Procurement: Russia Cancels The Escape Clause

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April 28, 2013: Russia has reminded potential customers for its weapons that while credit terms are being offered, these loans would only be offered if they “complied with market principles.” What got a lot of potential customers thinking that the Russians were returning to the Soviet days of easy credit and lots of loans that never got repaid was a deal made earlier this year. This was when a Russian bank agreed to handle a $400 million loan to Indonesia for the purchase of six more Su-30 jet fighters. The Russian government guaranteed the seven year loan. Indonesia agreed to this purchase a year ago but sorting out details delayed closing the contract until recently. Although expensive, the Russian fighters are modern and look great. They are also relatively cheap to maintain and they are a popular export item for Russia. Yet Russia has to periodically mention that all loans are made on the basis that they are to be repaid. What the Russians don’t say, but everyone knows, is that the Russians have no problem with paying bribes to get a contract. Even when the Russian equipment and credit terms are the best deal, many buyers are from countries where getting a percentage of defense purchases is a popular local custom.

Meanwhile, Russia has been very successful with its combination of low prices and easy credit. Six years ago Russia broke into the Indonesian market by guaranteeing a billion dollars in loans so Indonesia could purchase eight Su-30 fighters, two submarines, and four Mi-26 assault helicopters. The U.S. had not sold weapons to Indonesia for a while because of human rights issues. The Russians stepped in with low prices, immediate delivery, and, most importantly, attractive credit terms. Many Indonesian military leaders preferred Western equipment and that attitude proved a constant obstacle to additional Russian sales. But the Russians have their foot in the door and will use easy credit, bribes, and fast delivery to remain competitive.

Most of the Russian sales are to countries that are credit risks. Venezuela, despite its oil wealth, is deep in debt and in danger of default. Other countries, or at least their governments, are in danger of disappearing before deals can be completed. That already happened with Libya and is about to happen with Syria. Then there is China, which considers buying Russian weapons a license to steal the technology and manufacture their own versions. In short, Russia has not completely abandoned the selling tactics of the Soviet Union, including some hefty risks. While Russia sold $15 billion in weapons last year, some of those sales may turn out of be very unprofitable.

 


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