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Russia's Policy on the Market of the Modernization of Soviet/Russian-Designed Arms
Sergei KANDAUROV
Senior Fellow
Russian Institute for Strategic Studies (RISI)
In the arsenals of the armies of many Third World nations and former Warsaw Pact members, there remain Soviet-designed armaments that were manufactured in the 70s-80s. These include well-known models like T-72 tanks, MiG-21/23, Su-22 and MiG-29 fighter planes and many others. There are thousands of such armaments.
Size and character of the modernization market
This does not, however, reflect the size of the current market of the modernization of Russian-designed weaponry and military technology. There are a number of factors that reduce the potential size of this market:
in a number of cases the armaments have already outlived their operation life and it is pointless to consider modernizing them;
various nations that used to be active importers of Soviet/Russian armaments (for example, Central and Eastern European countries that have recently joined, or seek to join NATO) have since reoriented toward Western armaments, making modernization irrelevant. Lobbying by major Western military-industrial enterprises offering their products played a large role in this.
Thus, the real size of the world market for the modernization of Russian-designed armaments is significantly smaller than simply the total number of Soviet military technology units in foreign countries. According to expert estimates, of the 9-10,000 T-72 tanks abroad, about 5,000 can be modernized1. Of the 12,000 MiG-21s, only about 2,000 MiG-21bis -type planes can be upgraded2.
Since the mid-90s, experts have noted the increasing interest of many states in the modernization of Russian-designed military technology used in their armies. This interest is dictated chiefly by the following factors:
the rapid rise in the cost of new modern armaments, especially in aviation technology;
the need for many Central and Eastern European nations to modernize weaponry to NATO standards;
the expansion of international cooperation in the development and production of armaments, which facilitates the modernization and creation of "hybrid weaponry.3"
The market in question has certain characteristics that set it apart from the new technology segments of the world arms market. First of all, in this market, most of the buyers are countries with low paying capacity. India, China and several oil-exporting countries in the Middle East are exceptions in this trend. Therefore, modernization programs must be relatively cheap despite being very labor-intensive, - and even then there is no guarantee that the purchaser will complete all payments4. This condition lowers the potential financial effectiveness of modernization programs and requires significant clarity of the work in all of its stages, including market research and the search for potential customers.
Another trait of the market is that a number of countries that choose to modernize Russian-designed weaponry, like the Central and Eastern European nations, have a relatively developed domestic military industry - in the past, they received technical documentation for servicing and repairing Russian military technology as well as licenses for independent production. Thus, these countries can rely on their own resources to conduct modernization, without needing to turn to the original developer - Russia. This is also true for member nations of the Commonwealth of Independent States (CIS) - Ukraine, Georgia and Belarus - as well as China, which has set up mass production of weaponry analogous to Russian models.
In recent years, a number of new tendencies have emerged on the market for modernization of Russian-designed armaments:
Israel's military-industrial firms have been increasingly active in this segment of the world market there have been some successful attempts to establish contacts concerning the modernization of armaments and military equipment with India and China, Russia's traditional partners in military technical cooperation; work on modernizing a number of Russian armaments that make up the foundation of Russia's export potential has been on the rise;
certain Western European and American defense companies have also expressed interest in modernizing military aviation technology of Soviet/Russian design, such as the Mi-24 helicopter;
foreign nations like Ukraine, Israel, the Czech Republic, Slovakia and Poland, to modernizing Russian armaments (without the participation of Russian military-industrial complex (VPK) enterprises), seem to be coordinating their actions and joining efforts;
certain Central and Eastern European countries which were previously planning to switch completely to Western armaments are once again interested in modernizing their Russian-designed military-aviation technology;
as a result of efforts made over the last few years, a number of weapons models have been created at Russia's defense complex enterprises which have been equipped with modern electronic and optical-electronic systems. At the same time, despite these indisputable achievements on the part of Russians, foreign competitors, and, above all, Israeli companies, have been outstripping Russian firms in the competition for lucrative contracts.
Russia's policy on the market of the modernization of domestically designed armaments
At the present time, a number of objective factors obstruct Russia's activity on the market of the modernization of domestic armaments, which were exported to foreign states in the past. Some of these are external, and some are domestic in nature.
External factors
Russia's activity on the market of the modernization of Russian armaments is complicated by the policy of several CIS nations, above all, Ukraine. Observers have noted that Ukraine often supplied spare parts and even entire aircraft subsystems to Central and Eastern European countries that sought to repair and modernize MiG-29 fighter jets, foregoing Russian enterprises. Ukrainian warehouses have had these parts since Soviet times5. Ukrainian factories cooperated with Israeli firms in the tender for modernizing the stock of MiG-21bis jets in the Ethiopian Air Force6. In addition, the Malyshev Plant directly competed with Russian enterprises on the market of the modernization of T72M1 tanks in Central and Eastern European countries.
There are many adversaries who oppose Russian proposals to modernize the large volume of military technology in Central and Eastern European countries (MiG-29, Mi-24, T-72M1). These are local military and industrial circles that support domestic options for modernization as well as foreign lobbyists who urge the purchase of Western armaments like F-16 or JAS-39 Gripen fighter jets7.
Despite the fact that many Western European firms have left the Russian armaments modernization market, the T-72 tanks in particular,8 there is mounting interest in projects involving modification of Russian aviation technology, like the Mi-24 helicopters, determined to comply with NATO standards after certain modernizations. Furthermore, some of the biggest Western European companies, like BAE Systems, have decided to participate in corresponding projects9. All of this, naturally, raises the level of competition in the given market and complicates the activity of Russia's exporters.
Domestic problems
Another unfortunate moment is that the preparation of modernization programs by Russian arms developers is linked with domestic economic problems that traditionally haunt the Russian defense industry. In view of limited financial resources, Russian defense enterprises are forced to invest most of their assets into the solution of technical and technological problems, while hardly any money is left for marketing or finding necessary partners. A typical example is JSC Kurganmashzavod, which received a contract with the United Arab Emirates for the modernization of a batch of BMP-3s back in 1999. The enterprise experienced serious difficulties in fulfilling the contract, even though the deal with the UAE was signed on favorable terms.
Because only Rosoboronexport, the official Russian state arms exporter, has the right to coordinate modernizations of the armament earlier transferred to foreign states, it becomes more difficult, in our opinion, to efficiently react to the needs of one or another foreign state for such services. In other countries - Israel, for example - individual weapons enterprises, including IAI, Elbit, and Rafael, exercise this right, quite effectively at that. Up until the merger with Rosvoorouzhenie, Promexport participated in the modernization of Russian armaments. It is known, for example, that one of the tasks of this company was to meet demand on the part foreign clients in reequipping machinery with all-weather or nighttime vision technologies and increase the precision of installed weapons. Despite a certain lack of competition with Rosvoorouzhenie, Promexport doubtlessly enhanced the level to which the existing demand for these services was met.
Russia's export strategy in the market of the modernization of domestically-designed arms is also far from ideal. As a result of Rosvoorouzhenie's policy, many types of weapons - potential "candidates" for modernization were ignored for a long time. It is indicative that the Russian developer was next to last in the long list for the modernization of the T-72 tank offered by Czech, Polish, French, Ukrainian and Israeli firms. This type of policy has repeatedly been harshly criticized - for example by General Director of the Russian Agency for Conventional Arms (RAV) Alexander Nozdrachev in March of 2001. In particular, he pointed out the Russian exporters' passive stance on the modernization market, which jeopardizes Russia's position on the market10.
In response to such criticism, as early as mid-2000, Rosvoorouzhenie voiced its intention to strengthen its position on the market of modernizing Soviet/Russian armament and military equipment still used in the Central and Eastern European countries, and this was reflected, in particular, in the company's exposition at the Berlin ILA-2000 arms expo. Among the priorities in activities in Central and Eastern Europe was the modernization of the MiG and Su fighter jets and Mi helicopters.11 Actual efforts in this realm, however, were apparently insufficient, especially with regard to programs outside of JV MAPS activity. It is not by coincidence that, later, Rosoboronexport brought up a review of the strategy concerning the export of Mi-17 helicopters, becoming active on the market of the modernization of T72M1 tanks, and the like. In August of 2001, at the MAKS-2001 International space and aviation salon, an agreement on cooperation was signed by Rosoboronexport and the Mil Moscow Helicopter Plant (MVZ), which sought to create better conditions for modernizing helicopter technology used by foreign states.12
Rosoboronexport presented its new strategy for the export of military-transport Mi-17 helicopters at the Farnborough-2002 Airshow.13 While in the past the emphasis was on deliveries of new aircraft, now Rosoboronexport, MVZ, the Kazan Helicopter Factory (KVZ) and Krondshtadt Company joined forces to introduce a modernized version of the helicopter, equipped with new avionics, a modern airborne guidance system, and a more powerful engine.
Rosvoorouzhenie's traditional penchant for working with large contractors stood in the way of successful realization of modernization programs for Russian-designed armaments. Despite being labor-intensive, contracts for modernizing stocks of armaments do not provide a large hard-currency income, and are thus not financially profitable for the company. For comparison - Rosvoorouzhenie was to receive $500 mln for modernizing MiG-29 fighters in Central and Eastern Europe, and Israel is getting $15 mln to modernize the stock of MiG-21 aircraft in Cambodia.
Following export strategies that concentrated only on the most profitable contracts had other negative long-term effects in addition to financial losses. By trying to maintain only the most lucrative directions, like the modernization of MiG-29s in Central and Eastern Europe, Rosvoorouzhenie practically handed over the turf to Israeli, Ukrainian, Polish, Czech and other foreign companies. Having become comfortable on the arena and having gained respect from potential clients, they then began to cut into modernization agreements Russia considered important - with India or China, for instance. In this way, Israel began solidifying its position on the markets of these nations in the sphere of supplying new armaments as well.
It is notable that, with regard to the modernization of many types of armaments, Russia inevitably found itself having to catch up - whether with MiG-21 fighters, T72M1 tanks or Mi24 helicopters. Decisions to accept large-scale assignments were made only after a tangible threat of losing the corresponding segment of the market arose. The resulting impression is that throughout the mid-90s and until 2001-2002, the Russian side failed to evaluate the size of various market segments, to the pros and cons of marketing its modernization programs, and its attitude toward Israel's policy in the market.
The search for partners
In view of the difficult financial situation in which Russian defense enterprises have found themselves, numerous attempts were made over the last few years to establish cooperative relationships with foreign countries, including the primary Western arms producers. Thus, in 1999, contacts concerning the modernization of T-72 tanks were made with Nexel Enterprises, an American company. This was meant to raise the ability of Russian developers to complete with Polish, Ukrainian, French and Czech companies, which had also joined for similar work and demonstrated their first modernized tank, the T72-MP at the Eurosatory-98 arms expo. The joint Russian-German MAPS enterprise was crucial to Russia's capture of the market for the modernization of MiG-29 fighter jets.
It should be noted that, despite the individual successes of establishing mutually-profitable international cooperation on the market of modernizing Russian armaments - for example cooperation with Germany in the modernization of the MiG-29 and contacts with France's Thales for the refinement of Su-30s for Malaysia - the strategy did not prove itself on the whole.
First of all, finding the right partner for cooperation turned out to be a complicated matter:
Ukraine competed with Russia in the world market of armored technology, preferring to cooperate with Central and Eastern European nations and Western arms producers;
attempts to cooperate with South Africa to jointly modernize Russian armaments in African nations were unsuccessful;
Central and Eastern European countries are attempting to organize their own modernization of many armaments they inherited after the dissolution of the Warsaw Pact (T-72, Mi-24 and others);
joint projects with the US cannot be large-scale, due to the open opposition of American policy to Russia in the world arms market;
Israel turned out not to be a reliable partner and generally followed its own interests during the cooperation without making unfair moves.
Secondly, the hope for foreign partners for cooperation who would take upon themselves the task of creating and installing avionics elements led to the fact that analogous domestic developments were left without attention and support. Characteristic is the example of a new weapons control system for T-72 tanks, versions of which were initially developed by Poland (Drawa-T system), France and other foreign states. Russia's attempt to cooperate with the US (Nexel) to oppose Poland failed. Only relatively recently did Russian enterprises create a new automated weapons control system with stabilized sights for the commander and the gunner14. In our opinion, it is natural that Russia has finally begun to enter the world market of modernization with purely domestic developments for such armaments as the T-72 tank, the Mi-24 and Mi-17 helicopters and other military equipment15.
As for the choice of international partners for modernizing Soviet/Russian military technology abroad, it is much better for Russia to seek an intermediary among local companies16 or to cooperate with a well-known Western European firm with a solid reputation which would help with the marketing of Russian production17. Israeli firms should be involved only in joint projects that aid the promotion of Russian armaments into new markets or when the realization of other profitable aspects - technological, economic, and contractual - depends on this.
To halt the unsanctioned intrusion of foreign firms into the modernization of Russian armaments, it is useful to stipulate in new contracts for weapons delivery the inadmissibility of the modernization of military technology without the sanction of Russian representatives. In addition, the advantages of a package version of weapons modernization offered by Russian producers over the partial modernization offered by foreign firms active on the market of the modernization of Soviet/Russian armaments should be promoted more extensively.
1 INFO-TASS "Vega" database, 28.06.2002.
2 1997 estimates, INFO-TASS "Vega" database, 29.04.1997.
3 INFO-TASS "Vega" database, 25.05.1997.
4 Israel's IAI Company faced this when carrying out a contract to modernize an outfit of MiG-21s in Cambodia.
5 INFO-TASS "Vega" database, 26.05.2000.
6 INFO-TASS "Vega" database, 29.04.1997.
7 INFO-TASS "Vega" database, 26.05.2000.
8 Jane's Defence Weekly, 18.07.2001, p.11.
9 INFO-TASS "Vega" database, 29.03.2001.
10 INFO-TASS "Vega" database, 27.03.2001.
11 INFO-TASS "Vega" database, 06.06.2000.
12 INFO-TASS "Vega" database, 16.08.2001.
13 INFO-TASS "Vega" database, 22.07.2002.
14 INFO-TASS "Vega" database, 28.06.2002.
15 Similar conclusions can be drawn from circumstances around the development of Russian models of advanced jet trainer, see Eksport Vooruzheniy, #3, 2001.
16 As in the choice of Brazil's Avibras for the promotion of the Su-35 plane to Brazil.
17 As in the development of JV MAPS with Germany's DASA.
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