It is too early to say that India is losing interest in Russian military equipment. Yet, Russia cannot hope for a drastic increase in supplies either.
Photo: ITAR-TASS
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Military-Technical Rearrangement
As always in February, Kommersant Vlast analytical weekly sums up the achievements of Russia’s weaponry exporters. Weapons supply grew by $1 billion in 2007, while the entire system of military-technical cooperation and Russia’s defense industry was undergoing reorganization.
Great Integrator
Russia’s weaponry export, which reduced catastrophically in 1997-1998 (down to $2.6 billion a year), has been steadily growing for almost a decade. Main increase occurred since the creation of Rosoboronexport Federal State Unitary Enterprise, the integrated state mediator in military-technical cooperation. The enterprise was created by means of step-by-step merger of three state mediators. In April 2000, Vladimir Putin made Russian Technologies company a part of Promexport. In November, he signed a decree on creating Rosoboronexport on the basis of Promexport and Rosvooruzhenie company.
Certainly, the integration’s chief contributor was Sergei Chemezov, Putin’s old colleague. In Soviet times, they worked together in East Germany in the KGB’s foreign intelligence. In late 90s, they worked in the Russian President’s Administrative Department. In September 1999, Chemezov was appointed the head of Promexport. Soon afterwards, he suggested uniting all state mediators into one enterprise. Liquidating Russian Technologies was the plan’s first step.
However, when Rosoboronexport was created, Promexport’s deputy director Andrei Belyaninov unexpectedly became its director, while Chemezov became just the first deputy director of Rosoboronexport. Anyway, it was Chemezov who worked on arranging major weapon contracts. In April 2004, he became Rosoboronexport’s director. His long-standing acquaintance with Putin encouraged the state’s more active support for Russian weaponry producers’ export projects. Consequently, Russian weaponry sales grew from $3.68 billion up to $7.5 billion during Chemezov’s work in Rosoboronexport in 2000-2007. Last year, as compared to 2006, the export increased drastically by $1 billion. With correction for the dollar rate fall and dollar inflation, it means an actual growth of nearly 5 percent. According to preliminary estimation, the supplies under Rosoboronexport’s contracts made up over 80 percent ($6.1 billion) of the total sum.
However, Chemezov did not stop at creating Rosoboronexport. Eventually, the company became not just the only weaponry state mediator, but also the only exporter of weapons and military equipment. In mid-January 2007, President Putin signed a decree on granting the exclusive right to export military end-products to Rosoboronexport only. Thus, Russia created its second export monopoly after Gazprom. Before, the right to independently export end-products also belonged to Russian Aircraft-Building Corporation MiG, Reutov Machine-Building scientific & production center, Kolomna Machine-Building design center, and Tula Instrument-Making design center. They now have to sign contracts via Rosoboronexport only. Producers are allowed to bypass the state mediator only when selling spare parts abroad and when maintaining the weaponry sold earlier (this right now belongs to 17 factories and design centers).
Obtaining more and more rights for Rosoboronexport, Chemezov kept developing integration processes as well, which earned him a joking nickname of “Great Integrator” among weaponry producers. Back when creating Rosoboronexport, he suggested establishing on its basis an organization similar to the Soviet Defense Industry Ministry adjusted to market realia. Initially, the project for entrusting Rosoboronexport with the control over the entire Russia’s defense-industry complex stipulated transforming the state mediator into a joint-stock company and handing over to Rosoboronexport at least the blocking packages (25 percent plus one share) of all leading defense enterprises. Although the president did not support the idea in 2002, Chemezov was not distracted by that failure. He suggested a different, extensive way towards consolidation, which was implemented in 2007.
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| Photo: Dmitry Dukhanin |
| Sergei Chemezov (R) secured the president's backing when he pointed out it is necessary to use Soviet experience in the defense industry. |
Russian Technologies instead of Rosoboronexport
The new plan provided for controlling the defense industry in two directions: Rosoboronexport’s membership in the boards of major defense companies and creating a defense-industry state corporation on the basis of Rosoboronexport.
Chemezov disclosed the idea for the first time in late 2005. To implement this part of the ‘Chemezov Plan’, Rosoboronexport was actively buying up industrial assets ever since it was created. In 2002, there began the process of creating Helicopters of Russia helicopter-building holding on the basis of Rosoboronexport’s subsidiary Oboronprom, which was fully implemented in 2007. In late 2005, Rosoboronexport acquired 61.8 percent of shares of major Russian car producer AvtoVAZ. In late 2006, it bought out 66 percent of shares of titanium producer VSMPO-Avisma Corporation. In early 2007, via Russpetsstal Holding, it bought Krasny Oktyabr metallurgical factory, and began forming a state monopoly for special steel production. In November 2007, it announced it was going to create an armored-tank holding based on Uralvagonzavod, and offered to join to the shareholders of Kurganmashzavod and Arzamass Machine-Building Factory. Last year, Rosoboronexport started consolidating assets in aircraft engine-building, and began forming two more holdings, of electric appliances and composite materials.
Meanwhile, the legislative basis was prepared for the state corporation. In June 2007, Chemezov said that the Kremlin administration had already coordinated the Russian president’s decree on the necessity to work out a draft bill on transforming FGUP Rosoboronexport into a state corporation. It received the name of one of the first joined companies – Russian Technologies. “We do not want defense components in the name, because the state corporation will also include civilian enterprises,” explained Chemezov. On November 9, the State Duma passed the law “About Russian Technologies state corporation”. The law was approved by the Federation Council on November 16, and signed by the president on November 24. According to the law, the corporation is being created for facilitating “development, production, and export of high-tech industrial products” and for “attracting investment into organizing various branches of industry, including the defense-industry complex”. Russian Technologies’ property is to be formed by payments from the state, the organizations whose shares are in the corporation’s property, and “other legal incoming payments”.
Russian Technologies’ creation will be carried out in two steps. First, Rosoboronexport will be transformed into a joint-stock company. Then, it will become part of the state corporation together with its subsidiaries VSMPO-Avisma, AvtoVAZ, Russpetsstal, and Oboronprom. In fact, Russian Technologies will be a holding state company with a special status, and its subsidiaries will be able to carry out any actions on the market, including IPOs. Nowadays, the assets of Rosoboronexport and its subsidiaries are estimated at $25 billion. Around $6 billion more pass annually through its accounts as export contracts. The weaponry orders portfolio makes up over $24 billion. Formally a non-commercial organization, Russian Technologies is beyond the system of control over NGOs. Moreover, it is beyond the bankruptcy law. The choice of Russian Technologies’ head was quite logical: Chemezov became its director general, for its creation was his personal project. Taking into account the prospect that Putin will retain power as prime minister, Chemezov has good chances to strengthen his administrative resource and to implement new plans for expanding Russian Technologies.
Chemezov as Rosoboronexport’s director was replaced by his former deputy Anatoly Isaikin, who supervised economic security issues, administrative activities, supplying special armaments, and carrying out some exhibitions. Defense enterprises’ directors said Isaikin was “one of Chemezov’s closest associates and carried out his personal errands”. “In any case, it is someone extremely loyal to Chemezov, and who has always been his right hand,” said a source from Chemezov’s closest entourage. After Rosoboronexport is turned into a joint-stock company and its 100 percent of shares is transferred to Russian Technologies, Chemezov is likely to become the head of the state intermediary’s board of directors.
However, becoming part of Russian Technologies has actually changed Rosoboronexport’s status, turning it from a state mediator into just a foreign trade department of the state corporation. Certainly, Russia’s law “About military-technical cooperation” was timely adjusted, and now provides for a possibility to act as a weaponry state mediator for the enterprise’s 100-percent state-owned subsidiary. Yet, Chemezov has in fact created a casus belli: now, nothing will legally prevent any export structure of another state corporation like Gazprom from claiming to act as a state mediator in the military-technical cooperation as well.
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| Photo: ITAR-TASS |
| India refused to pay more for updating Admiral Gorshkov aircraft carrier. |
At the same time, Rosoboronexport obtained a number of obvious advantages by becoming Russian Technologies’ subsidiary. For instance, as Chemezov said, if foreign sanctions are imposed on Rosoboronexport now, it will not concern its subsidiaries. The sanctions were once imposed on Rosoboronexport by the U.S. Department of State in August 2006 due to the alleged violation of the U.S. law “On non-proliferation of mass destruction weapons production technology and means of supplying it to Iran”. The sanctions could also affect the titanium export by VSMPO-Avisma, because it was Rosoboronexport’s subsidiary back then. These scenarios are now becoming impossible. Although it is impossible to guarantee that similar sanctions will not be imposed afterwards, especially with Rosoboronexport’s active coming to new markets earlier controlled by the U.S. or European countries. In recent years, Russia has acquired conflicts of interests with the U.S. -- in Venezuela and Saudi Arabia, and with France – in Algeria, Libya, and Morocco.
Weaponry-Export Wars
It is the competition with the U.S. and France, as well as acute intra-clan struggle among Algeria’s authorities, that triggered an actual fall-through of a large contract for supplying 28 one-pilot MiG-29SMT and 6 two-pilot MiG-29UB to Algeria. The contract was signed within the framework of a large package agreement on military-technical cooperation worth around $8 billion in total. Russia promised to write off Algeria’s foreign debt to former USSR (around $4.7 billion) while carrying out the portfolio of military equipment orders. However, after supplying the first set of MiG jets in late 2006, Algeria stopped buying them.
A source in Russia’s Federal Service for Military-Technical Cooperation (FSMTC) said the supply of more MiG jets was initially suspended due to Algeria’s claims to the quality of two training-and-combat MiG-29UB. “The FSMTC discussed the claims at its session in March, and worked out the recommendations for removing the problems. The problems were removed,” the source said. He added, however, that Algeria kept making groundless claims to MiG jets. “All aircrafts of the first supply were taken over by the customer’s representatives in Russia. After the jets were transported to Algeria, they were taken over by Algerian Air Force, put into operation, but then there appeared the claims,” said a source in MiG Corporation. “Algeria stopped financing the project. Consequently, the contract’s next stage has been suspended, while MiG and Russia on the whole are suffering losses.” Anyway, a source in the Russian president’s staff said that in August 2007, Algerian President Abdelaziz Bouteflika sent a letter to Vladimir Putin asking him to solve the issue of MiG jets’ quality.
Experts regard this and other similar scandals as consequences of the inner struggle among the Algerian authorities. Ruslan Pukhov, director of the Strategy and Technology Analysis Center, believes that Algeria’s political elite “consists of pro-Russia, pro-France, and pro-U.S. groupings that defend their partners’ interests”. “These clans counteract each other, winning in turns,” said Pukhov. The expert thinks the cooldown in Russia-Algeria relations fell in time with French President Nicolas Sarkozy’s drastic activation in the African direction. Among other things, he is actively promoting French fighter jets Rafale in northern Africa, which compete with Russian MiGs. In its turn, the U.S. lobbies its fighter jets F-16 in Algeria. Consequently (as of early January 2008), Russia has been considering whether to cancel the contract and to request Algeria to pay the forfeit to MiG Corporation. Anyway, Algeria does not exclude it might buy heavier fighter jets Su-30MKI(A) instead of MiG jets.
However, Rosoboronexport had more difficulties in 2007 due to the inability of Russian defense enterprises to carry out their obligations in due time. It especially complicates Moscow-Delhi military-equipment cooperation. For instance, Indian Fleet representatives said in September 2007 that the handing over into India’s lease of Chakra nuclear submarine of project 971 Shchuka-B, scheduled for August 15, has been put off to June 15, 2008, because Amur Vessel-Building Factory is delaying its construction by 10 months. Moreover, Russia insisted on reconsidering its price from $650 million to $785 million. India agreed to the delay, but refused to reconsider the price.
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| Photo: |
| Air-defense S-300PMU1 system. |
The delays in re-equipping and updating Admiral Gorshkov aircraft carrier for India at Severodvinsk Machine-Building Enterprise led to putting off the ship’s delivery date from late 2008 to 2011-2012. Moreover, the cost of production was underestimated. In January 2004, the contract for updating the vessel was signed at around $700 million. Already in mid-2007, Russian officials said around $1 billion more is needed. Russia has already offered to Delhi to pay $700 million more for Admiral Gorshkov. Naturally, India refused. Apparently, the delay with handing over the vessel itself will lead to reconsidering the supply deadline of fighter jets MiG-29K and MiG-29KUB and anti-submarine helicopters Ka-28 and Ka-31 for the vessel.
Last year, India also refused to take over the updated anti-submarine aircraft Il-38 and diesel-electric submarine of project 877EKM because of claims to quality of the update. Due to all the delays and difficulties, India’s Navy Commander-in-Chief Admiral Sureesh Mehta said in early December that Delhi might reconsider the military-technical cooperation with Russia if Moscow keeps delaying the update of Admiral Gorshkov. The admiral said India might “ponder where our defense relations are going”.
The negative trends in Russia’s defense industry might trigger the fall of Russian weaponry supplies at large in the mid-term perspective. “After reaching the level of supplies of $7 billion a year, Russia found itself on a sort of ‘plateau’: the export will remain at this level for at least 3 or 4 years, if the current international situation remains. However, the ‘plateau’ might then suffer a drastic fall,” said Pukhov. The expert believes Russia’s defense industry needs more personnel, especially highly-skilled workers. Meanwhile, the inflation in the sector considerably exceeds the general inflation level in the country. In 2007, the inflation in Russia made up around 12 percent, while the defense industry’s inflation is estimated at over 20 percent. Besides, as Pukhov thinks, the industry’s overhead expenses are rapidly growing due to the neglect of energy-saving technologies. So, Russia is unable to produce some weapons at all, while others might prove unable to compete due to their cost.
Russian Technologies state corporation will be able to timely neutralize the negative trends. With his administrative resource, Chemezov is able to lobby the budget changes and the laws correction in order to improve the situation with Russia’s defense industry. Apparently, it will become his priority task as Russian Technologies’ head.
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Who is Armed by Russia
Dmitry Vasiliev, expert of the Strategy and Technology Analysis Center, analyzed the structure of Russia’s weaponry export.
What Was Supplied
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| Photo: Pavel Smertin |
| 40 Su-30MKI fighter jets were supplied to India. |
The 2007 supplies are quite unusual in their structure. Although the major share is once again made up of aircraft supplies (61 percent of total identified amount of military-technical cooperation), the second position was unexpectedly taken by the supplies of armaments and military equipment for land troops (21 percent of identified supplies).
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| Photo: ITAR-TASS |
| 347 T-90S tanks were supplied to India. |
Speaking of aircrafts, the major part is once again made up by Su-30MK fighter jets. A record number of transfers in the entire post-Soviet period – 49 jets: 24 to India, 12 to Venezuela, 10 to Malaysia, and 3 to Algeria. It is in stark contrast to the fall-through years of 2005-2006, when the heavy fighter jets export was chiefly focused on transferring technologic sets under Indian license program. The 2007 results exceed by far the quite successful years of 2002-2004 when Sukhoi and Irkut corporations supplied 35-38 jets annually to foreign markets. In early 2008, MiG Corporation kept supplying MiG-29SMT to Algeria under the 2006 contract. Nowadays, that country already has around 15-20 MiG-29SMT and MiG-29UBT jets.
China is among the chief recipients of helicopters in 2007 (12 transport Mi-171 helicopters). Venezuela acquired at least two fighter Mi-35M helicopters and two transport Mi-26T2 helicopters. At last, aircraft engines were transferred to China and India under separate contracts. India began preparation for licensed production of 120 RD-33 engines (necessary for modernizing India’s fleet of MiG-29 jets), and China obtained AL-31FN engines for its F-10 jets.
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| Photo: ITAR-TASS |
| Russia supplied 12 Mi-171 helicopters to China. |
The third and the fourth position in Russia’s supplies structure are taken by transfers of air-defense systems and navy armaments accordingly (10 percent and 8 percent of identified supplies). However, considering the low transparency of the export of these types of weapons, the estimation might be lower than in reality. We can suppose that China began receiving S-300PMU2 Favorit systems in 2007. Among large supplies of navy equipment, there is data about the transfer of two missile boats Molnia of project N12418 under a 2003 contract for supplying two and for licensed production of ten more boats in Vietnam.
What Was Signed
The year of 2007 was also successful in the number of new contracts. Here again, India and Su-30 MK jets are the absolute leaders. In April, the long-awaited contract for supplying 18 Su-30MKI to Indian Air Force was signed, to replace the Su-30K acquired by India in 1997 and 1999. In October, a new contract (estimated at $1.6 billion) for supplying to India extra 40 fighter jets and technologic sets Su-30MKI was signed, in addition to the already ordered in 2000 the 140 sets to be assembled in India at HAL factories.
A small contract worth $335 million for supplying 6 fighter jets (Su-27SMK and 3 Su-30MK2) was signed by Indonesia. So, within a year, Russia received orders for exporting 64 jets of Su-30MK line, which is considerably higher than in the super-successful 2006, when Algeria and Venezuela ordered 52 fighter jets in total.
In summer 2007, there appeared news that Russia signed a contact with a Middle East country (presumably Syria) for supplying 5 interceptor jets MiG-31E. The news was denied by Russian officials, but sources in the industry confirmed there at least was the export order for MiG-31E without specified importing country. Apparently, it is the first contract ever for exporting new MiG-31E. Besides, MiG Corporation must have received orders for MiG-29SMT, and probably MiG-29M2 as well, to Syria or some other Middle East country.
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| Photo: Marina Lysceva |
| Russia supplied MiG-29SMT fighter jets to Algeria. |
Separate contracts for aircraft engines were signed in 2007 with China and India. China ordered another set of 100 AL-31FN ($320 million), and India signed an agreement on establishing a licensed production of 120 RD-33 engines ($300 million). Last year’s peculiar feature is that a large number of contracts were signed in the sector of armaments and military equipment for land troops. Chief of them are orders of 347 T-90S tanks and 14 Smerch systems to India, worth almost $1.5 billion in total. There was also an agreement with Greece on exporting 415 BMP-3 tanks worth ˆ1.2 billion in total. This contract is expected to be ratified by the Greek government in summer 2008.
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| Photo: |
| S-300PMU1 systems were supplied to Iran. |
In the air-defense sector, the chief intrigue was produced by the news from Iranian sources about the allegedly existing contract for supplying S-300PMU1 systems to Iran. The news was announced by Iranian Defense Minister Mostafa Mohammad Najar. However, the data concerning the contract’s signing date and its terms and deadlines were not disclosed.
Russia’s weaponry export in 2000-2007 ($ billion)
| Years | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | | Russia | 3,681 | 3,705 | 4,81 | 5,4 | 5,78 | 6,126 | 6,5 | 7,5* | | Rosoboronexport’s share | 3,09 | 3,3 | 3,984 | 5,075 | 5,12 | 5,226 | 5,3 | 6,1* | Source: Russia’s Federal Service for Military-Technical Cooperation.*
Estimated by the Strategy and Technology Analysis Center. |
Konstantin Lantratov
All the Article in Russian as of Feb. 11, 2008
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