russian exodus abroad, depriving the sector of crucial intellectual capital.

The lack of state orders forced the Russian defense producers to turn to the export market for its source of revenue, but here it also encountered difficulties. The principal recipients of Soviet armaments, former Soviet republics and Warsaw Pact states, had vanished as an export source upon the collapse of their communist governments.

The demise of the Soviet Union heralded a shift of the strategic axis of Central and Eastern Europe, as the countries in this region sought integration with their Western neighbors. By opting to join NATO these countries committed to ridding themselves of Soviet-legacy hardware in favor of NATO-standard equipment. As a result, Russian defense suppliers became increasingly reliant upon China and India to serve as the engine of their export market, and by the beginning of the 21^st Century those two nations comprised 80 percent of all purchases of Russian military hardware.

Russia’s defense producers also continued to rely on Soviet-legacy designs, which were based on the paradigm of state-on-state industrialized warfare matching Soviet systems against those of the U.S. and NATO. Meanwhile, niche producers such as Israel began to focus on defense products of greater relevance in the area of irregular warfare. An emphasis on defense electronics and unmanned aerial vehicles (UAVs) allowed Israel to become a stronger player in the global arms market, eroding some of the Russian share of the Indian defense market.

Questions concerning the capacity for innovation have also plagued Russia’s defense industry, leading some government officials to criticize the sector for failing to provide the high-tech weaponry needed to outfit the Russian armed forces with modern platforms.  This has forced the Defense Ministry to do what was unthinkable during the post-Second World War Soviet period: turn to outside sources for needed equipment, as exemplified by negotiations for the Russian purchase of Israeli UAVs.

Despite these problems, global demand for its defense products in select areas such as air-defense systems, helicopters, missiles and combat aircraft indicates that the Russian defense industry still exudes life. Former Soviet arms clients such as Algeria, Syria and Vietnam have been tapped, new clients in Malaysia and Venezuela have been cultivated, and the Kremlin has shrewdly used the implied delivery of its S-300 air-defense system to Iran to try and pry more money for the same platform out of the Saudis.

Russian defense products, while perhaps not of the high-tech quality of their Western competitors, continue to be valued on the global market. Russian small arms, in particular, remain in demand due to their functionality, durability, easy maintenance and relatively low cost - each aspect a byproduct of the Soviet-era need to outfit a large, conscript army. Cooperative projects with other countries, such as India on the PAK FA fighter and Brahmos anti-ship missile, may also offer a lifeline for the industry.

More importantly, however, has been the renewed attention placed on the defense sector since Vladimir Putin first came to power. Under his leadership the Russian government streamlined Russia’s defense export business by creating Rosoboronexport as the unitary state arms trader, and then embarked on the nationalization and consolidation of the entirety of Russia’s defense industry. In addition the Kremlin has provided the defense sector with a financial cushion by boosting state orders for military equipment to the tune of $189 billion under the 2007-2015 State Armaments Program, while at the same time launching an effort to root out endemic corruption.

Whether such efforts will lead to a renewed strength in the Russian defense industry or instead temporarily serve to stave off its further diminishment is uncertain. But the looming difficulties facing the Russian defense sector are unlikely to be overcome by an uptick in year-on-year export sales. Foremost among these difficulties is the decline in Chinese demand for Russian hardware. Improved Chinese production capabilities and the country’s growth as an arms exporting competitor are undoubtedly of concern to Moscow.  There has also been a problem regarding the pilfering of Russian defense technologies, where countries produce copies of Russian designs without the purchase of a license, resulting in a loss of revenue.

Unless the Russian defense industry is able to demonstrate advanced innovations or develop new technologies in coordination with outside partners, the likelihood increases that within the next decade some of its particular segments - such as production of naval surface vessels - will be forced to cede their own domestic market to foreign suppliers. While perhaps not the collapse predicted, such a scenario would result in the further shrinking of the Russian defense industry and its relegation to niche provider on the global market.

Dan Darling is an international military markets analyst with Forecast International Inc., an aerospace and defense research company. A graduate of Kansas State University with a degree in history, he specializes in the European and Middle Eastern regions at Forecast.
Russia's UAC delivers 14 commercial aircraft in 2009

http://www.flightglobal.com/articles/2010/02/02/337912/russias-uac-delivers-14-commercial-aircraft-in-2009.html

By David Kaminski-Morrow

DATE:02/02/10

SOURCE:Flight International

Russia's United Aircraft airliner manufacturing divisions delivered 14 aircraft in 2009 and posted an 18% increase in consolidated revenues to Rb114 billion ($3.8 billion) .

Sales of commercial aircraft accounted for 11% of this total, Rb12.5 billion, 8.7% up on the previous year. Its civil aircraft divisions manufactured 17 civil aircraft, of which 14 were delivered.

The Aviastar plant at Ulyanovsk delivered five Tupolev Tu-204s: two to Red Wings, and one apiece to Cubana, Air Koryo and VTB Leasing. Voronezh-based VASO delivered four Ilyushin Il-96s - three to Polet and one to Rossiya, as well as the first two Russian-built Antonov An-148s, also to Rossiya.

The KAPO plant in Kazan delivered two Tu-214s to Russia's presidential transport arm, and a third went to Transaero. Three other airliners were manufactured but not delivered - these were Sukhoi Superjet 100 test airframes built by the KnAAPO plant in Komsomolsk-on-Amur. First deliveries of the type have been delayed.

Military sales accounted for Rb86 billion of UAC's income last year while research and development sales made up the balance. The company has not given profit or loss data.

UAC's consolidated debt fell by 13% to Rb157 billion. It says the debt reduction is associated with the initiation of state financial support measures to aerospace companies. Russia's government holds 89% of the share capital in the company.