$1 BILLION IN FOUR DAYS

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Russian arms export grew

According to official reports, the Russian arms export set another record in 2005, when $6.126 billion worth of merchandise was sold to foreign customers. Validity of the estimates is questionable.


Russian arms export grew every year, ever since establishment of Rosoboronexport in November 2001, and the growth amounted to $1 billion a year. Independent experts in the meantime predicted a fall in arms export every following year which never came to pass. Rosoboronexport went on upping the scale of arms export, setting new and new records and making experts doubt truthfulness of official information. These doubts have never been so grave yet because the estimate of arms export in 2005 was corrected on three occasions in the last two months.

Alexander Denisov, Senior Assistant Director of the Federal Service of Military-Technical Cooperation, said on November 30, that “the president-endorsed export plans amounting to $5.1 billion will be fulfilled and perhaps even exceeded to some extent.” The figure ($5.1 billion) would have meant a $700 million decline against the 2004 arms export, which was logical due to cyclical nature of the arms market. “This decline was to be ascribed to reduction of revenues from export of heavy fighters,” to quote Dmitry Vasilyev, an expert with the Center of Analysis of Strategies and Technologies. “All previous contracts were fulfilled in 2002-2004, and realization of new ones was to begin in 2007. It is export of ships that dominated Russian arms export in 2005, and smoothed the transition from old and new aviation contracts that kept arms export from falling to the 2000 level.” The expert says that other major arms exporters (the United States, France, Germany, and Great Britain) are subject to similarly periodic declines.

Sum total of the 2005 arms export, increased by $200 million on December 28. Addressing the meeting of the Commission for Military-Technical Cooperation, Vladimir Putin praised the “positive dynamism of arms export” and said that $5.3 billion worth of merchandise had been sold to foreign customers. “Somewhat less than the year before, but not bad,” the president said.

In early January, however, this “somewhat less” all of a sudden became “another record” Defense Minister, Sergei Ivanov, reported to Putin on January 18. “We summed everything up and came up with $6 billion,” Ivanov boasted. Judging by how calmly the president took the news, he was not surprised at all. Neither chose to explain how “just over $5.1 billion” had grown into the all-time record $6 billion.

In the meantime, even this record lasted only three weeks. Mikhail Dmitriyev, Director of the Federal Service of Military-Technical Cooperation, said on February 9, that “we completed the year with $6.126 billion,” more than $1 billion over the figure Denisov had aired.

So substantial a difference may only be ascribed to deliveries of merchandise to foreign customers under one or several major contracts in the last days of 2005. Most experts reckon that the matter may concern two submarines. Admiralty Shipbuilders in St.Petersburg may have delivered to the Chinese the last of the five submarines of Project 636, $225 million apiece. A multipurpose nuclear submarine of Project 971 could become the largest delivery. It was built (initially for the Russian Navy itself) in Komsomolsk-on-Amur. Formally handed over to the Russian Navy, the submarine could be turned over to the Indian Navy. Unofficial reports indicate that the first installment for the submarine amounted to $600 million – the sum that brings sum total of this one and the St.Petersburg deal to $825 million (the difference between the preliminary and final evaluations of arms export in 2005).

There is no saying why in this case neither Denisov nor Putin had taken these deals into account in their December statements. There could be some political considerations involved that prevented them from admitting transfer of nuclear submarines to the Indian Navy. On the other hand, there are no international restrictions on export of nuclear-powered submarines without nuclear weapons and with conventional missiles of a range in excess of 300 kilometers. Besides, concealing the fact altogether was a flat impossibility. Foreign satellites and aircraft would have noticed so large a submarine in no time at all.

In the meantime, sum total of arms export could be merely boosted to report another record. It is these regular corrections that worry experts. “National statistics has always been the most reliable source of information on arms export and its volume until now,” Konstantin Makienko of the Center of Analysis of Strategies and Technologies said. “This year, however, validity of this source raises very many questions.”

A considerable growth in the stock of orders became another major statistical triumph of 2005. Ivanov reported to Putin on January 18, “A number of contracts signed in the last days of December increased the stock of orders to $22 billion. In other words, our military-industrial complex has contracts for the next several years.” Dmitriyev came up with even more impressive figures on February 9. “The stock of orders has always been fairly high. On the level of $15-16 billion, that is. It amounts to $23 billion these days, the level that puts it on a par with the Soviet past.” “After 2007, actual arms export will be exceeding $7 billion,” Dmitriyev promised. “That’s what we will be able to supply our customers with.”

As a matter of fact, so impressive a stock of orders may end in problems. Degradation of the Russian industry in the last 15 years may render it unable to fulfill foreign contracts and ones within the framework of the state defense order. Regular demands for more and more money give way to cautious questions concerning the ability of the military-industrial complex to use it. The state defense order equaled the arms export for the first time in 2004…

Chief of the General Staff, Yuri Baluyevsky, was the first to express concerns over the growing stock of orders. “Neither my colleagues not I are confident that we will actually get the weapons we will need in 2011,” Baluyevsky admitted to Putin at the conference of senior officers of the Armed Forces in November 2005. “Absence of coordination between the military-technical policy and capacities of the national military-industrial complex are one of the reasons for the existing state of affairs.”

Vladislav Putilin, Chief of the Department of Defense and Security Programs of the Economic Development Ministry, said in late December, “The 2006 state defense order will be almost 1.3 times that of 2005. The military-industrial complex is having problems with fulfillment of the 2005 state defense order. I’m not therefore going to say anything more about 2006. The 30% growth with all the problems we are facing, that’s a lot indeed. Add here foreign contracts…”

Andrei Belianinov, Director of the Federal Service of State Defense Order, echoed Putilin by saying, “There are no more problems with finances, there are problems with fulfillment of the state defense order. This year, the state defense order exceeded the arms export revenues ($8 billion against $6 billion). Weapons factories should be refurbished, or increased funding of the state defense order and longer lists of foreign customers will never produce the desired effect.”

Rearrangement of the defense industry may solve this problem and improve coordination of distribution and fulfillment of arms export contracts. Ever since 2001, the state has been steadily re-nationalizing defense enterprises once sold to private owners. In 2005, this policy culminated in establishment of a helicopter holding on the base of Oboronprom, a subsidiary of Rosoboronexport. All major companies producing MI helicopters were amalgamated into one holding by the end of the year. The holding even bought controlling interest in Kamov-Holding from AFK Sistema. Oboronprom now controls both helicopter schools in the country (Mil’s and Kamov’s). In the meantime, not even private companies like Rosvertol objected to their transfer to state control.

Establishment of United Aircraft Corporation will be the next step. First suggested in 2004, and actively lobbied by Boris Aleshin of the Federal Agency of Industry, the project secured Putin’s support last year. The president proclaimed the decision to merge the largest state and private aircraft-manufacturers into a single corporation at the meeting of the State Council on February 22. The state will own the future United Aircraft Corporation 75%. Presidential decree on the United Aircraft Corporation was expected in April 2005, but the latest reports indicate that it may finally be signed later this week. The discord on the matter boiled down to the degree of state involvement (from 50% plus one share to 75%) and to candidates for directorship (Aleshin aspires for it). The game is worth the candle. Experts say that the United Aircraft Corporation will control at least 10% of the global market of aircraft estimated at $1.7 trillion.

A shipbuilding holding will probably follow. Last July, Aleshin suggested a new concept of state-private business partnership in construction of surface combatants. Aleshin is convinced that the holding should be formed on the basis of two major shipbuilders in St.Petersburg, Northern Shipbuilders and Baltic Factory. In 2004, 72.19% of the former was bought by Mezhprombank controlled by Sergei Pugachev of the Federation Council. In 2005, Mezhprombank bought 88.2% in the latter as well. Aleshin is convinced that the state should delegate three design bureaus (Northern, Neva, and Almaz) into the future holding and own at least a controlling interest. It seems, however, that these plans may be thwarted by the Concern of Medium and Small Ships controlled by Interregional Investment Bank. The concern in question owns a large chunk of the Vympel Shipbuilders in Rybinsk, Yantar in Kaliningrad, and Amur Shipbuilders, and maintains close working contacts with Almaz Design Bureau.

As a matter of fact, all these collisions have already resulted in fierce battles over construction of three frigates for India worth $1.56 billion. The contract is to be signed in early March. The Northern Shipbuilders was formed in August 2005, by Aleshin himself that it had been chosen for the contract.

In September, however, Putin signed a decree “Matters of military-technical cooperation with foreign states” that was supposed to lesson internal competition in the sectors of industry where vertically integrated holdings had not yet been formed yet. The document enabled the Federal Service of Military-Technical Cooperation to choose companies and factories for fulfillment of export contracts without contests, by a collegial decision alone. As a matter of fact, the decree but intensified the war over the Indian contract. The board of the Federal Service of Military-Technical Cooperation opted to give the contract to Yantar owned by the state 51% in December. The decision was backed by Rosoboronexport, Rosoboronzakaz, Defense Ministry, and Economic Development Ministry. The Federal Agency of Industry alone demanded the contract for the Northern Shipbuilders. Well, it was not the end of the problem by far. Last week, Ivanov ordered establishment of a special panel that would evaluate Northern Shipbuilders’ and Yantar’s capacities.

All of that is accompanied by an information war in the media. It does not take a genius to predict continuation of war in the national military-industrial complex…

Structure of Russian arms export in 2005

Exporter Volume (in millions of dollars)

1. Rosoboroneksport 5,200

2. MIG Corporation 306

3. Instrument-Making Bureau (Tula) 230

4. Mechanical Engineering Bureau (Kolomna) 60

5. Military-Industrial Corporation of Mechanical Engineering (Reutov) 30

6. 16 companies permitted to deal with foreign customers directly 300

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