Winning: The Russian Military-Industrial Complex

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June 1, 2009: Russia announced that its defense firms currently have $35 billion in back orders, and, overall, do not have the capacity to accept any more right now. The defense industry employs nearly three million people and account for about 20 percent of industrial jobs in Russia. At the end of the Cold War in 1991, defense work was more than three times as large as 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.

A year ago, Russia expected to sell only about $6 billion worth of weapons for 2008. But sales surged in the second half of the year, with the total being over $8 billion. Russia exported $8 billion worth of weapons in 2007, and two years ago there were hopes that sales might reach $10 billion for 2008. The sudden fall in Russian arms sales comes from problems with the two largest customers; China and India.

Russian arms exports had been growing rapidly during the last few years. 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.

The United States and Russia are the largest exporters of weapons, together accounting for about 70 percent of world sales. Traditionally, the U.S. sold nearly three times as much as Russia, and that ratio seems to be holding. There 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 of maintenance services and spare parts. 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, about half the sales were for warships.

 Over the last decade, about 40 percent of Russian arms exports went to China. But that is now at risk, 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. The Russians 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.

India is unhappy with Russian sloppiness in handling large projects, like refurbishing an unfinished 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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