Procurement: Russia Has Left The Basement

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March 11, 2010:   Russian arms exports were up only two percent last year, to $8.5 billion. However, Russia booked $15 billion worth of orders in 2009, and now has $40 billion worth of back orders. While sales to China are down, Russia has found new customers in South America (not just Venezuela). Vietnam, seeking an ally against ancient enemy China, has become a big customer for aircraft and warships. Sales are being made to the Middle East again, especially to North African countries. India, however, remains the major export customer.

Russia exported $8.35 billion in weapons in 2008, and $8 billion in 2007. In 2005, there were hopes that sales might reach $10 billion for 2008. The stall in Russian arms sales growth comes from problems with the two largest customers; China and India. Russian arms exports had been growing rapidly for a while. In 2005 Russian arms exporters had already booked orders for six billion dollars worth of sales per year through 2008. In 2004, Russian arms sales were $5.6 billion, and that went to $6 billion in 2005 and $7 billion in 2006. Russian arms sales were only $4.3 billion in 2003, and ballooned 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.

Increasing these sales is very important for the government. The defense industry employs nearly three million people and accounts for about 20 percent of industrial jobs in Russia. At the end of the Cold War in 1991, the defense industry was more than three times larger than it is now. It was the large size of the defense industry that played a major role in bankrupting the Soviet Union. The Russians were never quite sure (cost accounting not being a communist favorite) what proportion of their GDP was devoted to military spending, but it is estimated that it was over 20 percent. That was more than four times figure for Western nations.

The new Russian defense industries are trying to compete with those in the West. But that has proved difficult. For example, India is unhappy with Russian sloppiness in handling large projects, like refurbishing an decommissioned Cold War era carrier. This project has been a financial disaster for India. Worse yet, India is buying more Western (Israeli, European and American) weapons, and notes the differences in performance and service. If Russia cannot change a lot of old habits real quick, their flourishing arms export business is going to slide back into the cellar.

 


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