russia's comeback to the arms market

Russia’s comeback to the arms market: a strategicchoice1

Éric Lahille

19 Rue Dautancourt, 75017 Paris, FranceE-mail: [email protected]

Abstract: The return of Russia as the main player in the global arms marketpresents specific features, by arms type and region. It also illustrates, beyond therevival of state control of strategic industries, a key element in its new foreignpolicy. This is in phase with the desire of various countries to assert greatermilitary autonomy in front of the perceived dangers of US unilateralistposturing.

Keywords: arms global market; economic strategy of Russia; militaryequipment; Russian arms transfers; Russian foreign policy; state and industrialorganisation; world arms trade.

Reference to this paper should be made as follows: Lalille, É. (0000) ‘Russia’s comeback to the arms market: a strategic choice’, Atoms for Peace: An International Journal, Vol. 00, No. 0, pp.000–000.

Biographical notes: Éric Lahille holds a Doctorate in Economics and isProfessor of International Economics at ESIEE Management (University ofParis-Est). He is also an associate researcher at the Centre d’études des modesd’industrialisation (CEMI) at the Ecole des hautes études en sciences sociales(EHESS). He is a former research professor at the University of Paris-Dauphineand was also employed as an economist in the industrial policy section of theMinistry of Defence, before joining the research division of the Paris Chamberof Commerce and Industry.

1 Introduction

Since the end of the 1990s we have seen a spectacular recovery in Russia’s position in themarket for conventional weapons. As of 2004, the SIPRI index even ranked Russia as theleading supplier of military equipment. Estimates for 2006 confirm the high level ofRussian exports, which should beat previous records. Such performance, unthinkable untilrecently, raises questions and merits analysis. What are the causes and consequences ofthe return of Russian arms companies to the forefront? An answer emerges if we analysethe phenomenon by geographical zone and type of weapon. This highlights the specificnature of Russia’s position at a global level, in particular its relations with its maincustomers (China, India) and the recent trend towards diversification, which opens up newprospects.

What are the economic determinants of this recovery? This thorny question has givenrise to numerous commentaries. We believe a series of factors comes into play. Amongthese, the programme of changing institutional structures located at the heart of the

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Russian regulatory apparatus largely explains this recovery. This involves the return of theState to centre stage, just as in the strategic industries.

That being said, a strictly economic approach does not explain the extent of thephenomenon. Geopolitical factors are at the origin of this growth in foreign outlets. Ourhypothesis consists in underlining the prevalence of non-economic factors on the overalldynamic of Russian arms exports. This change has led to a redefinition of industrialstrategy and economic organisation. Thus, Russia’s new foreign policy is manifested inthe global development of its arms sales.

2 Russian arms sales in perspective

2.1 MethodologyAccounting for exports of military equipment must be treated with caution. Attention maybe drawn to certain statistical problems, as these bias the result and cast doubt on thequality of data used. It is common that large gaps may be seen depending on the sourcesused.

Several difficulties present themselves due to the specific nature of this activity.Firstly, there are problems of definition and limits of the material being counted. The linebetween military and civil is often a fine one. It is only the use of certain equipment(helicopters, radar, aeronautic or naval motors, electronic equipment, communicationtechnologies) that can determine whether it is civil or military. The dual nature of sometechnologies also serves to blur the picture. Some contracts correspond to the sale oflicensing agreements to build weapons that involve technology transfer, not always easyto account for. These two items are complementary, even if know-how may sometimes besold without selling weapons as such.

One is also confronted with problems associated with all major export contracts, i.e.the time lag between signature and delivery. This may be considerable and engendersignificant price differences, irrespective of adjustments that occur during contractimplementation. Payment default is another potential source of inaccuracy, even though itis partly covered by export credit insurance. We thus have at least two possible indicatorsto measure exports, based either on deliveries or signed contacts.

Finally, it is a strategic sector and often lacks transparency. The amounts declaredmust therefore be treated with caution, insofar as official declarations may, for economic, political or diplomatic reasons, be biased upwards or downwards. Furthermore,exchange-rate variations may cause significant price changes or modify volumes. Theseremarks apply to Russia and some of its major clients who are far removed from Westernstandards of transparency and exposed to currency fluctuations. International comparisonsin the arms business must therefore be approached cautiously.

For all of these reasons, every measurement is subject to discussion. It is thus aquestion of selecting those that enable one to make a realistic assessment of major trendsand changes in world arms trade.

In this paper, we shall principally rely on data from the Stockholm International PeaceResearch Institute (SIPRI), which present the advantage of collecting data on effectivedelivery of the main conventional weapons systems. These are calculated not on the basisof official figures but from an estimation of the price for transactions at constant value.

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This method has the merit of harmonising the value of various contracts and providingreliable international comparisons.

Criticism levelled at the supposed obsolescence of SIPRI’s calculations, said to datefrom the Cold War era, according to CAST2 experts, are subject to discussion, to the extentthat they concern the principal movements of equipment and technologies. Theyincorporate sales of weapons manufacturing licences. They obviously do not cover thewhole set of more or less intangible services linked to certain transactions. For this reason,one may consider that Russia enjoys a bonus compared to the USA, which exports moreservices linked to arms. SIPRI data has just been adjusted in the 2006 edition of theYearbook. This has a significant impact on certain results previously supplied by theStockholm Institute and downplays Russian results for 2005.3 Thus, Russia slips back tobelow $6m (constant) and is overtaken by the USA. Generally speaking, Russian armssales accompany fundamental economic shifts and changes in Kremlin policy.

2.2 Is Russia a deceptive market leader?What are the long-term trends in the global weapons market? As Figure 1 shows, there hasbeen a significant drop in trade for conventional weapons over the past 25 years or so.After a historic peak in 1983, corresponding to a volume of around $43b (constant), armssales had dropped to just over $20b in 2005. The market shrank by almost 50%. The trendis clear, but not linear. There are cyclical movements and the end of the period saw asignificant upturn. It seems that the market bottomed out at around $16b in 2000. Since2003, the trend has been reversed and arms sales are recovering, although the amounts arehalf what they were at the beginning of the 1980s. Given this restrictive context, it waslogical that the exports of the two historic leaders, Russia and the USA, should decline.However, the drops were not simultaneous and, expressed in relative values, the respectivemovements diverge.

Note: The bar chart shows annual totals, the line denotes the 5-year moving average, plotted at thelast year of each 5-year average.

Source: 2006 SIPRI Yearbook (summary, p.17).

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Russia’s comeback to the arms market: a strategic choice 3

Figure 1 The trend in international transfers of major conventional weapons, 1980–2005

Two major trends emerge if we look at Russian arms exports over the long-term. From theend of the 1980s, the USSR entered a downturn. After an initial levelling off, Sovietexports began to decline. It must be remembered that in the 1980s the USSR had a 40%share of world arms exports. At the beginning of the 1990s, this fell to 20%. This wasfollowed by a collapse, culminating in a share below 10% in 1998.

From 1999, the trend was rapidly reversed, in line with Russia’s economic situation.The Putin era is marked by an upward movement. The sustained, relatively stable andcontinuous growth in arms sales has even led Russia to dethrone its rival the USA since2004, according to the SIPRI index.4

If we consider yearly data, Russia has been the leader since 2002, thus surprisingeverybody by becoming the number one arms seller. However, the new Russian lead maybe considered as anecdotal, since the USA reaches comparable levels of sales in themedium term. The results are above all symptomatic of a renewed Russian presence on theinternational stage. From 2001 to 2005 Russian arms exports accounted for 31% of theworld total, the USA 30% and France was in third place at 9%.

Competition between the two market leaders has intensified in the recent period. TheUSA should increase its sales in 2006, while Russia should hit a new record of $8b.5

Medium-term prospects remain good. Order books are full and should provide severalyears of work in most sectors. In anti-aircraft systems, missiles and combat aircraft firmseven lack capacity.6

Recent results are thus as spectacular as they are unforeseen by all specialists in thesector. Russia’s lead, moreover, gives rise to doubts and remains challenged.

2.3 A square dance between Russia and America?As Figure 2 shows, 1999 saw a turnaround on the world arms market. The drop in USexports coincides with a Russian recovery. The latter, relegated to third place behindFrance during the 1998 financial crisis, regained market share and its historical numbertwo ranking. For the first time since the 1980s, Russia was at the level of the USA withvolumes exceeding $5b (constant). From 2002 to 2004 Russian exports edged ahead. From1998 to 2002 US sales were divided by three. Then, the situation stabilised but Russia tookthe lead and maintained it on average, despite a US rebound at the end of the period.

The US and Russian trajectories are globally opposed. These observations are borneout over the long-term, but also in the most recent period, when US exports dropped, whilethose of Russia rose.

Russia’s leading position appears all the more sound in that it has occurred in thecontext of a global downturn. The world market only began to recover in 2003. Since 1999Russia has won back market share and increased its exports both in dollar and volumeterms. This external growth is explained by the collapse of internal demand due to thebankruptcy of the State that led to the chaos of 1997–1998 and the necessity to find foreignoutlets to safeguard industrial and technical potential.

Figure 3 confirms these trends and shows two key data for the comparative evolutionof the two leading arms exporters. Firstly, their cumulative relative share is fairly stable.Secondly, the size of the variations of each country in world trade is substantial. USexports peaked at 55% of the total in 1998 then fell to 24% in 2003, a drop of 31 points.Inversely, the Russian share fell by around 8% in 1998 and rose to over 35% in 2002, arise of 27 points.

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Source: SIPRI Yearbooks 1996 to 2006.

Source: SIPRI (author’s calculations).

We thus see a kind of square dance between the two leading exporters. The US declineand the Russian growth are two sides of the same coin. Russia scored points in a contextwhen the unilateralist foreign policy of the Bush administration led to a decline in itsinternational influence and hegemony in the arms business. Paradoxically, US strategy ran

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Figure 2 World arms exports

Figure 3 Russian and US arms exports

counter to its objectives and created an opportunity for Russia. This did not go unnoticedby the US Congress, who in 2006 denounced the decline of US influence in the developingworld (Grimmett, 2006). Even if this report is not free of political bias, it highlights theebb of US presence. The study of deliveries and contracts won by Russian companiesconfirms that the US decline benefited them directly.

2.4 A polarisation of the Russian presenceFor over ten years Russian exports have been concentrated on China and India. Dependingon the year, these two clients account for between two-thirds and three-quarters of Russiansales. Sales vary little over time in both absolute and relative value. The stability of theshares of the two Asian giants is a key factor in understanding the evolution of Russianexports. Since 1999, the recovery has been clearly driven by China and India, who play akey role in the dynamic of the Russian defence industry.

3 Chinese demand: the stakes

In the early 1990s, China (with India) became the main outlet for Russian companies.Then, its share only fell below 40% at the height of the 1997–1998 crisis. In the early2000s it reached a record level of 60%. Deliveries of military equipment went from $1bin 1996 to $3b in 2001 and $2.5b in 2003 (constant). Despite a temporary dip in 2003, theyremain at record levels. China, number one client of the Russian military-industrialcomplex, accounts on average for almost 45% of total sales.

They cover every category: land-based weapons, missiles, combat and transportaircraft, bombers, helicopters, warships, submarines, anti-aircraft systems, etc. If the valueof exports has fluctuated little since 1999, this is because of significant sectoral changes.Chinese needs seem virtually limitless and their orders are highly diversified. Over thepast 15 years the Chinese armed forces have equipped themselves with a complete rangeof modern weapons systems. Aeronautics is the main field of imports. Sales of the Sukhoiare central, but one also finds RSK-Mig, Tupolev and Iliushin making majorcontributions. In 2004 and 2005, naval construction saw a steep increase thanks to thedelivery of destroyers by Severnia verf. According to CAST, in 2005 aeronauticsaccounted for only 38% of the total, compared to 45% for the naval sector. This wouldseem to be cyclical and linked to the end of Sukhoi’s delivery of 140 SU-27SK and Su-30MK ordered by China in 2001. For 2006, official data show a sharp recovery indeliveries of aeronautic equipment. This shows the existence of a shift in orders from onecategory to another based on current Chinese priorities.

On a qualitative note, trade relations between China and Russia are developing. At thebeginning of the 1990s Russian companies were content to sell a wide range of indifferentmaterial at low prices. It was a question of surviving by selling off old stock, in a contextof organisational vacuum and major economic crisis. As time went on, commercial,industrial, technological and even strategic partnerships were forged. The two countriescooperated extensively, but the Chinese became more demanding. They insisted on havingmore modern and sophisticated weapons systems as well as technology transfers thatenabled them to develop their own defence industry.

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This is explained by a contradictory situation. International isolation in the militaryand strategic fields and integration into the global economy have forced China to rely ona single supplier to meet its strong demand. Economic growth has provided the means toattain its geopolitical ambitions. However, China is largely dependent on Russian sales.Russia supplies almost 95% of Chinese foreign arms purchases because of theinternational embargo.

One of the major issues is whether Russia will continue to transfer sensitivetechnologies and strengthen its cooperation. There is nothing to suggest the trend willcontinue, insofar as the position of Russian companies has improved and they are nolonger totally dependent on this privileged client. The statements of 26 April 2006 by theRussian Defence Minister, M. Ivanov, emphasising the need to find an agreement onintellectual property with the Chinese, shows that the Russian authorities are aware of thepotential boomerang effect of certain technology transfers.

4 Features of the Indian market

India, a traditional client of the USSR, has remained a privileged client of Russia and isits number two outlet. It accounts for a quarter of Russian arms exports and 10% of theworld market. Between 2001 and 2005 India bought more than $7.3b worth of weaponssystems from Russia. The contracts are for the same categories as China and areprogressing in a similar fashion. They are diverse and the predominance of aeronauticsover naval construction has diminished in recent years. The Russian missile industry hasgrown sharply thanks to the delivery of weapons systems for Indian surface vessels andsubmarines.

India, like China, is seeking to build a defence industry. On the one hand, it hasfavoured cooperation and joint programmes with the Russians so as to develop projects ofmajor interest.7 On the other hand, Indian demand is more sophisticated than that of China.The Indian armed forces impose their specifications and demand adaptations to standardequipment. This differentiation of demand requires technical improvements and involvesclose partnership. This is the case for RSK-Mig and Sukhoi who set up a joint venture in2004 to bid for an Indian airforce RFP to replace its Mig-21s. Formerly this would haveled to international partnerships. In 2005 the creation of the Russian–Indian firmRosoboronservice met the need to ensure the technical and operational implementation ofwarships and submarines for the Indian navy. Finally, India is seeking to encouragecompetition and diversify its suppliers.8 This sometimes limits Russian sales to the benefitof Western suppliers. Over the last 10 years Indian weapons imports from Russia accountfor 78% of the total.

If there are similarities between Russia’s two leading clients, there are also somedifferences that render their trading, industrial and technological relations quite specific.The high concentration of exports to these two markets and their increasingly stringentdemands has led Russia to adjust its strategic positioning. The success gained with thesetwo clients allows a widening of Russian horizons and the quest for economies of scalefavours this. For a number of years now the trend seems to be to find new outlets andextend Russia’s zone of influence.

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5 A new strategy: diversification

Since 2002–2003, the Russian authorities have been engaged in a process of wideningtheir sphere of influence at a global level. This strategy impacts all continents.

Over the last 10 years Asia accounted for 10% of Russian exports, for over $2.5b(constant). Vietnam is the main client, Kazakhstan and Pakistan are traditional clients. Butthe Russians are also making inroads in heretofore marginal zones such as South Korea,where deliveries are increasing significantly, such as orders for surface-to-air missilesfrom Almaz and Kolomna. In 2005 T-80U tanks, armoured vehicles, antitank missiles and19 engines for IL-103 training planes were delivered in the framework of a contract for 23aircraft built by RSK-Mig. Countries such as Malaysia, Indonesia and Thailand are in theprocess of signing contracts for helicopters and various versions of Sukhoi combataircraft, worth several billion dollars. This will soon double Russian exports to Asia.

Russia is the leading supplier of arms to Africa, providing 50% of total imports to thatcontinent and accounting for 10% of Russian arms exports. Over the past decade Sudanand Ethiopia accounted for almost half of Russian deliveries to Africa. The current trend,though, is to open up new markets. Morocco is likely to buy anti-missile systems andSouth Africa could become a key industrial partner.

For the present, Algeria is the main client for Russian companies. In the last decade itwas ranked in fourth place, purchasing $1b (constant) worth of military equipment, or3.5% of the total. Recent years have seen strengthened cooperation that goes beyond astrict military framework9 and an explosion in sales. Algeria has deepened and diversifiedits procurement. SU-24MK combat aircraft, Tanguska-M1 air defence missiles and themodernisation of warships were announced in 2005. In March 2006 during Putin’s visit toAlgiers a huge arms contract was signed for the purchase of 36 Mig-29SMTs, 28 Su-30MKAs, 8S-300PMU1 air defence missile systems and 200 T-90S tanks. The valueof the contract is reported to be in the region of $7.5b (Abdullaev, 2006).

In the Near and Middle East Russia trades mainly with Iran, the number three outletfor Russia in the medium- and long-term. It accounted for 6.5% of Russian exports,10

making it a major client. Contrary to popular belief, there has not been rapid growth inrecent years, but the continuation of a long-term trend. Yemen (Russia’s number six clientfrom 2001–2005), Erithrea, Egypt, Oman and the UAE have all contributed to Russianexports. Recent trends show growth potential in the region. The rise in orders frome theUAE (purchase of 50 Pantsir-IS missile systems under negotiation), Egypt and above allSyria, which is seeking to reinforce its airforce,11 should drive up supply.

Major changes are also taking place in Latin America. Colombia and Mexico were themain buyers from 2000 to 2004, but countries like Peru, Brazil and Venezuela arechanging the situation in this region. The past couple of years show that Latin America isbecoming a key growth market for Russia. In 2006 Brazil bought around 30 helicoptersfor $400m12 and Russia has several industrial and technological partnerships with Brazil.13

On the edge of the military field, there are also joint projects for space rocket launchersand satellites.

Venezuela, a marginal client up to 2004, is becoming a major outlet. In 2005, itprocured several helicopters and large quantities of handheld weapons. It also placedorders worth $200m for 15 helicopters.14 In 2006 things sped up and Venezuela entered anew phase of cooperation with Moscow. In July 53 new helicopters were ordered and, tothe chagrin of Washington, H. Chavez ordered around 30 Su-30 combat aircraft. The value

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8 É. Lahille

of new contracts is several billion dollars. Combined with this is a determination tocooperate closely in training, maintenance and repairs. Data from the official exporterRosoboronexport indicate that Moscow is to cooperate in modernising the Venezuelanarmed forces.15 This suggests future contracts in aviation, shipbuilding, missiles andelectronics.

Russia has also been active in Europe, even if there seem to be less openings than inthe developing countries. Greece (number one European importer and Russia’s numberfive client in recent years) and Cyprus are key outlets for Russian companies. Navaldeliveries are significant as well as land-based arms, missiles and helicopters. Aeronauticcontracts have been signed with former Soviet bloc countries (Czech Republic, Hungary,Slovakia), often in exchange for repayment of Russian debt. This movement is likely tocontinue despite the entry of these countries to NATO structures.

All of this shows that the Russian authorities have a clear strategy of internationalexpansion, manifested in a vast diversification in new regions of the world. For thesereasons and because Russia is developing its cooperation with its historic clients, itsposition is unlikely to slip back in the coming years. US pressure and sanctions againstcompanies suspected of exporting sensitive weapons to hostile countries demonstrate adetermination to counter Russia’s rise or to seek to recover positions lost in recent years.The effects of such measures are likely to be limited. They could even encourage Russiansales, as in Asia or Latin America, should the countries non-aligned with Washingtonperceive the USA as seeking to radicalise its superpower status.

6 Interpreting the Russian recovery

The ranking of Russian companies in world arms trade is as spectacular as it isunexpected. Since 2002 observers and analysts have repeatedly predicted the end ofgrowth in Russian arms sales (Makienko, 2003). This systematic forecasting error,continued in the current scepticism relative to Russia’s leading position, is symptomaticof a series of errors in analysis and interpretation.

7 A gap between structural competitiveness and economic conditions?

The arguments put forward in support of this conventional wisdom are threefold:

� The chaos of the 1990s created an irreversible industrial and technological lagcompared to Western suppliers.

� The globalisation of the arms market made things more difficult for Russiancompanies. The new competitive dynamic placed them in a median position and newcompetitors caught up with them (Beloyosov and Schouhgalter, 2003).

� The Russian recovery can be explained by economic factors linked to the rise inenergy prices. Figures for Russian arms sales do not reflect structural economicconditions in Russia.

There is a consensus that Russian industrial and technological potential was disorganisedby the collapse of the economic system of the Soviet era and by the shock therapy. But the

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resilience of the industrial apparatus and technological potential was underestimated, aswas the impact of government measures after 1998.

The exorbitant weight of Soviet military R&D, that absorbed 75% of total R&D, is adistant memory. After falling to around 6% of the military budget in the mid-1990s, itrecovered to 13% by the end of the decade.16 It has since stabilised at around 15% of aconstantly rising budget. The scientific and technical chaos and the brain drain have beengradually stemmed (Wilson and Markusova, 2004). In a context of scarce human andfinancial resources, Russian companies’ strategy first consisted in retaining existingknow-how and selling what they built. In several key sectors they succeeded in extendingproduction cycles and dematuring the principal technologies. Though the innovationswere limited and incremental, they managed to weather the worst of the crisis, as theirexport figures demonstrate. In recent years they have become more ambitious. The surgein R&D budgets and innovation go hand in hand with a strategy of internationalpartnerships. We are seeing a vast reorganisation of the technical and scientific apparatus(Boussyguine, 2005), accompanied by industrial restructuring and economic recovery.

In 2002, the average age of capital equipment was 16 years (Beloyosov andSchouhgalter, 2003), way above international standards. It is now undergoingrationalisation and modernisation. The Russian authorities are favouring the search forinternational technological and industrial partnerships to integrate international valuechains17 and consolidate their position. The acquisition of a stake in EADS in 2005demonstrates this.

The quality gap in Russian equipment compared to that of the West has often beenpointed to,18 but this argument is less and less relevant.

It has little impact on exports since the competitiveness of the Russian defenceindustry does not rely solely on technological and industrial excellence. The strategicpositioning of Russian companies is coherent with their market. Supply, based on valuefor money, fits the military and financial needs of their clients. Moreover, the emergingeconomies, which have distanced themselves from the Bush administration, favourcooperation and technology transfer with Moscow. This is in line with their diplomacy andforeign policy. Despite rising oil revenues and/or strong economic growth, they want tobuy relatively cheap equipment. Finally, insofar as the Russian authorities are seeking tocontrol the negative effects of technology transfer and to stimulate upgrades (as is the casefor Sukhoi’s development of a 5th generation combat aircraft) a backslide does not seemto be on the cards.

More generally, Russian firms’ export success shows that the specific features of thesector carry the day over purely technical and economic considerations. Diplomatic andstrategic factors play a key role here. This explains the forecasting errors. As we sawearlier, the growth in Russian arms sales is here to stay and is not just linked to a rise inoil prices. The Russian recovery began in 1999, long before energy prices began to rocketin 2002. If this had favourable consequences on growth and the consolidation of theindustrial sector, the domestic and foreign actions of the Kremlin played a decisive role inthe recovery.

8 The State and the economy : major structural transformations

In the military as in the civilian field, the Putin era has been marked by a return of the Stateto the economy. This is manifested in a renewal of industrial policy and the creation of

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10 É. Lahille

new institutional structures. The analysis and identification of the main structuralweaknesses allowed protective measures to be taken that were subsequently extended andsystematised. What are these State interventions and the main directions of this industrialstrategy?

After the breakup of the military–industrial complex, new methods of coordinating theactions of the players had to be found and new structures created. From the individualsurvival strategies followed by competing firms Russia switched to a more cooperativeapparatus under the umbrella of the State. The Kremlin gradually sought to rationalise theproductive apparatus and concentrate industrial and technological potential by imposingits choices on public and private companies. This trend accelerated recently and is notunconnected with shifts in the political balance of power. In the aeronautic field, thegrouping of Sukhoi, RSK-Mig, Tupolev and Iliushin into a single company (AOK) in2007, under the authority of the Ministry of Defence, is the result of this process. It allowsthe parties to reach critical size and identify technical, commercial and financial synergies.AOK is in effect a holding company and the formula meets the need for strategiccoherence.

Without going into detail on the other sectors, everything indicates that the Russianauthorities are re-concentrating the defence industry. Naval construction, the other mainRussian export sector, is going the same way, with the creation of a single controllingentity. Moreover, these structural transformations should enable Russia to remedy the highdegree of specialisation of its major groups, who until recently had core competenciesfocused exclusively on the military sector (Goaguen, 2003). The aim is to build a newnetwork among companies working in the civil and military sectors, improve the spreadof innovation and find synergies linked to dual technologies.

With this in mind, changes in the status and role of the Rosoboronexport agencyembody the new strategic orientations of the Russian authorities. Set up in 1992 to ensurebetter transparency of arms sales, it soon began competing with firms in themilitary–industrial complex, thus contributing to the disorganisation of the system. Its roledid not evolve until 1999 and from 2000 its status was transformed. Rosoboronexportbecame the sole export agency. The Putin government sought to centralise decisionmaking and limit sterile competition among firms depending on exports to survive. Theobjective of this far-reaching institutional reform is thus to remedy the absence ofcoordination inherited from the previous era and to rationalise decision making at thehighest level of the state.

For reasons of economic doctrine and domestic policy, it was simpler to coordinatedefence activities by re-centralising outward flows of equipment than seeking directinternal industrial coordination. As exports accounted for more than 75% of turnover forthe sector,19 it was judicious to set up control of foreign sales through this agency. Thisstructure played a key role in the consolidation of the sector. It can be considered as thespearhead of a process aiming to reorganise an atomised sector. It also enabled the Stateto get its hands back on the financial resources that can contribute to Russian industrialdevelopment.

Initially it allowed anarchy and savage internal competition to be brought undercontrol. It put a stop to the excesses of the 1990s. In time, Rosoboronexport asserted itselfas the lynchpin of the restructuring of the defence industry. Through the orders it places itfacilitates partnerships and industrial concentration, as in aeronautics and navalconstruction. In 2001 the agency controlled at least 80% of foreign sales. Since 2004 this

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share has fluctuated between 90 and 95%. In early 2007 President Putin decided towithdraw the authorisation to export autonomously from the few companies who were stilldoing so.20

This measure is the result of the return of state control in strategic activities and theend of the unrestricted free-market parenthesis that led to the financial crisis of 1998 It isthus not surprising that M. Tchemezov, Rosoboronexport’s CEO and loyal ally of Putin,found himself in control of arms exports.

Finally, it must be emphasised that the role of Rosoboronexport has changed overtime. In a few years it has become a complex structure and a major institution in Russia’sindustrial and financial fabric. Today it is a conglomerate with numerous investments inthe Russian economy. Since 2005, for example, the automaker AvtoVAZ (builder of Ladacars) and the titanium giant VSMPO-Avisma have come under its control. In this regardit plays the role of regulator in the Russian economy and participates in the developmentof two major industrial sectors.

The State has therefore come back with a bang. How can this be explained? There aretwo reasons: the domestic situation and international upheaval.

9 Causes and consequences of the strategic transformation

One can understand that the dominant view stumbles on two major problems when itcomes to interpreting the resurgence of Russian arms exports. Firstly, a purely economicapproach to arms sales is simplistic because it excludes the geopolitical and diplomaticvariables that influence competitiveness. Secondly, it focuses only on manufacturing andtechnical components while ignoring the nature of the arms market.

More generally, it is confronted with the problem of the theoretical foundations andepistemologies of standard approaches (Lahille, 2004a, 2005). These exclude reflection onpolitics and violence or incorporate them in a utilitarian perspective. This leads, as wehave seen elsewhere, to a theoretical impasse (Lahille, 2004b). In the case of Russia, thisapproach, dissociating economics from politics, fails to seize the specific nature of armsexports. These respond to political as much as to economic considerations. They areinterlinked. One could even say that arms sales are the meeting point of economics andinternational politics. They are therefore a key subject object in analysing internationalrelations. We thus need to analyse the international situation in order to identify andunderstand world trade in arms.

In order to do so we must go back to the 9/11 attacks and the consequences of USunilateralist strategy. The Iraq war provoked a rupture in international relations. The Bushsuperpower policy convinced numerous countries that they needed to protect themselvesfrom US hegemony. A new coalition of countries non-aligned with Washington appearedin the wake of the opposition to the war led by France, Germany and Russia. US foreignpolicy led the Russians to review their strategy. Their analysis was that bilateraldifferences and even conflicts with Washington could no longer be excluded. Russianconcerns have their source in US policy towards Iraq (Sapir, 2007).

Russia is not an isolated case. Several countries all over the globe felt exposed to USpressure or threats. A vast strategic reorientation is thus not surprising. This is manifestedin a rapprochement between Moscow and countries considered by Washington as regionalpowers to be contained, weakened or beaten.

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We are beginning to see the geopolitical consequences of the US invasion of Iraq. Itoverturned the world order resulting from the collapse of the Soviet bloc. It created theconditions for a recovery in arms sales after 2003. Countries feeling threatened and/orseeking to assert their independence opted to strengthen their military by forging newalliances with Russia, which at the same time distanced itself from the Bushadministration.

Insofar as the Russian defence industry relies heavily on exports21 (despite a rise in themilitary budget since 1999) the Kremlin’s policy has been to diversify and intensify itsexternal relations. Russia has thus exploited its strategic positioning to reinforce itsinternational influence, notably via the sale of arms. The spectacular rise in Russian armsexports is the result of a diplomatic shift. It is a means to the quest for power sufficient tocounter US pressure and threats.22

On a domestic level, state interventionism aiming to rationalise the defence industry ispart of this strategy. Since 2003, Putin’s Russia has set the assertion of its independenceand freedom of action on the international scene as a key objective (Gomart, 2006;Williams, 2006). The means deployed to reach this objective are to combine a nationalindustrial policy with an offensive foreign policy, translated into a leading position in thesale of arms. It is obviously the State that simultaneously articulates the two aspects of thispolicy (Ivanov, 2006).

10 Conclusion

The shock therapy was supposed to lead Russia towards a market economy andrepresentative democracy. This new era should have put an end to the Cold War andushered in a new peaceful world order. The Soviet economy, centred around themilitary–industrial complex, should have given way to private civilian business. The 1998financial crisis tolled the death knell of this simplistic vision of transition. It demonstratedthe ineffectiveness of the economic policies advocated by the IMF in the framework of theWashington consensus. This led the Russian authorities to change economic direction. Thequestion raised by J. Stiglitz (2002) in a famous article – ‘Who lost Russia?’ – is again onthe agenda. The Iraq war seems to be a geostrategic watershed that radically accentuatesinternational tensions. After the economic failure, it signals the diplomatic failure of theBush administration and is the second stage in the ‘loss’ of Russia. The lessons learned bythe Russians are clear. In a world marked by international muscle flexing, it is essential tosafeguard one’s interests. This explains the return of Russia to the international scene. Itis reasserting its autonomy and power, on the margin of Western conceptions. Confrontedwith the chaos of transition and a world geopolitical upheaval, Russia opted for avoluntarist strategy of independence. This involves a return of the State to the economyand a revived international presence, notably in the field of arms sales, at the crossroadsof politics and economics.

References

Abdullaev, N. (2006) ‘Russia again links arms sales to foreign policy’, Defense News, 28 December.

Beloyosov, D.R. and Schouhgalter, M.L. (2003) The Development of the Russian Defence Sectorafter the Crisis (1999–2002), Moscow: Moscow Academy of Sciences.

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Boussyguine, V. (2005) La science en Russie. La nouvelle organisation de la recherche,L’Harmattan.

Goaguen, C. (2003) ‘Le complexe militaro-industriel russe: entre survie, reconversion etmondialisation’, CPE, No. 1032, February, pp.4–17).

Gomart, T. (2006) ‘Politique étrangère russe: l’étrange inconstance’, Politique Etrangère, No. 1.

Grimmett, R.F. (2006) ‘Conventional arms transfers to developing nations 1998–2005’,Congressional Research Service, Report to Congress.

Hagelin, S., Browley, B. and Wezeman, S. (2004) ‘International Arms Transfers’, SIPRI 2004Yearbook, Armaments, Disarmament and International Security, Oxford University Press.

Ivanov, S. (2006) ‘Russia must be strong’, Wall Street Journal, 11 January.

Lahille, É. (2004a) ‘Les politiques économiques américaine et européenne face aux attentatsterroristes et aux conflits militaires’, Accomex, March/April.

Lahille, É. (2004b) ‘Violence et économie. Limites de la théorie dominante’, Le Débat Stratégique,Lettre du CIRPES, No. 76, Sept/Oct.

Lahille, É. (2005) ‘Terrorisme et politique économique: les Etats-Unis après 9/11’, Politiqueétrangère, No. 2.

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Notes

1 This paper was previously published in French in Recherches internationales, No. 79,July/August/September, 2007.

2 Centre for Analysis of Strategies and Technologies (www.casrt.ru).3 Compared to figures in the SIPRI 2005 Yearbook, they dropped by $5m.4 The SIPRI is a rolling 5-year index, enabling medium-term trends to be identified.5 Refer to statements of M. Dimitriev, Director of the Federal Service for Foreign Technical and

Military Cooperation reported by V. Litovkine in RIA Novosti, 09/03/2007 (http://fr.rian.ru).6 cf. Kommersant, 13 June 2006 (http://www.kommersant.com:).7 We can mention Brahmos anti-ship missiles that should equip the Indian navy and that are

derived from the Russian Yakhont missile, and the long-range air-to-air R-172 missile that wasdeveloped in Russia with Indian funding.

8 For example, BAE Systems won a contract for 66 British Hawk planes at the expense of theRussian Mig-AT. Before that, the French had delivered the Jaguar and Mirage-2000 to India.

9 cf. SIPRI 2005 and 2006 Yearbooks.10 cf. SIPRI 2006 Yearbook.11 Syria may have purchased several Su-27 aircraft in 2005. The official visit of Bashar El Assad

to Moscow in 2006 may have led to several orders. Unofficial sources mention the replacementof Mig-25 and the modernisation of Mig-21, Mig-23 and Mig-29, the purchase of S-300 and Pantsir-S1 anti-missile defence systems, several Klass-kilo submarines and short-rangeIskander-E ballistic missiles.

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14 É. Lahille

12 cf. Jane’s Defence Weekly, December 200613 Including an intergovernmental agreement for the protection of technologies, signed in 2006; cf.

Russian News and Information Agency, Novosti, 14/12/2006 (http://fr.rien.ru/science).14 D. Vasiliev, Russia’s Arms Trade with foreign states in 2005, cf. www.mdb.cast.ru/mdb/1-2006/

arms_trade/item2/15 cf. RN & IA, Novosti, 7/12/200616 cf. The IISS, The Military Balance, 2000-1 and 2004-5.17 Apart from cooperation with India, Brazil and South Africa, European countries (particularly

France) are playing a growing role.18 SIPRI 2005 Yearbook.19 For example, Sukhoi developed, with the participation of Safran, the French group, the Super Jet

100 regional jet, with 15 units to be delivered to Russia’s AirUnion for over $400m in2007–2008.

20 Mainly Mig ($306m of exports in 2005), Toula ($230m) and Kolomenskoie ($60m).21 68% in 2004 and 62% in 2005.22 The deployment of the US anti-missile shield fits into this perspective.

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russia's comeback to the arms market

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