Final Results of Russia's Military-Technical Cooperation with Foreign States in 2001

Konstantin MAKIENKO

Maxim PYADUSHKIN

It has been a standard practice with the Centre for Analysis of Strategies and Technologies (CAST) to analyze military-technical cooperation (MTC) results for the year, and to publish preliminary results in the last issue of Eksport Vooruzheniy for the year in question and the final results in the second issue of the following year. The reason for that has been that the official reports on Russian arms exports were published in March or April. However, President Vladimir Putin disclosed the figures for last year already at the end of December 2001. No additional official announcements followed. In March 2002, the well-informed newspaper Vedomosti carried a report on the volume of deliveries by all parties to MTC.¹ The report permits us to sum up the final results of 2001.

At the end of last year President Putin announced that foreign currency receipts from MTC amounted to $4.4 billion.² However, unlike previous years, he did not disclose the main indicator of arms exports - the volume of arms deliveries. Vedomosti filled this gap. Table 1 shows the newspaper’s figures and CAST estimates with regard to the volume of Russian deliveries in 2000 and 2001.

The figures cited below permit the following conclusions:

·   CAST estimates made on the basis of analyzing information from open sources proved quite close to the actual figures. This is especially true of 2000 when the main error was related to the Reutov-based Machine-Building Research and Production Association (NPO Mashinostroeniya) as its BrahMos project became known to the public at large only in summer 2001. The preliminary estimates for 2001 were less accurate and the biggest mistake was made in evaluating RAC "MiG" export volumes.

·   The volume of deliveries in 2001 remained approximately the same as in 2000. As CAST had predicted, Russian arms exports reached a plateau of $3.5-4 billion. The volumes are likely to remain unchanged for two to three more years, as long as current large-scale contracts are under implementation.

In addition to final figures for 2001, the press carried information about the cost of Russian arms deliveries by individual parties to MTC for a period beginning with 1994 (see Chart 1).

Table 1. Russian arms exports

	2000	2001
Vedomosti	CAST estimate3	Vedomosti	CAST estimate4
Rosoboronexport	3,090	3,091.2	3,300	3,200
Antey Concern	393	393.8	138	150
Instrument Building Design Bureau (KBP)	73	95	107	100
RAC “MiG”	86	95	97	150-200
NPO Mashinostroeniya	39	Unknown	31	30-40
Kolomna Machine-Building Design Bureau (KBM)	0	0	32	32
Total, mln	3,681	3,680	3,705	3,672

Chart 1. Russia's arms export in 1994-2001

Source: Weekly Voyenno-tekhnicheskoe sotrudnichestvo, #14, 1-7.04.2002.

Impacts of 2001 results on Russia's de­fense industry and arms trade

The information available about the results of Russia's MTC with foreign states in 2000 and 2001 allows to assess the development prospects and evolution of the Russian arms trade system and defense industry.

Arms trade: the dilemma of the gov­ern­ment mediator

Even a simple comparison of the performance of Russian arms exporters shows that last year Ro­soboronexport managed to strengthen its posi­tion as the dominat player in Russian arms trade by successfully accumulating the potential of its predecessors - Rosvoorouzhenie and Promexport. Both the volume of the govern­ment mediator's deliveries and its share in over­all arms exports grew from $3.09 billion to $3.3 billion⁵ and from 84% to 88% respectively (see Diagrams 1 and 2). Its $11 billion portfolio of orders⁶ will allow Rosoboronexport to keep up the same level of deliveries for two or three more years. In addition, it has actually monopo­lized trade with two key importers of Russian armaments: India and China.

The cost of deliveries by independent arms trad­ers went down from $591 million in 2000 to $405 million in 2001, amounting to 16% and 12% of overall exports respectively. As the de­liveries of Tor-M1 (SA-15) short-range surface-to-air missiles to Greece by Antey Concern are being completed, the position of independent Rus­sian arms exporters evened out, with each con­tributing 1-4% of total exports. In 2002 proba­bly only RAC "MiG" can significantly im­prove its export performance, as its portfolio of orders at the end of 2001 amounted to $900 million.⁷

No doubt, the dominating position of Rosobo­ronexport may fundamentally change the struc­ture of Russian MTC. Having proven its effec­tiveness after the merger of Rosvoorouzhenie and Promexport the government mediator is naturally tempted to expand operations by mo­nopolizing Russian arms exports as a whole. Its arguments in favor of such a monopoly are ex­pertise in marketing and promoting defense in­dustry products on world markets, the estab­lishment of stable ties with clients, and the need to remove unnecessary competition among Rus­sian arms exports on foreign markets. It has been suggested to allow defense plants to inde­pendently sell spares and offer maintenance ser­vices to the armaments exported by the govern­ment mediator by way of compensation for the loss of the right to independent exports of other arms traders.

In any other business and with any other econ­omy a pattern under which the government me­diator sells a commodity and the manufacturer offers maintenance services could be attractive, primarily for the manufacturer, because the de­liveries of spare parts and long-term mainte­nance services usually are no less profitable than direct sales. However, in the case of Russia and

Diagram 1. Shares of key exporters in total Russian arms exports in 2000

Diagram 2. Shares of key exporters in total Russian arms exports in 2001

Note: Diagrams are prepared by CAST.   

MTC this pattern will hardly work. Firstly, ex­ports of spares are profitable only if they are manufactured on a large scale. Most Russian arms manufacturers will have to launch the pro­duction of spares from scratch. Secondly, on the contracting world arms market where competi­tion between manufacturers is growing there is an increasingly evident trend that the price of spares and maintenance services for the entire lifetime of an arms system is included in the ini­tial sale price.

The belief that manufacturers should compete for export contracts signed by a single mediator instead of competing on international markets is not flawless either. The existing system of MTC lacks the tradition of tenders for export orders. Hence, if Rosoboronexport becomes an export monopoly, it is likely that subcontracts will be distributed among manufacturers for "informal" reasons or as a result of lobbying efforts.

And finally, the possible monopoly in arms ex­ports will raise questions about the need to pre­serve the present government regulation in MTC. As various CAST publications have stated,⁸ in such circumstances the role of the Russian Federation Committee for Military-Technical Cooperation with Foreign States (CMTC) would become ambiguous because its current functions would overlap with those of the government mediator. Besides, it is natural that the concentration of economic might and political power in MTC in one company will provoke total bureaucratic opposition not only from federal government institutions but also from regional industrial and political elites.

However, it seems that at present Rosoboronex­port should be choosing not between "becoming a monopoly or not," but between "remaining a pure mediator or evolving into a military-in­dus­trial corporation."

Unlike the MTC pattern that existed in 1994-1996, with the current arrangement the govern­ment mediator has unique powers. The charter allows the company to trade not only in arma­ments and military hardware but also in strate­gic commodities - oil, precious and rare metals and stones as well as various financial instru­ments. Rosoboronexport was given the right to form and control the entire financial and or­ganizational infrastructure of guaranteeing arms trade - insurance and transport companies, banks and industrial facilities. Such an adminis­trative and economic potential coupled with a broad sales network covering the whole world (35 representative offices abroad) permits Ro­soboronexport to advance from being a pure arms trade mediator to a diversified exporting and manufacturing corporate structure operating in both the defense and civilian sectors.

Deliberately or not, last year Rosoboronex­port already started moving in this direction. It signed cooperation agreements to promote de­fense products on foreign markets with several regional administrations and defense agencies as well as with individual manufacturers, includ­ing those having the right to independent opera­tions on foreign markets (Antey Concern). Also in 2001 it acquired controlling shares in the Russian Insurance Center insurance company.

For the first time, Rosoboronexport leader­ship announced intentions of "getting involved in de­fense industry property" at the end of 2001.⁹ Now the plans are beginning to materi­alize: the government mediator has a stake in the com­puter software developer for military simulators R.E.T. Kronshtadt. It is holding talks on man­aging the military-purpose produc­tion at JSC Volgograd Tractor Plant.¹⁰

Thus, in the framework of the program of set­ting up major holdings in the Russian military in­dustrial complex initiated by the authorities, the mediator could naturally become the biggest holding. This gives Rosoboronexport a chance to switch from the road of extensive to intensive development and defuse the tension over the possible artificial monopolization of arms ex­ports.

In addition to grave economic consequences for the industry, the monopolization of Russian arms trade in the hands of one mediator company is also fraught with the threat of restricting access to information on MTC.

The current openness or transparency of the Russian arms trade may be described as unintentional. Unlike the West, the Russian government and defense companies do not bother to submit an­nual reports on arms exports to the parliament or public. One can only welcome the new tradi­tion when the president annually announces one or two integral figures on MTC results for the outgoing year.

Meanwhile, media wars waged in the framework of competition for individual orders or the redis­tribution of property remain the main sources of information about MTC and the defense indus­try. It is indicative that in the Russian defense sector private companies applying modern busi­ness and financial technologies in their opera­tions demonstrate greater openness. At the same time it is becoming understandable that compa­nies often allege confidentiality to conceal diffi­culties in winning or implementing contracts.

The possible monopolization of Russian arms exports will undoubtedly result in a monopoly on information in the sphere of not only MTC but also probably the defense industry as a whole. A decline in the number of information players and the resulting contraction of accessi­ble information will bring further down the low standard of discussion of the development prob­lems of the Russian military industrial complex by political, industrial and scientific elites. As a result we can predict that most major decisions will be made to meet narrow clan interests, which will have a most negative impact on the quality of these decisions.

There is also another danger. If the pattern of MTC coverage is transformed to resemble the one accepted in Belarus, Russian arms traders will achieve nothing except that Russia will be labeled as a "rogue state" on the world arms market. After joining the ranks of such arms exporters as Belarus and North Korea it should not expect an equitable attitude in future arms tenders. Transparency in defense exports does not prevent the United States, the UK or France from holding leading positions on the world arms market. The openness of financial information allows clients to choose the most stable and predictable partner. With the present degree of competition between defense compa­nies, the quality of information policy be­comes a key instrument of promoting one's products.

¹ Alexei Nikolsky, Mikhail Kozyrev, "Monopoliya VTS krepchayet," Vedomosti, 05.03.2002.

² Yuri Golotyuk, "PR prezidentskogo urovnya," Vremya Novostei, 27.12.2001, p.2.

³ Konstantin Makienko, "The Official Results of Russia's Arms Export in 2000," Eksport Vooruzheniy Journal, March-April, 2001.

⁴ Konstantin Makiyenko, "Preliminary estimates of Russia's Arms Exports in 2001," Eksport Vooruzheniy, #6 (November-December), 2001.

⁵ Alexei Nikolsky, Mikhail Kozyrev, "Monopoliya VTS krepchayet," Vedomosti, 05.03.2002.

⁶ Interfax-AVN, 10.12.2001.

⁷ Information of RAC "MiG" press service, cited by Interfax-AVN, 21.12.2001.

⁸ Maxim Pyadushkin, Ilya Bulavinov, "Torgovlya pod prezidentskim pritselom," Kommersant-Vlast, #1, 15.01.2002.

⁹ Alexei Nikolsky, Mikhail Kozyrev, "Posrednik idyot v investory," Vedomosti, 22.02.2002.

¹⁰ Ibid.