Russia: Arms exports hit an all-time high

Liquid Arms

Arms exports hit an all-time high, 25 december 2007

Russia has exported record-high $7 billion arms in 2007, First Deputy Prime Minister Sergey Ivanov said on Monday. Still, it came short of $1 billion as a ship construction contract with Algeria was frozen over tensions in the bilateral relations. Russian arms sales have doubled over the past seven years when arms exports have been overseen by Rosoboronexport’s former CEO and Rostekhnologia’s new director general Sergey Chemezov.
Sergey Ivanov said on Monday “there are good reasons to say that this year the benchmark of $7 billion has been surpassed” to beat the record of $6.5 billion in 2006. Arms exports are growing on major deals signed between 2004 and 2006. During that period a number of Muslim countries were buying a lot of arms from Russia at the backdrop of U.S. military interventions in Afghanistan and Iraq as they perceived Moscow if not as America’s enemy but at least a rival. In the meantime, the Russian military industry has bounced back from the 1990s slump on export contracts which built groundwork for large-scale serial supplies.

The biggest part of the contracts was executed by Rosoboronexport, the state arms exports agency which was set up in November 2000. Arms producers and designers are now allowed to export only spare parts and do repairs and modernization of the hardware they have exported. Rosoboronexport was first headed by Alexander Belyaninov but it was Sergey Chemezov who was doing preparations for all major deals. Mr. Chemezov went on to take the helm at the firm in April 2004. His old friendship with Vladimir Putin made sure that the state was very supportive of Russian arms export projects. On November 26, 2007, Mr. Chemezov became head of the state-run corporation Rostekhnologia which will merge with Rosoboronexport. Over Sergey Chemezov’s seven years in Rosoboronexport, sales of Russian arms abroad went up from $3.68 billion in 2000 to $7 billion this year.

Rosoboronexport would not comment on Mr. Ivanov’s announcement on Monday. Mikhail Dmitriev, head of the Federal Military and Technical Cooperation Service, said that “aviation is still in the greatest demand – Su and MiG jets and Mi helicopters”. Russia will have exported 70 Su-30 fighters alone to India, Algeria, Venezuela and Malaysia worth $3 billion this year. “This was a record-breaking year for us,” Oleg Demchenko, president of the Irkut corporation, told Kommersant. “The plant in Irkutsk will assemble 43 Su-30MKI, Su-30MKM and Su-30MKI(A) fighters by the end of the year. We were not producing as much even in the Soviet times.”

There have also been major deals in missile defense systems. Early this year Mr. Ivanov announced a contract with Iran on the Top-M1 short-range complex to be executed. Meanwhile, Russia is still doing a contract with China on a long-range system S-300PMU-2.

Scheduled naval supplies have failed. Indian fleet officials said in September that the leasing of the Chakra nuclear submarine of the 971 Shchuka-B project was put off until June 15, 2008 after the Amursky Shipyard in Komsomolsk-on-Amur was 9 months late with the construction. Russia also insisted that the bill should grow from $650 million to $785 million. India agreed to the postponement but would not have the price reviewed.

Several contracts with Algeria which were part of an $8 billion package deal signed during Vladimir Putin’s visit to the country in March 2006 have been frozen at Algerian authorities’ initiative. The chill in the bilateral relations seems to be linked to the domestic situation in the country as well as France’s resurgence in the region.

Apparently, these reasons can account for a $1 billion drop in exports compared to estimates at the start of the year. Mikhail Dmitriev said in February: “In 2007 we may reach the level of $8 billion in military and technical cooperation.” Still the named $7 billion may be viewed as a rough estimate. For example, in 2005, results of the year’s arms trade were revised several times. In December 2005, the Federal Military and Technical Cooperation Service reported the year’s exports to reach $5.1 billion, which was $700 million below 2004’s indicator. Russian President Vladimir Putin revealed later at a session of the Military and Technical Cooperation Commission revised figures of the exports of $5.3 billion. In January 2006, Sergey Ivanov was already quoting a figure of “over $6 billion”. Finally, Mikhail Dmitriev in February announced exports to stand at $6.126 billion in 2005.

In the short term, Russian arms exports are likely to keep growing, which is proved by a rise in exporters’ contract portfolios. Mr. Dmitriev said in February that the portfolio was worth $30 billion, $20 billion of which accounts for Rosoboronexport, which will make sure Russia exports are at least no less than in 2007 for two or three years to come. The head of the Federal Military and Technical Cooperation Service said on Monday: “Currently the portfolio is worth over $32 billion, which allows us to be confident about military and technical cooperation in the future. The start has been launched by Rosoboronexport which will have a portfolio of orders of $24 billion.” Exports in 2008 are also expected to be dominated by air force supplies including Su and MiG fighters to India, Venezuela, Indonesia and Syria. There are also supplies of missile defense systems to China and Syria, military ships to Vietnam, and submarines to India and Algeria.

But experts say that Russian arms exports might slump in three or four years’ time. “We will reach some sort of ‘tableland’ with the $7 billion,” Ruslan Pukhov, director of the Strategy and Technology Analysis Center, told Kommersant. “Our export will be keeping at the same level in the next three to four years if the current political situation in the world persists. But this ‘tableland’ may be followed by a dramatic fall.” The expert says that the Russian military industry is desperately understaffed especially with highly-skilled workers. At the same time, inflation in the industry is higher than the national average. In 2007, prices in Russia will grow some 12 percent while the military and industrial complex will see a 20 percent jump. Mr. Pukhov also said that the industry sees a steep growth of overhead expenses as it is not using energy saving technologies. As a result, Russia may not be able to produce some specimens of arms while others will be impossible to sell at a competitive price.

Konstantin Lantratov and Alexandra Gritskova