Everyone Trades
Early in the year, Vlast traditionally sums up the operating results of Russian arms exporters. From the economic standpoint, 2002 was successful: according to unofficial data, delivery volumes reached a new record value of $4.7 billion. However, the main event was liberalization of Russia’s system of military-technical cooperation with other countries.
In January of last year, Vlast gave a detailed account of the struggle of various groups to change Russia’s system of military-technical cooperation (MTC) with foreign countries. The management of Federal State Unitary Enterprise Russian Defense Export (FGUP Rosoboroneksport), the only state agent and the largest Russian arms exporter, pressed President Putin to prohibit individual defense enterprises from selling their products abroad independently (at the beginning of the year, five other companies besides Rosoboroneksport had this right). In turn, the directors of these companies and Mikhail Dmitriev, the chairman of the military-technical cooperation committee, pressed for an expansion of the number of exporters. They proposed granting individual producers the right to export parts independently and to repair and service previously delivered weapons. The amount of money involved was considerable. In recent years, the share of independent exporters of finished products in the total volume of Russian arms deliveries has increased steadily from 3–5% in the mid-1990s to 15% last year. In 2002, this share was worth about $700 million.
It goes without saying that Rosoboroneksport was interested in bringing all these deliveries under its control, mainly because the country’s leaders evaluated the company’s operations by the amount of currency earnings. Other companies were striving to get into the repair and parts market, because they believed (with good reason) that this would allow them to significantly increase their revenues. First, specialists estimated the value of this market at about 30% of the cost of the serviced equipment. Second, they would be able to seek out and arrange orders without having to rely on the indulgence of Rosoboroneksport, which was used to working primarily with large contracts for delivery of finished products. Third, they would not have to pay the state agency commissions that sometimes exceeded 10% of the contract value. It was quite natural that Mikhail Dmitriev shared their hopes, since he was supposed to coordinate the operations of arms exporters, but if Rosoboroneksport had a monopoly in this sphere, he would have nothing to coordinate.
Rosoboroneksport was understandably displeased at the prospect of a mass entry of individual companies onto the foreign market. It was not so much a matter of losing money as losing control over the situation. Some companies might start operating successfully on the foreign market without the state agency’s participation, and at some point would demand the right to export finished products.
The outcome was somewhat unexpected. President Putin did not accept Rosoboroneksport’s proposal to give it a monopoly in the area of MTC. On the contrary, in September, he authorized other companies to independently export parts for previously delivered equipment, as well as service and repair it. The first four companies—Pribor Scientific Production Center (NPTs Pribor), Rubin Central Naval Engineering Design Office (TsKB morskoi tekhniki Rubin), the Salyut Moscow Machine-Building Enterprise (MMP Salyut), and Sukhoi Aviation Military-Industrial Complex (AVPK Sukhoi)—received this right by presidential decree. A list of another 42 companies that would subsequently be granted this right by the MTC committee was also approved. All this was unexpected, because prior to this it was believed that Vladimir Putin’s former colleagues in the KGB’s First Chief Directorate, i.e., Rosoboroneksport’s general director Andrei Belyaninov and especially his first deputy Sergei Chemezov, had much more influence on the President than all their rivals put together.
Matters did not end there, however. In October, the MTC committee made a fundamental decision to increase the number of exporters of finished products. Military-industrial holdings that were set up within the framework of the special federal program “Reform and Development of the Military-Industrial Complex (2002–2006)” were to receive the right to carry out foreign economic activity and export arms independently. The program stipulated that all defense enterprises that were still afloat would become part of vertically integrated holdings [it was proposed to set up about 50 holdings, three of which already existed: Sukhoi Aviation Holding Company (AKhK Sukhoi), the Air Defense Concern (PVO), and Tactical Missile Weapons (TRV)]. In other words, the committee’s decision called Rosoboroneksport’s future into question.
Evidently, Viktor Ivanov, another former KGB man and the deputy head of the presidential administration, played a key role in this turn of events. Last year, President Putin made him responsible for creating the unified PVO concern out of the Antei concern and the Almaz Research and Production Association (NPO Almaz). Ivanov accomplished this task and became chairman of PVO’s board of directors. At the same time, Antei’s managers, who had been fighting with Rosoboroneksport for a long time, convinced Ivanov that Andrei Belyaninov’s initiatives were harmful and the state agent’s monopolization of export powers was unacceptable.
Be that as it may, the events showed the vulnerability of the Belyaninov–Chemezov team, whose position had previously been considered unshakable. However, as Vlast’s sources at Rosoboroneksport have attested, the team is starting to break up on its own.
The fact is that in November 2001, when President Putin combined the state agents Rosvooruzhenie headed by Akeksei Ogarev, a Yeltsin “family” protégé, and Promeksport headed by Sergei Chemezov, Belyaninov became the nominal general director of the united Rosoboroneksport. This was because Chermezov’s name was clearly associated with the struggle among power groups for control over arms exports, and the President decided not to appoint him head of the country’s largest exporter. However, no one disputed Chemezov’s primacy in the company itself. He continued to work at the headquarters of the former Promeksport on ul. Stromynka, while Belyaninov went to him for meetings from Gogolevsky bulvar.
This situation has recently begun to change. Sources at Rosoboroneksport say the general director has acquired a taste for leadership and no longer wants to play the role of number two to his first deputy. Whereas Chemezov previously had the final say, Belyaninov now misses no opportunity to show that he is the real master of the house. Recently, he rejected Chemezov’s structural reorganization proposal for the company and insisted on his version of reform of Rosoboroneksport’s personnel structure. They say Chermezov pretended that nothing unusual had happened and raised no objections.
This does not mean he has resigned himself to the realignment of forces at Rosoboroneksport. On the contrary, Vlast sources report that the decisive round of the confrontation still lies ahead. In this case, the automatic replacement of Belyaninov with Chemezov is only one possible outcome. It may be that Chemezov will be able to convince the President to appoint him assistant for MTS matters or even vice premier responsible for the defense industry and the arms trade (Chemezov has been nurturing this idea for a long time). This in turn could lead to major changes in the existing balance of power in the arms trade sphere and a partial reorganization of the MTS system itself.
For now, experts are making very cautious forecasts about the prospects of Russian arms exports in 2003. First, the entry of individual companies onto the market could become a negative factor, as was the case in 1992–1994, when close to 20 manufacturers had the right to export independently. The competition among them was fierce, and exporters resorted to dumping to obtain orders and were prepared to sell goods at dumping prices. As a result Russian arms export volumes dropped to a record low of $1.7 billion. Second, if changes in the organization of the MTS system actually occur, this will almost certainly have a negative effect on export volumes; in any case, this has not furthered Russian arms sales in the past.
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The Year of Russian Aircraft
Official results for 2002 in the area of arms exports will become known only in February–March [after this issue of Vlast was published]; however, it is already clear that delivery volumes have increased by almost a billion dollars compared with 2001.
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| Sukhoi airplanes (in the photo: a Su-30MKI) make up about one-third of Russian arms exports |
The arms trade is evaluated according to two key figures: the value of deliveries and the amount of currency earnings. Over long periods, these two figures should be about equal; but in any given year, they may seriously differ. In 2001, for example, Russia delivered arms valued at $3.7 billion abroad but currency earnings amounted to $4.4 billion.
Last year, as before, the state agent Rosoboroneksport accounted for the main volume of deliveries and currency earnings. In a recent interview, general director Andrei Belyaninov stated that the company’s revenues had reached $4.3 billion. The value of deliveries as of November amounted to $3.4 billion according to chairman of the MTS committee Mikhail Dmitriev. Taking into account that shipments of arms and military equipment to foreign customers usually intensify in December, Rosoboroneksport’s total delivery volume should approach $3.9 billion or even exceed this amount (i.e., higher than the target figure of $3.5 billion for 2002). In comparison, the value of the company’s deliveries in 2001 amounted to $3.3 billion.
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| China is prepared to buy two type 956EM destroyers for $700 million each |
As in the preceding two years, fighter planes of the Su-27/30 family formed the export basis. Ten Su-30MKI planes were delivered to India under a contract signed in 1996. China received 19 Su-30MKK’s and 10 Su-27UBK’s. In addition, 10–15 assemblages for licensed J-11 planes are being sent to China (the Chinese name for Su-27SK fighters produced under Russian license). According to unconfirmed reports, Russia also delivered a second consignment of Su-27’s (from the Ministry of Defense’s inventory in stock) to Ethiopia last year. Approximately 12 Su-24 frontline fighters are being delivered to Algeria. The combined value of all these shipments came to more than $1.3 billion. There are reports that Western journalists observed four Su-27’s at Asmara airport in Eritrea. However, the most likely supplier of these fighters is Ukraine or some other CIS state. The appearance of heavyweight fighters in Eritrea’s air force was probably provoked by Ethiopia’s purchase of a new consignment of Russian Su-27’s.
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| The Indian army is ready to defend the motherland down to the last Russian tank |
Along with deliveries of helicopters and air-to-air and air-to-surface missiles, aircraft equipment as a whole made up more than two-thirds of the company’s exports. In the land force equipment sector, Rosoboroneksport has completed the delivery obligations under a tank contract concluded with India in early 2001, which stipulated the delivery of 124 T-90S tanks and licensed production of an additional 186 of these tanks. Eighty-four machines were sent to India in 2002, after which Rosoboroneksport and the Ural Coach Factory (Uralvagonzavod) of Nizhny Tagil proceeded with preparations for licensed production of the T-90S in India.
Naval weapons occupied a relatively modest place in Rosoboroneksport’s deliveries last year. Vietnam received two patrol boats; and for India, the company carried out modernization of a type 877EKM submarine, which received a Club-N missile system.
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| Whereas Sukhoi sells its planes mainly to the Far East, MiG looks to the Middle East, having already delivered several MiG-29 fighters to Yemen |
During the year, however, Rosoboroneksport concluded a series of very large naval contracts, including contracts with China for the construction of two type 956EM destroyers (worth $1.4 billion), delivery of eight Kilo class submarines (worth up to $2 billion), and Rif long-range shipborne antiaircraft missile systems. Greece has ordered a third Zubr air-cushion landing craft.
Thus, it looks as if the era of absolute domination of aircraft equipment is coming to an end; and in future, Russian exports will be based to a large extent on naval weapons.
Faddei Setkin, Ilya Bulavinov, Nikolai Gulko
All the Article in Russian as of Feb. 03, 2003
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Photo: Pavel Smertin
