Hidden Effects: Russian President Vladimir Putin attends a meeting in the Volga River region of Samara on July 21. Multiple countries have ongoing defense relationships with Russia and could be harmed by sanctions. (ALEXEI NIKOLSKY/ / AFP/Getty Images)
WASHINGTON — In the days following US and European Union sanctions against Russia, it was unclear what sort of economic impact they would have on nations that do defense deals with Moscow.
But across Europe last week, the early returns began trickling in. And the assessments were mixed.
In a major blow to the sanctions effort, however, India — the world’s largest consumer of Russian military equipment — rebuffed American efforts to join the sanctions program during US Secretary of State John Kerry’s visit to New Delhi on Aug. 1.
In Europe, the sanctions prohibiting the import or export of defense-related items with Russia, along with dual-use technologies used in the oil and gas exploration industries, are forecast to hit the Finnish economy particularly hard.
In a statement to the Finnish Parliament on July 31, Prime Minister Alexander Stubb estimated that the drop in Finnish trade with a deteriorating Russian economy could erase up to 1 percent of the Finnish gross domestic product in 2014-2015. Russia is Finland’s biggest trading partner, after Germany.
Mauri Pekkarinen, the leader of the Eduskunta’s Parliamentary Commerce Committee, questioned the fairness of the proposed sanctions to smaller EU states, maintaining that “the arms embargo will also negatively impact talks on bilateral defense cooperation with Russia.”
Finland and Russia in 2013 explored reopening defense cooperation and renewing their arms trade. As part of a final bilateral arrangement, Russia offered Finnish companies the prospect of bidding for high-end subcontracting work on major Russian defense programs. Russia also invited Finland to join a long-term defense partnership under which Moscow would supply most of Helsinki’s weapon systems, including battle tanks, air-defense systems and aircraft.
To this end, Finland’s Defense Ministry established an expert panel to produce a list of potential areas for cooperation. The MoD was expected to present its preliminary report to government later this year, but the crisis in Ukraine has stalled progress, and it is not known if or when the report will be delivered.
“We are working around the clock to ensure that the latest sanctions have the minimum impact on Finnish trade and jobs,” Stubb said. “Nobody wants or likes sanctions, but this is a crisis of Russia’s own making.”
India: 'No Change in Our Policy'
Behind the United States, Russia is by far the world’s second largest arms exporter, inking about $13 billion in global arms sales in 2012, more than half of which went to two customers: India and China.
Russian exports of arms and military equipment to the EU are worth about $4.2 billion annually, whereas European exports to Russia are worth about $400 million, portions of which include the $1.6 billion 2010 deal in which France agreed to sell two Mistral ships to Russia.
While it is highly unlikely that China will go along with the sanctions, India has rebuffed Kerry’s efforts to convince the new government in New Delhi to join the sanctions.
“There is no change in our policy. We think that foreign policy is in continuity. Foreign policy does not change with the change in the government,” India’s External Affairs Minister Sushma Swaraj said on Aug. 1.
Kerry replied that Washington “will obviously welcome India joining in with respect to [sanctions], but it’s India’s choice.”
Prior to the meeting, one Indian official said in private that New Delhi is finding it difficult to cope with the situation as Russia is a long-term strategic partner. However, India is also eager to further strengthen its ties with Washington in this geopolitical situation, the official added.
While India plans to continue the relationship, the US and EU bans on military products will still have some effect on Russian exports.
“It is too early to tell if any arms projects from Russia to India would be affected due to sanctions,” said Nitin Mehta, defense analyst in New Delhi.
A source in the Indian Defence Ministry said India and Russia have, in fact, decided to increase their level of defense cooperation. The source said the talks on a fifth generation fighter aircraft, an Indo-Russian joint project, are being accelerated.
The Indian Air Force expects to order more than 200 of the twin-engine aircraft, which is based on Sukhoi’s T-50 PAK FA, but the Indian government has long complained to Moscow about its low level of participation in the project.
Also, a team from Russian defense giant Rosoboronexport was in New Delhi this month to discuss leasing two Amur-class submarines to the Indian Navy on a fast-track basis, the source added.
Minor Impact Felt in Europe
In Europe, the picture is a bit murkier. In the UK, for example, the potential damage to London’s financial sector is more worrisome than the new round of defense sanctions.
That’s hardly surprising. Figures provided by ADS, the defense and aerospace trade organization, showed that Russia accounted for 0.93%, or $205 million, of British military and security exports in 2013.
“The bulk of defense exports to Russia are [destined] for third party governments. For example, the French military and Indian Navy,” ADS said in a statement.
“The value of the export licenses outstanding are less than 1 percent of all defense exports. The UK is not arming Russia or the pro-Russian troops in eastern Ukraine,” said Jeegar Kakkad, the ADS chief economist and director of policy in a July 23 statement.
The British government has not approved defense equipment manufacturer licenses to Russia since March, when it blocked or amended 34 export licenses.
A further 251 existing licenses are being reviewed, although the UK government said the majority of the licenses that remained after the March cull covered equipment for commercial use.
Announcing Rolls-Royce’s first half results on July 31, Chief Executive John Rishton said the company had limited business with the Russians.
“Our exposure to Russia is frankly small. We’ve got relatively few people that work for Rolls in Russia and it is a relatively small market for us, relatively small in terms of supply chain and relatively small in terms of any market.”
BAE Systems, Britain’s largest defense equipment supplier, said it had no military sales to Russia and only a very small exposure in the security sector.
Still, Russia was among the top 10 security export destinations for British companies last year with exports totaling $119 million.
Much of that business is in the cybersecurity sector. The ADS figures showed equipment employing cybersecurity software was the largest single export category — around $65 million.
In Italy, Finmeccanica’s partnership with Sukhoi to build the Superjet passenger aircraft is spared from the defense sanctions since it is a civil program, while Italy’s main defense deal with Moscow had already slowed this year ahead of any sanctions due to growing opposition in Russia to foreign-built products.
The sale, which covers 358 Iveco LMV vehicles, has seen a slower delivery schedule with vehicles blocked in Italy as the Russians continue to delay in collecting them, sources said.
On an earnings call on July 30, French aircraft and rocket engine manufacturer Safran SA’s CEO Jean-Paul Herteman said he expected to feel “no impact” on the civil side of his business, and possibly only a minor disruption on the defense side from the sanctions.
In Germany, Georg Wilhelm Adamowitsch, managing director of the Federation of German Security & Defence Industries, said “our industrial sector is also little affected by these sanctions, as the exports of defense products to Russia were already only on a low level.”
German defense giant Rheinmetall Defence declined to comment.
Israel, US Unaffected by Sanctions
In Tel Aviv, sanctions will not cause “material harm” to Israeli arms exporters, a recently retired Israeli defense official said, since bilateral defense trade with Russia has remained “negligible” for years out of deference to US security concerns.
Israeli defense and industry sources estimate that sales to Moscow constitute less than 10 percent of the more than $7 billion in new contracts signed annually since 2009.
In a July 31 interview, the former official, a retired major general, said sanctions will “complicate and delay” Israeli goals of expanded defense trade with Moscow.
“We’re selling to Russia, but mainly for purposes of homeland security,” he said. “Obviously, we aim to grow that market as one of the ways of strengthening ties with such an important country that has a unique capacity to influence events in our region ... for better or worse.”
In an interview in early March, a senior Israeli Defense Ministry official said Israel routinely consults with Washington — “on a voluntary, good-faith basis, not because we’re obliged to” — on potential Israeli arms deals with Moscow.
“We could have gained billions in exports from Russia, but we need to balance all our interests, a prime one being the security concerns of our No. 1 ally in Washington,” the senior MoD official said.
Government and industry sources say Israel’s MoD is not granting export licenses for Russia’s expressed interest in small satellites, advanced UAVs, synthetic aperture radar payloads, and digital, encrypted command-and-control capabilities. A separate authority managed by the Israeli Prime Minister’s Office is still formulating the government’s policy of cyber-related exports to Russia.
In the United States, Russia could move to cut off the supply of RD-180 engines, used to launch Air Force assets aboard the United Launch Alliance’s Atlas V vehicle, as a response to these sanctions. In fact, a top Russian official threatened that months ago after the first sanctions were announced.
Despite that bluster, the flow of RD-180s remains, largely because each engine provides much-needed cash into Russian coffers.
On July 30, Air Force Secretary Deborah Lee James reiterated that there has been no cut-off and that the service has options, including moving more launches onto the alliance’s Delta IV rocket and, down the road, launches on newly certified vehicles such as SpaceX’s Falcon 9.
In the meantime, the US government is exploring the production of a new engine design that would be manufactured inside the United States to take away the threat of being held hostage by Russia over space launch. Although estimates vary, that program could cost more than $1 billion over five years. ■
Andrew Chuter in London, Tom Kington in Rome, Barbara Opall-Rome in Tel Aviv, Vivek Raghuvanshi in New Delhi, Albrecht Müller in Bonn, Gerard O’Dwyer in Helsinki, and Paul McLeary and Aaron Mehta in Washington contributed to this report.