from:www.kommersant.com/page.asp?idr=527&id=651264

1 Billion in 4 Days
Kommersant Vlast follows the tradition summing up the activities of Russian arms exporters. The year 2005 was a success for the Russian military industry, official reports claim. The supplies hit a new record high of $6.126 billion. Yet, the accuracy of this figure is quite doubtful.
Russia arms exports have been steadily growing up to the annual $1 billion since the creation of Rosoboronexport, the united state mediator in the military and technical cooperation, set up by the merger of Rosvooruzheniye and Promexport on November 5, 2001. Every year, independent experts, however, persistently forecasted a recession in exports for the coming year. The slump never occurred, though, as Rosoboronexport was boosting exports setting new records and beating the skepticism of analysts for official data. This year, these doubts look grounded as never before. Official reports have reviewed the total volume of the Russian military export three times in the past two months.

Peculiarities of Military Statistics

Alexander Denisov, the first deputy director at the Federal Military and Technical Cooperation Service, announced on November 30 that “the plan of $5.1 billion, endorsed by the president, will be fulfilled and exceeded.” The $5.1 billion would have meant a 700-million slump in the exports in 2005, against indicators of 2004, which would be quite in line with the cyclic nature of the arms market, according to experts. “The fall in the military supplies is mostly due to fewer profits from heavy fighters,” Dmitry Vasilyev, an expert at Center for Analysis of Strategies and Technologies, said in an interview with Vlast. “The jets were delivered in 2002-2004 under old agreements while new contracts will be executed in 2007 onwards. We can say that the supplies of warships, which dominated the Russian export in 2005, acted as a link between old and new aircraft contracts and prevented the military exports from falling behind the level of 2000.” Other major arms exporters such as the United States, France, Germany and the UK regularly experience similar recessions, the Russian expert noted.

On December 28, the total figure for 2005 went up by $200 million. President Vladimir Putin reported at a session of the Military and Technical Cooperation Commission that the arms exports retained “the stable growth” and cited the sum of $5.3 billion. “This is somewhat less than last year but it is roughly the same level,” the president concluded.

Oddly enough, after New Year’s holidays, the “somewhat less” turned into “a new record” that Defense Minister Sergey Ivanov reported to Putin on January 18. “We have summed up final result, which is $6 billion in 2005,” the minister boasted pointing out that the success proved the efficiency of the new system of military and technical cooperation introduced in 2000. The president was not at all surprised by the news, judging from his reserved reaction. Still, neither Putin nor Ivanov would explain how the initial $5.1 billion came to be the record-high $6 billion.

However, this record was also broken a week later. The head of Federal Military and Technical Cooperation Service, Mikhail Dmitriev announced on February 9 that the agency “closed last year with the result of $6.126 billion.” The sum is more than $1 billion higher than the one that Dmitriev’s first deputy had posted. The change is unprecedented. The difference between preliminary results reported at the end of the year and the final sum that the arms export service usually announces in mid-February has never exceeded $100 million.

Foreign customers must have received military hardware under a major contract in last days of 2005, which explains that big discrepancy. Most experts agree that it probably was the supply of two submarines. St. Petersburg-based Admiralteyskie Verfi apparently delivered the last 636 project submarine of those five to China, each of them costing $225 million. The supply of the 971 project’s multifunctional atomic submarine could become the most sizeable purchase. The submarine was initially built for the Russian Navy in Komsomolsk-on-Amur by Amur Shipyard, a part of Shipbuilding and Boatbuilding Concern. The vessel must have been already handed to the Indian Navy after the Russian Navy formally accepted it. The first installment totaled $600, in unofficial reports. The sum and the cost of the St. Petersburg’s submarine give the $825 million discrepancy between preliminary and official results for 2005.

However, it does not explain why Denisov and Putin did not take these deliveries into account for their December forecasts. Perhaps, some political reasons made them reluctant to disclose the information about the sale of the multifunctional atomic submarine to India. No international treaties, however, restrict selling a submarine with an atomic-powered motor but without any atomic weapons or missiles with the range of over 300 km. What’s more, one can’t hide this fact. Such a sizeable submarine would be easily located by foreign space and aircraft reconnaissance systems.

Still, the sum total of the exports in 2005 could have been simply overestimated to mark a new record. Experts became skeptical as the authorities made these corrections. “National statistics have been the most accurate source of the information on the Russian military export so far,” Konstantin Makienko, the deputy director of Center for Analysis of Strategies and Technologies, told Vlast. “However, this source seems to be doubtful this year.”

Problem with the Volume

A dramatic rise in the number of purchase orders has become the most evident achievement of 2005, in terms of statistics. Sergey Ivanov presented a report to Vladimir Putin on January 18 saying: “We signed a number of contacts on last days of December, so the total volume now comes to $22 billion. The industry has thus secured sizeable orders for upcoming years.” Meanwhile, Mikhail Dmitriev released even more impressive data on February 9: “We have always had quite a big volume of military hardware worth of some $15-16 billion. The current figure is $23 billion which comes close to the Soviet times.” Such an influx of deals should entail a further boost of annual supplies. “The actual number of the armaments deliveries will surpass $7 billion from 2007,” Dmitriev promised. “This is the amount we can produce for sure.”

The impressive volume of orders may, however, bring some setbacks. The Russian industry, which had evidently degraded over the past 15 years, may prove unable to fulfill both foreign military contracts and the internal state orders on time. Constant appeals for more money to be earmarked from the budget have already vanished to give way to cautious apprehensions whether the military industry is able to manage these funds properly. In 2004, the state defense for the first time came to equal military exports. There’s more to it, the growth in the military budget now exceeds the growth in arms supplies.

Yury Baluevsky, the chief of the General Staff, was the first to voice concerns about a rising number of orders for the defense industry. He laid it on the line to Vladimir Putin at a session of the heads of the Russian armed forces last November. “My colleagues and I are not sure that we will get in 2011the armaments that we will need. It is mostly due to the bad correlation between the military policy and the capacity of the defense industry,” Baluevsky said.

Vladislav Putilin, the director of the Defense and Security Programs Department at the Economic Development and Trade Ministry, said in late December: “The state defense order grew 1.3 times in 2006, compared to 2005. The industry carries out the order for 2005 very slowly, so I would not like to say whether this figure is big or not. Given loads of problems, the 30-percent growth is substantial. We can also count foreign contracts. We have reshaped the financing of the capital construction in the military sphere to overcome the problem. The funds will be spent to modernize the defense industry in the view the growing output of new hardware and armaments.”

The Federal Defense Order Service’s director Andrey Belyaninov expressed similar fears in early January. “There are some problems in fulfilling the state order but there are currently no problems with its financing. This year, the sum of the federal defense order has exceeded profits from military hardware sales abroad - $8 billion against $6 billion. Military enterprises ought to be modernized. Otherwise, an increase in the state defense order or the growing number of overseas customers will bring no fruit.” Mikhail Dmitriev seemed to be the only person confident of the potential of the military industry. He told Vlast on February 9 that he is sure that the Russian defense industry will execute all export contracts in time.

Deprivatization Leading to Nationalization

The restructuring of the defense industry could solve this issue and improve the system of the distribution and execution of export contracts. The state has been engaged in the nationalization of private defense companies since 2001. A vivid example of this policy is the creation of the helicopter-building holding managed by the Oboronprom industry corporation, Rosoboronexort’s subsidiary. Major helicopter plants producing Mi helicopters were finally merged into the holding by the end of the last year. The joint company also bought the controlling stake in Kamov Holding from Sistema. Thus, Oboronprom has taken control over the two Russian helicopter schools, Mi and Kamov. Private companies like Rostvertol, however, did not contest this actual shift nationalization in public.

The creation of the United Aircraft Construction Corporation is on the way. Last year, Vladimir Putin endorsed the project that the head of the Russian Industry Agency, Boris Aleshin proposed in 2004 and has been promoting ever since. The Russian president announced the decision to create the United Corporation of major state and private aircraft-building firms at a session of the State Council in Zhukovsky on February 22, 2005. The state’s share in the corporation will amount to 75 percent. However, the presidential decree creating the corporation has not been signed yet, although it was due to be out in last April. It can be signed this week, according to latest reports. The controversy arouse as the state-owned share grew from 50 percent plus one stock to 75 percent and Aleshin expressed his ambitions to be the company’s head. The game is indeed worth the candle since the aircraft corporation may soon control at least 10 percent of the world’s aircraft market worth of $1.7 trillion, according to analysts.

The creation of a shipbuilding holding seems to be the next point on the agenda. In July, Boris Aleshin came up with his conception of the mixed state and private partnership in shipbuilding too. He believes that the holding should be based on the two major shipyards of St. Petersburg, Severnaya Verf and Baltiysky Zavod. Mezhprombank, controlled by Federation Council member Sergey Pugachev, bought 72.19 percent in Severnaya Verf in 2004 and 88.2 percent in Baltiysky Zavod in 2005. Boris Aleshin says that the state should include its three St. Petersburg-based design bureau, Severnoye, Nevskoye and Almaz, into the holding too. In his case, the state also seeks to hold the controlling stake.

However, Shipbuilding and Boatbuilding Concern is likely to oppose these plans. The concern, owned by Interregional Investment Bank, owns major stakes in Rybinsk-based Vympel plant, Yantar plant in Kaliningrad, Amur Shipyard and enjoys close cooperation with the Almaz design bureau.

The controversy has already fueled the fierce competition for the $1.56 billion-worth contract to build three frigates for India. The deal is to be struck in early March. Boris Aleshin sent a letter to Northern Shipyard back in August 2005 notifying that the company won the bidding for the contract.

Yet, Putin singed a decree Matters of Military and Technical Cooperation between Russia and Foreign States in September in an effort to knock down the domestic competition in those industries where the vertical-integrated holdings had not been set up yet. The decree enabled the Federal Military and Technical Cooperation Service to appoint executors of export contracts without tenders but based on collective decisions. The document stirred up the war for the Indian order as the board of the federal agency ruled to give the contract to Yantar, 51-percent owned by the state. Rosoboronexport, the Defense and Economic Development Ministries upheld the decisions whereas the Federal Industry Agency favored granting the contract to Severnaya Verf. The battle for the contract is not over yet. Defense Minister Sergey Ivanov ordered last week to shape a task force to weight the capacity of Severnaya Verf and Yantar in the construction of the frigate.

All these developments were enhanced by attacks of the two parties in the press. Moreover, internal wars in the Russian military industry are likely to continue until the state remolds the industry and obtains the controlling stake in key defense companies.


  &The Arms Russia Sold in 2005

Konstantin Makienko, the deputy director of the Center for Analysis of Strategies and Technologies, takes a look over the composition of Russian arms exports in 2005.

Things We Sold

Naval armaments became the most sizeable supplies of 2005 accounting for 45 percent of the total Russian arms export. Six Kilo-class submarines were sent to China last year. Three of them were built at Admiralteyskiye Verfi in St. Petersburg, two at Northern Machine-Building Enterprise and one at the Krasnoye Sormovo shipyard in Nizhny Novgorod. The six submarines cost $1.5 billion.

The Tayzhou 956EM torpedo-boat destroyer is the second-largest sale. The $1.4-billion contact to build two destroyers was signed in January 2002. The second vessel is to be constructed this year. South Korea got three Murena air cushion landing boats while India received a modernized 08773 submarine fitted with Club-S missile system from Zvezdochka shipyard in Severodvinsk.

The aircraft industry saw a phenomenon that has not occurred since 1994. It is the first time in the past ten years that not a single Su-27/30 fighter was sent abroad. The Irkut corporation kept on carrying out the licensing program to build 140 Su-30MKI fighters for India sending 5 complete sets ready for the assemblage at the HAL corporation’s plants. India also received 28 “conditional” sets which are apparently parts of fighters, according to unofficial reports. The deliveries totaled $600.

The MiG corporation sent 6 MiG-29SMT fighters to Yemen and modernized twelve earlier supplied MiG-29SE. The Russian company also modernized two MiG-29Bs for the Air Force of Eritrea. The shipments cost $300 million. 16 Mi-17 and 7 Mi-35 helicopters were delivered to Czech Republic to the amount of $150 million as the clearance of the Russian debt. Small lots of Mi-8 and Mi-17 helicopters were shipped to Vietnam, Malaysia, China, Iran, Sudan, Burkina Faso, Venezuela, Kazakhstan and Latvia. Some ten Ka-32 helicopters were sent to South Korea.

The sphere of anti-aircraft systems saw major transactions as well. The Almaz Antey concern sent two S-300PMU1 anti-aircraft missile systems to Vietnam gaining $250 million. The Russian company has started modernizing the Kvadrat anti-aircraft missile systems for Egypt.

Land hardware was also on the supply list in 2005 but the sales were not that large. UralAZ executed the contract to deliver 22 Ural trucks to Mexico. The 144 Factory of the Russian Defense Ministry and Kurganmashzavod have apparently fulfilled the agreement with Yemen on 180 BMP-2 infantry combat vehicles sending the remaining 52 vehicles. Tula Instrument-Making Design Bureau has started shipping Kornet-E anti-tank missile systems to Eritrea, according to some reports. The design bureau also delivered similiar missile systems to Oman, says Alexander Denisov, the first deputy of the Federal Military and Technical Cooperation Service.

Things We Signed

The deal with China to sell 34 Il-76MD military transportation planes and 4 Il-78 inflight refueling tankers was the biggest one in 2005 costing $1.2 but the mass media put the price at $1.5 billion. China also ordered three sets of aircraft motors. The $267 million contract to deliver 100 RD-93 motors for Chinese FC-1 light fighters was struck in April. The $580 million order for 100 AL-31FN motors to be used for Russian Su-27SKs and Su-30MKKs followed in July. This pattern of Chinese purchases is quite peculiar. Beijing evidently prefers to gradually stop buying fight planes and start importing hardware and components parts that the Chinese industry is unable to produce so far .

Russia signed quite an important contract at the MAKS-2005 aviation salon for the Saturn research and development center to create AL-55I motors for Indian HJT-36 and HJT-39 training jets of the Indian Air Forces. The price of the contract is not that impressive at the first stage reaching some $250 million. But .ong-term-wise, Russia will finally develop its own technology for the 2-5 ton motors and will shed the dependence on the unpredictable Ukraine.

The sale of 29 Top-M1 anti-aircraft short-range missile systems to Iran, estimated at $800 million, also became a key contract of 2005. It seems to be the biggest Iranian order after Russia lifted the restrictions imposed by the Gore-Chernomyrdin memorandum.