CONTENTS Industrial Policy #2(8), 2007 The Russian Aviation Industry: From European Option PUBLISHER to National Strategy 2 Center for Russian Defence Procurement in 2007 4 Analysis of Strategies and Russia’s Space Program in 2006: Some Progress but Technologies No Clear Direction 9 CAST Director & Publisher Ruslan Pukhov War And People Advisory Editor Konstantin Makienko Russian Anti-Armour Weapons and Israeli Tanks in Lebanon 13 Editor-in-Chief Ilya Nevorotov Arms Trade Researcher Ruslan Aliev Russia on the Arms Market in 2006 16 Researcher Alexey Pokolyavin Researcher International Cooperation Dmitry Vasiliev The Multipolarity Trap: How Russia Should Make Friends… Researcher and With Whom? 20 Polina Temerina Military-Technical Relations between Russia and North Editorial Office Korea: Past, Present and Future 25 Leninsky prospect, 45, suite 480 Moscow, Russia 119334 phone: +7 495 135 1378 fax: +7 495 775 0418 Our Authors 27 http://www.mdb.cast.ru/ To subscribe contact phone: +7 495 135 1378 or e-mail: [email protected] Moscow Defense Brief is published by the Centre for Analysis of Strategies and Technologies All rights reserved. No part of this publication may be reproduced in any form or by any means, electronic, mechanical or photocopying, recording or otherwise, without reference to Moscow Defense Brief. Please note that, while the Publisher has taken all reasonable care in the compilation of this publication, the Publisher cannot accept responsibility for any errors or omissions in this publication or for any loss arising therefrom. Authors’ opinions do not necessary reflect those of the Publisher or Editor Computer design & pre-press: ZEBRA-GROUP www.zebra-group.ru The editorial team would like to thank Simon Saradzhyan, News Editor, The Moscow Times, for his insightful guidance and generous advice The editorial team would like to thank Howard Gethin for his contributions in editing and proof-reading Cover photo: Il-96-300 - The flagship of Russia’s civil aircraft industry. Pulkovo airport, St.Petersburg, Russia, June 2006 Photographer: Marina Lystseva # 2, 2007 Moscow Defense Brief © Centre for Analysis of Strategies and Technologies, 2007 Printed in Russia Industrial Policy The Russian Aviation Industry: From European Option to National Strategy Konstantin Makienko European Prospects Boeing 787 and Europe’s A350, Russia’s national air carrier could also be said to have belonged to the Boeing party. In 2004-2006, many observers were convinced that Aeroflot’s top management preferred Boeing and was reluctant the best option for Russia’s civil aviation was to integrate to purchase the A350, which lagged behind its competitor into the European aerospace industry. The emergence of is in development. There are reasons to believe that Sergei perspective coincided with Moscow’s political rapprochement Prikhodko, a deputy head of the Kremlin administration, with Paris, Berlin and Rome, and broad cooperation with is the most influential supporter of the Boeing party in Europe in the energy sector. This approach also signaled an the corridors of power. Economic Development and Trade extreme skepticism regarding the capability of the national Minister German Gref tends to support it as well. In addition aviation industry to overcome its crisis, develop competitive to the Boeing faction, the “national” party was also opposed products and become a serious player, at least on the domestic the Europeans, and was represented mainly by the Ilyushin market. Finance leasing company, which was banking on upgrading The strategy of integration with Airbus seemed logical, and producing the Russian and Russian-Ukrainian Il-96, given the degradation of the civilian segment of the domestic Tu-204 and An-148 aircrafts. Oddly enough, the “national” aviation industry and deteriorating political relations with party has virtually no supporters among governmental the United States. The ultimate, logical result of this strategy authorities to lobby its interests. would have been for Russia to give up its claims to be a system The implementation of the“European option” manifested integrator; that is, to give up its ambition of re-emerging as itself in the sale of a 10% stake in Irkut Corporation to the an independent, major player in the world aviation industry. Europeans, Vneshtorgbank’s (VTB) purchase of a 5% stake In this case, manufacturing aircraft components for Airbus in EADS, and most importantly, the blocking of Aeroflot’s would generate the bulk of sales. In the best case scenario, purchase of the U.S.-made Boeing 787. Although the airline Russia could count on becoming a full participant in the management favored Boeing, it was forced by the government development of a new generation of airliners, including the to opt for the European A350. In addition, there is the project possible transfer of an assembly line to a Russian aviation for starting a production facility for converting A320 into plant. In the long term, Russia hoped to take part in the freighters. management of EADS and raise its stake in the corporation Finally, the production of components for the European to 15-20%. Airbus has begun in Irkutsk. The “European party” of the Russian aviation industry consists mainly of the leaders of the “Irkut alliance,” which have long-standing ties with EADS. The most active figure Crisis of the European Option in this party is Vice President of Irkut Corporation Valery Bezverkhny, who initiated the unsuccessful acquisition of the The rapprochement between Russia and Europe was bankrupt Fokker company by Irkut at the beginning of the quite intensive until about the beginning of 2006, when decade, and who later oversaw the sale of 10% of Irkut shares Angela Merkel came to power in Germany as the new to EADS. Igor Shuvalov, Presidential advisor on economic Chancellor. After Gerhard Schroeder stepped down, the issues, was the most active supporter of the European option climate in Russian-German relations became more reserved. in the corridors of power. Moreover, for some time President In bilateral relations, the new Chancellor emphasized Vladimir Putin himself appeared to have toyed with the idea sensitive subjects such as human rights, freedom of speech of Russia joining EADS. and democratic standards. Finally, it was Angela Merkel who, A natural opponent of the European strategy was the in September 2006, frankly and unequivocally stated that “Boeing party,” led by the Sukhoi holding company, which Russia could not be a full-fledged partner in EADS. enjoyed close ties with the American corporation on the The reaction of panic and hostility in the European SSJ-100 regional jet project. At that stage, when Aeroflot press to the news of Vneshtorgbank’s (VTB) purchase of a was holding a tender for long-range aircraft that involved 5% stake in EADS was an important indicator of the attitude # 2, 2007 Moscow Defense Brief The Russian Aviation Industry: From European Option to National Strategy Industrial Policy of European opinion-makers to the prospects of Russian- player on the global market. Indeed, all the necessary European aviation industry integration. And this reaction prerequisites are in place. reinforced the widespread view in Russia that Europeans First, even though the situation in civil aviation openly despise Russia when it is weak, and fear and hate it at remains grave, the outlook is clearly positive. In 2001, not the slightest sign of it growing strong. only old, but even new Russian aircrafts failed to meet The atmosphere of dialogue at industry level also international flight safety and environmental requirements deteriorated. Firstly, it became clear that the main priority for or to be certified internationally. Only a few aircraft were EADS, which was going through a deep crisis, was to resolve being built, and the system of after-sale maintenance did not production problems on the A380, and not the formation exist. Two key civilian aircraft manufacturers – Aviastar-SP of dubious and risky alliances with Russia. Secondly, Louis and the Voronezh plant – were on the verge of bankruptcy. Gallois, the new co-CEO of the European concern, is known Air transportation plummeted. Russia had over 260 airlines, for his antipathy against Russians, a characteristic generally each so miniscule that none of them could afford to order inherent in French Protestants. Russia remembers well that new aircrafts. The profits of the entire sector totaled a it was Gallois who played a key role in removing Russian mere $300 million. At 2,000 units, the aircraft fleet was companies from the ATR project. redundant. The situation in Russia also changed. A diversification But from 2001-2006, the situation improved noticeably of the economy and reorientation from a reliance on raw as the debts of key manufacturers were restructured or paid, materials was declared at the political level. The state started and the production of new aircraft meeting international paying close attention to industrial policy in several machine- safety and environmental requirements revived, thanks to building sectors, including aviation. Consolidation of the orders from leasing companies. aviation industry intensified in 2006. The state decided to Secondly, domestic demand for new aircrafts started launch and partly finance large-scale national projects from to soar in 2004. The combination of rapid growth of air the budget: the SSJ-100 regional jet, the MS-21 short- and transportation (at about 8% a year except 2005) and the medium-range aircraft and the PS-12 engine. massive disposal of obsolete Soviet-made aircrafts resulted The political and industrial positions of the national in snowballing demand for modern, cost-effective airliners. party strengthened. Large-scale state financing of the MS-21 Market volume over the next five years is estimated at 300 project runs inherently counter to the European option. Part aircraft. of the “Irkut alliance” consolidated around Oleg Demchenko, Thus, the basic prerequisites for a strategy to revive General Director of the Yakovlev design bureau and Irkut national production have been established.