In the wake of the events in Crimea and southeastern Ukraine in the spring and summer of 2014, the United States, the European Union, Ukraine and some other countries imposed sanctions on Russia. Moscow responded with countermeasures. The term ‘import substitution’ began to be widely used in the Russian political vocabulary. This problem was particularly acute in the military-industrial sphere, as the production of a large number of Russian weapon systems at that time involved imported components, assemblies or materials. Denied access to them, Russia could fail to implement its State Armaments Program for 2011-2020 (SAP-2011).
Another factor that complicated the situation was that in the 1990s-2000s the Russian defense industry was engaged in active cooperation with Western suppliers as ties with former Soviet republics and Warsaw Pact countries were severed. Also, Russia had to meet foreign customers’ requirements to integrate individual imported components and systems into Russian combat platforms. During the reform of the Russian Armed Forces, started by Defense Minister Anatoly Serdyukov, the Russian army even began to buy finished Western platforms or, at best, organized their “screwdriver assembly” in Russia.
After Sergei Shoigu replaced Serdyukov as defense minister, the ministry did not conclude any new contracts and continued implementing only previously signed agreements. These provided, for example, for the import of 290 Iveco 65E19WM armored light multirole vehicles from Italy in addition to previously delivered ones, or the funding of the construction of two Mistral-class amphibious assault ships by STX France. Imports accounted for a small part of all purchases by the Defense Ministry, but the sanctions jeopardized supplies of critical assemblies and components for Russian platforms in all branches and services of the Russian Armed Forces. According to data made public by the Defense Ministry in the summer of 2015, the production of at least 826 types of weapons and military equipment, formerly bought abroad, is to be launched at home between 2014 and 2025.
THE HISTORY OF IMPORT SUBSTITUTION AT A GLANCE
Import substitution is not something new for the domestic defense industry. The country had to use it for the first time during World War I when the Russian Empire had to replace parts and components for various types of equipment (primarily naval), ordered before the war from Germany and Austria-Hungary, and to learn to use military equipment produced by its allies in the Entente. Before World War II, the defense industry of the Soviet Union was more self-sufficient, but the initial military setbacks suffered by the Soviet Army in the war with Nazi Germany, which caused mass evacuation of industrial facilities and the loss of some of them, resulted in Soviet imports under the Lend-Lease program becoming a major factor in the victory. The growth of tensions in relations with the former allies after the war made the previous level of cooperation with them impossible, and Moscow had to launch its own production of high-tech military equipment that had earlier been supplied by the U.S. and the UK. This equipment included radars, sonars, some aircraft instruments, all-wheel drive vehicles and other systems.
The establishment of the Warsaw Pact and the Council for Mutual Economic Assistance (also known as Comecon) created a new situation for the Soviet Union when, due to political and economic reasons, Moscow voluntarily gave up the production of some types of weapon systems in favor of its allies. For example, Poland was assigned to build medium and large amphibious ships, training and hospital ships, etc. The Soviet Union also bought L-29 and L-39 trainer/combat aircraft from Czechoslovakia (sometimes even instead of domestic developments); 2S1 Gvozdika self-propelled howitzers from Bulgaria; mortars from Hungary; anti-tank missiles and anti-submarine ships from East Germany; and so on.
This situation had a reciprocal effect on the Soviet Union itself. The policy of duplicating the production of individual weapon systems and military equipment can be viewed not only as proof of the “inefficiency” of the Soviet economy and the “omnivorous role” of the military-industrial complex, but also as an attempt to create alternative production. This conclusion comes to mind when you consider some of the decisions made in those years. For example, road tractors similar to Belarusian-made MAZ tractors were produced also in Kurgan; Perm and Zaporozhye produced engines for Mi-8 helicopters; and Kharkov developed its own diesel-powered version of the turbine-powered T-80 main battle tank. It is also common knowledge that Ukrainian defense enterprises were largely isolated from others and were capable of organizing full-cycle production in many fields, above all in aircraft-building. Another confirmation of the above conclusion is that the chief designer of the Project 677 fourth-generation diesel-electric submarine planned at the design stage in the 1980s that it would be based on Russian-made components. Interestingly, the Soviet Union’s “import substitution” in Ukraine and Russia later facilitated the independent existence of their own defense industries after the two Soviet republics had gained independence, although they did maintain close cooperative ties.
It was in the defense industry where import substitution first began to be implemented in post-Soviet history. The main factor behind this policy was not politics but calculation and common sense. After 1991, despite cuts in the defense budget, Russia continued the development of new weapon systems. Although many of them were based on Soviet designs, which provided for cooperation with other former Soviet republics, the Russian leadership and the Defense Ministry sought to create fully domestic systems. For example, the R-39UTTH Bark ballistic missile, intended for new Project 955 ballistic missile submarines, used engines developed by the Dnepropetrovsk-based Yuzhnoye Design Bureau. However, after test failures the Bark program was canceled in favor of a new Russian missile, R-30 Bulava, which was much more “import-independent,” like its sister missile, Topol-M ICBM.
This tendency gained momentum in the 2000s when the country began to develop new weapon systems en masse. In 2011, Anatoly Serdyukov unequivocally ruled out the possibility for Ukrainian companies (the Yuzhny Machine-Building Plant and the Yuzhnoye Design Bureau, both based in Dnepropetrovsk) to participate in the development of a new heavy liquid-fueled ICBM, Sarmat. He clarified, though, that “individual experts” could receive private offers. The same approach was used with regard to the AI-222-25 turbofan engine, built by the Ukrainian Zaporozhye-based Motor Sich company in cooperation with Russia’s Salut Gas-Turbine Engineering Research and Production Center (Moscow) and the Omsk Engine-Building Plant (since 2011, a branch of Salut). After 2002, the two countries produced the engine in cooperation, each doing about half of the job (Ukraine produced the more sophisticated “hot” part of the engine). By 2015, however, the production had been fully localized in Russia.
Another example is the development of a family of chassis, Platforma-O, by Russia’s Special-Purpose Vehicles Plant since 2010. The chassis will have an innovative electromechanical transmission and will replace analogs produced by the Minsk Wheel Tractor Plant for advanced weapon systems.
Back in 1993, Russia’s NPO Saturn and Ukraine’s Zorya-Mashproekt set up a joint venture, Turborus, to serve Ukrainian-made marine gas turbines. However, Russia failed to launch its own production of the M90FR and M55R gas turbines. The year 2010 was marked by the beginning of, probably, one of the main processes in import substitution in Russia—the commencement of the production of the VK-2500 turboshaft engine, an analog of the TV3-117, built in Zaporozhye. In 2014, the first ten engines were made.
Some import substitution measures were taken even before the events of 2014. For example, the government’s Executive Order 1224 of December 24, 2013 imposed a ban or restrictions on imports for defense and security needs. Their import required confirmation that they were not produced in Russia.
Yet, it was impossible to abruptly give up supplies from other post-Soviet countries for technological, political and financial reasons. The latter factor played an essential role in the purchase of Ukrainian An-140 and An-148 aircraft (formally produced by Russian plants) by the Russian Ministry of Defense, and the joint development of the An-70 medium-range military transport aircraft. Russia and Ukraine also planned to jointly develop local air defense systems. In addition, Ukraine designed and produced homing devices for the R-74 short-range air-to-air missile, to be used by fifth-generation fighter aircraft.
The cooperation between the two countries peaked in 2010-2014, during the presidency of Victor Yanukovich. Net defense exports from Ukraine to Russia were estimated in those years at $50 million to 65 million, although the actual figure was much higher: for example, the export of space and missile equipment alone in 2012 stood at $260 million. The import of aircraft engines in 2010-2014 increased from 404 to 653 units and exceeded $500 million. Interestingly, the amount of engine imports from Ukraine exceeded the annual volume of helicopter production in Russia which was obviousy creating a stock of engines.
However, in a bid to improve the quality of new Russian weapons, Moscow had to turn to Western producers, which created a difficult situation after 2014. There were many factors behind this situation. One was the realization that Kiev was no longer a stable partner from a political perspective, and that the Ukrainian defense industry was degrading. On the other hand, the SAP-2011 program required developing and producing a large number of new equipment, which was impossible to do with reliance only on Russian resources and capabilities. Paradoxically, as more and more new equipment was supplied to the army under the SAP-2011 program every year, Russia’s dependence on imports only tended to increase. It is hard to estimate the amount of European supplies to Russia. Russian-EU contracts for arms supplies in 2011-2013 were estimated at €75 million, while the export of dual-use goods and technologies reached €20 billion a year.
Finally, the use of imported components helped to speed up the development of new-generation combat equipment and, in some cases, even to reduce its cost. Russia felt no need to produce its own analogs of these components and did not hurry to resolve this issue until it was too late (after 2014). It is no secret that imported components and assemblies were installed in T-14 Armata main battle tanks, BMP-3 infantry fighting vehicles, Typhoon-K armored vehicles, in some ships and aircraft, and many other weapon systems. The sanctions imposed by the West had an immediate effect on Russian producers. For example, Russian Helicopters JSC in 2016 warned about the risk of nondelivery of foreign components for helicopters produced by the company.
Strangely enough, the import substitution problem proved to be the most difficult with regard to Ukraine, although Russia imported some 700 types of various products and components from that country, as compared to 860 types imported from NATO countries. Already in June 2014, Deputy Defense Minister Yuri Borisov reported that supplies from Ukraine were disrupted almost daily; products dispatched by Ukrainian producers were not allowed to go to Russia by the Ukrainian customs. What made the problem even more painful was the need to repair and maintain equipment, above all engines, and weapons already in service in the Navy and the Air Force.
The issue of import substitution (on the scale of the national economy) was discussed at the highest level. In July 2014, President Vladimir Putin endorsed an import substitution program, and on August 4, 2015 the government issued Executive Order 785, establishing an ad hoc commission to coordinate efforts in addressing the issue. The commission comprised two subcommissions: one for civilian sectors of the economy and the other for the military-industrial complex. The latter subcommission was headed by Deputy Prime Minister Dmitry Rogozin.
The government also took concrete measures to support domestic producers. For example, in the summer of 2015 it announced the decision to make advances for about 80 percent of programs to substitute defense imports from NATO and EU countries. Earlier, in 2014, 13 detailed plans and timelines were adopted for defense import substitution.
INTERMEDIATE RESULTS AND PERSISTING PROBLEMS
At present, an independent expert assessment of the import substitution program in the defense industry would certainly be interim and incomplete. Officials have reported the results of their activity in this field several times. For example, in 2014, Defense Minister Sergei Shoigu issued an order to launch in 2015 the production of 695 types of weapons and equipment out of the 1,070 types that had been previously produced in cooperation with Ukrainian companies. Some time later, however, other figures were made public. During the first half of 2015, only 57 types of Ukrainian-made components were substituted out of the 102 planned. This was only 55 percent of the annual target figures. The disparity in figures could be explained by different methods of calculation. In addition, there were reports of some “detailed schedule plans” regarding import substitution for supplies from Ukraine and NATO/EU. The plans concerned 186 and 800 types of weapons and military/special-purpose equipment, respectively. These may be types of particular importance, which should be substituted first. Another reason for the disparity in figures may be the fact that almost all end products manufactured in Ukraine have Russian components, and the question is, how to keep records of components to be substituted. The same applies to NATO/EU.
At the same time, the results for NATO and EU countries were not encouraging: over the same period, full-cycle substitution was fulfilled only for seven out of 127 planned types. By October, the results improved somewhat: substitution for Ukraine covered 65 types (64 percent of the target figures), and for NATO and the EU it covered 55 types (43 percent). Simultaneously, Russia was creating backup stocks of sanctioned equipment.
Regarding deadlines for implementing the plans, it was reported in December 2015 that the deadline for Ukraine was set for 2018, and that for NATO and the European Union for 2021, but the latter concerned only one percent of the equipment to be substituted. The bulk of the equipment (90 percent) was planned to be substituted before the end of 2018. Interestingly, in July of the same year, a different deadline was named for the import substitution program—2025. Later, the plans must have been revised to speed up the work.
The greatest difficulty with import substitution concerns naval ships, especially gas turbines for projects 11356 and 22350 frigates now being built. The termination of gas turbine supplies has already led to a halt in the construction of four ships, already laid down—Admiral Butakov and Admiral Istomin (Project 11356) and Admiral Golovko and Admiral Isakov (Project 22350). This problem cannot be solved at least until 2018, when the first Russian gas turbine is expected to be built. On the other hand, Russia has mastered the repair of gearboxes and turbines for ships in service with the Navy.
Two Project 20385 corvettes, Gremyashchiy and Provornyy, were designed for German MTU 16V1163TB93 diesels for propulsion. The sanctions forced Russia to introduce changes into the project and replace the German diesels with Russian analogs (16D49 diesel engines and reverse-gear transmission), which has slowed down construction and affected ship performance. Meanwhile, the developer of the Russian diesels, Kolomna Plant, has produced a new modification, now under testing, which is even more powerful than MTU engines and which will improve the performance of future ships of this class.
The situation is somewhat better with ships of other types that were also designed to have MTU engines. The German engines on project 21631 small missile boats have been replaced with Chinese analogs. China’s Henan will also supply diesels for Project 21980 counter-sabotage boats. Project 12150 patrol boats have received M-470MK diesels, produced by Russia’s Zvezda company, instead of German MU 10V2000M93 engines. Zvezda will also supply engines for Project 22800 missile corvettes instead of the originally planned German diesels.
In the context of marine engines, it would be interesting to note that project 21850 Chibis coast guard small patrol boats are equipped with Swedish Volvo Penta engines. Despite the sanctions, the Swedish company continued to supply the engines, so this project remained unaffected by the Western restrictions.
The Zvyozdochka Ship Repair Center by mid-2015 had started the production of DRK-1200 pod drives to replace Rolls-Royce engines. In 2015, the Center planned to produce ten pod drives. Moven Nizhny Novgorod Co. has launched the production of fans for naval ships to replace those formerly bought from Ukraine.
In 2014-2015 the import substitution program was fully implemented for newly built non-nuclear submarines, on which all components are now Russian-made.
Much progress has also been reached in the aerospace field. Since the end of 2015, Su-30SM multirole fighters have been supplied with Russian IKSH-1M wide-angle collimator head-up displays (HUDs), produced by the Ramenskoye Instrument Design Bureau, instead of French Thales HUD 3022 (CTH 3022), used previously. The guided missile system on board Mi-28N (NE, UB) helicopters now includes Russian-made command transmission equipment. As already mentioned, the program for building helicopter turboshaft engines is gathering steam. It was planned to increase the production of VK-2500 turboshaft engines to 350 units by 2017, which will fully meet the demand for the engines under the State Defense Order. Project documentation has been prepared for developing PD-12V turboshaft engines, which are to replace Ukrainian D-136 engines on Mi-26 helicopters. The development was planned to begin in 2016. Also in 2016, Ural Works of Civil Aviation began to repair Ukrainian D-18T turbofan engines used by An-124 heavy military transport aircraft. Russia is now considering the possibility of rejecting Ukrainian support services for these aircraft and equipping them with domestic engines.
Elektropribor Tambov Plant has launched Russia’s first large-scale production of inertial navigation systems, based on laser gyroscopes, for combat and civil aircraft and missile systems. Plans to produce this equipment were made public in 2011, but it was only in 2016 that large funds were allocated to retrofit the plant.
Under the import substitution program, Russian producers have launched the production of electric pump equipment for T-14 and T-72B3 main battle tanks, and Kurganets-25 and BMP-3 infantry fighting vehicles. Another important achievement of the Russian defense industry is the production of night sight matrices to replace French and Belarusian analogs. Russia has also developed an electronic fuel injection system for Common Rail engines, and has since 2014 markedly increased the production of diesel engines under Cummins and Renault licenses.
Remdizel Co. has started to overhaul MT-LB multipurpose light armored vehicles, whose production was stopped back in the 1980s. The MT-LB was built by the Kharkov Tractor Plant in Ukraine, as well as in Poland and Bulgaria (the two countries did not supply the vehicles to the Soviet Union). During the previous 18 months, Russia launched the production of almost 3,800 components for repairs and overhauls out of the 4,000 planned, including fuel tanks and caterpillar tracks. This success will enable the company to start making modernized MT-LB chassis.
Russia is also working to produce ceramic armor, large diameter tubeless tires for wheeled military vehicles, blast-proof seats and other components for armaments and military equipment in service with the Land Forces, as well as repair wheeled vehicles built in Belarus by MAZ and Minsk Wheel Tractor Plant.
Russia’s plans also include the production of electronic components. In 2020, Russia is to produce radiation-resistant components in an amount that will meet 90 percent of domestic demand. Among already implemented projects, Mikron Group has begun to supply radiation-resistant integrated circuits for GLONASS-K navigation satellites.
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The restrictions imposed on the supply of military and dual-use products to Russia in 2014 have had a serious impact on the Russian defense industry. Their effects began to be felt in 2015-2016 when Russian stocks were used up and when contracts with Western countries, signed before the sanctions, expired. Experience has shown that Western countries are not united on this issue. Some of them have terminated supplies (for example, Germany’s Rheinmetall Defense Electronics which was to build a combat training center in the Nizhny Novgorod region), while others continued their supplies (Italy continued supplying knockdown kits for the assembly of Rys armored vehicles). In addition, the negative effects are minimized by a relatively small number of Western-made platforms in the Russian army, and by the implementation of some import substitution programs, which were launched in Russia long before the 2014 crisis.
The most difficult task was to replace Ukrainian products and components, of which there were many, especially due to Kiev’s strict compliance with the ban on the supply of this category of goods to Russia. However, even this factor has not led to the termination of interaction between the two countries. For example, Russia continues receiving Ukrainian aircraft engines, as well as components for its armaments and equipment intended for export. These include marine gas turbines, which were supplied, even though belatedly, for two Project 11661E frigates being built for Vietnam.
The production of a wide range of new products under the import substitution program is a serious challenge for the domestic industry. On the other hand, it provides an opportunity to increase production capacity in the coming years amid defense budget cuts. The flip side of this situation is the need to bear expenses already now in order to produce the required products. The deadline set for the start of the production of nearly 90 percent of all critical products—2018—is very strict, and all the plans can hardly be implemented by that time.
Russia has been faced with an acute problem of the shortage of modern machine tools. This issue is taking center stage, considering restrictions on the import of new machine tools that can be used for the production of military and dual-use products. At the same time, if relations with the West warm up and if the sanctions are lifted, Russian producers may return to Western suppliers. But this time, Russia will strengthen safeguards against risks and create a sufficient stock of imported products. This, however, does not apply to cooperation with Ukraine, which will obviously be reduced to a minimum. If the sanctions against Russia persist for a long time, the Russian defense industry may again seek full autarky (with the exception of cooperation with companies of Israel, China, South Korea, and some other countries), which would have a negative impact on its innovative potential in the long term.
