Russia’s Arms Trade: Geopolitics and Economics

July 31, 2013
Source: Euronews

Among the many debates surrounding the endless bloodshed in Syria, one of the loudest has been over Russia’s defense of its sale of advanced anti-aircraft missiles (S-300) to the Assad regime. Pointing to the fact that the contracts were signed before the conflict, and justifying their fulfillment as legal under international law, the sale has nevertheless been seen by many analysts as having obvious geopolitical calculations and was being pursued in support of Russia’s national interests rather than economic calculations.

With Russia, the arms industry is so closely intertwined with the government that it is often times hard to see which consideration is more important. But recent examinations of Russia’s arms sales reveal that Moscow is selling weaponry not only to further its national interests abroad, but to also engage new clients and bring in much-needed hard currency to the state coffers.

To give the matter some perspective, 80% of Russia’s arms exports are controlled by Rosoboronexport, Russia’s state-owned export firm.  But the remaining percentage of firms mainly provide support and maintenance services, leaving the big hardware sales to what is effectively an organ of the Russian Foreign Ministry. This is a key distinction because Russia is facing increasingly negative economic predictions (the last two months recorded 0% GDP growth) and is turning to the National Wealth Fund to finance investment projects. Increasing budgetary restraints, high inflation (6.9%), and increasingly evident signs that the Central Bank will start its own Quantitative Easing program means that the Russian government is reliant on the hard currency influx that weapons sales bring.  And at $12.7 billion in 2012, it is no small influx—in addition to $15 billion in new contracts signed in 2012.

As of June 1, Rosoboronexport’s portfolio of orders stood at $34 billion, supplying arms to 66 countries and having military support agreements with 85.  These include old stalwart clients like Algeria, Venezuela and India. It also includes newcomers such as Vietnam, which on Monday announced it will take possession in November of the first of six Varshavyanka class “black hole”(Project 636M) diesel-electric submarines, with the aim of  modernizing its military in the face of an increasingly assertive China. This deal also has the potential to irritate the Chinese, which is curious considering they recently undertook large-scale naval exercises with Russia, and the two countries’ interests in the Pacific are becoming increasingly aligned. But the rationale becomes clear when one looks at the $2 billion price tag on the deal, as well as the contract for it, which stipulates that the crews have to be trained in Russia.

The submarine deal with Vietnam is also important to Russia as many of its old clients are starting to grow tired of Russia’s questionable quality and late delivery times. One such frustrated client is India. India recently shortlisted two European fighters for a new $10 billion arms purchase—circumventing both Mig and Sukhoi fighters—and has been waiting for the delivery of its refurbished Soviet-era Project 1143.4 class aircraft carrier, the Vikramaditya (formerly the Admiral Gorshkov). Originally scheduled to be delivered in 2008, the carrier failed sea trials in December, and only just passed its most recent tests. Adding to the problems, the original contract was for $947 million, but has since grown to $2.3 billion. To be sure, India still remains a significant importer and user of Russian equipment, but there is evidence of growing strain between the two business partners.

Naval equipment accounts for only 13% of Russia’s exports. Twenty-eight percent was for ground force weaponry—including a $1 billion arms package to Azerbaijan, and an aggressively pursued contract for 100 T-90S tanks from Peru. The largest piece of Russian arms sales, 40%, was for aircraft. (Even the U.S. is buying a fleet of Mi-17 helicopters for Afghanistan. However, it seems that the cost has exploded from $4.4 million a helicopter in 2008 to $19 million for any further purchases, leading to consternation in Congress). The most popular of these aircraft are the Su-27 “Flanker” and Mig-29 “Fulcrum” fighter jets. But this is a potential area of weakness for Russia’s arms industry as the market for advanced fighters is inundated with countries hawking their particular version. The U.S. and its fifth generation F-35 stealth fighter, and the French Dassault Rafale and EADS/BAE consortium Eurofighter Tycoon, provide stiff competition.

None of these transactions has gotten nearly the attention that Russia’s outstanding contract for S-300 missiles to Syria has gotten. Moscow has defended its sale as legal, with Foreign Minister Sergei Lavrov saying, “The contract on S-300s is absolutely legal, it’s transparent and it’s fully in line with the international norms and with the Russian export control legislation.” And justifying its legality also gives Russia a way to criticize the West for arming anti-Assad militants—some of which have links to terrorist organizations—despite the fact that the West has been unable to control whose hands those weapons may end up in. Russia caved to Western pressure over the sale of S-300 missiles to Iran and now faces a $4 billion case in the international arbitration court over its scrapped 2010 deal. Supplying Syria, under previously agreed upon contracts, allows Russia to both undercut Western efforts in the country and refurbish its own image as a reliable arms provider.