Procurement: The Giant Stumbles


April 13, 2009: In the last eight years, Russia exported over $40 billion worth of weapons. The biggest customer was China, accounting for 38 percent, with India buying nearly as much. Russia exported $8.3 billion worth of weapons last year, and $8 billion in 2007. There were hopes that sales might reach $10 billion last year, but didn't happen because of major problems with India and China over quality issues and theft of technology.

Russian arms sales had been rising sharply (they were only $4.3 billion in 2003), as the economies of their two biggest customers (India and China) grew larger. That, and the escalating price of oil (driven largely by increased demand from China and India), has sent international arms sales from $29 billion in 2003, to over $60 billion now. Oil rich countries, particularly those in the Persian Gulf, as eager to buy more weapons, with which to defend their assets.

The United States and Russia are the largest exporters of weapons, together accounting for over 70 percent of world sales. Traditionally, the U.S. sold nearly three times as much as Russia, but lately that was getting closer to only twice as much. The reason is, more effort by the Russians to not just sell on price, but also on service and warranties. Most of the cost of a new weapon comes during the lifetime (often a decade or more) of use. In the past, Russia had a bad reputation for support, and lost a lot of those "after-market" sales. The U.S. was much better in that respect, but much more expensive. Now the Russians not only have the price advantage (often half, or less, the cost of equivalent American weapons), but an improving reputation for providing good service. The Russians are also selling more high tech, and expensive, warships. For many years, warplanes comprised about two thirds of Russian sales, but now, warship sales are eating into that.

Over the last decade, about 40 percent of Russian arms exports went to China. But that is no longer the case, as Russian manufacturers feud with the Chinese over stolen technology. The Chinese have been quite brazen of late, as they copy Russian military equipment, and then produce their own versions without paying for the technology. Worse, the Chinese are now offering to export these copies. Russian officials are trying to work out licensing deals with the Chinese, but are not finding much interest. The Chinese say their generals are angry over how Russia sells technology to potential Chinese enemies, like India. The Russians don't understand that, as they have been selling weapons to India for decades. Russia fears that the Chinese have just decided that they don't need to buy Russian technology, or equipment, any more, and can just steal what they need. Then again, all this could just be a lot of posturing, as the Chinese negotiate to get the best deal they can for Russian military technology. It is cheaper to build under license, because that way you get technical assistance from the developer of the technology.

The bad relations between India and Russia, over weapons exports, are hurting the Russian ability to remain India's largest supplier. A major problem is the disputes over the Russian refurbishment of an aircraft carriers for India. This has turned out to be more costly than originally estimated. The Russians demanded that the Indians pay twice as much ($2.5 billion) because of the Russian errors. At first, the Indians appeared to go along with this. But before the new deal could be finalized, the Indian navy announced that the Russians would have to eat a large chunk (about half) of the extra costs. The Russians have played hard ball, despite the ill will being created in India.

The Russians have also encountered problems in getting enough qualified people to revive arms manufacturing activities that have been moribund for over a decade. That has led to some monumental errors, like the botched refurb of the aircraft carrier for India. But there have been many lesser failures, and customers are sharing experiences. Russia considers all this as growing pains, but their customers are looking for other suppliers.

Another problem for Russian manufacturers is competition from the West. The Indians are more interested in Western gear. While pricey, compared to Russian stuff, you get what you pay for. Over the last half century, Western, particularly American, weapons have consistently bested Russian equipment. That's hard to ignore, and Russian missteps with current arms customers are magnified as a result. Much is at stake, as Russia is using growing arms exports to rebuild their Soviet era defense industries. Many of these operations died, or nearly perished, during the 1990s. Some may not survive the current problems with quality control and Chinese piracy. If Russia cannot export more weapons, many of its defense firms will either go out of business, or subsidized by the Russian government. Either way, Russia is going to have a hard, and expensive, time maintaining its position as a major military manufacturer.



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