Breakthrough Into the Global Arms Market
No. 2 2008 April/June

The marked consolidation of Russia’s
positions on the global weapons market is one of the major
achievements of Vladimir Putin’s presidency. Nominal arms sales and
hard-currency revenues from these sales have steadily increased.
These revenues stood at $3.4 billion in 1999, while Russian state
arms trader Rosoboronexport saw its arms exports reach $6.2 billion
in 2007.

 At the time of this
writing, no official figures on total arms exports for 2007 have
been made public yet. However, as follows from past experience,
independent exporters account for no less than $1 billion in
supplies. This assumption puts overall exports for 2007 at $7.2
billion to $7.5 billion, with arms sales for the last eight years
more than doubling.

Even more impressive is
the growth of the portfolio for contractual commitments. It stood
at $6 billion to $7 billion throughout the 1990s, while it reached
a staggering $32 billion at the end of 2007. Rosoboronexport
accounted for about $23 billion of this amount, and independent
actors accounted for the rest.

It would be fair to say
though that the growth of arms exports would not be that impressive
if it is counted not in current, but in constant prices. The U.S.
dollar was worth much more in Russia and in the rest of the world
in 2000 than it was in 2007. However, one can state a marked
increase in supplies in physical terms, especially if one takes
into account the export of heavy-class fighter aircraft.

The Su-30MK heavy-class
fighter has been the indisputable leader in sales in the last eight
years. Since 1999, 100 such aircraft have been sold to China and
about 50 to India (and as many component kits for the fighter’s
licensed production). Another 28 Su-30s have been ordered by
Algeria, 24 by Venezuela, and 18 by Malaysia. In addition, several
Su-30MK and Su-27 aircraft have been bought by Vietnam, Indonesia
and Ethiopia. In individual years, the production of heavy fighters
in Russia reached 50 units, which is comparable with the production
of similar class fighters in the United States.

The last few years have
seen a marked increase in demand for the MiG-29 medium-class
fighter. After a difficult period in the second half of the 1990s,
when supplies of these aircraft plummeted to almost zero, their
export has resumed. At first, they were sold to Asian and African
countries of modest means, namely Sudan, Bangladesh, Myanmar and
Eritrea. Later, in 2004, Russia signed a major contract with
India’s Air Force for the development and production of 16 MiG-29K
shipborne fighters for the Vikramaditya aircraft carrier (formerly
Russia’s Admiral Gorshkov aircraft carrier). Fighter supplies
include demand for expensive airborne weapons and ground aircraft
maintenance equipment. Accompanying contracts of this kind may
reach the hundreds of millions of dollars. On the whole, aircraft
account for about 50 percent of Russia’s arms exports. This export
structure is also characteristic of the major classical exporters –
the U.S., the UK and France.

China is still Russia’s
largest client in the naval arms trade. Over the past several
years, Beijing has purchased three destroyers from Russia, about
ten submarines, and large batches of sea-launched missiles. India
has purchased three advanced Talwar-class frigates and ordered
three more ships. It has also launched an extensive program to
modernize its submarine fleet and actively purchases shipborne
antiship and air defense missile systems. In some cases, India was
the first customer of such systems and actually paid for their
development and production.

Standing apart from
these contracts is the BrahMos project for the development of the
PJ-10 sea-, air- and shore-based heavy supersonic missile. The
project is being implemented by a Russian-Indian joint venture of
the same name on a risk-shared basis. This is the first program of
this kind in Russia. The experience gained during its
implementation will be used for the development of a Russian-Indian
fifth-generation fighter and a medium-class transport aircraft.

Finally, in 2004,
Russia and India concluded a major and very difficult transaction
for the purchase by India of the Russian Admiral Gorshkov aircraft
carrier. The contract provides for the ship’s retrofitting in order
to accommodate horizontal take-offs and landings for MiG-29K
fighters. New Delhi will receive the ship free of charge, but will
pay for its repair and modernization. According to press reports,
the contract is worth $750 million; in addition, India will pay as
much for 16 deck fighters.

China is the largest
buyer of Russian air defense systems – it has ordered more than 10
battalions of the S-300PMU-1/2 long-range surface-to-air missile
system. The demand for this and other air defense systems has
markedly increased lately, and large contractors have appeared in
the Middle East and Northern Africa. One more client is Vietnam,
which has bought two S-300PMU-1 battalions.

Many clients purchase
Russian armaments and equipment for the Ground Forces. The largest
buyers include, above all, India, which has purchased about 700
T-90 battle tanks. Algeria is another major buyer.


The very low geographic
diversification of Russian arms supplies in the late 1990s was
behind the country’s potentially very dangerous structural weakness
on the global arms market at the time. Up to 80 percent of Russian
arms were sold to only two countries – China and India. At the same
time, the structure of the Chinese and Indian demand was markedly

China imported large
batches of series-produced armaments or those that had not
undergone in-depth modernization, and the supplies often were to be
made within a relatively short period of time. For example, Moscow
and Beijing signed a contract for the development and supply of the
Su-30MKK fighter aircraft to China in 1999, and the next year
Russia supplied the first few fighters to the customer. The Chinese
version of the aircraft was a rather simple modernization; yet,
even considering this, its development took an unprecedented short
period of time. In all, Russia sold 100 Su-30MKK fighters and 20
Su-27UBK combat trainers to China from 2000 to 2004, i.e. an
average of 25 aircraft per year, plus component kits for the
licensed production of Su-27SK aircraft.

In contrast, the Indian
military ordered armaments with very high operational and
technological characteristics, causing Russian science and industry
to work at the limit of their capacities in the mid-1990s.

Initially, the Indian
Air Force and Navy ordered small batches of armaments, while
supplies were made over long periods of time. The 1996 contract for
the development and supply of 32 Su-30MKI fighters graphically
manifested the characteristic peculiarities of Indian imports. The
contract provided for an extensive amount of research and
development. New Delhi wanted the fighter’s onboard equipment to
include French, Israeli and Indian-made components, which involved
high technical risks. The integration of foreign-made equipment
with Russian systems proved to be the most difficult task faced by
designers from the Sukhoi Design Bureau.

The combination of
large short-term orders for series-produced systems placed by
China, whose commitments involved no risks, with India’s contracts
for sophisticated hi-tech systems helped Russian industries and
companies that were awarded the orders in order to survive and
develop. In this respect, Chinese and Indian contracts were a good
blend for Russia: Chinese orders ensured extensive series
production for Russian manufacturers, while Indian orders
stimulated intensive R&D for new sophisticated systems.

After 2005, however,
the situation changed dramatically. By that time China had achieved
the initial saturation of its market, whose demand was increasingly
met by the Chinese defense industry. India, which had acquired the
initial experience of operating its weapon systems and which had
had Russia liquidate technical shortcomings characteristic of the
first trial armaments, placed new and very large orders. In
addition to 172 Su-30MKI fighters, contracted in 1996 and 2000, New
Delhi ordered 58 more. The Indian Navy ordered three more
Talwar-class frigates in addition to the three it had purchased in
2003-2004. Rumor has it that the Navy plans to buy a third batch of
Russian-built frigates.

Nevertheless, Russia
had always realized that exports ensured by the demand of only two
clients could not be stable. It was clear that the growth of the
Chinese defense industry would inevitably bring about a reduction
or even the termination of imports from Russia. The Indian market
had always been open, and British, German, French and Swedish
manufacturers had always been present there along with Soviet
companies. In the early 1990s, the Indian military, shocked by the
breakup of the Soviet Union, began a consistent policy to diversify
sources of armaments. France and especially Israel have markedly
increased their presence on the Indian arms market over the last 15
years. At the turn of the century, the United States also began to
display a growing interest in it.

Russia took consistent
efforts to diversify its clients. These efforts produced the first
serious results in 2003 when Russia signed contracts with three
Southeast Asian countries – Vietnam, Malaysia and Indonesia.

Vietnam ordered
S-300PMU-1 surface-to-air missile systems, four Su-30MK2 fighters,
and Project 12412 missile boats. Malaysia signed a $900 million
contract for the purchase of 18 Su-30MKM fighters, while Indonesia
purchased four Su-27/30 fighters and ten helicopters, worth a total
$200 million. The orders placed by the three countries with Russia
in that year reached a total of about $2 billion. The transactions
caused some commentators to talk about the formation in Southeast
Asia of a third pole of consumption for Russian weapons and
military equipment, in addition to China and India.

However, a real
breakthrough in diversifying the market for Russian arms exports
came in 2006, when Russia concluded large package transactions with
Algeria ($7.5 billion) and Venezuela ($3 billion). Coupled with
contracts signed with Middle Eastern countries, the Algerian and
Venezuelan packages ensured the formation of a balanced portfolio
of contractual obligations. This was one of Russia’s most important
achievements in the field of military-technical cooperation, which
is comparable to, if not more important than, a quantitative growth
of exports.


What factors are behind
the growth in Russian exports and their diversification? Russia’s
broader presence on the global arms market was caused by many
military-political, economic and image factors. These include,
above all, upsurges of military-political tensions in the world in
1999 and 2003, the fast economic, military and technological growth
of China and India, favorable trends on the oil market, which
ensured a high paying capacity of countries in the Middle East and
Northern Africa, and finally, the political and economic
strengthening of Russia itself.

In the period from 2000
to 2005, before the contracts with Algeria and Venezuela, Russian
exports grew due to Chinese and Indian demand, which increased
together with the rapid economic and technological development of
these booming great powers. Both China and India are world leaders
in economic growth rates, which helps them to allocate more and
more resources for the modernization of their Armed Forces, above
all the Air Force. Both nations are engaged in large-scale programs
for the purchase and licensed production of Su-30MK combat
aircraft. Apart from purchasing large batches of the fighters, they
have launched expensive projects for creating basically new
industries capable of making advanced fourth-generation fighter

Both countries do not
conceal their regional and potentially global ambitions. India is
seeking to become a dominating military power in the Indian Ocean
region “from Cape Town to Sidney.” This strategic goal, together
with other factors, is behind the purchases of foreign, including
Russian, naval armaments.

The contract with
Russia for the retrofitting and modernization of the Russian
Admiral Gorshkov aircraft carrier has a key role in these plans.
After the contract’s implementation, India will become the world’s
fourth country (after the U.S., France and Russia) to have aircraft
carriers accommodating horizontal take-off and landing deck
aircraft. In addition, the need to create an escort group is
stimulating the Indian Navy to import new class frigates (Talwar),
six of which have been ordered from Russia.

China, which does not
have a strong naval tradition like India, has not started yet – at
least officially – to create an aircraft carrier fleet of its own.
Nevertheless, China’s force projection potential has markedly
increased due to purchases from Russia. The Navy of the Chinese
People’s Liberation Army has purchased Russian shipborne
anti-aircraft systems, which have enabled the Chinese Navy to
operate beyond the range of shore-based fighter aviation. Thus, for
the first time in its history, the PLA Navy is capable of operating
more than 500 to 700 kilometers from shore.

At the same time, there
were also short-term factors behind the active purchasing efforts
by China and India in the first few years of the new century.

India’s imports were
particularly motivated by its armed conflict with Pakistan in the
district of Kargil in 1999. New Delhi focused on contracts for
Ground Forces armaments. In particular, it bought 40 Mi-17
transport/assault helicopters and hundreds of T-90S main battle
tanks. After the Kargil fighting, India also decided to modernize
its frontline aviation.

military-technical policy was apparently influenced by the NATO
bombings of Yugoslavia in 1999, after which Beijing increased its
imports of air defense systems. Unlike other defense fields where
Chinese purchases were marked by a conservative approach to
technical risks, the PLA was the primary customer of the latest
S-300PMU-2 anti-aircraft missile system. In general, Beijing
focused its attention on Ground Forces armaments after 1999.

The next stage in the
growth of Russian exports, which included the Algerian and
Venezuelan package contracts and the purchases of Russian military
equipment by Middle East countries, was caused by other factors.
These included a sharp deterioration of the military-political
situation in the Middle East following the U.S. operation in Iraq
in 2003, and U.S. pressure on Iran and Syria. Washington’s policy
of force triggered a growth of anti-American sentiment in the
world, including a leftward shift in the policies of Latin American
countries, above all Venezuela. These changes also contributed to
the growth in demand for Russian arms.

This eagerness to buy
Russian armaments was also stimulated by soaring oil prices which
made it possible for Algeria, Venezuela, Iran and – indirectly –
Syria to make large purchases. This factor reflects a general trend
in global history, namely a positive correlation between high oil
prices and a growth in demand for armaments on the global market.
So in this case Russia was simply just as lucky as other exporter

In Algeria and Syria,
Russia has used a new and rather efficient instrument to promote
its military hardware. The matter at hand is the conversion of
those countries’ debts to the former Soviet Union into purchases of
Russian machine-building products, including military hardware.
This solution has proved particularly effective with Algeria, whose
resource base differs greatly from Russia’s. In exchange for its
$4.7 billion debt, Algeria has endorsed contracts to the tune of
$7.5 billion.

Finally, the
improvement of Russia’s financial standing has enabled
Rosoboronexport to use the practice – standard for other exporters
– of preferential crediting of weapons importers. For example,
Moscow and Jakarta concluded an agreement in 2007 to give Indonesia
a $1 billion target-specific loan for the purchase of Russian
armaments. Indonesia plans to use the loan to modernize its Air
Force. Immediately after receiving the loan, Indonesia placed an
order with Russia for six Su-30 fighters in addition to the four
such aircraft it had purchased in 2003.

The signing of the
Algerian and Venezuelan contracts meant more than just a sharp
quantitative growth of Russian exports and an expansion to new
markets; it signaled a radical change of the quality of Russia’s
military-technical cooperation. The package nature of these
contracts and their unprecedented (for the Russian defense
industry) volume show that Russia has switched over from sales of
individual types of armaments to offers of package solutions to the
military security issues of importer countries, from supplies of
armaments as commercial goods to military security offers as
political goods. In this regard, the growth of Russian supplies,
their differentiation, and particularly the expansion of export
geography mark changes in Russia’s positions in the world.

Some importers have
begun to view Russia’s integral might as, at least, equal to that
of France or Britain. Unlike China, for which Russia was a
non-alternative source of armaments for a long time, Algeria and
Venezuela can use the services of European exporters, which can
meet a large part of their requirements.

It is only natural that
Russia’s success has worried its competitors and made their
competition with Moscow still keener. In particular, they have
tried to actively counter the implementation of the Algerian

Paradoxically, some
objective factors must work against Russian exports, yet the latter
keep growing from year to year. These factors include the
exhaustion of what the Soviet Union had achieved in technology, the
saturation of the Chinese market, and stepped up competition on the
Indian market. This paradox means that Russia’s achievements in
arms sales since 2005 are due to the country’s political and
economic consolidation and its return to the ranks of great powers
– at least, as regards its image.


The signing of the
Algerian and Venezuelan packages in 2006 and the placement of the
Indian orders for fighter aircraft and battle tanks in 2007 have
brought about a basically new phenomenon in post-Soviet Russia –
some defense industries are operating at full capacity. Whereas in
the 1990s the defense sector struggled hard to find orders, it now
faces the challenge of their efficient and timely fulfillment. In a
way, Russia’s defense industry is now faced with a crisis of
transition from occasional contracts and working below capacity to
large-scale production. In addition, the industry is experiencing a
shortage of manpower and state-of-the-art production assets, which
adds to difficulties with fulfilling contracts.

Manufacturers that have
encountered this problem include, for example, the Irkut
Corporation, which builds Su-30MK fighters, Almaz-Antey (a
developer and producer of many air defense systems, in particular
the S-300PMU long-range surface-to-air missile system), and the
Tula-based KBP Instrument Design Bureau. At present, these
companies are fully engaged with orders until 2012. The reason for
these changes is not only the high demand for Russian armaments on
the global market, but also the compression of the country’s
production capabilities. Moreover, the end producers of armaments
and military equipment are operating well, as a rule, and are
capable of meeting the growing demand.

The problems become
aggravated at lower levels of cooperation where the situation is
much more difficult. Here are a couple of examples.

The demand for Mi-17
helicopters in the last few years has reached 150 machines a year.
Three helicopter plants in Russia can supply 120 to 150 machines,
but the production of reduction gear does not exceed 80 to 100
sets, thus impeding the fulfillment of export contracts and putting
into doubt the industry’s ability to meet the fast-growing demand
from Russian clients. Similarly, the production of Su-30MK fighters
is also limited – not so much by the capacity of aircraft plants in
Irkutsk and Komsomolsk-on-Amur, as by the capacity of companies
producing components (e.g. ejection seats).

Full operating capacity
for many years in advance paradoxically has a negative side to it.
Previously, one of Russia’s advantages on the arms market was its
ability to supply products within a short period of time after a
contract was signed, or at least when no large-scale R&D was
required. While buyers of Western, especially European, armaments
sometimes had to wait for the ordered equipment for years, the
Russian defense industry was often able to start delivering
products within months after a contract was signed. Now, potential
buyers of Russian armaments that are in particular demand – first
of all air defense systems – also have to wait several years for
their turn. The problem will become even more aggravated when and
if the Russian Army, too, decides to place large-scale orders for
new weapons systems. Then the issue of large-scale investment in
the expansion of production will inevitably rise.

In the last 18 to 24
months, export contractors have been faced with one more problem,
namely the fall of the U.S. dollar, since a majority of contracts
are denominated in dollars. Coupled with the fast growth of
production costs, wages, and energy and utility prices, this factor
sharply reduces export profitability. Moreover, contracts,
especially those concluded before 2005, increasingly often result
in negative profitability. There have already been precedents when
Russian companies have had to admit that they are unable to fulfill
some contracts or entered into unpleasant negotiations with buyers
on a revision of contractual terms.

All these factors show
that Russia’s present capabilities in promoting its armaments on
the global market exceed the defense industry’s ability to fulfill
current and potential contracts. The further growth of military
exports is mainly limited by production capacity. The technological
modernization of the Russian defense sector and a marked
improvement in the quality of its management must be a top priority
task for the country in the next few years.