Rosoboronexport, Spearhead of the Russian Arms Industry Louis-Marie Clouet September 2007 Russia/NIS Center The Institut français des relations internationales (Ifri) is a research center and a non partisan forum for debate on major international political and economic issues. Headed by Thierry de Montbrial since its founding in 1979 , Ifri is an independent state-approved organization. Created in March 2005 as the Brussels-based branch of Ifri, Eur-Ifri aims to contribute to the diversity of policy-thinking in Brussels with a view to stimulating the political debate and to feeding the decision- making process in the EU institutions. The opinions expressed in this book are the authors’ alone and do not reflect the official views of their institutions. Russia/NIS Center © All rights reserved – Ifri – Paris, 2007 ISBN IFRI EUR-IFRI 27 RUE DE LA PROCESSION 22-28, AVENUE D’AUDERGHEM 75740 PARIS CEDEX 15 – FRANCE B – 1040 BRUXELLES TEL. : 33 (0)1 40 61 60 00 TEL. : 32(2) 238 51 10 FAX : 33 (0)1 40 61 60 60 FAX : 32 (2) 238 51 15 E-MAIL : [email protected] E-MAIL : [email protected] WEBSITE : www.ifri.org L.-M. Clouet / Rosoboronexport, Spearhead of the Russian Arms Industry Russie.Nei.Visions Russie.Nei.Visions is an electronic collection dedicated to Russia and other new independent states (Belarus, Ukraine, Moldova, Armenia, Georgia, Azerbaijan, Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and Kyrgyzstan). Written by key experts, these policy-oriented papers deal with strategic and political as well as economic issues. This collection guarantees Ifri’s quality standards (editing and anonymous peer-review). If you wish to be notified of upcoming publications, please send an e-mail to: [email protected] Latest publications: - Oksana Antonenko, "Russia and the Deadlock over Kosovo", Russie.Nei.Visions, No. 21, July 2007; - Nadezhda Arbatova, "Russia-EU beyond 2007. Russian Domestic Debates“, Russie.Nei.Visions, No. 20, June 2007; - Arnaud Dubien, “The Opacity of Russian-Ukrainian Energy Relations”, Russie.Nei.Visions, No. 19, May 2007. © Ifri 1/19 L.-M. Clouet / Rosoboronexport, Spearhead of the Russian Arms Industry Author ouis-Marie Clouet holds a diploma from the Institut d'Etudes Politiques Lde Paris (Institute of Political Sciences) and a DESS (Post-Master of Specialized Studies Diploma) on the "Control of Armament and Disarmament" from the University of Marne-la-Vallée, France. He is currently completing a doctoral thesis at the University Pierre-Mendès- France Grenoble 2 devoted to the economy of Russian power and arms export since 1991, under Professor Jacques Fontanel's supervision. The thesis is funded by the French Ministry of Defense's General Delegation for Armaments. Published works include: "Grupa Thales" in Eksport Vooruzheniy (Tsentr Analiza Strategiy i Tekhnologiy, Moscow, No. 3, May- June 2006); "Armements et énergie, frères siamois de la nouvelle puissance russe?" [Arms and Energy, Twin Brothers of Russia's New Power ?] in Le Débat stratégique (Centre Interdisciplinaire de Recherches sur la Paix et d'Etudes Stratégiques, Paris, No. 92, July 2007). © Ifri 2/19 L.-M. Clouet / Rosoboronexport, Spearhead of the Russian Arms Industry Contents AUTHOR ........................................................................................................2 CONTENTS.....................................................................................................3 SUMMARY......................................................................................................4 ROSOBORONEXPORT, PIVOT OF RUSSIAN ARMS EXPORTS .............................5 THE SYSTEM OF RUSSIAN MILITARY-TECHNICAL COOPERATION ...............................5 “COMMERCIAL PRAGMATISM” AND POLITICAL CONSTRAINTS.....................................7 ROE, CORE OF INDUSTRIAL REORGANIZATIONS .............................................9 KREMLIN’S PRIVILEGED INSTRUMENT ......................................................................9 A SPRAWLING INDUSTRIAL HOLDING COMPANY .....................................................10 MANAGING THE STRUCTURAL AND POLITICAL TRANSITION ...........................12 AN OPAQUE AND CRITICIZED SYSTEM ...................................................................12 MAKING CONSOLIDATION DURABLE .......................................................................13 SERGEY CHEMEZOV, NEW LORD OF THE RUSSIAN ARMS INDUSTRY..............14 ANNEX I: BIOGRAPHIES OF PEOPLE MENTIONED...........................................16 ANNEX II: THE RUSSIAN ARMS EXPORT SYSTEM ..........................................18 ANNEX III: ROSOBORONEXPORT AND THE RUSSIAN MILITARY-INDUSTRIAL COMPLEX (MIC)...........................................................................................19 © Ifri 3/19 L.-M. Clouet / Rosoboronexport, Spearhead of the Russian Arms Industry Summary osoboronexport, a federal state unitary enterprise, is at the heart of RRussian political power: it is the key pivot of the arms exports policy and of the ongoing consolidations of the Russian military-industrial complex (MIC). On behalf of its Director Sergey Chemezov, a close relation of President Vladimir Putin, Rosoboronexport has become the driving force for the renewal of Russia’s military-technical policy, as it benefits from a quasi monopoly on arms exports. Through Rosoboronexport, the Russian state is seeking to modernize the Russian MIC⎯token of the country’s power and influence on the international scene. In order to ensure the long-term success of its takeover operations of Russian industrial companies, Rosoboronoexport now needs to complete its transformation into an industrial holding company and strengthen its privileged position beyond the next Russian presidential elections to be held in 2008. © Ifri 4/19 L.-M. Clouet / Rosoboronexport, Spearhead of the Russian Arms Industry Rosoboronexport, Pivot of Russian Arms Exports erceiving it to be both an instrument of diplomatic leverage abroad and Pa vector of economic growth domestically, President Putin has placed the arms industry at the heart of Russian power. The arms export monopoly, Rosoboronexport (ROE), has become one of the key instruments of Russian foreign policy, which combines debt-reduction, hydrocarbons and arms. Since 2002 ROE has become an industrial holding company pivotal for the sectorial reorganizations undergone by the arms industry and, as such, has seized back control over industries deemed to be strategic. Chemezov’s strategy raises the same issues as those characteristic of Russian re-nationalizations: Kremlin-ROE relations, individual ambition and enrichment and procedural opacity. The System of Russian Military-Technical Cooperation Russian arms exports have grown steadily since 1998: from less than US$ 2 billion in 1998, they are expected to reach US$ 7 billion in 2007. According to President Putin, Russia’s order book totaled US$ 30 billion in March 2007, pending contracts included.1 In 2006, arms export deliveries reached a record US$ 6.5 billion, placing Russia at the second rank of world arms exporters behind the United Sates. In 2004, the top twenty Russian arms companies’ revenue depended on average over 70% on exports.2 The choice of centralization in terms of decision-making stemmed from the chaotic organization of the Russian arms trade in the 1990s along with the internecine competition between Russian companies and state agencies. Soon after he had been appointed Prime Minister on August 1999, Vladimir Putin chose someone close to him, Sergey Chemezov,3 to head Promexport, and subsequently ROE⎯the sole state agency born of Translated from French by Jessica Allevione. 1 “Russian Arms Exports Break a Record in 2006 (Putin)”, RIA Novosti, 20 March 2007, <http://fr.rian.ru/business/20070320/62298419.html>. 2 Estimations by the Center for Analyses of Strategies and Technologies (CAST) in Moscow. 3 See his biography in annex I. © Ifri 5/19 L.-M. Clouet / Rosoboronexport, Spearhead of the Russian Arms Industry the Rosvooruzhenie and Promexport’s merger.4 Set up in November 2000, ROE has the status of federal state unitary enterprise whose capital belongs entirely to the Federal State. It is in keeping with a renewed system for the control and promotion of arms exports, which includes:5 – the Commission for Military-Technical Cooperation, a steering body presided by the Russian President.6 ROE’s director is automatically member of this committee and may intervene in order to influence its decisions. – the Federal Service of Military-Technical Cooperation (FSMTC), headed by Mikhail Dmitriev,7 is in charge of controlling and issuing export licenses. Administratively, it is an offshoot of the Ministry of Defense, but is accountable directly to the President. It enforces the Commission’s decisions in military-technical cooperation policy. – ROE, the state enterprise in charge of prospecting, negotiating, finalizing and executing arms sales contracts. Officially, the right to export depends on the FSMTC, which is situated in the same buildings as ROE. In theory, therefore, the former may take back the latter’s export license. Yet it requires a presidential decree to appoint and dismiss ROE’s Director General. The current General Director, Sergey Chemezov, has direct access to President Putin, and makes use of it at will: unable to obtain the revocation of KBP Tula's license directly from FSMTC, for example, he simply asked Putin that the exportation of the Tunguska-M1 anti-aircraft defense systems be taken away from KBP Tula and come under Rosoboronexport's