Konstantin Makienko is Deputy Director of the Moscow-based Center for Analysis of Strategies and Technologies.
Resume: The “anti-Western” arms markets are closing down one after another as a result of international embargoes or political reorientation of respective countries. So Russia will predictably lose its positions in favor of Europe (above all, France) and Israel, while remaining a key player on the market.
Foreign Affairs recently published an article by Jonathan Caverley and Ethan B. Kapstein entitled “Arms Away. How Washington Squandered Its Monopoly on Weapons Sales.” The article provides an extremely interesting view of the U.S. academics on developments in the arms market. Analyzing mainly changes in the U.S. position in this market, namely the loss by the United States in the 2000s of its monopoly on arms sales achieved in the 1990s, the authors also touch upon more fundamental issues. One of them is the general evolution of the configuration of players in this market. Another, largely theoretical issue is the basic factors, both political and economic, that influence this evolution. The main reason why the U.S. defense industry lost its position in the market, according to the authors, was that the U.S. defense industry focused on the production of cutting-edge and excessively expensive weapons, which have begun to lose to simpler and more affordable weapons systems made in Europe, Russia, Israel or even South Korea.
THE 1990S: DID THE U.S. REALLY HAVE THE MONOPOLY?
Indeed, the early 1990s were a period when the U.S. consolidated its position in the arms market, compared with the 1980s, due to a sharp reduction, starting in 1992, of Russian arms sales and to a withdrawal from the market of second-tier players which in the previous decade had built up arms exports, taking advantage of a giant demand created by the Iran-Iraq War. Amid the fall in Soviet/Russian, Chinese and Brazilian arms exports and some decline in European sales, the U.S. increased arms sales to the Arab monarchies of the Persian Gulf after the 1991 war with Iraq.
Global arms sales reached a record high in 1987-1988 at the height of the Iran-Iraq War and numerous internal conflicts in developing countries (Afghanistan, Angola, Ethiopia, Cambodia, and Nicaragua) where pro-Western and pro-Chinese guerrilla movements opposed pro-Soviet governments. In the early 1990s, Moscow stopped arms supplies to quasi-Marxist regimes in the Third World on very easy terms or free of charge. Following the collapse of the “world socialist system” and the dissolution of the Warsaw Pact, Moscow stopped arms sales to its former allies in Central and Eastern Europe. In addition, Russian arms exports in the late 1980s-early 1990s were given a heavy blow by UN sanctions against Iraq and Libya, which were among Moscow’s major customers. The change of the Soviet political paradigm behind arms sales for the Russian commercial paradigm also brought about a brief termination of Russian-Indian arms trade. As a result of all these factors, Russia’s exports in 1994 fell to a record low of U.S. $1.7 billion.
The end of the Iran-Iraq War, which generated an annual multi-billion dollar demand for weapons, dealt a heavy blow to second-tier arms exporters, particularly China and Brazil. European manufacturers suffered losses, too. In 1994, China moved from the ranks of net arms exporters to net importers, while Brazil left the market completely, and its defense industry ceased to exist.
Against this background and after the victorious end of the First Gulf War, the United States received large defense orders from Saudi Arabia, the UAE and Kuwait. Partly, the orders were intended to improve the combat efficiency of the Gulf armies, but mostly they were a form of gratitude to Washington for the salvation from Saddam. Thus, having won the Cold War, defeated Iraq and avoided large losses caused by the end of the Iran-Iraq War, the U.S. considerably strengthened its position in the arms market for some time. However, this absolute domination (but not a monopoly at all even then) lasted not a decade, as the American authors say, but only three to four years.
The year 1994 saw the beginning of the restoration of Russia’s position in the arms market, this time on a depoliticized, commercial footing. Moscow signed a historic U.S. $650 million contract for the supply of 18 MiG-29N fighter aircraft to Malaysia. It continued to fulfill the first major arms contracts with China, primarily for the supply of Su-27SK/UBK fighters. It restored cooperation with India and Vietnam, and continued to supply armored vehicles and submarines to Iran under contracts concluded back in Soviet times. Russia earned its share of gratitude from Arabian monarchs – the UAE and Kuwait purchased large quantities of BMP-3 infantry fighting vehicles and Smerch multiple rocket launchers. In the mid and late 1990s, Russia successfully used its very special marketing tool – namely, arms supplies as compensation for the Soviet debt. In this way, it supplied MiG-29 fighters to Hungary, T-80U battle tanks and BMP-3 infantry fighting vehicles to South Korea, and Buk-M1 surface-to-air missile systems to Finland. In 1996, Russian arms supplies in payment of the Soviet debt stood at U.S. $800 million, 22 percent of all Russian arms exports, which amounted to U.S. $3.6 billion.
France and Israel were even more active in building up their presence in the arms market. Paris received major contracts from Taiwan for building warships and aircraft; Saudi Arabia bought French frigates; the UAE purchased a large batch of advanced Leclerc main battle tanks; and large quantities of arms were supplied to Pakistan. Israel quickly became a major player in the market, actively selling electronic systems, unmanned aerial vehicles, and upgrade solutions to China and Turkey.
To sum up: the spurt in the U.S. foreign market share, which really could reach 60 percent at its highest, was observed during a very short period of time, from about 1990 to 1994-1995, and was a deviation brought about by a simultaneous effect of three factors – the victory in the Cold War, the victory in the First Gulf War, and consequences of the end of the Iran-Iraq conflict. The market began to return to a more balanced state already by the mid-1990s, when Britain and France remained major exporters, along with the United States, when Russia began to restore its position in the market, and when Israel started its phenomenal ascent.
THE 2000S: WAS THERE REALLY LOSS OF MARKETS?
The dynamics of the U.S. position in the 2000s was not simple, either. Possibly (although not definitely), the U.S. foreign market share decreased, but not to 30 percent. Most likely, it was between 40 and 50 percent. There were only a few cases where the United States lost its position in the market or lost in direct competition. The authors mentioned almost all these episodes. In Southeast Asia, it was aircraft purchases by Malaysia (which continued to buy Russian aircraft under a contract for the supply of 18 Su-30MKM fighter jets and which halted the planned procurement of F-18F Super Hornet fighters) and Indonesia which turned its eyes to Russian and South Korean aircraft producers. The Czech Republic and Hungary preferred relatively cheap Swedish Gripen lightweight fighters to U.S.-made aircraft. Brazil announced several years ago that it was negotiating with France for the purchase of Rafale combat jets, although a contract has never been signed. Brazil’s major naval contracts, concluded in 2008 and won by French producers, can also be cited as U.S. losses. And, of course, one should mention the famous Medium Multi-Role Combat Aircraft (MMRCA) Competition, also known as the MRCA tender, for the supply of 126 multi-role combat aircraft to the Indian Air Force. The competition was won by the Dassault Rafale.
Meanwhile, the United States has a strong position in the colossal market of the Gulf monarchies. Saudi purchases of British Typhoons or a UAE deal for the purchase of Mirage 2000-9 fighters (or the possible continuation of UAE purchases of French aircraft, this time the Rafale) cannot be considered losses. They are part of the established arms sources structure of conservative Arab oil regimes, which permits a limited diversity of sources amid constant U.S. domination, as the United States is the only country that can guarantee the survival of these regimes. While sharing pieces of the pie with Paris and London, Saudi and UAE sheiks still spend the bulk of the money on U.S. F-15SA, F-16 Block 60, and air defense systems.
Boeing has dealt a humiliating defeat to Dassault Aviation in major tenders in South Korea and Singapore, as the air forces of these countries have preferred to buy the well-proven U.S. F-15 fighters to the French Rafale. The U.S. reigns supreme in the markets of Japan and Australia. The Polish market, the largest and the only growing market in Eastern Europe, is also oriented towards U.S. weapon systems. Although the Czech Republic and Hungary have rented a total of 28 Swedish Gripen fighters, Poland has bought 48 F-16s. Finally, in the 2000s, the U.S. entered a new market for it in India, where over five years it sold military transport and base patrol aircraft, as well as combat helicopters, to the tune of U.S. $10 billion.
THE LOW COST FACTOR
Caverley and Kapstein explain the loss of the alleged (but not proven) U.S. monopoly in the weapons market by U.S. companies’ focus on the development and production of excessively expensive cutting-edge weapon systems, which have begun to lose to less sophisticated and less expensive weapons. However, of all the above examples of failures only a few can be explained by this economic factor. The U.S. lost tenders for aircraft, held in India and Brazil, to French producers. However, the French Rafale is much more expensive than any American fourth-generation fighter, be it the heavy-weight F-15 and F-18 Super Hornet or the medium-weight F-16. Generally speaking, if there is an exporter that really suffers from a lack of low-cost offers, this is France. Apparently, it is this circumstance that is the main reason behind the relatively low French sales after France stopped delivering light-weight Mirage 2000-5/9 fighters and shut down the production of this relatively cheap (by French standards, of course) aircraft.
The Indian Air Force, which had given preference to U.S. weapons until about 2007-2008, rejected the United States’ bid in the MMRCA tender, apparently because it was not satisfied with the proposed technology transfer level. Brazil’s choice was explained by the established industrial and corrupt links with Dassault and by the readiness of the French to allow Embraer to license-build the Rafale.
All other examples of alleged U.S. failures, ranging from the Chinese domination in the Pakistani market to Russian achievements in Malaysia and Indonesia, are also explained by political, technological or industrial factors, but not by the price of U.S. proposals. Price was not the main factor, either, behind the Thai government’s decision to buy the Gripen: three years before that, the previous Thai government had almost signed a contract to buy the more expensive, especially in operation, Russian heavy-weight Su-30. So, the Thai choice was due to reasons other than price.
It turns out that perhaps the only instance where price played a crucial role was the Czech and Hungarian choice (as well as the choice of Switzerland, not mentioned by the authors) in favor of the small Swedish fighter. In all the three cases requirements for high combat efficiency of the purchased aircraft were not a top priority. In addition, the Czech Republic and Hungary did not ask for technology transfer (the Swiss purchase is more complicated, as it provides for co-financing by the purchaser of the development of a new version with a higher payload, Gripen NG). Military, political, industrial or technological reasons may make the price factor less important. That is why India and Brazil, which seek to create national military aviation industries, have given preference to the more expensive French aircraft. And that is why Uganda, which is not a rich country and which risks being involved in conflicts between North and South Sudan or in the Democratic Republic of the Congo, has opted to buy the expensive Su-30MK2 multirole fighter aircraft.
Incidentally, it would be wrong to think that the U.S. has nothing to offer in the low-cost segment. The U.S. armed forces have huge stocks of all types of weapons and military equipment, which are in very good condition and can be delivered to customers immediately or after a low-cost upgrade – and at a very reasonable price. The U.S. can respond to any cheap and simple offer from competitors with offers of inexpensive weapons and equipment of a high technological level from storage facilities. It is almost impossible to compete with Americans in price or technology, so Washington could really achieve a monopoly in this field.
Then why is this not happening? The main constraints on American expansion in the arms market are very stringent legislation regarding technology transfers and Washington’s permanent propensity for sanctions and embargoes. The first factor stands in the way of U.S. technology supplies to countries with growing defense industries, such as India or Brazil. The second one causes countries seeking to pursue relatively independent foreign and defense policies, for example, Malaysia, Indonesia and Algeria, to diversify arms sources, and, of course, rules out the possibility of arms supplies to rogue states, ranging from Syria to North Korea. The U.S. is probably the most politicized and ideologized arms exporter. So, it is not a loss of positions in the arms market that limits Washington’s ability to influence the policies of other states. Things are just the other way around – foreign-policy and ideological prejudices and the fear of advanced technology leakage prevent U.S. companies from crushing their competitors in the world market. For example, the Pentagon prevents the shipbuilding industry making non-nuclear submarines for fear that diesel submarines built for export will contain technologies used in nuclear submarines. As a result, the growing and promising market of conventional submarines has been divided among Russia, Germany and France. Last year, the market was entered for the first time by South Korea.
TYPES OF ARMS MARKETS
The arms market is under the influence of a set of diverse factors. These most often include political, industrial, technological and military considerations. The price factor, which for some reason attracted the entire attention of the U.S. authors, plays probably the least important role. Of major importance is the established tradition of relations between importers and exporters, corrupt ties, and marketing effectiveness. The policy of importers is usually motivated by several of the aforementioned factors, but most often only one or two clearly dominate. An explicit domination of one motivation determines the type of the weapons market. A complex and dynamic combination of motivations produces an intermediate type. Overall, one can single out the following models of consumer behavior in the arms market:
In the corrupt model, decisions to purchase weapons and military equipment are driven not by rational state or national interests but by corporate or personal financial interest of high-placed representatives of the importer country. This model is widespread in countries of Muslim culture and in Latin America. In addition, the influence of this type of motivation is strongly felt in India and countries of East and Southeast Asia.
In the dependent model, weapons and military equipment are a kind of intermediate goods disguising the true subject of a deal. Under the guise of weapons and military equipment, the importer country actually buys security guarantees of the producer country. This model is most common in capital-excessive countries that are unable to ensure their external military security on their own due to demographic and cultural peculiarities. Gulf oil monarchies are the best example. Therefore, successful advancement of armaments to such markets requires great military and political weight of the exporter country and reliability of its military and political guarantees.
In the political model, decisions to import particular types of weapons and military equipment are made depending on the political orientation of the buyer country. Through its purchases, the importer demonstrates its political and civilizational preferences, which may be pro-Western (Central and Eastern Europe), anti-American (Venezuela) or pronouncedly pluralistic (Malaysia, Indonesia).
The blockade model. There are countries that are in a state of blockade (de jure or de facto) and whose weapons are in critical need of renovation or modernization. Formerly, such countries included Saddam’s Iraq and Libya under Gaddafi. At present, elements of a blockade with regard to supplies of advanced conventional weapons and military equipment are seen in cases of Syria and Iran. Taiwan holds a special place, as its import model can be described as dependent, yet it has clear signs of the blockade type.
The industrial-technological model applies to countries that give priority to access to advanced military and general industrial technologies. Therefore, the key role in this model is played by the exporter’s willingness to transfer technologies, sell licenses or implement offset programs. China, Brazil and India are the best examples of this type of importer. South Korea and Turkey have recently been quickly evolving towards this model, as well.
Finally, the military model of arms imports is typical of countries giving priority to combat qualities of the weapons they buy. In extreme cases, when the importer is in a state of armed conflict or when there is a high probability that it may break out, special importance is attached to the promptness of supplies and ability of military personnel to quickly learn to use the purchased weapons.
An analysis within the framework of the proposed motivational models of the arms markets shows that the United States has the strongest position in ‘political’ and ‘dependent’ markets. The former primarily include countries of the Anglo-Saxon civilization and culture, some European allies of the U.S. and Japan. The most illustrative examples of U.S. clients with a ‘dependent’ motivation are Arabian oil monarchies, first of all, Saudi Arabia. The U.S. position is strong also in countries that seek to ensure their military security: American weapons are effective and have been tested in combat, and the tactics of their employment have been well proven by the world’s mightiest armed forces. This is why India has preferred the time-tested Apache attack helicopters to Russia’s Mi-28NE. For the same reason Israel and South Korea are oriented towards Washington, although these two markets have also signs of a ‘political’ and even ‘dependent’ motivation. There is no reason to believe that the United States’ competitiveness in these types of markets is going to decline in the future.
Meanwhile, countries seeking to build their own industries will have to develop relations with Europe, especially France, because of the U.S. restrictions. This has become particularly obvious in the case of Brazil and, to some extent, India. Later, they may be joined by countries that are now oriented primarily towards the United States, such as South Korea and Singapore. But on the whole, the structure of buyers of U.S. weapons is expected to remain the same. Changes are possible mainly in cases of countries’ political reorientation (for example, a collapse of the Saudi royal family).
The dynamics of Russian markets looks less attractive. The sales boom in the 2000s was largely due to a very high demand in China and India. Both countries were developing their own industries and technologies. China has now solved this problem to some extent, while India has raised the level of its technological requirements, which the Russian industry more and more often is unable to meet. This does not mean that the Indian and even Chinese demand for Russian systems and technologies will disappear completely, but the volume of trade, especially with Beijing, will never again rise to the level of the 2000s. Possibly, the industrial-technological cooperation model will develop in relations with growing countries, such as Vietnam and Indonesia (although Indonesia has already chosen South Korea as its priority partner), yet it is clear that these countries will not compensate for the decrease in Chinese and Indian purchases.
Another large group of Russia’s clients, which made it diversify its defense exports over the last decade, includes countries pursuing independent or anti-Western foreign and defense policies. The anti-Western political motivation behind the import behavior is present in Venezuela and Iran (before the introduction of an embargo on arms supplies). Syria’s purchases, too, have been largely politically motivated, although the Syrian model also features characteristics of the ‘military’ and ‘blockade’ models. Vietnam, Algeria, Malaysia and Indonesia are among countries with independent foreign and defense policies.
The “anti-Western” markets are closing down one after another as a result of international embargoes or a political reorientation of respective countries. Other countries (such as Venezuela) are characterized by high political risks and economic instability. The Algerian market is close to saturation, whereas the Indonesian and Malaysian markets are open for competition; however, Russia has seen little success there in recent years. Last year, for example, Russia lost to South Korea in a tender for the supply of two submarines to Jakarta. Vietnam remains the only stable and predictable country in this cluster. In the next five to seven years, it will be oriented primarily to arms imports from Russia. So Russia will predictably lose its positions in favor of Europe (above all, France) and Israel, while remaining a key player on the market.