CONTENTS

#1(7), 2007 Official View Point Russia’s Relations with Europe in Aerospace, Shipbuilding PUBLISHER and Defense Industries 2 Centre for Analysis of Strategies and Technologies War And People North Korea: the Bush Administration’s Strategic Fiasco 4 CAST Director & Publisher Ruslan Pukhov The Globalization of NATO: Prospects and Consequences 6 Advisory Editor Konstantin Makienko Industrial Policy Researcher Ruslan Aliev Challenges to the Reform of Defense R&D in Russia 9 Researcher Russia’s Defense Industry in 2006 14 Alexey Pokolyavin Researcher Dmitry Vasiliev Arms Trade Researcher Polina Temerina The Venezuela Contracts 16 Researcher Russia-India Military-Technical Cooperation: Current Ilya Nevorotov Issues and Perspectives 19

Editorial Office Leninsky prospect str., 45, suite 480 Moscow, Russia 119334 International Cooperation phone: +7 495 135 1378 The Indo-Russian Transport Plane Project: Background, fax: +7 495 775 0418 Status and Perspectives 21 http://www.mdb.cast.ru/ To subscribe contact phone: +7 495 135 1378 Facts & Figures or e-mail: [email protected] Moscow Defense Brief is published by the Centre for Analysis of Structure of Russian Ministry of the Interior 23 Strategies and Technologies Structure of Russian Ministry of Defense 24 All rights reserved. No part of this publication may be reproduced in any form or by any means, electronic, Major Events in Russian Arms Trade and Defense mechanical or photocopying, recording or otherwise, without Industry in the Second Half of 2006 25 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 Our Authors 27 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 # 1, 2007 Moscow Defense Brief  © Centre for Analysis of Strategies and Technologies, 2007 Official View Point

Russia’s Relations with Europe in Aerospace, Shipbuilding and Defense Industries Vladimir Vasiliev he past decades have seen a remarkable rise in the Fincantieri and the Rubin design bureau have launched R&D Tscale and cost of aviation, space and defense projects. on the development of a next generation submarine. For example, R&D for the Boeing 787 or the Airbus A380 These examples demonstrate a positive development, costs over ten billion euros, and such investments take whereby politically-motivated programs initiated by the many years to recoup. Similarly, it costs billions of euros to state are being replaced by pragmatic, business-oriented develop fighting aircraft, helicopters and missile systems. projects initiated by business, which are only subsequently As a result, the internationalization of both civilian and accorded political support. Other examples include the joint military programs to develop the next generation of high- project to develop SaM-146 engine for the Superjet 100 tech products is inevitable. Even the US, with the largest regional jet, the creation in Russia of a centre for the defense, space and R&D budgets in the world, has been forced conversion of A320 aircraft to transport versions, the project to take this path. Europe launched on this process with the to use Russian booster rockets at the Kourou cosmodrome creation of the Airbus consortium three decades ago, and has in French Guiana, and possible Russian participation in the since integrated several large defense and aerospace holdings A350 project and in the development and production of the into EADS. Shipbuilding, missile manufacturing and even medium class aircraft series to replace present European armour, the most conservative of industries, have been best-sellers – Airbus A320/321. subject to the same process of international integration. On the European side, EADS and Safran are most Russia and Europe have begun over the past fifteen active in joint projects, along with Russian companies that years to work together on high-tech projects, first of all in comprise the United Aircraft Corporation, and the Saturn the aviation, helicopter and space sectors. These efforts have Scientific Industrial Association. met with some challenges. For example, the MiG-AT training Several factors that promote the integration of Russian aircraft and the Mi-38 transport helicopter programs and European aviation, space and other high-tech machine- were launched during an era that was extremely difficult building sectors will continue to grow in importance over the for Russia, with precious little financing, and inadequate next few years. market research. However, even such relatively unsuccessful First, Russia and Europe already have a strategic programs helped to lay the foundation for future cooperation, relationship on energy issues. In spite of all of the problems by creating networks and promoting understanding of that have arisen, cooperation in this sphere will only increase, different work methods and cultures. and it is only logical to expect such cooperation to extend to Several Russian-European programs are proceeding high technology sectors. successfully, particularly on joint projects for third countries. Second, the rapid growth of the Russian market, while For example, French companies are providing navigation and it cannot be compared to the Chinese or Indian markets, display systems for Su-30MKI fighters destined for India. The will nevertheless continue, making Russia into one of the Indian naval forces have chosen to equip Russian MiG‑29K major markets of the world. The expansion of Aeroflot’s carrier-based fighters with French helmet-mounted targeting plans to acquire long-range carriers is symptomatic of systems, and French equipment also graces the Malaysian this potential. If Russia’s national carrier first intended to Su‑30MKM. purchase 12 aircraft, it is now considering a purchase of 44, Russia and Italy are working together to create a new which brings it into the same league as the largest airlines generation of training aircraft. Due to the close relations of Asia or Europe. between the Yakovlev design bureau and Aeromacci, each Third, the predicted weakening of the US dollar will country now boasts a highly effective training aircraft at the force European companies to move more production into the final stages of testing. Alenia corporation is on the verge of dollar zone. While this includes the US itself and East Asia, joining the Sukhoi Superjet 1 00 Russian regional jet project Russia could also serve as a location for European production as a full partner, not just as a supplier of equipment. Similarly, in the dollar zone.  # 1, 2007 Moscow Defense Brief Russia’s Relations with Europe in Aerospace, Shipbuilding and Defense Industries Official View Point

Finally, the scientific and industrial complexes of Russia losses during the 1990s, has preserved a strong capacity for and Europe are complementary. As demonstrated by the innovation, to which it has devoted significant resources in technical problems associated with the serial production recent years. There are areas in which Russia remains a world of the A380 and the delays to the full-scale launch of the leader, for example, in the sphere of piloted spaceflight and A350 project, Europe is beginning to suffer from a deficit of satellite navigation. Thus, a strategic partnership in high- resources in its competition with the US on a wide range of tech between Russia and Europe would by no means be a one products, and new difficulties lie ahead in the niche for short- way street. Russia has much to offer, and the competitiveness range carriers. At the same time, Russia, in spite of its colossal of both parties would benefit.

# 1, 2007 Moscow Defense Brief  Russia’s Relations with Europe in Aerospace, Shipbuilding and Defense Industries War And People

North Korea: the Bush Administration’s Strategic Fiasco Ivan Safranchuk hen North Korea withdrew from the Non-Proliferation long thought to be a bluff. But now that the nuclear test has WTreaty (NPT) in 2003 and declared itself to be a nuclear destroyed such illusions, the Korean crisis might finally be power, the prevailing view was that it was bluffing. Isolated tackled seriously. and dependent on humanitarian assistance, it was hard to The main options are: 1) military action against North imagine that it had truly developed nuclear weapons capacity. Korea on a limited scale to destroy critical infrastructure, or As a result, even if Pyongyang had bluffed earlier for the sake on a larger scale to overthrow the regime; 2) full isolation of getting better positions at negotiations, it now had no other of North Korea, hoping that a social-economic crisis will choice but to prove its claim. Otherwise, the regime would bring changes to Kim’s behavior; 3) regime change from the have faced complete political bankruptcy. through the promotion of civil unrest or an elite coup d’etat; The Bush Administration thought it had learned 4) reconciliation with North Korea through negotiations. some lessons from the Clinton years. In 1994, the Clinton Limited or large scale military action against North administration promised economic benefits to North Korea Korea would be very unfavorable for Russia and China, who in exchange for a freeze on its nuclear program. From this, share borders with the country and do not wish to experiment the Bush administration concluded that first, the North with the consequences of military action, which could result Korean program was not mature enough in 1994 to warrant in massive waves of refugees and the use of WMD. Military the success of Pyongyang’s blackmail; second, the freeze on action is also unacceptable to South Korea, whose capital nuclear activities was an empty commitment because it is of Seoul is located within range of North Korean artillery, reversible; and thus, only the comprehensive and verifiable which is allegedly armed with not only conventional, but de-nuclearization of North Korea should be considered as a also chemical shells. The US cannot hope to persuade Seoul, valid option for negotiations. Beijing and Moscow of the wisdom of using military force The problem with these perceived lessons is that in 1994 even as a threat. The three capitals do not want this option to the international community was still in the heat of revelations be considered in any manner whatsoever. of the Iraqi nuclear program. The subsequent discrediting of The full isolation of North Korea is also a painful option the allegations against Iraq in 2003 should not overshadow for its neighbors. Beijing and Seoul could dramatically limit the very different international climate that prevailed in 1991. or even cease humanitarian assistance, financial exchanges After the first Gulf War the Iraqi nuclear program appeared and economic cooperation with North Korea, but they are to be far more mature than most intelligence agencies and unlikely to be consistent in this policy. Even though both analysts had predicted. IAEA safeguards did not prevent Iraq South Korea and China are very disappointed in Kim, they from clandestine activities on a larger scale than suspected. would not participate in an effort to isolate North Korea to the Such were the dominant views of the time. So in 1993-1994, point that it either collapses or gives up. And without the full when North Korea attempted to withdraw from NPT, which participation of North Korea’s neighbors, a real blockade is it had joined only in 1985, its nuclear program was easily impossible. A limited, mostly sea blockade, is not a problem. subject to exaggeration. It is likely that North Korea exploited However, full isolation is out of the question. this tendency to outbid the Clinton administration. But the Regime change through civil unrest is another lesson the Bush administration took from this – not to give nightmare scenario for the neighboring countries. First of all, into Pyongyang’s blackmail – was incomplete, to say the nobody believes that a sufficient scale of social unrest could least. be provoked that would overthrow the government. More Kim Jong-il seems to understand the Bush importantly, social unrest in a extremely poor country with administration’s logic. Clinton was ready to buy a “glimpse” nuclear weapons represents an extraordinary risk for the of a bomb. Bush thinks he is a tough guy, so he won’t buy just neighboring countries. So long as Kim prevents his citizens a “glimpse”. Kim Jong-il’s reasoning was likely to be: “OK, he from rushing to China, Russia or South Korea, we are all safe to will get a real bomb.” criticize his dictatorship and police rule over the population. The first reaction from Washington and its allies such But if authority as such collapses in North Korea and masses as Japan was to disbelieve the North Korean nuclear test of Koreans become free to knock on the gates of South Korea, – indeed, it is tempting to deny the reality of something China or Russia, then these three countries would probably  # 1, 2007 Moscow Defense Brief North Korea: the Bush Administration’s Strategic Fiasco War And People

need to take forceful measures to keep people within North to support a change of leader in North Korea, should the Korea’s borders, and then take measure to manage their life opportunity arise. within these borders. While for Seoul and Beijing a change of leader is a Authority in North Korea must remain intact. This is maximalist position, for the United States and Japan it is an a critical concern for the neighboring countries, and one acceptable minimum: “OK, let’s get rid of Kim, if nobody is that is not addressed by any scenario for military action, ready for more.” The anti-Kim solution is a compromise that full isolation or civil unrest/revolution. But regime change would allows China and South Korea, on the one hand, and the through an elite coup d’etat is a different story. US and Japan, on the other, to overcome their disagreement Throughout both of its terms, the Bush administration and form very strong common position, one which they all urged, with Japanese assistance, South Korea and China to take truly need. stronger approach to North Korea. In the wake of the North Of course, it remains a big question as to how precisely Korean missile and then nuclear tests in June and October an elite coup should be managed. However if China gets down of 2006, South Korea needs to make some adjustments to its to business, Kim may be in real trouble within the next year cooperative approach toward North Korea. South Korea could or two. afford a more independent foreign policy while the North The Russian position in recent years has been very Korea threat was in decline or at least was expected to steadily close to that of Beijing and Seoul. But with South Korea dwindle. But now, in an aggravated security environment, and China prepared to dispose of Kim, Russia may become Seoul needs to be more in line with the US. Nevertheless, diplomatically isolated. Russia is so used to having China and South Korea does not favor a regime change. South Korea as diplomatic partners on the Korean issue that Beijing’s elite was furious over the North Korean nuclear it seems to underestimate the fundamental shift that both test. North Korea as it is now is less and less useful to China. Seoul and Beijing may be ready to take in their approach China can not allow the US and Japan to solve the crisis on toward Kim. their own terms. This forces China to act as an apologist for Russia wants the North Korean crisis to return to the North Korean. China does not like the job, but has no way sphere of diplomacy. It is a fact that the Bush administration out. The Chinese response to this dilemma has been smart did not want to have direct negotiations with North Korea and and balanced; namely, to act consistently to deescalate the was not always cooperative at the Six-Party talks. Of course, crisis. North Korean diplomats are anything but nice partners. Still, Both China and South Korea recognize that they have Washington was always willing to exploit their tricks as an to change something in their policy toward North Korea, excuse for not taking steps toward compromise. Russia and but they cannot simply adopt the US-Japan position. All China were only occasionally successful in their efforts to four countries feel they need a common position on North deescalate the crisis that Pyongyang and Washington were Korea, but fundamental differences in regional politics do willing to escalate. not simply vanish, even after a nuclear test. As the anti-Kim consensus emerges as a possible ground A reasonable compromise may be to remove Kim through for a US-Japanese-Chinese-South Korean compromise on an elite coup d’etat in North Korea. South Korea wants to have North Korean, Kim is likely to be given a last chance. The somebody without the Kim family legacy. China needs to get next round of Six Party Talks is precisely this last chance. rid of Kim as trouble-maker and convert the Korean problem This new round of talks is fundamentally different from the into a stable, manageable and long term issue. previous, not in the agenda or positions of the parties, but in South Korea needs some response from North Korean the sense that the major task of the talks is to examine Kim on economic cooperation. China needs the crisis to be (who surely will manage his delegation in direct, manual manageable. Albeit from different perspectives, both China mode from Pyongyang). The new round should be judged and South Korea have come to the common conclusion that and measured not by the quantitative parameters of accords Kim does not serve their interests. Beijing may hesitate to achieved or not achieved through lengthy negotiations, but shift fully to an active anti-Kim position, and may prefer to by the quantitative, binary parameter of whether or not Kim give him one last chance, but surely Beijing will be prepared will be dropped as hopeless case after these talks.

# 1, 2007 Moscow Defense Brief  North Korea: the Bush Administration’s Strategic Fiasco War And People

The Globalization of NATO: Prospects and Consequences Fedor Lukyanov

mong NATO supporters and sceptics alike, expectations Article 5 of the Washington Agreement and provide military Afor the November 2006 summit in Riga ran high. The assistance to an ally that had come under attack. location was highly symbolic: leaders of the world’s most However, the US response proved to be even more fateful. powerful military-political alliance met on the territory The immortal words of Donald Rumsfeld: “the mission defines of its former principal adversary for very the first time. the coalition,” were quickly adopted as a White House slogan. Rumours that Ukraine and Georgia would be invited to The forceful American renunciation of the very concept of a join the alliance at Riga had people in Moscow on edge. For permanent coalition post 9/11 was extremely worrisome for his part, NATO Secretary-General Japp de Hoop Scheffer NATO, in spite of subsequent efforts by US officials to soften designated “outreach”, or the extension of the alliance beyond the blow. At the Riga Summit, for example, US Assistant its traditional areas, as the key issue. Secretary of State for European and Eurasian Affairs Daniel In the end, nothing sensational happened. Those Fried noted how the Bush Administration no longer spoke of gathered apparently decided not to taunt Russia, and a “coalition of the willing,” because “it’s all NATO.” membership was promised only to Croatia, Albania and But at the time the sole superpower, shocked by the Macedonia. Kyiv and Tbilisi would have to make do with attack, thanked its allies but decided to proceed without the existing Intensified Dialogue track. As for NATO’s global engaging the alliance. This decision gave concrete form to the reach, no radical innovations were envisaged. The Summit image of NATO’s irrelevance that analysts had been drawing Declaration blandly suggests only that NATO is “adapting to for the past decade. Since the end of the Cold War the North the 21st century security environment, through its operations, Atlantic alliance has defined neither a new mission nor a transformed defence capabilities and deeper engagements role for itself in meeting the challenges of changing times. with countries in and beyond the Euro-Atlantic Area, as well Subsequent events would only reinforce this conclusion. as continued internal reform.” Nevertheless, western politicians and alliance officials Leaders endorsed the Comprehensive Political Guidance, indefatigably cite the same events of recent years to refute a conceptual piece that describes terrorism and weapons of the thesis of NATO’s inadequacy in addressing contemporary mass destruction as the likely principal threats to the alliance global challenges: the peacekeeping mission in Afghanistan, over the next ten to fifteen years. Other challenges include the training of Iraqi security forces, support for the African instability and threats from failed states, more sophisticated Union’s mission to Darfour, and even purely humanitarian conventional weapons, and the disruption of the flow of missions like assistance to victims of the tsunami in Indonesia, natural resources. This last item provoked much commentary the earthquake in Pakistan, o r Hurricane Katrina. in Russia thanks to the statements, made on the eve of the On this shaky ground, US academics Ivo Daalder and summit, by US Senator Dick Lugar to the effect that NATO James Goldgeier optimistically state in the pages of Foreign should focus on the energy security of its members. This Affairs that “with little fanfare—and even less notice—the notion was not seriously taken up at the summit itself. North Atlantic Treaty Organization has gone global.” Moreover, The confrontation with terrorism drove the mobilization they are convinced that “as the world’s premier multinational of NATO forces to Afghanistan. All agreed that the operation military organization, comprising many prosperous nations is a decisive test of NATO’s ability to measure up to the above with a vested interest in maintaining global stability, NATO listed threats of the future. But it is precisely in Afghanistan is uniquely suited to meeting such demands.” where the future for NATO looks rather grim. However, with the exception of the Afghan operation, This new, and by no means glorious, page in the where NATO has taken on real responsibility (even though the history of the North Atlantic alliance began just over five majority of troops stationed there are not part of the NATO years ago. It then became clear that the threats of the twenty framework), the remaining operations are clearly of a purely first century would have little in common with those of the technical character. twentieth. The tragic day of 11 September, 2001 was a turning This reflects both the American approach to NATO point for NATO, when its members declared for the first time (political declarations aside, US strategists do not view the in the history of the alliance their readiness to act under alliance as a provider of reliable support when it comes to  # 1, 2007 Moscow Defense Brief The Globalization of NATO: Prospects and Consequences War And People

American security), as well as the unwillingness of European those who have declared their intent to distance themselves allies (with the exception of the UK) to engage in serious from Russia). operations in far off lands. Moscow takes an exceptionally negative view of this, Efforts to stimulate the Europeans to a more active role and only partly due to the residual mistrust of its former in global security have been afoot since the mid-1990s, once potential adversary. NATO seems possessed by an incapacity it became clear that, with the disappearance of the Soviet to explain the purpose of its expansion, if any such purpose threat, the Old World’s commitment to force development exists, aside from endlessly repeating that it is not directed has declined considerably. The European Union’s attempt against Russia’s interests. However, reference to Nato’s new, to formulate a European Security and Defense Identity global mission rings hollow in the context of Estonia or (ESDI) failed, and the US played a role in this failure, since it Georgia’s North-Atlantic role. saw the ESDI as an attempt to circumvent the transatlantic Of all the states that joined NATO at the end of the 1990s, dimension of the alliance. But in the final analysis, Europe only Poland has made a real contribution to its capacity. stopped well short of insisting on an independent defense Warsaw has indeed been extremely enthusiastic, insofar as policy. During the Cold War, Europeans became accustomed it quite rightly views the alliance as an effective means of to rely upon the American guarantee of security. As RAND promoting Poland on the world stage. By answering the call Corporation analyst James A. Thomson wrote in 1997: “why, in September 2006 for additional forces, sending 1000 of the after all, should Europe commit resources to a larger security 2500 troops requested by NATO command, Poland de-facto role if the United States is going to take care of those problems saved the mission. anyway?” Other allies showed no enthusiasm whatsoever and Anticipating that NATO would increasingly be called to agreed with great reluctance to the larger contingent. The US act beyond its customary territories, Thomson called for the and UK worked hard at Riga to convince Germany, Italy, Spain creation of a third NATO command, in addition to SACEUR and France to remove the restrictions they have placed on the and SACLANT. This new command would be charged with engagement of their forces in Afghanistan. As it turns out, the crisis response and the projection of force beyond NATO’s “Old Europe” is prepared to serve in the relatively peaceful zone of responsibility. To increase Europe’s stake in a northern parts of Afghanistan, but not in the south, where stronger alliance, Thomson recommended that a European active combat is the norm. be appointed to head this third command. Ukraine has the potential to become a “second NATO’s 1999 operation in Kosovo is often portrayed Poland;” that is, a country ready to make a real contribution as a great success; but even leaving aside the shaky moral to the operations of the organization, and could even put basis of that campaign, its net effect seven years later is NATO membership at the centre of its international self- dubious. One can hardly describe the appearance of yet identification. However, the internal situation in Ukraine another weak Albanian state on the map of Europe, where and Russia’s strong opposition make Ukraine’s potential the ethnic cleansing of the Serbian population has de-facto membership a problematic issue for the time being. been legalized, as a positive outcome. In a Washington Post article published in March 2006, Since then, Europe has not increased its role in political- Ronald Asmus and Richard Holbrook asserted that if it had military affairs. On the contrary, it has clearly demonstrated not expanded in 1990s, NATO “would probably have atrophied its inability to formulate a common position. Decisive and become increasingly irrelevant, because it would have support for the US after 9/11 was a singular exception. In all failed to address the historic security issues of that decade: other cases the close ties linking some EU members to the stopping ethnic cleansing in the Balkans and helping to create US have paralyzed the efforts of the Old World to play a an a new Europe.” The authors go on to argue that since this last autonomous role, while the reluctance of the “Old Europe” to task has been completed, the alliance should move onward get mixed up in global power games prevents it from lending to address global problems. unconditional support to the US position. However, further expansion in the spirit of 1999 and Thanks to the symbolic capital it acquired during the 2004 would not signal a new agenda, but simply reinforce Cold War, NATO retains a good measure of authority. And the algorithm of the Cold War’s conclusion. A cardinal shift with the European Union recoiling from expansion fatigue, of mission and re-orientation towards other theatres, such as nations of the former Soviet Union and south-eastern Europe the Middle East and the Pacific (to the extent that China grows view NATO’s membership as the their only chance to join an in influence and ambition), require a completely different elite club of states. perspective on who could act as a partner for NATO. Their desire for inclusion is graciously rejoined by the This theme has been discussed actively since the grander members of NATO who view it as a convenient and beginning of 2006. The US ambassador to NATO (and former natural means of “tying down” volatile states (especially aide to Dick Cheney) Victoria Nuland said in a Financial

# 1, 2007 Moscow Defense Brief  The Globalization of NATO: Prospects and Consequences War And People

Times interview that Washington sees the alliance as “first a wide set of reforms, both conceptual and structural.” The and foremost a political alliance devoted to strengthening ex-premier then called for serious consideration of Israel’s and defending our democratic values at home and around the membership of the alliance. world.” In her opinion, NATO should transform itself into a Granted, Asnar’s position is exceptional for continental “globally deployable military force,” whose area of operations Europe. In her answer to the US call to give NATO a more global include virtually the entire globe, partnered closely with mission, the French Minister of Defense Michele Alliot-Marie countries like Australia, Japan and South Korea. wrote in Le Figaro: “The development of a global partnership Nicholas Burns, the US Undersecretary of State for could...dilute the natural solidarity between Europeans and Political Affairs, asserts that the transformation of the alliance North Americans in a fuzzy entity…. It would “send a bad would entail the development of partnerships with countries political message, that of a campaign launched by the West beyond NATO’s borders: “We can train more intensively from against those who don’t share their ideas. What a pretext a military point of view and grow closer to them because we we would offer to those who promote the idea of a clash of are deployed with them. Australia, South Korea and Japan civilisations.” are in Afghanistan. They have all been in Iraq... They have all Clearly, the debate does not yet indicate that NATO will been in the Balkans.” move in precisely this direction, nor is there any guarantee Ivo Daalder and James Goldgeier write: “NATO no longer that a serious transformation will in fact be launched. The US needs to have an exclusively transatlantic character. Other is confronted with many serious problems, many of its own democratic countries share NATO’s values and many common doing, and under such conditions Washington may simply interests — including Australia, Brazil, Japan, India, New lack the authority and strength to give the alliance a new form Zealand, South Africa, and South Korea—and all of them can that would still respond to its needs. greatly contribute to NATO’s efforts”. These authors suggest However, should the scenario for a “global NATO” begin that “the North Atlantic Treaty must be amended, particularly to take form, staunch opposition can be expected from Russia Article 10, which currently limits new membership in NATO (which has not been invited to take part in a renewed alliance), to European countries”. China and the Islamic world. The expansion of NATO on a The former Spanish prime minister Jose Maria Aznar, global scale would provoke the creation of alternative alliances. who in his time strongly supported the US operation in Instead of promoting the resolution of global problems, it Iraq, made a presentation March 2006 to the Institute for would lead to a new confrontation of military blocs. During Contemporary Affairs in Jerusalem, where he said: “If we trace the Cold War the confrontation of two camps was a source the line between the West and the rest, Israel is on the same of both tension, but also a guarantee of stability. However, in side as Europe, the U.S., Japan, and Australia. We defend the the 21st century, the emergence of non-state actors has made same values against the same enemies.” Mr. Asnar explained the world a much less manageable place. The emergence of that by the “same enemies” he means “Islamic extremism and system of opposing camps would likely generate a great deal terrorism,” and to confront its enemies “NATO must undertake of tension, but without securing stability.

 # 1, 2007 Moscow Defense Brief The Globalization of NATO: Prospects and Consequences Industrial Policy

Challenges to the Reform of Defense R&D in Russia Ruslan Pukhov, Mikhail Barabanov

n the 1980s, the Soviet Union was a world leader in science of science, technology, experimental and design work fell Iand technology, second only to the United States. It spent upon the shoulders of the Ministry of Defence alone, and its enormous sums on both civilian and military research and capacity to fulfill this role was marginal at best. The share of development, producing a broad spectrum of advanced R&D spending in the Defence budget fell from 18.6% in 1990 military technologies and defence systems. In 1990, the to 5.7% in 1996. As a result of non-payments by the state, a Russian Federation could boast of over 4600 military and total of 1149 individual R&D projects commissioned for the civilian science and research institutes, and spent 2.03% of government’s procurement program were cancelled. its GDP on R&D, close to the OECD average. Since 1999, Russian defence spending has increased With the collapse of the Soviet Union, science was steadily, reflecting the policy orientation of governments among the principal victims of the stalled transition to a under Vladimir Putin as well as strong economic growth. market economy. To date, the number of science and research Expressed in US dollar equivalents, Russia’s military spending institutes has fallen to 2900, while scientific-research funding quadrupled from 2000 to 2007. now accounts for a mere 0.3% of GDP. From 1990 to 2003, After the collapse of the Soviet Union, new arms purchases the number of planning organizations among science and for Russia’s aging arsenal were put off indefinitely. Under Boris research organizations decreased by a factor of 7.8, the number Yeltsin, the first significant purchase of arms was planned of design bureau by 3.6, while the number of industrial R&D for 1996, but was postponed to 2000, and even then was not departments decreased by a factor of 1.8. The number of really implemented. The armaments programs adopted by specialists working in R&D decreased by more than double, the Russian government for 1995-2005 and for 2001-2010 from 1.9 million in 1990 to 872,000 in 1999. emphasized military R&D and the creation of prototypes Severe cutbacks to military spending were the principal rather than serial production, which was to resume at a later cause of this state of affairs. In nominal terms, military date, under better economic conditions and in the context of spending in 1999 was seven times less than the Soviet defence the mass rearmament of the military. By 2000, the share of budget of 1989. But if one takes into consideration price defence budget funds allocated to military R&D grew to 13%. increases during this period, real Russian military spending, This was still a relatively small amount of money and was reflecting the decreasing purchasing power of the rouble, not sufficient to prevent the ongoing degradation of Russia’s decreased by thirty times from 1989 to 1999. defence-science potential. Nevertheless, this policy did in fact As a result, Russia’s defense budgets throughout the help some sectors; the strategic nuclear forces in particular, 1990s served principally the social needs of the armed forces, survive to see a better day. with the bulk of spending going to salaries, pensions, as well Chronic under-financing of the state armaments as housing and other services to soldiers sent to the reserves. programs of 1996-2005 and 2001-2010 meant there was no On average, 53% to 63% of the military budget was spent significant procurement until 2004-2005, when increases in the social sphere, while other categories of expenditure in military spending finally brought some real money to were cut down to the bare minimum. Not surprisingly, the table, and led to the revival of the internal market for R&D spending was hit hard. After the sectoral ministries military production. In 2005, 183 billion rubles were spent on responsible for creating arms and military equipment were purchases of arms and military equipment; with 237 billion disbanded in 1991-1993, responsibility for the financing budgeted for 2006 and 302.7 billion planned for 2007. Spending Under the Russian Federation Budget Category “National Defense”

Year 2000 2001 2002 2003 2004 2005 2006 2007 Million rubles 209 445 214 668 284 158 344 525 413 700 531 133 667 257 821 172 Million dollars 7 480 7 162 9 472 11 484 14 266 18 969 23 831 30 415 Note. These figures were derived from the market rate for dollars/roubles for each year. This methodology does not reflect the real purchasing power of the rouble in the military and defence industry sectors. # 1, 2007 Moscow Defense Brief  Challenges to the Reform of Defense R&D in Russia Industrial Policy

In light of the de-facto collapse of the two previous state Sukhoi and Mikoyan specialized in the development of armaments programs, Russia’s leadership decided to adopt a fighters; Ilyushin in passenger and military-transport planes; new program for 2007-2015 at a meeting of the government’s Tupolev in passenger planes and bombers; Yakovlev in pilotless Military-Industrial Commission on 2 June, 2006. A total systems and vertical take-off/landing planes. Faced with severe of 4939.4 billion rubles (approximately $186 billion at the budget cuts, these bureaus were often forced to stop work on current exchange rate) is to be spent over the course of this their area of specialization and concentrate their resources program, with 63% for the purchase of new types of arms and on projects for which there was some demand in the market. equipment, and the remaining 27% on defense R&D. Thus, Yakovlev stopped its work of deck-landing aircraft and Although several new defense products will begin focused on the development of the next-generation Yak-130 serial production in 2006-2007, the program prudently puts training aircraft. Simultaneously, the design bureau worked off major purchases to 2009-2010. Meanwhile, the priority on foreign commissions, taking part in the development of remains on the development of prototypes. In general, the ATR turboprop aircraft, the IAI Galaxy business jet, the sale figures used to state the volumes of future purchases should of documentation for the creation of the Aeromacci M-346 be taken with a grain of salt, as prices in Russia’s defense sector training plane, and the Chinese L-15 trainer. have grown by as much as 20% in recent years, or twice the Virtually all aviation and shipbuilding design bureaus general rate of inflation. The government thus far has failed saw their activities diversify in a similar fashion. The decision to take this into consideration when drawing up its forecasts, of Sukhoi, which had never worked on passenger planes, to much less act to counteract this trend. become involved in the Rissian regional jet (RRJ) program, is the most extreme example of this phenomenon. Such developments provoked a mass migration of engineers and Structural Transformation of Military R&D technicians from one bureau to another, to the extent that individual design bureaus have lost, to a degree, their once very While the injection of rubles is welcome and clearly distinct identities built on entrenched traditions and work essential, financing alone will not save Russian R&D, which methods. This fusion of personnel and even top-managers is also characterized by complex structural problems. The could be observed in the mid-to-late nineties between the near-total concentration of R&D in large, specialized design Sukhoi and Mikoyan bureaus. bureaus and scientific-research institutes, structurally There is no justification for the preservation of an excess segregated from the factories engaged in the serial production number of design bureaus, given the limited number of projects of their designs, was a defining feature of the Soviet military- that are actually being funded. Moreover, with the mass exodus industrial complex. The design bureau was an independent of engineers and technicians from defense industries since the organization with its own single-run production facilities and 1990s, most design bureaus are experiencing severe shortages was managed, as a rule, by an authoritative “director-designer” of qualified personnel. Even those facilities that preserved who enjoyed a high degree of political influence. the greatest scientific capacity are unable to conduct full- This institutionalization of the design bureau as the core scale research and are forced to cooperate with competing of Soviet R&D has remained practically unchanged in today’s design bureau. For example, Sukhoi, which suffered least of Russia. In spite of the overwhelming reductions of funding all from resource shortages over the past fifteen years, has to the defense-industry complex during the post-Soviet a severe shortage of specialists for testing the endurance period, not one of the large bureaus has been closed, and of materials. As a result, Sukhoi was forced to invite the each one continues its work as before, at least on paper. The Ilyushin and Yakovlev design bureaus to participate in its Myasishchev aviation design bureau is an excellent example. principal civilian project, the Sukhoi Superjet-100 regional During the Soviet period it specialized in the development of plane (formerly called RRJ). After these two design bureaus strategic bombers, and later, on the Buran Soviet space shuttle withdrew from the project, Sukhoi began a mass recruitment and high-altitude reconnaissance-planes. But although it lost of their engineers and technicians. In a similar fashion, Irkut almost all of its qualified personnel and has re-equipped most plans to include not only the Ilyushin and Tupolev design of its facilities to produce automobile parts, there has been no bureaus, but also to recruit specialists from the Ukrainian change to the bureau’s charter of incorporation and it might Antonov design bureau, to begin work on the 18-tonne class well even receive some symbolic resources from the state multi-functional transport plane. In this fashion, a kind of defense procurement budget. spontaneous integration among various design bureaus is At the same time, there have been some changes that will underway, and the de-facto establishment of ad hoc project assist in the government’s plans to encourage the horizontal teams for the execution of specific programs. integration of design bureau. During the Soviet period there This spontaneous practice will be codified to a large was a division of labor among design bureaus that specialized degree with the establishment of the United Aircraft in specific niches. For example, the aviation design bureaus Corporation. In the framework of this mega firm, which will 10 # 1, 2007 Moscow Defense Brief Challenges to the Reform of Defense R&D in Russia Industrial Policy

bring together the vast majority of all facilities active in the will be incorporated as open joint-stock companies. The aviation industry, three aircraft-making divisions will be submarine holding will be fully owned by the state, while the created: combat, military-transport and civilian aviation. surface ship design center will include some private capital. Each of these divisions will in turn establish integrated It is thought that submarine projects will be commissioned centers that unite the qualified personnel active in all current only by the state, that is, from the Navy and other security design bureaus. agencies, so 100% state ownership of the center is logical. The same processes are even more evident the design of On the other hand, the surface ship center, in addition to surface ships and submarines. Historically, the shipbuilding fulfilling state orders, may well design or purchase licenses to sector has been marked by a lesser degree of competition build commercial ships for use in oil and gas exploration in among its design bureaus than the aviation industry, where the Arctic and the Far East. This could include ice-breakers, the inherent technical, bureaucratic and political competition tankers for use in frozen waters and ships to transport among bureaus was as a rule supplemented by personal liquefied natural gas from the Shtokman field to the Barents antipathy or even hatred among the chief designers. By way Sea. Insofar as these projects will involve private capital, the of contrast, in shipbuilding, the work of each bureau occupied FAI will open the future surface ship design bureau to non- a clearly defined niche, and they were almost all concentrated state participants. in St. Petersburg (Leningrad), far from the center of political Finally, a horizontal consolidation of the design capacity and bureaucratic struggle. This specialization and collective of the air defense sector has already taken place. The Almaz- isolation promoted a greater degree of cooperation and good- Antey Concern was established in 2002, uniting the vast will during Soviet times. majority of designers and producers of anti-air defense At present, the Northern project-design bureau, which products, from long-range SAM systems with an active developed the Project 11356 (Talwar Class) frigate and the range of 200 kilometers (S‑300PMU and S-300B [SA‑10/20 next generation Project 22350 (Fleet Admiral Gorshkov Class) and SA‑12]) to the Tor-M1 (SA‑15) SAM systems. The frigate for the Russian Navy, appears to have the most potential management of the Concern was faced with the complex task for future success. The Severnoe project-design bureau is of integrating various bureaus, each of which was aggressively also engaged in a project to design a family of corvettes with promoting its own products. This was particularly difficult 2000 ton displacement, though the Russian Navy has decided with respect to the Almaz (S‑300P) and the Antey (S‑300B) upon the Almaz design bureau’s more simple and inexpensive design bureau. The chiefs of these two bureaus, academicians project. This project is currently building four Project 20380 Efremov and Bunkin, have been competing with each other corvettes, with the Steregushchiy as the lead ship. since the 1950s, and over the years have developed a deep It is well known that at the beginning of the 1990s the personal enmity. Nevertheless, a single engineering-design practice of so-called contractual relations became widespread center for the Concern was established in the summer of in Russian shipbuilding. This meant that when one bureau was 2006, which is now conducting R&D for the development of awarded a contract for a particular project, it would be obliged next-generation systems. The integration of design talent to hire on a temporary basis a few dozen designers from other should allow, aside from the elimination of duplication, the bureaus located in St. Petersburg. Thus, for the past decade a creation of multi-service anti-air defense systems that will large contingent of engineers and designers, each of whom replace the missile systems of the army, land air defense, and remains formally employed a specific individual bureau, has the long-range naval air defense system. already been working as a spontaneously integrated structure. This practice is characteristic in the design of surface ships (between the Northern and Nevskiy design bureau and Export Dependence Almaz), as well as in the submarine construction sector, where bottom-up integration has affected the Rubin and Malakhit The almost total cessation of arms purchases by the bureau. Ministry of Defense in the mid-1990s drove the Russian The government’s plan for the restructuring of military-industrial complex to the verge of collapse. Exports shipbuilding sector takes this process fully into account. became the only practical means of survival, and has locked According to the Federal Agency for Industry’s plan for the many enterprises in a hypertrophic orientation towards the restructuring of the shipbuilding sector, two engineering demands of foreign markets. This applied equally to the centers are to be established, each of which shall unite those conduct of R&D, as only those programs oriented towards design bureau that remain under state control. One center will projects with some export potential were supported. Many be established in the framework of a submarine construction design bureaus for the first time in their history initiated holding, uniting Rubin and Malakhit. The second will unite programs designed to create weapons exclusively for export, surface shipbuilding design bureau, including the Northern, or offered custom-designed systems to one or another Nevskiy and Almaz, as well as Zelenodolsk. Both centers purchaser. # 1, 2007 Moscow Defense Brief 11 Challenges to the Reform of Defense R&D in Russia Industrial Policy

For its part, in order to preserve the defense industrial This led to a significant redistribution of power in the base, the Defense Ministry began to finance R&D programs military-industrial complex of Russia. Even though MiG that did not have direct application to the needs of the Russian over several decades had become synonymous with Soviet armed forces (i.e., products that the Russian armed forces military aviation, Sukhoi gained a dominant position in this would not purchase in any significant quantity), but sector during the 1990s, while MiG suffered a deep setback. which were aimed at foreign markets. In this manner, one This was in part related to the export success of the Su‑27 on might speak of the appearance of a unique symbiosis of world markets, but also reflected the back-room negotiating Russia’s defense administration and its defense industry in talents of the Sukhoi leadership. Irkut’s success in obtaining supporting the export of arms. the historic Indian contract for the development of the It is precisely this symbiosis that explains the significant Su‑30MKI is related to a large degree to the links maintained successes that Russia has demonstrated on the international by the management of this company with not only Russian, arms markets in the last few years and the annual increase but Indian political circles. of arms deliveries abroad by $1 billion. By 2000, according The Kamov design bureau offers another example, as it to several estimates, as much as 70% of military R&D gained the upper hand over the traditionally dominant Mil conducted in Russia was in support of export products. design bureau during the 1990s. Moreover, Kamov’s success The Ministry of Defense itself finances projects with was due not only to traditional forms of political influence, export potential that it also plans for the use of its own but also to methods of “informational warfare.” In 1995 Sergey forces. The Sukhoi program for the “grand modernization” Mikheyev, the head of Kamov, secured a place for his Ka‑50 of the Su-27 fighter, known as the Su-35, as well as the attack helicopter with Russian military. But after 2000, with establishment of the Almaz-Antey air-defense version with the changeover in the Russian military and political elites, the vertical launch of the Shtil’-1 (SA-N-12) SAM complex, Mil design bureau got its bureaucratic revenge, and was able destined above all for deliveries to India. to have the Ka‑50/52 replaced with the Mi‑28N in the service This strategy of risk-sharing with foreign partners of the armed forces. in promising R&D projects has become so deeply In order to limit this kind of bureaucratic lobbying, entrenched that attempts are being made to apply it there were attempts during the mid-1990s to introduce a to such key national programs such as the creation of a competitive system of defense contracts, including for R&D fifth-generation I‑21 fighter. Russia’s leadership has been projects. These efforts have seen only partial success. The extremely keen to involve other countries in this project, system of competitive tenders works only for relatively small especially India. At the same time, in parallel to the internal projects and for contracts issued by the Ministry of Defense version, an export version called the I-21E is being planned. (though even here the occasional corruption scandal erupts), The contrast of the Russian approach to American fears of but as for large contracts and those of essential importance “leaks” of crucial technologies associated with the F-22 or for national security, these competitions are largely for JSF fifth-generation fighter program to foreign countries is show. Here, as elsewhere, the deciding factor remains the remarkable. bureaucratic influence of the participant, as well as the subjective preferences of highly placed military and political decision makers. The decision of the Russian Air Force to The “Subjective Factor” as an Obstacles choose the Mi-28N as its main attack helicopter and to launch to Rational Planning serial production is an excellent example, since the Mi-28N had not even begun testing, and was far behind its competitor, The hypertrophied role of the defense design bureau the Ka-52, in terms of readiness. director that developed during the Soviet period has The influence of the “industrial generals” has had a range brought an element of subjectivity and arbitrariness to of negative effects. First, the directors of the more influential the planning of defense development, the distribution of design bureau tend to hoard resources, leaving precious little contracts and decisions to launch products in to serial from state contracts for second and third level subcontractors. production. Frequently, the decisive factor is neither military The second drawback of this politicized system is the ability nor production considerations, but the bureaucratic and of the design bureau directors to continue to attract state political influence of one or another design bureau director. financing for R&D projects that objectively show little During the administrative and political chaos of the 1990s, relevance to current needs. This situation is exacerbated by the the struggle for scarce state funding sharpened to such a existence of ultra-specialized Soviet-era design bureau that point that industry “reform” amounted to little more than a remain focused on their traditional topics. With inadequate shakedown of existing hierarchies, while the political factor financing, they continue to pursue an enormous number of became dominant in the distribution of contracts, reflecting projects that have been dragging on for years, many of which the lobbying power of one or another firm. overlap in purpose and duplicate each other. In several cases 12 # 1, 2007 Moscow Defense Brief Challenges to the Reform of Defense R&D in Russia Industrial Policy

attempts to introduce competitive tenders for R&D have in plans weapons development, exercises general coordination fact served to conceal this situation, as projects that simply over military R&D, and works on the commissioning, duplicate efforts could be presented as “competing” with one production and use of military equipment. Until 2000, within another. the framework of the Ministry of Defense alone there were For its part the Ministry of Defense, after showing no less than 57 purchasing departments, poorly coordinated preference to one developer, is often unable to resist the among one another and wasting even those limited resources political pressure emanating from other design bureau to at their disposal. provide them with “consolation prizes,” and thus continues In the framework of the first stage of reform, as not only to finance redundant R&D but also to purchase approved by the Russian Security Council in September redundant serial production. Having announced, after twenty 2000, the number of arms procurement offices within the years of indecision, its choice of the Mi‑28N as the main Defense Ministry was to be reduced to 20 by 2002; a unified combat helicopter, the Ministry of Defense simultaneously procurement office was formed for the Air Force, the Navy extended work on the Ka‑50 and Ka‑52, with the aim of using and the Rear of the Russian Armed Forces; the number of these for “special tasks.” Similarly, although the Yak‑130 was individuals able to sign off on State purchases in the military adopted by the Air Force as its principal training aircraft, sphere was reduced from 200 to 51; and a mandatory financing continues to be given to the competing program to centralized register of all state contracts was established. develop the MiG-AT. By the end of 2004 the formation of a unified The result is that Russia’s security and defense agencies procurement system was initiated within the Ministry of are in fact conducting too much R&D, given the limited Defense. It is headed by a Chief of Armaments for the Armed resources available, while reference to that very same lack of Forces with the rank of Deputy Minister of Defense, and money allows a few developers to drag their work on for an directly supervises the general procurement departments indefinite period and to appropriate funds without any real corresponding to the various services, the number of which accountability for results. This situation is of course an ideal has been reduced to 12. In this manner, the department breeding ground for industrial corruption. responsible for the development of armaments has been Obviously, Russia’s system of military R&D can be for the first time in Russian practice separated from the improved only with the minimization of such subjective and department exercising operational command of the forces. arbitrary factors in the planning and execution of projects. In order to supervise R&D and arms purchases a separate Indeed, over the past few years serious efforts have been made Federal Service for Defense Purchases was formed under the in this direction. Ministry of Defense (Rosoboronzakaz). First, the accelerated consolidation of Russia’s defense Finally, in May 2006, the Military-Industrial Commission industry into sector-integrated holdings is resulting in fewer (MIC) was established within the government to coordinate overlapping and duplicate projects within these holdings the activities of the defense industry and the creation of themselves, and leading to the eventual establishment of new armaments, de facto recreating a body analogous to a single design bureau for each holding. The Almaz-Antey the one operative during the Soviet period. It is expected air defense Concern has gone the farthest in this direction, that arms procurement on behalf of the Ministry of Defense having this year united five design bureaus into a single and other agencies will conducted by a civilian Procurement engineering and design center for the Concern as a whole. The and Contracting Agency for Arms and Military Equipment, managers of the other newly-established defense-industry established under the aegis of the MIC. The Defense conglomerates will be forced to take a similar path. The Ministry’s unified system of procurement will then take on fact that such consolidation will occur at the internal level the planning of R&D and purchases, while the new Agency within each holding will minimize the political factor, when will take care of the contracting details. It is further expected compared to the unsuccessful attempts of the government to that the Federal Service for Defense Procurement will be exercise its outside influence directly upon the “historical” removed from the Defense Ministry portfolio to become design bureaus. a government-wide body that supervises the work of the Another means of reducing the number of projects is Procurement and Contracting Agency and the unified system to expand the number of inter-service R&D, including the of procurement. establishment of unified arms systems for the various services These measures should lead to the formation of a of the Armed Forces. unified, civilian and relatively autonomous center for the In administrative terms, the emphasis is on improving management of defense R&D and procurement. The extent coordination among R&D systems and purchases. Beginning to which this system, imposed upon the military-industrial in 2000, with Vladimir Putin’s coming to power, a step-by-step complex from the outside, proves able to overcome the transition to a system of unified procurement was put into consequences of the collapse and chaos of the 1990s in this motion. This implies the creation of a single structure that sphere, will be determined in the near future. # 1, 2007 Moscow Defense Brief 13 Challenges to the Reform of Defense R&D in Russia Industrial Policy

Russia’s Defense Industry in 2006 Dmitry Vasilyev

he year 2006 saw several important developments Meanwhile, Oboronprom (a de-facto subsidiary of Tthat promise to shape the Russian military-industrial Rosoboronexport), continued to consolidate the shareholdings complex for years to come. First, a standing governmental of Russian helicopter manufacturing companies. Following Military-Industrial Commission, chaired by Sergey Ivanov, its purchase of the Rostvertol additional share issue in 2006, Deputy Prime Minister and Minister of Defense, was created Oboronprom’s share in that company reached 25%. It also in March. The Commission is charged with coordinating the initiated a deal to purchase 20% of the Kazan Helicopter development and production of armaments, mobilization Plant, apparently from the management of that company, training, the development of military industry and bringing its total ownership to 51%. technologies, and also to oversee the export and import of Rosoboronexport Director General Sergey Chemezov arms. announced that the helicopter holding might be folded One of the results of the Commission’s work in into the UAC. This might be interpreted as an attempt to 2006 was the development of a State Arms Program for bolster the holdings of the UAC before a potential exchange 2007‑2015 – a program funded by 4.96 trillion rubles, of of share with EADS, or as an indication of the inability of which 3.41 trillion are earmarked for new serial production Oboronprom to properly manage the helicopter companies purchases. The Minister of Defense said that the program it is acquiring. marks the beginning of the rearmament of the armed forces. In 2006 Vladimir Putin approved amendments to However, in spite of the large volume of funds allotted to the law on state regulation of the aviation industry, giving the program, officials have not specified precisely where all foreign companies the right to acquire over 25% of the the money is coming from, which suggests that the program shares of Russian aviation companies, but only with the will be dependent upon high oil prices. permission of the head of state. This was done first of all to The highlight of the year in the aviation industry was the allow Finmeccanica to acquire 25% of Sukhoi Civil Aircraft formation of the United Aircraft Corporation (UAC), meant Company. The two companies signed a letter of intent in 2006 to consolidate state shareholdings in the aviation industry. to enable the Italian company to participate in the Sukhoi The President signed a degree on the UAC in February, but Superjet-100 Russian regional jet project. the corporation was formally registered only in November The highlight of the year in engine-building was the sale – a delay attributed to competing interests and views on the by Vneshtorgbank in August of its shares of engine-building valuation of the several shareholdings merged into a single companies in the Perm region AFK Sistema. The bank sold company. In the end, the UAC at this interim stage has been 81.25% of its shares in the Sales company, which control the valued at 96.8 billion rubles and the state’s ownership share Perm Motor Plant (71.6%), the Aviadvigatel’ design bureau at 90.1% (see table 1). (10%) and a number of other companies located in Perm. The formation of the UAC is to be finalized by April The total value of the deals is estimated at $120 million. 1, 2007. By that date the Kazan Aviation Production These events suggest that Sistema has been tasked by the Association and the MiG Russian Aircraft Corporation authorities, together with Rosoboronexport, to consolidate should be reincorporated as joint-stock companies and the engine manufacturing sector. The first stage of this process their shareholdings, together with privately-held shares should consolidate the shareholdings of the Perm region in aviation companies, will have been consolidated in the manufacturers, the Saturn Scientific Production Association, UAC. At that point the value of the company should be 150 the Ufa Engine Construction Production Association, as well billion rubles, with a state share of 76%. The company will as, in all likelihood, Motor-Sich, the Ukrainian manufacturer conduct an initial public offering of its shares sometime of helicopter engines. By some accounts, the shares of this before 2010. last company are already controlled by Oboronprom. It is worth noting that in its valuation of the UAC, Deloitte Oboronprom had already made an earlier attempt & Touche gave the cost of each shareholding in terms of a to consolidate the engine manufacturing sector. An bracket or range. In order to maximize the state’s ownership announcement was made in May that the company had share in the UAC, its shareholding in individual companies submitted a plan to the Military-Industrial Commission was consistently priced at the top of the range. Moreover, in to create an aviation engine construction holding. The plan order to boost the valuation of MiG, the state plans to write would have included the state-owned Chernyshev, Salyut and off the company’s debt of some 19.5 billion rubles. Klimov plants together with the privately-owned Ufa facility. 14 # 1, 2007 Moscow Defense Brief Russia’s Defense Industry in 2006 Industrial Policy

Table 1. Valuation of the Participants of the UAC

Capitalization, Percent of Shares transferred Valuation of share in the UAC, Company billion rubles to the UAC, % billion rubles. Sukhoi Aviation Holding Company 52.4 100 52.4 Aviaeksport 2 15 0.3 Ilyushin Finance Co. 11.7 38 4.4 Komsomolsk on Amur Aircraft Production 38 25.5 9.7 Association (KNAAPO) Ilyushin Aircraft Company 11.9 86 10.2 NAZ Sokol 3.1 38 1.2 Novosibirsk Aviation Production Association 2.7 25.5 0.7 (NAPO) Tupolev 4 90.8 3.6 Finance Leasing Company 8 58 4.6

Irkut Corporation 25 38.2 9.6 Total 96.8 Source: UAC. Author’s calculations However, there have been no subsequent announcements Finally, Rosoboronexport’s industrial expansion reached concerning this plan. new heights in 2006. Aside from its involvement in the reform In shipbuilding, the government approved a strategy on of engine manufacturing and electronics, Rosoboronexport the development and reform of the sector to 2030. The details has delved into the consolidation of the metallurgical of this strategy were not published, except that in place of a industry. In January, Rosoboronexport and Aviatekhnologia single integrated structure like the UAC, the state intends to established a joint-venture called AT-Spetstekhnologia to establish three holdings, corresponding to the three major manage metalurgical companies producing special metals geographic shipbuilding centres in the North, West and Far and alloys for the defense-industrial complex. Over the East. The Defense Minister suggested that geopolitical factors course of the year Rosoboronexport acquired 66% of VSMPO- and the need to support Russian industry in the Far East lay Avisma, the largest producer of titanium in the world, and behind this decision. launched negotiations to acquire shares of Red October, a The Russia’s electronics industry got a lot of attention in manufacturer of special steels. 2006. The Ministry of Industry and Energy devised a strategy In early December Rosoboronexport created a joint- for the development of the sector to 2025, with a high priority venture with Alfa-Bank which is to take an active role in given to military electronics. The ministry should submit a implementing the Federal program for the reform of the detailed plan to the government by February 2007 on how to defense industrial complex for 2007-2011. According to spend the 23 billion rubles allocated to the sector. The first official reports, the joint-venture will assist in the financing, likely beneficiaries of this largess are to be the Mikron (owned debt restructuring and trust management of the state’s by Sitroniks) and Angstrem facilities in Zelenograd. shareholdings in defense industries. With every passing Oboronprom’s consolidation efforts also extended year, as Rosoboronexport is diversifying and becoming more to electronics. In September, the company announced the involved in the reform of the sector, such arms exports have creation of a subsidiary, Radio-Electronic Warfare (REW), become just one of its functions. that would consolidate the leading companies in the sector, In summary, the main result of the year was the similar to how Oboronprom has attempted with respect establishment of a legal framework for the restructuring of to helicopter construction. The announcement suggested several key sectors of the defense-industrial complex. The that formalities concerning the formation of REW would be positive dynamic of increased funding continued from last complete by the end of the year, but no further information year, driven by a large portfolio of export orders plus growth on this initiative is available. in the state defense order.

# 1, 2007 Moscow Defense Brief 15 Russia’s Defense Industry in 2006 Arms Trade

The Venezuela Contracts Konstantin Makienko

n July 2006, Russia and Venezuela signed a series of Mi‑35M and one Mi-26T). The second was for the transfer of Icontracts for the delivery of Russian arms worth $3 billion five Mi-35M for a probable cost of $81 million. during Venezuelan President Hugo Chavez’s visit to Russia. On the eve of the July visit, a new contract for 18 helicopters The prospects for this level of trade between Russia and was signed, including 14 Mi-17B5, two Mi-35M and two Mi- Venezuela were discussed as early as 2001-2002, when a 26T. In addition, it appears as though another contract for the large (up to 50 units) delivery of MiG-29SMT fighters was delivery of 20 Mi-17, including two VIP versions, was agreed considered. However, due to political instability in Venezuela, upon. The cost of all 38 helicopters amounts to $484 million. Russia’s caution in pursuing military-technical cooperation Thus, the total size of Venezuela’s helicopter programs, which with an anti-American regime, and the opposition of a includes the delivery of 40 Mi-17, 10 Mi-35M and three Mi- pro-American bureaucracy in Venezuela itself, the first real 26T amounts to $685 million. This would be the largest (by contracts for the delivery of helicopters and small arms were cost) single post-Soviet sale of helicopters. Taking into account concluded only in 2005. In July 2006 new contracts were earlier purchases of Mi-17’s from Israeli aviation companies, concluded that resemble, in both scale and variety, the Algeria Venezuela stands alongside China and India as the largest deals concluded in March 2006. purchasers of helicopters of Russian post-Soviet production. Information regarding other likely purchases must be considered preliminary. For example, there is oblique evidence What Do We Know? of Venezuelan interest in Russia’s air-defense systems. In any case, during his visit to Izhevsk, Chavez visited not only the Full and reliable information on the contracts is not small arms factory, but also the Kupol plant which produces available to the public. The aviation deals are thus far the most the Tor-M1 missile system. An air-defense system purchase clearest. First, the contract for delivery of 24 Su‑30MK2’s for a would be fully consistent with the logic of Venezuela’s military- probable sum of $1.5 - 2 billion. Such fighters had earlier been technical policy, one of the priorities of which is to protect the delivered to the PLA (24 units) and the Vietnam Air Force airspace of the country after the decommissioning of its F-16s, (four units). The first four units were delivered to Venezuela which are no longer combat-ready due to the US embargo on in December 2006, that is, just four months after the closing deliveries of spare parts. of the deal. This tight schedule suggests that in spite of the The deal to sell Venezuela a batch of Russian AK-103 fact that it secured no orders in 2005, the KNAAPO has kept assault rifles and licenses for their production of is noteworthy, its production capacity in good shape. A full production because this is the first time that Russia has made a deal not cycle of the Su-30 requires about 18 months to complete, just to deliver arms but to construct a turn-key facility for their and so the delivery of the remaining 20 fighters will most manufacture. likely proceed in batches of ten units, from 2007-2008. But Finally, Venezuela has demonstrated its interest in Russian one cannot exclude the possibility that all 20 units will be An-74 military-transport aircraft. Earlier, Caracas intended delivered before the end of 2007. According to some sources, to purchase twelve CASA-C-295 light transport aircraft of in addition to this contract, Venezuela negotiated an option European production, but this deal was blocked by the USA, to purchase another batch of 24 Su-30MK2. However, the which supplies its engines. In October, a Venezuelan delegation likelihood of Venezuela exercising this option, if indeed it visited the Omsk Polyot factory that produces the An-74. There does exist, depends of several factors, first of all the stability have also been reports that the Russian Project 677 conventional of the regime of Hugo Chavez. Moreover, by 2008 Russia will submarine won a tender conducted by the Venezuelan Navy for have developed the new Su-35 fighter with fifth-generation the purchase of next-generation submarines, but the contract avionics, modernized engines and a new array of weapons. itself, it seems, will be signed at a later date. Chavez has already expressed his interest in this aircraft, and so Venezuela could well place the first foreign order for it. Details on the helicopter acquisitions also were published. Qualitative Analysis As early as 2005, two contracts for a total of $201 million were signed for the delivery of 15 helicopters, including 6 Mi- This series of Venezuelan contracts is the second 17B5, 8 Mi‑35M and one Mi‑26T. The first contract for $120 concluded in 2006 (after the Algerian contracts) which include million envisaged the delivery of 10 aircrafts (six Mi-17, three the following elements: 16 # 1, 2007 Moscow Defense Brief The Venezuela Contracts Arms Trade

1. A multi-billion dollar scale, far exceeding the usual until 2009-2010. This includes the traditional customers level for Russian arms exports. Only the contract for the India and China, and the new additions of Venezuela and licensed production by India of the Su-30MKI, worth $3.3 - Algeria. In a few years, once deliveries of the Su‑30MKM 3.5 billion, can compare to the cost of the Algerian package, at begin, Malaysia will join this club. It is also reasonable to $7.5 billion, and the cost of the Venezuelan package, at about suppose that relatively large sales will be made to Syria and $3 billion. Iran. 2. A geographic expansion beyond Russia’s traditional Diversity is another distinguishing feature of the customer base in India and China. Algeria has now become Algerian and Venezuelan packages. The range of products a significant importer of Russian defense and aerospace includes military aviation, naval equipment, air-defense equipment, it purchased significant amounts of Russian arms and land forces armaments. This suggests that Russia has and has modernized its stocks, but it was also a significant moved beyond the mere sale of individual types of arms that purchaser of Soviet armaments in the past. Venezuela, on characterized its trade in the 1990s, to deals with better heeled the other hand, has never made major purchases from either customers for comprehensive solutions to their military Russia or the Soviet Union. security challenges. Transcending the purely commercial sale 3. A wide variety of weapon types, including defense of arms, Russia is now in the process of becoming a provider of and aerospace equipment for air and land forces, and very security, a more complex and inevitably political relationship. likely for the air defense and the navy. The rise of Russian export volumes, the widening range of As for the volume of the Algerian and Venezuelan product types, and especially the geographic diversification packages, taken together they amount to over $10 of importers all indicate the increasingly integral power of billion, making up half of the current portfolio held by Russia, now recognized by importing states as at least the Rosoboronexport. Moreover, for the first time in Russia’s post- equal of France or the UK. Indeed, with the exception of Soviet history its exports are well-balanced geographically, China, for which Russia remains practically the only available going beyond the Indo-Chinese “reservation.” One can now source of armaments, both Algeria and Venezuela could speak of a group of five to six states that will remain the major have turned to the Europeans to satisfy the majority of their purchasers of Russian aerospace and defense equipment defense equipment needs. Table 1: Identified and Supposed Contracts

System Number Cost Date of Signature Source and Comments Confirmed Contracts Su-30MK2V fighters 24 $1.5 billion* 17.07.2006 Kommersant, Vedomosti Mi-17 transport helicopters 3 $26 million Transport and attack helicopters 6 Mi-17, 3 Mi-35M, $120 million 2005 1 Mi-26 Attack helicopters 5 Mi-35M $81 million 2005 Transport and attack helicopters 2 Mi-35M, 2 Mi-26, $484 million 15.07.2006 Kommersant 34 Mi-17 AK-103 assault rifles 100 000 $54 million 03.07.2006 Kommersant Factory to produce AK-103 assault $474.6 million 12.07.2006 Kommersant rifles, factory to produce 7,62 mm ammunition Total $2 739,6 million Supposed and possible future contracts Tor-M1 SAM systems NA NA; likely a few Vedomosti hundred million dollars Patrol boats NA Vedomosti Project 677 conventional submarines 2 Tender by Venezuelan Navy An-74 transport planes 6 $72 million *estimate Source: table by the author # 1, 2007 Moscow Defense Brief 17 The Venezuela Contracts Arms Trade

The Venezuelan contracts are also indicative of an machine-building. This could include deliveries of Il-96 and important geopolitical process. After a decade and a half Tu-204 passenger aircraft to Venezuela and other states in the of forced passivity in the Latin American region, Russia is region. In addition, Russia could renew the Soviet practice re‑establishing its presence in this soft underbelly of the USA. of making discounted and subsidized deliveries of defense Moreover, Russia’s return is felt not on an ideological plane, and aerospace equipment to the poorer states in the region, but on two important geopolitical and geoeconomic fronts, many of which, like Cuba, have not renewed their stocks of namely, in military-industrial cooperation and in energy. arms in over two decades. Against the backdrop of growing As distinct from Soviet times, when the Soviet presence was leftist and anti-American sentiment in Latin America, Russia based on Cuba, Russia now relies on Venezuela, with its much has a unique opportunity to provide a worthy, asymmetric richer base of resources. To secure this toehold Russia will response to US activity in Russia’s sphere of interest in the most likely promote cooperation not only in the delivery of near abroad. arms and joint energy projects, but also in the area of civilian

18 # 1, 2007 Moscow Defense Brief The Venezuela Contracts Arms Trade

Russia-India Military-Technical Cooperation: Current Issues and Perspectives Konstantin Makienko

Current Situation: Rising Competition on the Delivery or leasing of C-130 Hercules MTA. The slow Indian Market development of an Indo-Russian MTA might enable such deliveries. Russia could lose the entire Indian The past few years have seen a sustained rise in the market for MTAs to the US and Ukraine should the US presence of French and Israeli arms manufacturers on the manage too sell a large batch of Hercules to India; Indian market, while the US has also just recently launched Deliveries of Patriot PAC-3 air defense missile systems upon a new strategy of engagement. with enhanced anti-missile capacity. India’s interest The French and Israeli efforts date to the early 1990s. in the Patriot derives from the stoppage of joint With the collapse of the Soviet Union and the danger of production of the S-300B, though Russia retains a fair interruption of supplies from Russia, the Indian military chance at selling the S-300P and/or the S-400 on the sought to diversify its sources of arms procurement. The Indian market. relative success of the French and Israelis was enhanced Nonetheless, in spite of Western activity on the Indian by the growth of Indian demand into market segments market, demand for Russian arms revived since the pause where Russia had only weak offerings, including unmanned from 2004-2005 that followed the large contract for the aerial vehicles (UAV), command, communication and Gorshkov aircraft carrier and MiG-29K. For instance, a second reconnaissance systems, as well as non-nuclear submarines order for Talwar-class frigates was placed in the summer of with air-independent propulsion systems. It is worth noting 2006, worth $1.6 billion, and a decision was made to purchase that in the majority of cases the Indian military chose a additional batches of T-90S tanks and Mi-17-V5 helicopters. non-Russian system only when there was no Russian option The contract to develop AL-55I engines for the Indian HJT- available, or when the Russian offering was patently non- 36 trainers is also important in this regard. In addition, a competitive. The decision of the Indian Air Force to purchase decision in principle was made to modernize the entire fleet the British BAE Systems Hawk trainers was perhaps the only of MiG-29 to the MiG‑29SMT, and to purchase a second batch time when Russia had a reasonable chance to win a contract of carrier-based MiG‑29K fighters. Thus, Russia still appears and failed. to enjoy good or even preempted prospects of selling its A newer threat to Russian positions is posed by the products on the Indian market. US decision to launch a vigorous military and political The following factors will determine whether Russia engagement with India, with the aim of bringing India into a maintains its positions on the Indian market: global anti-Chinese league, together with Japan, Taiwan and Competition for the Indian Air Force tender for 126 South Korea. The Americans intend to increase their share of multirole fighters; the Indian market to 20-25% by 2015. Aside from air-defense The development of the Indo-Russian MTA project; systems, US companies have the best chance to succeed in Programs to develop a fifth-generation fighter. support, rather than combat systems. Thus, Lockheed Martin is actively marketing its C-130 Hercules transport aircraft, but not its military fighters. The Tender for 126 Fighters At present, the most likely deliveries of American arms to India include the following: The purchase of 126 multirole fighters is likely to be P-3 Orion or P-8A maritime patrol aircrafts. Enabling the largest single Indian program in the coming years. factors include delays in finalizing the Russian “Sea Historically, it began with the notion of directly purchasing Snake” anti-ship target search and track system, the French Mirage 2000-5 fighter, however, after the conditions installed on old Il-38 aircraft, but the high cost of the for this purchase were changed, the Indians decide to hold a P-8A in particular remains an obstacle; new tender. Aside from the Mirage 2000-5, all other fourth # 1, 2007 Moscow Defense Brief 19 Russia-India Military-Technical Cooperation: Current Issues and Perspectives Arms Trade

generation fighters currently available on the market have Other Joint Programs entered the competition, from ultralight to medium aircraft. These include the Russian MiG-35, the American F/A‑18E/F In general, Russia’s strategy to retake the Indian market and F‑16, the European Eurofighter Typhoon, the Swedish should be founded on a new paradigm for military-industrial Gripen and, in addition to the Mirage 2000‑5, the French cooperation: from one based on direct sales or at most Rafale. In 2005 the Indian Air Force distributed a Request licensed production to a paradigm of joint projects based on for Information (RFI) and also established the details of a the sharing of risks. India is an ideal partner for such projects Request for Proposal (RFP), though the latter document has for the following reasons: not been issued due to personnel shuffles in the Ministry of Russia still maintains a certain technological Defense and the occasional corruption scandal. superiority, which allows it to play the leading role; On the whole, the Russian MiG-35 has a good chance There are no military-political risks to such cooperation. of wining this tender. However, to succeed, the following On the contrary, the military development of India is in conditions have to be met: Russia’s national interest; Full support at all levels of government right up to the India has demonstrated a clear interest in the head of state. It is only at this level that an effective implementation of such projects. linkage could be made between support for military- Russia and India are already implementing one such technical programs and access for Indian companies to project – the heavy long-range supersonic anti-ship PJ-10 Russian energy projects; (BrahMos) missile. However, this program does not envisage Rapid progress on the Indo-Russian MTA project would purchases by the Russian Navy. create a positive political and psychological atmosphere The next major cooperative project will be the program for the promotion of the MiG-35; to create the MTA multirole transport aircraft. Together with A domestic order of at least some MiG-35 or closely- an acceleration of work on the MTA, it is essential to begin related fighters would provide a strong stimulus to the preparatory work on a project to create a light fifth-generation MiG-35’s chances in India; fighter in the sub 20-ton class, which India has expressed A competitive offer of air-launched weapons and an interest in pursuing. These three projects: MTA, light active phased-array radar would also sharply improve fifth-generation fighter and the purchase of 126 multi‑role the odds for the MiG-35. More state financing for fighters, could also be linked together. A dynamic start to the the development of such next-generation systems is MTA program would demonstrate Russia’s ability to execute desperately required. joint military programs with India on the basis of risk- The successful integration of Russia’s aviation industry sharing. This in turn would establish a foundation for work would enable Sukhoi, Russia’s best design bureau, to on a joint Russo-Indian fifth-generation fighter. Meanwhile, support the interests of the MiG aircraft company. The an awareness on the part of India’s military leadership of the prospect of applying the results of Sukhoi’s work on schedule of work for the fifth-generation fighter would could a fifth-generation fighter or the Su-35 to the MiG-35 lead them to reduce their requirements for the tender of 126 project is promising. aircraft and opt for a more conservative interim measure to MiG corporation has been showing some positive purchase additional MiG‑29SMT and Mirage 2000‑5. signs recently. Its financial position has improved, while its On the whole, the prospects for further military- production and scientific-technical potential are growing. industrial cooperation between Russia and India depend MiG has shown progress on the creation of a Russian active not so much on the activities of competitors as the ability phased-array radar. In 2007, Fazotron-NIIR plans to install the of the Russian defense industrial complex to overcome its own first prototype of the Zhuk-A radar on a flying laboratory. All organizational problems and to secure state support in the preconditions for the successful major modernization of the form of lobbying for its products on the highest political level, RD-33 engine are in place. Thus, the corporation is in its best the modernization of legislation, and finally the targeting of shape it has seen since the collapse of the USSR to compete funds to support the domestic purchase of weapons systems for the Indian tender. On the other hand, postponements to destined for the Indian market. the holding of the tender leave time for Delhi and Washington to develop closer relations. Rafale might also conclude its first export contracts, which would reduce the cost of the French fighter.

20 # 1, 2007 Moscow Defense Brief Russia-India Military-Technical Cooperation: Current Issues and Perspectives International Cooperation

The Indo-Russian Transport Plane Project: Background, Status and Perspectives Ruslan Pukhov iscussions on the creation of an Indo-Russian transport The military-operational requirements of the aircraft Dplane were launched towards the end of the 1990s, once were jointly established in 2005, which required some the Russian Air Force had determined its future needs in harmonization of the requirements of the Russian and Indian the area of military-transport aviation. It was assessed that air forces. One of the main points of contention concerns the the modernization of the aging fleet must begin with the engine unit. The Indian party prefers to equip the aircraft class of light MTAs, replacing the An-26 with the Il‑112V. with an engine of Western production, such as the V‑2500 The next priority would be to purchase a new generation of or the CFM-56. These engines are already in use in large medium transport to replace the An‑12. The An‑70, designed numbers with Indian commercial airlines, and so their use in 1987, was originally earmarked for this purpose, but the Air in the Indian version of the MTA has a strong economic Force was now looking for a more up-to-date option. With its rationale. The Russian military naturally would prefer an excessive takeoff and landing requirements, the An‑70 does engine of Russian design, for example the promising PS‑12, not match the specifications of the 20-ton payload class. The the Ukrainian AI‑436‑12 or a modernized D‑30KP‑3 (Burlak). project has been confounded by serious technical problems, A likely compromise would have each customer maintain having to mainly with the promising but not fully developed the right to choose the engine for the planes it orders, an D-27 engine, as well as the lack of clarity in Russia’s political established practice among commercial airlines in their relations with Ukraine. purchases of civil aircraft. The Tupolev project Tu-204-300 (Tu-330VT) is one Russia and India signed an intergovernmental possible alterative to the An-70. However, Tupolev has not agreement on the MTA project in January 2007, which sets shown much dynamism in taking this project forward, and out the following schedule. Preliminary design will begin it remains at an early stage of development. Moreover, the in 2007, with detailed design to begin in the third quarter Tu‑330 has turned out to be rather heavy as a replacement of 2008. The first flight is planned for late 2010, and testing for the An-12. As of 2006, it is clear that the financial and will be completed by 2012, followed by serial production. innovation capabilities of Tupolev leave little room for hope It should be noted that any delays to the start of full-scale that this project will succeed. design work increases the risk that serious competitors will Under these circumstances, the most realistic option emerge, leading to a corresponding loss of interest of the for the creation of a medium transport aircraft remains the Indian party in this project. The Indian Air Force has an Indo-Russian project. Irkut, Ilyushin and Rosoboroneksport urgent need for this class of aircraft, and they will be forced to are the Russian participants in the program, while the Indian seek alternatives if the Russian project fails to deliver. Given party is represented by HAL. Since the Irkut corporation the recent warming of political relations with the US, some gained a controlling stake in the Yakovlev design bureau, the kind of agreement to purchase or lease the American C-130J latter has also become increasingly involved in the project. MTA is entirely possible. Nikolai Dolzhenkov, first vice-president of Yakovlev and vice- president of Irkut, is serving as the director Irkut and Ilyushin joint programs. Potential Markets and Competitors This project has several important benefits. First, technical and financial risks are divided between two partners. Secondly, Current estimates place the demand for MTAs to 2025 the aircraft matches precisely the class-specifications of a at 390 units, with 100-150 for India and Russia, and the rest replacement for the Lockheed C‑130 and the An‑12. Third, the to third country markets. It’s notable that of the 1300 An-12 aircraft is being designed from the start for dual-use, satisfying medium transport planes ever produced, 183 were exported, military requirements but with commercial potential as well. with 95 still in active use. Finally, the participation of two nations guarantees a base The Indo-Russian MTA faces four potential competitors: number of orders. For its part, the Indian Air Force has signed the deep modernization of the American C-130J Hercules, the a letter of intent to purchase 45 aircraft with an option for a European A200M (an adjusted-to-scale twin-engine version second batch of the same number. The Russian Ministry of of the A400M), the Japanese Kawasaki C‑X project, and the Defense plans to purchase no fewer than 100 aircraft by 2025. modernized Chinese Y-8. Only the American craft is in serial # 1, 2007 Moscow Defense Brief 21 The Indo-Russian Transport Plane Project: Background, Status and Perspectives International Cooperation

production, but the excessively high price tag of $70 million well as civilian standards. The project will maximize the use for this class of MTA pushes it out of the market for many of electronic components and reduce hydraulic systems to a customers. Moreover, in spite of the major modernization of minimum. The designers have aimed to create an aircraft that the base model, this MTA is still based on a very old design is 150% more effective in its transport role than the C‑130J, that will hardly be able to compete with a truly new aircraft. at half the ticket price (no more than $35 million), and with It is unlikely that Europeans will be able to begin full- minimal operating costs. scale work on the A200M before the A400M goes to serial production or before the many problems confronting the A380 and the A350 are solved. Japan’s products are generally Significance of the Project extremely expensive, its domestic law places stringent restrictions on military exports, and the country remains The MTA project is of a cardinal importance to the politically dependent upon the US, which has proven emergence of Russia’s aviation industry from its prolonged successful in blocking the development of the aviation crisis. Aside from the specific case of the Be-200, Russia’s industry of its satellites. aerospace engineers have not produced a new civilian or Thus, the most dangerous competitor to the Indo- transport aircraft in 20 years. And until at least one such Russian MTA on third-country markets could in fact be a aircraft is successfully commercialized, the crisis cannot be deep modernization of the Chinese Y‑8, which in its time considered to be over. Sukhoi is currently engaged in such a was modeled on the An‑12. Chinese success at endlessly project – the creation of a regional jet. But the Supetjet 100 modernizing the MiG‑21 shows that PLC engineers are fully program is extremely risky and its success is by no means capable of developing technology from the 1950s. In any case, assured. Therefore it stands to reason that Russia needs a one might conclude that, for the time being at least, the MTA “backup” program that can serve to integrate those parts project enjoys a window of opportunity to fill an empty niche of its aviation industry that are not working on military on the market. projects. According to current estimates, the cost of R&D and The MTA is ideal in this regard, insofar as the risks preparation for production, excluding the engine, is $600 associated with its commercialization are lower than the million, to be divided equally between Irkut and HAL. This Supetjet 100 or the MC‑21 projects, given the fact that it estimate is likely on the low side, and the actual investment already has a de-facto order for 45 units plus an option for the will probably exceed $1 billion. same again. This project has the potential to restore Russia’s The product is being promoted as an aircraft that will ability to develop new civilian aircraft. Finally, the experience retain its technological edge for ten years after it hits the gained in the development of the MTA could prove useful for market, that is, until 2022-2025. Designed from the ground the development of new military aircraft, a project for which up as a dual-use aircraft, it meets military requirements as India remains Russia’s most promising partner.

22 # 1, 2007 Moscow Defense Brief The Indo-Russian Transport Plane Project: Background, Status and Perspectives Structure of Russian Ministry of the Interior

Source: scheme by CAST. Structure of Russian Ministry of Defense

Source: scheme by CAST. Facts & Figures

Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006

Importer (contractor) Date of event Description Details 1. New contracts and agreements Venezuelan contracts Venezuela 17.07.2006 Signing of a contract between Russia and Contract value – $1.5 bln. Contractor Venezuela for delivery of 24 Su-30MK2 – Sukhoi company, units will be built fighters by KNAAPO Venezuela 15.07.2006 Signing of a contract between Russia and Contract value – $484 mln. Contractors Venezuela for delivery of 34 Mi-17V-5, two – Kazan Helicopter Plant and Mi-35M and two Mi-26T helicopters. Rostvertol Venezuela 12.07.2006 Signing of a contract between Russia and Contract value – $474.6 mln Venezuela for construction of plant for license production of AK-103 assault rifles and 7.62 mm rounds Venezuela 03.07.2006 Signing of a contract between Russia and Contract value – $52 mln. Contractor Venezuela for delivery of 100 000 AK-103 – Izhmash concern. Earlier Venezuela assault rifles had directly bought another 100,000 AK-103 assault rifles Other contracts India 19.07.2006 Signing of a contract between Russia and Contract value – $1.6 bln. Contractor India for delivery of 3 Talwar-class frigates – Yantar shipyard (Project 11356) China 08.08.2006 Signing of a contract between Russia and Schedule times – 2006-2011. Contract China for repair under license RD-93 for delivery of 100 RD-93 engines in turbofan engines 2006- 2008 for Chinese aircrafts FC-1 was signed in 2005 USA 11.08.2006 Signing of an agreement between VSMPO- The agreement also includes Avisma corporation and Boeing company purchasing of Russian titanium during about establishing a joint venture for 30 years to the total amount of $18 bln producing titanium semi-finished materials China 12.10.2006 Signing of a contract between Russia Contract value – $1 bln. Contractor and China for delivery of 8 battalions of – Almaz-Antey air defense concern S‑300PMU2 “Favorite” SAM systems (SA-20) India 04.09.2006 Signing of a contract between Russia and Contract value – $250 mln. Contractors India for license production of 120 RD-33 – Chernyshev machine-building turbofan engines enterprise, Klimov plant. Delivery of engine patterns will begin in 2007 Vietnam 22.12.2006 Signing of a contract between Russia and Contract value – $250 mln. Contractor Vietnam for delivery of 2 “Gepard-3.9” – Zelenodolsky shipyard. Delivery corvettes (Project 1661) terms – 2009 Importer (contractor) Date of event Description Details

# 1, 2007 Moscow Defense Brief 25 Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006 Facts & Figures

Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006 2. Authorities news 14.10.2006 Russian President Vladimir Putin confirmed Program realization will take about “State Arms Program for 2007-2015” $185 bln (4.94 trln rubles) 25.10.2006 Russian President Vladimir Putin As result, foreign companies now signed amendments for the federal “Law can buy more than 25% of shares in of Governmental Control of Aviation Russian aircraft-building companies, Development” but only after permission of Russian President 02.11.2006 Russian Government took decision to form Russian Defense Minister Sergey “United Aircraft Corporation” (UAC) Ivanov was appointed as the UAC Chairman, and Director General of RSK MiG Alexey Fedorov – as the UAC President World market 15.12.2006 Russian President Vladimir Putin signed Producers will be allowed to export a decree, according to which from 1st only spare-parts and support March 2007 only Rosoboronexport will be previously sold units allowed to export arms and defense finished production 3. Corporate events 24.10.2006 Lockheed Martin corporation sold its The 50:50 joint venture was formed share in Russian-American joint venture by Lockheed Martin and Khrunichev International Launch Services space center in 1995. American share was bought by Mario Lemme, director and co-owner of Space Transport and also a consulter of Lockheed Martin on space projects in Russia Europe 16.10.2006 Vneshtorbank (VTB) increased its share in Other EADS major shareholders are: EADS from 5.02% to 6-7% Daimler Chrysler (22.47%), Lagardere & French State (29.96%), SEPI (5.48%) 4. Sanctions Iran 19.11.2006 US Department of State lifted sanctions Sanctions against Sukhoi and against Sukhoi company Rosoboronexport were imposed on 27th July 2006. Formal cause was violation of Iran Nonproliferation Act of 2000. Sanctions terms – 2 years Iran, Syria 28.12.2006 US Department of State imposed sanctions Sanctions terms – 2 years. Formal against Rosoboronexport (ROE), KBM cause was violation of Iran and Syria machine-building design bureau and KBP Nonproliferation Act of 2005. ROE was instrument design bureau sanctioned for the second time, KBP – for the forth time Source: Russian press

26 # 1, 2007 Moscow Defense Brief Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006 Facts & Figures

Our Authors Mikhail Barabanov. Graduated from the Moscow State University of Culture. Currently employed by the Moscow city government. Independent expert on naval history and armaments. Fyodor Lukyanov is Editor-in-Chief of the Russia in Global Affairs journal, published in Russian and English with participation of Foreign Affairs, and an international columnist with the Kommersant daily, Vedomosti, The Moscow Times and Gazeta.ru online source; leading national radio stations and TV channels. Fyodor Lykyanov graduated from Moscow State University 1991 as a Germanist. He worked as a correspondent, commentator and editor for many Russia media. Member of the Presidium of the Russian Council on Foreign and Defense Policy, an influential independent organization providing foreign policy expertise. Konstantin Makienko. Graduated from the Oriental Department at the Moscow State Institute for International Relations in 1995 and the French-Russian Masters’ School of Political Science and International Relations in 1996. Head of a project on conventional armaments at the Center for Policy Studies in Russia (PIR-Center), 1996-1997. Since September 1997, Deputy Director of CAST. Author of numerous articles on Russia’s military-technical cooperation with other countries. Ruslan Pukhov. Director of the Centre for Analysis of Strategies and Technologies (CAST) since 1997. In 1996 he graduated from the School of International Information of MGIMO University under the Russian Foreign Ministry. In 1996-1997 – post- graduated student of the French-Russian Master d’Etudes Internationales Sciences Po – MGIMO. In 1996-1997 – researcher of Conventional Arms Project in the Center for Policy Studies in Russia (PIR Center). Author of a number of research articles on the conventional arms trade and the defense industries of Russia and France. Ivan Safranchuk. Ph. D. Political Sciences. Graduated from the Moscow State Institute for International Relations. From 1997- 2001 was a researcher at PIR-Center and director of a project on nuclear arms control. Since July 2001, Head of the Moscow Office of the Center for Defense Information. Author of a number of scientific articles and reports on nuclear policy, nuclear disarmament, nonproliferation of WMD and Russian foreign policy. Dmitry Vasiliev. Graduated from the State University – Higher School of Economics with a Master’s Degree in Strategic Management in 2004. From 2003 to mid 2004, worked as an analyst at Absolut Bank in the Department of Risk Evaluation. Currently working since July 2004 as CAST researcher and editor-in-chief of the Eksport vooruzheniy (Arms Export) journal. Vladimir Vasiliev. Ph. D. Graduated from the All-union Correspondence Juridical Institute and Academy of Ministry of the Interior, USSR. Worked for law enforcement agencies, took up positions of the First Deputy Minister of the Interior of Russian Federation – Head of Organized Crime Headquarter, Deputy Secretary of Security Council of Russia. Colonel-general of police. State Duma member from Tver single-member constituency #173 (Tver region). Member of political faction “Edinaya Rossiya”. Chairman of State Duma Security Counsel of the Federal Assembly of Russian Federation. Deputy Director of State Duma Coordinating Committee on Russian security law development. Representative of the Federal Assembly of Russian Federation permanent delegation in NATO Parliamentary Assembly.

# 1, 2007 Moscow Defense Brief 27 Major Identified Contracts for Delivery of Russian Arms Signed in 2005