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Ukraine Crisis Could Hinder Russian Market Expansion

Aug. 3, 2014 - 03:45AM   |  
Joint Effort: Russia's NPO Mashinostroeyenia co-developed the BrahMos cruise missile with India's Defence Research and Development Organisation. (BrahMos Aerospace)
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WARSAW — Russia’s military intervention in eastern Ukraine could hamper the expansion of Russian defense companies in foreign markets, analysts said, although sales to some traditional allies may remain strong.

With this in mind, Moscow’s plan to spend 20 trillion rubles (US $564 billion) by 2020 on new weapons and gear for the armed forces could provide a much-needed stimulus for local manufacturers.

Petr Topychkanov, an associate at the Carnegie Moscow Center’s Nonproliferation Program, said Russia’s military intervention in Ukraine likely would “hurt Russian defense exports in two ways. First, some countries will temporarily limit their cooperation with Russia, but these cases are not so significant for the Russian arms trade. Second, Western sanctions will have an impact on international operations of Russian companies involved in arms trade.

“But this crisis hardly can damage Russian positions in key regions,” he said. “Even more, in the time of the crisis, if not because of it, Russia can get new contracts.”

The July 17 shootdown of a Malaysian Airlines plane over eastern Ukraine is expected to increase international pressure on Russia, which is supplying arms to rebels in Ukraine’s industrial heartland.

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While Russia’s defense industry is largely reliant on domestic deals, for some companies, foreign contracts were a driving force behind their increased sales in 2013.

Russian Aircraft Corp. MiG, which makes the Mikoyan MiG aircraft, posted revenues of about 30.3 billion rubles in 2013, a 68 percent increase compared with a year earlier, according to data released by its parent company, United Aircraft Corp. (UAC).

UAC said this was largely due to increased foreign sales, which included the delivery of 10 modernized MiG-29 fighters to the Indian Air Force. The manufacturer’s foreign sales represented 120 percent of the planned figure, the group said in a statement.

Sergei Korotkov, the CEO of RAC MiG, said he expects the company’s revenues to rise in 2014.

For Russian defense producers, India is one of the most promising markets, local analysts say.

“There are traditional partners such as India and China, Vietnam and Indonesia in Asia, or Syria and Algeria in Middle East, or Venezuela in the Americas, [as well as the] post-Soviet republics,” Topychkanov said. “There are new possibilities opened after significant changes in these regions such as Egypt, Iraq or Brazil.

“India and China are the most important because of the scale of the arms trade. ... India is much more promising ... because Russia not only exports weapons to this country, but also cooperates in production of new systems like BrahMos or the Su-35MKI [fighter jet].”

The BrahMos is a supersonic cruise missile jointly developed by India’s Defence Research and Development Organisation and Russia’s NPO Mashinostroeyenia design bureau.

Vasily Kashin, project director at Moscow Defence Brief, which is published by the Centre for Analysis of Strategies and Technologies think tank, said India is the No. 1 partner of Russia’s defense industry, representing about 35 percent of total exports, followed by China, with 12 to 15 percent.

To respond to the increased Indian demand for Russian weapons, Russia’s defense industry must expand and overhaul its production capacities, Topychkanov said.

“Russia has to upgrade the technological level of its defense industries,” he said.

The crisis in Ukraine is unlikely to strain relations with those post-Soviet states with whom Russia has maintained strong ties, and their governments will most likely continue to buy Russian weapons.

Meanwhile, Moscow aims to overhaul the military and replace a large portion of its outdated Soviet-designed equipment. In May, President Vladimir Putin announced plans to spend 20 trillion rubles on new arms and equipment by 2020. A further 3 trillion rubles have been earmarked to upgrade and expand defense production capabilities.

The planned spending increase means local output will be able to substitute for some imports, as suggested by senior state officials.

“The main issue on the agenda today is speeding up [the efforts] to replace imports in the defense industry and make the broadest possible use of Russian-made materials and components in [the] production of ... equipment and arms,” Putin said at a government meeting July 28.

“There are two programs ... [and their] impact on the Russian defense industry is indeed very significant,” Kashin said. “In 2013, the Ministry of Defense spent 550 billion rubles on procurement, 165.4 billion rubles on research and development, and 177.9 billion rubles on upgrades and modernization of the existing systems. The industry is working on a number of very ambitious and highly innovative projects.”

These include design of a fifth-generation fighter jet, three new ranges of armored combat vehicles, and new-generation air and missile defenses, Kashin said. ■


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