# 1, 2007 Moscow Defense Brief �

#1(7), 2007

PUBLISHER

CAST Director & Publisher

Ruslan Pukhov

Advisory Editor

Konstantin Makienko

Researcher

Ruslan Aliev

Researcher

Alexey Pokolyavin

Researcher

Dmitry Vasiliev

Researcher Polina Temerina

Researcher Ilya Nevorotov

Editorial Office Leninsky prospect str., 45, suite 480

Moscow, Russia 119334

phone: +7 495 135 1378

fax: +7 495 775 0418

http://www.mdb.cast.ru/

To subscribe contact

phone: +7 495 135 1378

or e-mail: mdb@cast.ru

Moscow Defense Brief is published by the Centre for Analysis of

Strategies and Technologies

All rights reserved. No part of this publication may be

reproduced in any form or by any means, electronic,

mechanical or photocopying, recording or otherwise, without

reference to Moscow Defense Brief. Please note that, while the

Publisher has taken all reasonable care in the compilation of

this publication, the Publisher cannot accept responsibility

for any errors or omissions in this publication or for any loss

arising therefrom. Authors’ opinions do not necessary reflect

those of the Publisher or Editor

Computer design & pre-press: ZEBRA-GROUP

www.zebra-group.ru

The editorial team would like to thank Simon Saradzhyan,

News Editor, The Moscow Times, for his insightful guidance and

generous advice

The editorial team would like to thank Howard Gethin for his

contributions in editing and proof-reading

© Centre for Analysis of Strategies and Technologies, 2007

CONTENTS

Official View PointRussia’s Relations with Europe in Aerospace, Shipbuilding and Defense Industries 2

War And PeopleNorth Korea: the Bush Administration’s Strategic Fiasco 4

The Globalization of NATO: Prospects and Consequences 6

Industrial PolicyChallenges to the Reform of Defense R&D in Russia 9

Russia’s Defense Industry in 2006 14

Arms TradeThe Venezuela Contracts 16

Russia-India Military-Technical Cooperation: Current Issues and Perspectives 19

International CooperationThe Indo-Russian Transport Plane Project: Background, Status and Perspectives 21

Facts & FiguresStructure of Russian Ministry of the Interior 23

Structure of Russian Ministry of Defense 24

Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006 25

Our Authors 27

Centre for Analysis of Strategies and Technologies

# 1, 2007 Moscow Defense Brief�

Official View Point

Russia’s Relations with Europe in Aerospace, Shipbuilding and Defense Industries

Russia’s Relations with Europe in Aerospace, Shipbuilding and Defense IndustriesVladimir Vasiliev

The past decades have seen a remarkable rise in the scale and cost of aviation, space and defense projects.

For example, R&D for the Boeing 787 or the Airbus A380 costs over ten billion euros, and such investments take many years to recoup. Similarly, it costs billions of euros to develop fighting aircraft, helicopters and missile systems. As a result, the internationalization of both civilian and military programs to develop the next generation of high-tech products is inevitable. Even the US, with the largest defense, space and R&D budgets in the world, has been forced to take this path. Europe launched on this process with the creation of the Airbus consortium three decades ago, and has since integrated several large defense and aerospace holdings into EADS. Shipbuilding, missile manufacturing and even armour, the most conservative of industries, have been subject to the same process of international integration.

Russia and Europe have begun over the past fifteen years to work together on high-tech projects, first of all in the aviation, helicopter and space sectors. These efforts have met with some challenges. For example, the MiG-AT training aircraft and the Mi-38 transport helicopter programs were launched during an era that was extremely difficult for Russia, with precious little financing, and inadequate market research. However, even such relatively unsuccessful programs helped to lay the foundation for future cooperation, by creating networks and promoting understanding of different work methods and cultures.

Several Russian-European programs are proceeding successfully, particularly on joint projects for third countries. For example, French companies are providing navigation and display systems for Su-30MKI fighters destined for India. The Indian naval forces have chosen to equip Russian MiG-29K carrier-based fighters with French helmet-mounted targeting systems, and French equipment also graces the Malaysian Su-30MKM.

Russia and Italy are working together to create a new generation of training aircraft. Due to the close relations between the Yakovlev design bureau and Aeromacci, each country now boasts a highly effective training aircraft at the final stages of testing. Alenia corporation is on the verge of joining the Sukhoi Superjet 1 00 Russian regional jet project as a full partner, not just as a supplier of equipment. Similarly,

Fincantieri and the Rubin design bureau have launched R&D on the development of a next generation submarine.

These examples demonstrate a positive development, whereby politically-motivated programs initiated by the state are being replaced by pragmatic, business-oriented projects initiated by business, which are only subsequently accorded political support. Other examples include the joint project to develop SaM-146 engine for the Superjet 100 regional jet, the creation in Russia of a centre for the conversion of A320 aircraft to transport versions, the project to use Russian booster rockets at the Kourou cosmodrome in French Guiana, and possible Russian participation in the A350 project and in the development and production of the medium class aircraft series to replace present European best-sellers – Airbus A320/321.

On the European side, EADS and Safran are most active in joint projects, along with Russian companies that comprise the United Aircraft Corporation, and the Saturn Scientific Industrial Association.

Several factors that promote the integration of Russian and European aviation, space and other high-tech machine-building sectors will continue to grow in importance over the next few years.

First, Russia and Europe already have a strategic relationship on energy issues. In spite of all of the problems that have arisen, cooperation in this sphere will only increase, and it is only logical to expect such cooperation to extend to high technology sectors.

Second, the rapid growth of the Russian market, while it cannot be compared to the Chinese or Indian markets, will nevertheless continue, making Russia into one of the major markets of the world. The expansion of Aeroflot’s plans to acquire long-range carriers is symptomatic of this potential. If Russia’s national carrier first intended to purchase 12 aircraft, it is now considering a purchase of 44, which brings it into the same league as the largest airlines of Asia or Europe.

Third, the predicted weakening of the US dollar will force European companies to move more production into the dollar zone. While this includes the US itself and East Asia, Russia could also serve as a location for European production in the dollar zone.

# 1, 2007 Moscow Defense Brief �Russia’s Relations with Europe in Aerospace,

Shipbuilding and Defense Industries

Official View Point

Finally, the scientific and industrial complexes of Russia and Europe are complementary. As demonstrated by the technical problems associated with the serial production of the A380 and the delays to the full-scale launch of the A350 project, Europe is beginning to suffer from a deficit of resources in its competition with the US on a wide range of products, and new difficulties lie ahead in the niche for short-range carriers. At the same time, Russia, in spite of its colossal

losses during the 1990s, has preserved a strong capacity for innovation, to which it has devoted significant resources in recent years. There are areas in which Russia remains a world leader, for example, in the sphere of piloted spaceflight and satellite navigation. Thus, a strategic partnership in high-tech between Russia and Europe would by no means be a one way street. Russia has much to offer, and the competitiveness of both parties would benefit.

# 1, 2007 Moscow Defense Brief�North Korea: the Bush Administration’s Strategic Fiasco

North Korea: the Bush Administration’s Strategic FiascoIvan Safranchuk

When North Korea withdrew from the Non-Proliferation Treaty (NPT) in 2003 and declared itself to be a nuclear

power, the prevailing view was that it was bluffing. Isolated and dependent on humanitarian assistance, it was hard to imagine that it had truly developed nuclear weapons capacity. As a result, even if Pyongyang had bluffed earlier for the sake of getting better positions at negotiations, it now had no other choice but to prove its claim. Otherwise, the regime would have faced complete political bankruptcy.

The Bush Administration thought it had learned some lessons from the Clinton years. In 1994, the Clinton administration promised economic benefits to North Korea in exchange for a freeze on its nuclear program. From this, the Bush administration concluded that first, the North Korean program was not mature enough in 1994 to warrant the success of Pyongyang’s blackmail; second, the freeze on nuclear activities was an empty commitment because it is reversible; and thus, only the comprehensive and verifiable de-nuclearization of North Korea should be considered as a valid option for negotiations.

The problem with these perceived lessons is that in 1994 the international community was still in the heat of revelations of the Iraqi nuclear program. The subsequent discrediting of the allegations against Iraq in 2003 should not overshadow the very different international climate that prevailed in 1991. After the first Gulf War the Iraqi nuclear program appeared to be far more mature than most intelligence agencies and analysts had predicted. IAEA safeguards did not prevent Iraq from clandestine activities on a larger scale than suspected. Such were the dominant views of the time. So in 1993-1994, when North Korea attempted to withdraw from NPT, which it had joined only in 1985, its nuclear program was easily subject to exaggeration. It is likely that North Korea exploited this tendency to outbid the Clinton administration. But the lesson the Bush administration took from this – not to give into Pyongyang’s blackmail – was incomplete, to say the least.

Ki m Jong- i l se ems to understand t he Bush administration’s logic. Clinton was ready to buy a “glimpse” of a bomb. Bush thinks he is a tough guy, so he won’t buy just a “glimpse”. Kim Jong-il’s reasoning was likely to be: “OK, he will get a real bomb.”

The first reaction from Washington and its allies such as Japan was to disbelieve the North Korean nuclear test – indeed, it is tempting to deny the reality of something

long thought to be a bluff. But now that the nuclear test has destroyed such illusions, the Korean crisis might finally be tackled seriously.

The main options are: 1) military action against North Korea on a limited scale to destroy critical infrastructure, or on a larger scale to overthrow the regime; 2) full isolation of North Korea, hoping that a social-economic crisis will bring changes to Kim’s behavior; 3) regime change from the through the promotion of civil unrest or an elite coup d’etat; 4) reconciliation with North Korea through negotiations.

Limited or large scale military action against North Korea would be very unfavorable for Russia and China, who share borders with the country and do not wish to experiment with the consequences of military action, which could result in massive waves of refugees and the use of WMD. Military action is also unacceptable to South Korea, whose capital of Seoul is located within range of North Korean artillery, which is allegedly armed with not only conventional, but also chemical shells. The US cannot hope to persuade Seoul, Beijing and Moscow of the wisdom of using military force even as a threat. The three capitals do not want this option to be considered in any manner whatsoever.

The full isolation of North Korea is also a painful option for its neighbors. Beijing and Seoul could dramatically limit or even cease humanitarian assistance, financial exchanges and economic cooperation with North Korea, but they are unlikely to be consistent in this policy. Even though both South Korea and China are very disappointed in Kim, they would not participate in an effort to isolate North Korea to the point that it either collapses or gives up. And without the full participation of North Korea’s neighbors, a real blockade is impossible. A limited, mostly sea blockade, is not a problem. However, full isolation is out of the question.

Regime change through civil unrest is another nightmare scenario for the neighboring countries. First of all, nobody believes that a sufficient scale of social unrest could be provoked that would overthrow the government. More importantly, social unrest in a extremely poor country with nuclear weapons represents an extraordinary risk for the neighboring countries. So long as Kim prevents his citizens from rushing to China, Russia or South Korea, we are all safe to criticize his dictatorship and police rule over the population. But if authority as such collapses in North Korea and masses of Koreans become free to knock on the gates of South Korea, China or Russia, then these three countries would probably

War And People

# 1, 2007 Moscow Defense Brief �North Korea: the Bush Administration’s Strategic Fiasco

need to take forceful measures to keep people within North Korea’s borders, and then take measure to manage their life within these borders.

Authority in North Korea must remain intact. This is a critical concern for the neighboring countries, and one that is not addressed by any scenario for military action, full isolation or civil unrest/revolution. But regime change through an elite coup d’etat is a different story.

Throughout both of its terms, the Bush administration urged, with Japanese assistance, South Korea and China to take stronger approach to North Korea. In the wake of the North Korean missile and then nuclear tests in June and October of 2006, South Korea needs to make some adjustments to its cooperative approach toward North Korea. South Korea could afford a more independent foreign policy while the North Korea threat was in decline or at least was expected to steadily dwindle. But now, in an aggravated security environment, Seoul needs to be more in line with the US. Nevertheless, South Korea does not favor a regime change.

Beijing’s elite was furious over the North Korean nuclear test. North Korea as it is now is less and less useful to China. China can not allow the US and Japan to solve the crisis on their own terms. This forces China to act as an apologist for North Korean. China does not like the job, but has no way out. The Chinese response to this dilemma has been smart and balanced; namely, to act consistently to deescalate the crisis.

Both China and South Korea recognize that they have to change something in their policy toward North Korea, but they cannot simply adopt the US-Japan position. All four countries feel they need a common position on North Korea, but fundamental differences in regional politics do not simply vanish, even after a nuclear test.

A reasonable compromise may be to remove Kim through an elite coup d’etat in North Korea. South Korea wants to have somebody without the Kim family legacy. China needs to get rid of Kim as trouble-maker and convert the Korean problem into a stable, manageable and long term issue.

South Korea needs some response from North Korean on economic cooperation. China needs the crisis to be manageable. Albeit from different perspectives, both China and South Korea have come to the common conclusion that Kim does not serve their interests. Beijing may hesitate to shift fully to an active anti-Kim position, and may prefer to give him one last chance, but surely Beijing will be prepared

to support a change of leader in North Korea, should the opportunity arise.

While for Seoul and Beijing a change of leader is a maximalist position, for the United States and Japan it is an acceptable minimum: “OK, let’s get rid of Kim, if nobody is ready for more.” The anti-Kim solution is a compromise that would allows China and South Korea, on the one hand, and the US and Japan, on the other, to overcome their disagreement and form very strong common position, one which they all truly need.

Of course, it remains a big question as to how precisely an elite coup should be managed. However if China gets down to business, Kim may be in real trouble within the next year or two.

The Russian position in recent years has been very close to that of Beijing and Seoul. But with South Korea and China prepared to dispose of Kim, Russia may become diplomatically isolated. Russia is so used to having China and South Korea as diplomatic partners on the Korean issue that it seems to underestimate the fundamental shift that both Seoul and Beijing may be ready to take in their approach toward Kim.

Russia wants the North Korean crisis to return to the sphere of diplomacy. It is a fact that the Bush administration did not want to have direct negotiations with North Korea and was not always cooperative at the Six-Party talks. Of course, North Korean diplomats are anything but nice partners. Still, Washington was always willing to exploit their tricks as an excuse for not taking steps toward compromise. Russia and China were only occasionally successful in their efforts to deescalate the crisis that Pyongyang and Washington were willing to escalate.

As the anti-Kim consensus emerges as a possible ground for a US-Japanese-Chinese-South Korean compromise on North Korean, Kim is likely to be given a last chance. The next round of Six Party Talks is precisely this last chance. This new round of talks is fundamentally different from the previous, not in the agenda or positions of the parties, but in the sense that the major task of the talks is to examine Kim (who surely will manage his delegation in direct, manual mode from Pyongyang). The new round should be judged and measured not by the quantitative parameters of accords achieved or not achieved through lengthy negotiations, but by the quantitative, binary parameter of whether or not Kim will be dropped as hopeless case after these talks.

War And People

# 1, 2007 Moscow Defense Brief�The Globalization of NATO: Prospects and Consequences

War And People

The Globalization of NATO: Prospects and ConsequencesFedor Lukyanov

Among NATO supporters and sceptics alike, expectations for the November 2006 summit in Riga ran high. The

location was highly symbolic: leaders of the world’s most powerful military-political alliance met on the territory of its former principal adversary for very the first time. Rumours that Ukraine and Georgia would be invited to join the alliance at Riga had people in Moscow on edge. For his part, NATO Secretary-General Japp de Hoop Scheffer designated “outreach”, or the extension of the alliance beyond its traditional areas, as the key issue.

In the end, nothing sensational happened. Those gathered apparently decided not to taunt Russia, and membership was promised only to Croatia, Albania and Macedonia. Kyiv and Tbilisi would have to make do with the existing Intensified Dialogue track. As for NATO’s global reach, no radical innovations were envisaged. The Summit Declaration blandly suggests only that NATO is “adapting to the 21st century security environment, through its operations, transformed defence capabilities and deeper engagements with countries in and beyond the Euro-Atlantic Area, as well as continued internal reform.”

Leaders endorsed the Comprehensive Political Guidance, a conceptual piece that describes terrorism and weapons of mass destruction as the likely principal threats to the alliance over the next ten to fifteen years. Other challenges include instability and threats from failed states, more sophisticated conventional weapons, and the disruption of the flow of natural resources. This last item provoked much commentary in Russia thanks to the statements, made on the eve of the summit, by US Senator Dick Lugar to the effect that NATO should focus on the energy security of its members. This notion was not seriously taken up at the summit itself.

The confrontation with terrorism drove the mobilization of NATO forces to Afghanistan. All agreed that the operation is a decisive test of NATO’s ability to measure up to the above listed threats of the future. But it is precisely in Afghanistan where the future for NATO looks rather grim.

This new, and by no means glorious, page in the history of the North Atlantic alliance began just over five years ago. It then became clear that the threats of the twenty first century would have little in common with those of the twentieth. The tragic day of 11 September, 2001 was a turning point for NATO, when its members declared for the first time in the history of the alliance their readiness to act under

Article 5 of the Washington Agreement and provide military assistance to an ally that had come under attack.

However, the US response proved to be even more fateful. The immortal words of Donald Rumsfeld: “the mission defines the coalition,” were quickly adopted as a White House slogan. The forceful American renunciation of the very concept of a permanent coalition post 9/11 was extremely worrisome for NATO, in spite of subsequent efforts by US officials to soften the blow. At the Riga Summit, for example, US Assistant Secretary of State for European and Eurasian Affairs Daniel Fried noted how the Bush Administration no longer spoke of a “coalition of the willing,” because “it’s all NATO.”

But at the time the sole superpower, shocked by the attack, thanked its allies but decided to proceed without engaging the alliance. This decision gave concrete form to the image of NATO’s irrelevance that analysts had been drawing for the past decade. Since the end of the Cold War the North Atlantic alliance has defined neither a new mission nor a role for itself in meeting the challenges of changing times. Subsequent events would only reinforce this conclusion.

Nevertheless, western politicians and alliance officials indefatigably cite the same events of recent years to refute the thesis of NATO’s inadequacy in addressing contemporary global challenges: the peacekeeping mission in Afghanistan, the training of Iraqi security forces, support for the African Union’s mission to Darfour, and even purely humanitarian missions like assistance to victims of the tsunami in Indonesia, the earthquake in Pakistan, o r Hurricane Katrina.

On this shaky ground, US academics Ivo Daalder and James Goldgeier optimistically state in the pages of Foreign Affairs that “with little fanfare—and even less notice—the North Atlantic Treaty Organization has gone global.” Moreover, they are convinced that “as the world’s premier multinational military organization, comprising many prosperous nations with a vested interest in maintaining global stability, NATO is uniquely suited to meeting such demands.”

However, with the exception of the Afghan operation, where NATO has taken on real responsibility (even though the majority of troops stationed there are not part of the NATO framework), the remaining operations are clearly of a purely technical character.

This reflects both the American approach to NATO (political declarations aside, US strategists do not view the alliance as a provider of reliable support when it comes to

# 1, 2007 Moscow Defense Brief �The Globalization of NATO: Prospects and Consequences

War And People

American security), as well as the unwillingness of European allies (with the exception of the UK) to engage in serious operations in far off lands.

Efforts to stimulate the Europeans to a more active role in global security have been afoot since the mid-1990s, once it became clear that, with the disappearance of the Soviet threat, the Old World’s commitment to force development has declined considerably. The European Union’s attempt to formulate a European Security and Defense Identity (ESDI) failed, and the US played a role in this failure, since it saw the ESDI as an attempt to circumvent the transatlantic dimension of the alliance. But in the final analysis, Europe stopped well short of insisting on an independent defense policy. During the Cold War, Europeans became accustomed to rely upon the American guarantee of security. As RAND Corporation analyst James A. Thomson wrote in 1997: “why, after all, should Europe commit resources to a larger security role if the United States is going to take care of those problems anyway?”

Anticipating that NATO would increasingly be called to act beyond its customary territories, Thomson called for the creation of a third NATO command, in addition to SACEUR and SACLANT. This new command would be charged with crisis response and the projection of force beyond NATO’s zone of responsibility. To increase Europe’s stake in a stronger alliance, Thomson recommended that a European be appointed to head this third command.

NATO’s 1999 operation in Kosovo is often portrayed as a great success; but even leaving aside the shaky moral basis of that campaign, its net effect seven years later is dubious. One can hardly describe the appearance of yet another weak Albanian state on the map of Europe, where the ethnic cleansing of the Serbian population has de-facto been legalized, as a positive outcome.

Since then, Europe has not increased its role in political-military affairs. On the contrary, it has clearly demonstrated its inability to formulate a common position. Decisive support for the US after 9/11 was a singular exception. In all other cases the close ties linking some EU members to the US have paralyzed the efforts of the Old World to play a an autonomous role, while the reluctance of the “Old Europe” to get mixed up in global power games prevents it from lending unconditional support to the US position.

Thanks to the symbolic capital it acquired during the Cold War, NATO retains a good measure of authority. And with the European Union recoiling from expansion fatigue, nations of the former Soviet Union and south-eastern Europe view NATO’s membership as the their only chance to join an elite club of states.

Their desire for inclusion is graciously rejoined by the grander members of NATO who view it as a convenient and natural means of “tying down” volatile states (especially

those who have declared their intent to distance themselves from Russia).

Moscow takes an exceptionally negative view of this, and only partly due to the residual mistrust of its former potential adversary. NATO seems possessed by an incapacity to explain the purpose of its expansion, if any such purpose exists, aside from endlessly repeating that it is not directed against Russia’s interests. However, reference to Nato’s new, global mission rings hollow in the context of Estonia or Georgia’s North-Atlantic role.

Of all the states that joined NATO at the end of the 1990s, only Poland has made a real contribution to its capacity. Warsaw has indeed been extremely enthusiastic, insofar as it quite rightly views the alliance as an effective means of promoting Poland on the world stage. By answering the call in September 2006 for additional forces, sending 1000 of the 2500 troops requested by NATO command, Poland de-facto saved the mission.

Other allies showed no enthusiasm whatsoever and agreed with great reluctance to the larger contingent. The US and UK worked hard at Riga to convince Germany, Italy, Spain and France to remove the restrictions they have placed on the engagement of their forces in Afghanistan. As it turns out, the “Old Europe” is prepared to serve in the relatively peaceful northern parts of Afghanistan, but not in the south, where active combat is the norm.

Ukraine has the potential to become a “second Poland;” that is, a country ready to make a real contribution to the operations of the organization, and could even put NATO membership at the centre of its international self-identification. However, the internal situation in Ukraine and Russia’s strong opposition make Ukraine’s potential membership a problematic issue for the time being.

In a Washington Post article published in March 2006, Ronald Asmus and Richard Holbrook asserted that if it had not expanded in 1990s, NATO “would probably have atrophied and become increasingly irrelevant, because it would have failed to address the historic security issues of that decade: stopping ethnic cleansing in the Balkans and helping to create a new Europe.” The authors go on to argue that since this last task has been completed, the alliance should move onward to address global problems.

However, further expansion in the spirit of 1999 and 2004 would not signal a new agenda, but simply reinforce the algorithm of the Cold War’s conclusion. A cardinal shift of mission and re-orientation towards other theatres, such as the Middle East and the Pacific (to the extent that China grows in influence and ambition), require a completely different perspective on who could act as a partner for NATO.

This theme has been discussed actively since the beginning of 2006. The US ambassador to NATO (and former aide to Dick Cheney) Victoria Nuland said in a Financial

# 1, 2007 Moscow Defense Brief�The Globalization of NATO: Prospects and Consequences

Times interview that Washington sees the alliance as “first and foremost a political alliance devoted to strengthening and defending our democratic values at home and around the world.” In her opinion, NATO should transform itself into a “globally deployable military force,” whose area of operations include virtually the entire globe, partnered closely with countries like Australia, Japan and South Korea.

Nicholas Burns, the US Undersecretary of State for Political Affairs, asserts that the transformation of the alliance would entail the development of partnerships with countries beyond NATO’s borders: “We can train more intensively from a military point of view and grow closer to them because we are deployed with them. Australia, South Korea and Japan are in Afghanistan. They have all been in Iraq... They have all been in the Balkans.”

Ivo Daalder and James Goldgeier write: “NATO no longer needs to have an exclusively transatlantic character. Other democratic countries share NATO’s values and many common interests — including Australia, Brazil, Japan, India, New Zealand, South Africa, and South Korea—and all of them can greatly contribute to NATO’s efforts”. These authors suggest that “the North Atlantic Treaty must be amended, particularly Article 10, which currently limits new membership in NATO to European countries”.

The former Spanish prime minister Jose Maria Aznar, who in his time strongly supported the US operation in Iraq, made a presentation March 2006 to the Institute for Contemporary Affairs in Jerusalem, where he said: “If we trace the line between the West and the rest, Israel is on the same side as Europe, the U.S., Japan, and Australia. We defend the same values against the same enemies.” Mr. Asnar explained that by the “same enemies” he means “Islamic extremism and terrorism,” and to confront its enemies “NATO must undertake

a wide set of reforms, both conceptual and structural.” The ex-premier then called for serious consideration of Israel’s membership of the alliance.

Granted, Asnar’s position is exceptional for continental Europe. In her answer to the US call to give NATO a more global mission, the French Minister of Defense Michele Alliot-Marie wrote in Le Figaro: “The development of a global partnership could...dilute the natural solidarity between Europeans and North Americans in a fuzzy entity…. It would “send a bad political message, that of a campaign launched by the West against those who don’t share their ideas. What a pretext we would offer to those who promote the idea of a clash of civilisations.”

Clearly, the debate does not yet indicate that NATO will move in precisely this direction, nor is there any guarantee that a serious transformation will in fact be launched. The US is confronted with many serious problems, many of its own doing, and under such conditions Washington may simply lack the authority and strength to give the alliance a new form that would still respond to its needs.

However, should the scenario for a “global NATO” begin to take form, staunch opposition can be expected from Russia (which has not been invited to take part in a renewed alliance), China and the Islamic world. The expansion of NATO on a global scale would provoke the creation of alternative alliances. Instead of promoting the resolution of global problems, it would lead to a new confrontation of military blocs. During the Cold War the confrontation of two camps was a source of both tension, but also a guarantee of stability. However, in the 21st century, the emergence of non-state actors has made the world a much less manageable place. The emergence of system of opposing camps would likely generate a great deal of tension, but without securing stability.

War And People

# 1, 2007 Moscow Defense Brief �Challenges to the Reform of Defense R&D in Russia

Industrial Policy

Challenges to the Reform of Defense R&D in RussiaRuslan Pukhov, Mikhail Barabanov

In the 1980s, the Soviet Union was a world leader in science and technology, second only to the United States. It spent

enormous sums on both civilian and military research and development, producing a broad spectrum of advanced military technologies and defence systems. In 1990, the Russian Federation could boast of over 4600 military and civilian science and research institutes, and spent 2.03% of its GDP on R&D, close to the OECD average.

With the collapse of the Soviet Union, science was among the principal victims of the stalled transition to a market economy. To date, the number of science and research institutes has fallen to 2900, while scientific-research funding now accounts for a mere 0.3% of GDP. From 1990 to 2003, the number of planning organizations among science and research organizations decreased by a factor of 7.8, the number of design bureau by 3.6, while the number of industrial R&D departments decreased by a factor of 1.8. The number of specialists working in R&D decreased by more than double, from 1.9 million in 1990 to 872,000 in 1999.

Severe cutbacks to military spending were the principal cause of this state of affairs. In nominal terms, military spending in 1999 was seven times less than the Soviet defence budget of 1989. But if one takes into consideration price increases during this period, real Russian military spending, reflecting the decreasing purchasing power of the rouble, decreased by thirty times from 1989 to 1999.

As a result, Russia’s defense budgets throughout the 1990s served principally the social needs of the armed forces, with the bulk of spending going to salaries, pensions, as well as housing and other services to soldiers sent to the reserves. On average, 53% to 63% of the military budget was spent in the social sphere, while other categories of expenditure were cut down to the bare minimum. Not surprisingly, R&D spending was hit hard. After the sectoral ministries responsible for creating arms and military equipment were disbanded in 1991-1993, responsibility for the financing

of science, technology, experimental and design work fell upon the shoulders of the Ministry of Defence alone, and its capacity to fulfill this role was marginal at best. The share of R&D spending in the Defence budget fell from 18.6% in 1990 to 5.7% in 1996. As a result of non-payments by the state, a total of 1149 individual R&D projects commissioned for the government’s procurement program were cancelled.

Since 1999, Russian defence spending has increased steadily, reflecting the policy orientation of governments under Vladimir Putin as well as strong economic growth. Expressed in US dollar equivalents, Russia’s military spending quadrupled from 2000 to 2007.

After the collapse of the Soviet Union, new arms purchases for Russia’s aging arsenal were put off indefinitely. Under Boris Yeltsin, the first significant purchase of arms was planned for 1996, but was postponed to 2000, and even then was not really implemented. The armaments programs adopted by the Russian government for 1995-2005 and for 2001-2010 emphasized military R&D and the creation of prototypes rather than serial production, which was to resume at a later date, under better economic conditions and in the context of the mass rearmament of the military. By 2000, the share of defence budget funds allocated to military R&D grew to 13%. This was still a relatively small amount of money and was not sufficient to prevent the ongoing degradation of Russia’s defence-science potential. Nevertheless, this policy did in fact help some sectors; the strategic nuclear forces in particular, survive to see a better day.

Chronic under-financing of the state armaments programs of 1996-2005 and 2001-2010 meant there was no significant procurement until 2004-2005, when increases in military spending finally brought some real money to the table, and led to the revival of the internal market for military production. In 2005, 183 billion rubles were spent on purchases of arms and military equipment; with 237 billion budgeted for 2006 and 302.7 billion planned for 2007.

Spending Under the Russian Federation Budget Category “National Defense”Year 2000 2001 2002 2003 2004 2005 2006 2007

Million rubles 209 445 214 668 284 158 344 525 413 700 531 133 667 257 821 172

Million dollars 7 480 7 162 9 472 11 484 14 266 18 969 23 831 30 415

Note. These figures were derived from the market rate for dollars/roubles for each year. This methodology does not reflect the real purchasing power of the rouble in the military and defence industry sectors.

# 1, 2007 Moscow Defense Brief10

Industrial Policy

Challenges to the Reform of Defense R&D in Russia

In light of the de-facto collapse of the two previous state armaments programs, Russia’s leadership decided to adopt a new program for 2007-2015 at a meeting of the government’s Military-Industrial Commission on 2 June, 2006. A total of 4939.4 billion rubles (approximately $186 billion at the current exchange rate) is to be spent over the course of this program, with 63% for the purchase of new types of arms and equipment, and the remaining 27% on defense R&D.

Although several new defense products will begin serial production in 2006-2007, the program prudently puts off major purchases to 2009-2010. Meanwhile, the priority remains on the development of prototypes. In general, the figures used to state the volumes of future purchases should be taken with a grain of salt, as prices in Russia’s defense sector have grown by as much as 20% in recent years, or twice the general rate of inflation. The government thus far has failed to take this into consideration when drawing up its forecasts, much less act to counteract this trend.

Structural Transformation of Military R&DWhile the injection of rubles is welcome and clearly

essential, financing alone will not save Russian R&D, which is also characterized by complex structural problems. The near-total concentration of R&D in large, specialized design bureaus and scientific-research institutes, structurally segregated from the factories engaged in the serial production of their designs, was a defining feature of the Soviet military-industrial complex. The design bureau was an independent organization with its own single-run production facilities and was managed, as a rule, by an authoritative “director-designer” who enjoyed a high degree of political influence.

This institutionalization of the design bureau as the core of Soviet R&D has remained practically unchanged in today’s Russia. In spite of the overwhelming reductions of funding to the defense-industry complex during the post-Soviet period, not one of the large bureaus has been closed, and each one continues its work as before, at least on paper. The Myasishchev aviation design bureau is an excellent example. During the Soviet period it specialized in the development of strategic bombers, and later, on the Buran Soviet space shuttle and high-altitude reconnaissance-planes. But although it lost almost all of its qualified personnel and has re-equipped most of its facilities to produce automobile parts, there has been no change to the bureau’s charter of incorporation and it might well even receive some symbolic resources from the state defense procurement budget.

At the same time, there have been some changes that will assist in the government’s plans to encourage the horizontal integration of design bureau. During the Soviet period there was a division of labor among design bureaus that specialized in specific niches. For example, the aviation design bureaus

Sukhoi and Mikoyan specialized in the development of fighters; Ilyushin in passenger and military-transport planes; Tupolev in passenger planes and bombers; Yakovlev in pilotless systems and vertical take-off/landing planes. Faced with severe budget cuts, these bureaus were often forced to stop work on their area of specialization and concentrate their resources on projects for which there was some demand in the market. Thus, Yakovlev stopped its work of deck-landing aircraft and focused on the development of the next-generation Yak-130 training aircraft. Simultaneously, the design bureau worked on foreign commissions, taking part in the development of ATR turboprop aircraft, the IAI Galaxy business jet, the sale of documentation for the creation of the Aeromacci M-346 training plane, and the Chinese L-15 trainer.

Virtually all aviation and shipbuilding design bureaus saw their activities diversify in a similar fashion. The decision of Sukhoi, which had never worked on passenger planes, to become involved in the Rissian regional jet (RRJ) program, is the most extreme example of this phenomenon. Such developments provoked a mass migration of engineers and technicians from one bureau to another, to the extent that individual design bureaus have lost, to a degree, their once very distinct identities built on entrenched traditions and work methods. This fusion of personnel and even top-managers could be observed in the mid-to-late nineties between the Sukhoi and Mikoyan bureaus.

There is no justification for the preservation of an excess number of design bureaus, given the limited number of projects that are actually being funded. Moreover, with the mass exodus of engineers and technicians from defense industries since the 1990s, most design bureaus are experiencing severe shortages of qualified personnel. Even those facilities that preserved the greatest scientific capacity are unable to conduct full-scale research and are forced to cooperate with competing design bureau. For example, Sukhoi, which suffered least of all from resource shortages over the past fifteen years, has a severe shortage of specialists for testing the endurance of materials. As a result, Sukhoi was forced to invite the Ilyushin and Yakovlev design bureaus to participate in its principal civilian project, the Sukhoi Superjet-100 regional plane (formerly called RRJ). After these two design bureaus withdrew from the project, Sukhoi began a mass recruitment of their engineers and technicians. In a similar fashion, Irkut plans to include not only the Ilyushin and Tupolev design bureaus, but also to recruit specialists from the Ukrainian Antonov design bureau, to begin work on the 18-tonne class multi-functional transport plane. In this fashion, a kind of spontaneous integration among various design bureaus is underway, and the de-facto establishment of ad hoc project teams for the execution of specific programs.

This spontaneous practice will be codified to a large degree with the establishment of the United Aircraft Corporation. In the framework of this mega firm, which will

# 1, 2007 Moscow Defense Brief ��

bring together the vast majority of all facilities active in the aviation industry, three aircraft-making divisions will be created: combat, military-transport and civilian aviation. Each of these divisions will in turn establish integrated centers that unite the qualified personnel active in all current design bureaus.

The same processes are even more evident the design of surface ships and submarines. Historically, the shipbuilding sector has been marked by a lesser degree of competition among its design bureaus than the aviation industry, where the inherent technical, bureaucratic and political competition among bureaus was as a rule supplemented by personal antipathy or even hatred among the chief designers. By way of contrast, in shipbuilding, the work of each bureau occupied a clearly defined niche, and they were almost all concentrated in St. Petersburg (Leningrad), far from the center of political and bureaucratic struggle. This specialization and collective isolation promoted a greater degree of cooperation and good-will during Soviet times.

At present, the Northern project-design bureau, which developed the Project 11356 (Talwar Class) frigate and the next generation Project 22350 (Fleet Admiral Gorshkov Class) frigate for the Russian Navy, appears to have the most potential for future success. The Severnoe project-design bureau is also engaged in a project to design a family of corvettes with 2000 ton displacement, though the Russian Navy has decided upon the Almaz design bureau’s more simple and inexpensive project. This project is currently building four Project 20380 corvettes, with the Steregushchiy as the lead ship.

It is well known that at the beginning of the 1990s the practice of so-called contractual relations became widespread in Russian shipbuilding. This meant that when one bureau was awarded a contract for a particular project, it would be obliged to hire on a temporary basis a few dozen designers from other bureaus located in St. Petersburg. Thus, for the past decade a large contingent of engineers and designers, each of whom remains formally employed a specific individual bureau, has already been working as a spontaneously integrated structure. This practice is characteristic in the design of surface ships (between the Northern and Nevskiy design bureau and Almaz), as well as in the submarine construction sector, where bottom-up integration has affected the Rubin and Malakhit bureau.

The government’s plan for the restructuring of shipbuilding sector takes this process fully into account. According to the Federal Agency for Industry’s plan for the restructuring of the shipbuilding sector, two engineering centers are to be established, each of which shall unite those design bureau that remain under state control. One center will be established in the framework of a submarine construction holding, uniting Rubin and Malakhit. The second will unite surface shipbuilding design bureau, including the Northern, Nevskiy and Almaz, as well as Zelenodolsk. Both centers

will be incorporated as open joint-stock companies. The submarine holding will be fully owned by the state, while the surface ship design center will include some private capital. It is thought that submarine projects will be commissioned only by the state, that is, from the Navy and other security agencies, so 100% state ownership of the center is logical. On the other hand, the surface ship center, in addition to fulfilling state orders, may well design or purchase licenses to build commercial ships for use in oil and gas exploration in the Arctic and the Far East. This could include ice-breakers, tankers for use in frozen waters and ships to transport liquefied natural gas from the Shtokman field to the Barents Sea. Insofar as these projects will involve private capital, the FAI will open the future surface ship design bureau to non-state participants.

Finally, a horizontal consolidation of the design capacity of the air defense sector has already taken place. The Almaz-Antey Concern was established in 2002, uniting the vast majority of designers and producers of anti-air defense products, from long-range SAM systems with an active range of 200 kilometers (S-300PMU and S-300B [SA-10/20 and SA-12]) to the Tor-M1 (SA-15) SAM systems. The management of the Concern was faced with the complex task of integrating various bureaus, each of which was aggressively promoting its own products. This was particularly difficult with respect to the Almaz (S-300P) and the Antey (S-300B) design bureau. The chiefs of these two bureaus, academicians Efremov and Bunkin, have been competing with each other since the 1950s, and over the years have developed a deep personal enmity. Nevertheless, a single engineering-design center for the Concern was established in the summer of 2006, which is now conducting R&D for the development of next-generation systems. The integration of design talent should allow, aside from the elimination of duplication, the creation of multi-service anti-air defense systems that will replace the missile systems of the army, land air defense, and the long-range naval air defense system.

Export DependenceThe almost total cessation of arms purchases by the

Ministry of Defense in the mid-1990s drove the Russian military-industrial complex to the verge of collapse. Exports became the only practical means of survival, and has locked many enterprises in a hypertrophic orientation towards the demands of foreign markets. This applied equally to the conduct of R&D, as only those programs oriented towards projects with some export potential were supported. Many design bureaus for the first time in their history initiated programs designed to create weapons exclusively for export, or offered custom-designed systems to one or another purchaser.

Industrial Policy

Challenges to the Reform of Defense R&D in Russia

# 1, 2007 Moscow Defense Brief��Challenges to the Reform of Defense R&D in Russia

For its part, in order to preserve the defense industrial base, the Defense Ministry began to finance R&D programs that did not have direct application to the needs of the Russian armed forces (i.e., products that the Russian armed forces would not purchase in any significant quantity), but which were aimed at foreign markets. In this manner, one might speak of the appearance of a unique symbiosis of Russia’s defense administration and its defense industry in supporting the export of arms.

It is precisely this symbiosis that explains the significant successes that Russia has demonstrated on the international arms markets in the last few years and the annual increase of arms deliveries abroad by $1 billion. By 2000, according to several estimates, as much as 70% of military R&D conducted in Russia was in support of export products.

The Ministry of Defense itself finances projects with export potential that it also plans for the use of its own forces. The Sukhoi program for the “grand modernization” of the Su-27 fighter, known as the Su-35, as well as the establishment of the Almaz-Antey air-defense version with vertical launch of the Shtil’-1 (SA-N-12) SAM complex, destined above all for deliveries to India.

This strategy of risk-sharing with foreign partners in promising R&D projects has become so deeply entrenched that attempts are being made to apply it to such key national programs such as the creation of a fifth-generation I-21 fighter. Russia’s leadership has been extremely keen to involve other countries in this project, especially India. At the same time, in parallel to the internal version, an export version called the I-21E is being planned. The contrast of the Russian approach to American fears of “leaks” of crucial technologies associated with the F-22 or JSF fifth-generation fighter program to foreign countries is remarkable.

The “Subjective Factor” as an Obstacles to Rational Planning

The hypertrophied role of the defense design bureau director that developed during the Soviet period has brought an element of subjectivity and arbitrariness to the planning of defense development, the distribution of contracts and decisions to launch products in to serial production. Frequently, the decisive factor is neither military nor production considerations, but the bureaucratic and political influence of one or another design bureau director. During the administrative and political chaos of the 1990s, the struggle for scarce state funding sharpened to such a point that industry “reform” amounted to little more than a shakedown of existing hierarchies, while the political factor became dominant in the distribution of contracts, reflecting the lobbying power of one or another firm.

This led to a significant redistribution of power in the military-industrial complex of Russia. Even though MiG over several decades had become synonymous with Soviet military aviation, Sukhoi gained a dominant position in this sector during the 1990s, while MiG suffered a deep setback. This was in part related to the export success of the Su-27 on world markets, but also reflected the back-room negotiating talents of the Sukhoi leadership. Irkut’s success in obtaining the historic Indian contract for the development of the Su-30MKI is related to a large degree to the links maintained by the management of this company with not only Russian, but Indian political circles.

The Kamov design bureau offers another example, as it gained the upper hand over the traditionally dominant Mil design bureau during the 1990s. Moreover, Kamov’s success was due not only to traditional forms of political influence, but also to methods of “informational warfare.” In 1995 Sergey Mikheyev, the head of Kamov, secured a place for his Ka-50 attack helicopter with Russian military. But after 2000, with the changeover in the Russian military and political elites, the Mil design bureau got its bureaucratic revenge, and was able to have the Ka-50/52 replaced with the Mi-28N in the service of the armed forces.

In order to limit this kind of bureaucratic lobbying, there were attempts during the mid-1990s to introduce a competitive system of defense contracts, including for R&D projects. These efforts have seen only partial success. The system of competitive tenders works only for relatively small projects and for contracts issued by the Ministry of Defense (though even here the occasional corruption scandal erupts), but as for large contracts and those of essential importance for national security, these competitions are largely for show. Here, as elsewhere, the deciding factor remains the bureaucratic influence of the participant, as well as the subjective preferences of highly placed military and political decision makers. The decision of the Russian Air Force to choose the Mi-28N as its main attack helicopter and to launch serial production is an excellent example, since the Mi-28N had not even begun testing, and was far behind its competitor, the Ka-52, in terms of readiness.

The influence of the “industrial generals” has had a range of negative effects. First, the directors of the more influential design bureau tend to hoard resources, leaving precious little from state contracts for second and third level subcontractors. The second drawback of this politicized system is the ability of the design bureau directors to continue to attract state financing for R&D projects that objectively show little relevance to current needs. This situation is exacerbated by the existence of ultra-specialized Soviet-era design bureau that remain focused on their traditional topics. With inadequate financing, they continue to pursue an enormous number of projects that have been dragging on for years, many of which overlap in purpose and duplicate each other. In several cases

Industrial Policy

# 1, 2007 Moscow Defense Brief ��Challenges to the Reform of Defense R&D in Russia

attempts to introduce competitive tenders for R&D have in fact served to conceal this situation, as projects that simply duplicate efforts could be presented as “competing” with one another.

For its part the Ministry of Defense, after showing preference to one developer, is often unable to resist the political pressure emanating from other design bureau to provide them with “consolation prizes,” and thus continues not only to finance redundant R&D but also to purchase redundant serial production. Having announced, after twenty years of indecision, its choice of the Mi-28N as the main combat helicopter, the Ministry of Defense simultaneously extended work on the Ka-50 and Ka-52, with the aim of using these for “special tasks.” Similarly, although the Yak-130 was adopted by the Air Force as its principal training aircraft, financing continues to be given to the competing program to develop the MiG-AT.

The result is that Russia’s security and defense agencies are in fact conducting too much R&D, given the limited resources available, while reference to that very same lack of money allows a few developers to drag their work on for an indefinite period and to appropriate funds without any real accountability for results. This situation is of course an ideal breeding ground for industrial corruption.

Obviously, Russia’s system of military R&D can be improved only with the minimization of such subjective and arbitrary factors in the planning and execution of projects. Indeed, over the past few years serious efforts have been made in this direction.

First, the accelerated consolidation of Russia’s defense industry into sector-integrated holdings is resulting in fewer overlapping and duplicate projects within these holdings themselves, and leading to the eventual establishment of a single design bureau for each holding. The Almaz-Antey air defense Concern has gone the farthest in this direction, having this year united five design bureaus into a single engineering and design center for the Concern as a whole. The managers of the other newly-established defense-industry conglomerates will be forced to take a similar path. The fact that such consolidation will occur at the internal level within each holding will minimize the political factor, when compared to the unsuccessful attempts of the government to exercise its outside influence directly upon the “historical” design bureaus.

Another means of reducing the number of projects is to expand the number of inter-service R&D, including the establishment of unified arms systems for the various services of the Armed Forces.

In administrative terms, the emphasis is on improving coordination among R&D systems and purchases. Beginning in 2000, with Vladimir Putin’s coming to power, a step-by-step transition to a system of unified procurement was put into motion. This implies the creation of a single structure that

plans weapons development, exercises general coordination over military R&D, and works on the commissioning, production and use of military equipment. Until 2000, within the framework of the Ministry of Defense alone there were no less than 57 purchasing departments, poorly coordinated among one another and wasting even those limited resources at their disposal.

In the framework of the first stage of reform, as approved by the Russian Security Council in September 2000, the number of arms procurement offices within the Defense Ministry was to be reduced to 20 by 2002; a unified procurement office was formed for the Air Force, the Navy and the Rear of the Russian Armed Forces; the number of individuals able to sign off on State purchases in the military sphere was reduced from 200 to 51; and a mandatory centralized register of all state contracts was established.

By the end of 2004 the formation of a unified procurement system was initiated within the Ministry of Defense. It is headed by a Chief of Armaments for the Armed Forces with the rank of Deputy Minister of Defense, and directly supervises the general procurement departments corresponding to the various services, the number of which has been reduced to 12. In this manner, the department responsible for the development of armaments has been for the first time in Russian practice separated from the department exercising operational command of the forces. In order to supervise R&D and arms purchases a separate Federal Service for Defense Purchases was formed under the Ministry of Defense (Rosoboronzakaz).

Finally, in May 2006, the Military-Industrial Commission (MIC) was established within the government to coordinate the activities of the defense industry and the creation of new armaments, de facto recreating a body analogous to the one operative during the Soviet period. It is expected that arms procurement on behalf of the Ministry of Defense and other agencies will conducted by a civilian Procurement and Contracting Agency for Arms and Military Equipment, established under the aegis of the MIC. The Defense Ministry’s unified system of procurement will then take on the planning of R&D and purchases, while the new Agency will take care of the contracting details. It is further expected that the Federal Service for Defense Procurement will be removed from the Defense Ministry portfolio to become a government-wide body that supervises the work of the Procurement and Contracting Agency and the unified system of procurement.

These measures should lead to the formation of a unified, civilian and relatively autonomous center for the management of defense R&D and procurement. The extent to which this system, imposed upon the military-industrial complex from the outside, proves able to overcome the consequences of the collapse and chaos of the 1990s in this sphere, will be determined in the near future.

Industrial Policy

# 1, 2007 Moscow Defense Brief��Russia’s Defense Industry in 2006

Industrial Policy

Russia’s Defense Industry in 2006Dmitry Vasilyev

The year 2006 saw several important developments that promise to shape the Russian military-industrial

complex for years to come. First, a standing governmental Military-Industrial Commission, chaired by Sergey Ivanov, Deputy Prime Minister and Minister of Defense, was created in March. The Commission is charged with coordinating the development and production of armaments, mobilization training, the development of military industry and technologies, and also to oversee the export and import of arms.

One of the results of the Commission’s work in 2006 was the development of a State Arms Program for 2007-2015 – a program funded by 4.96 trillion rubles, of which 3.41 trillion are earmarked for new serial production purchases. The Minister of Defense said that the program marks the beginning of the rearmament of the armed forces. However, in spite of the large volume of funds allotted to the program, officials have not specified precisely where all the money is coming from, which suggests that the program will be dependent upon high oil prices.

The highlight of the year in the aviation industry was the formation of the United Aircraft Corporation (UAC), meant to consolidate state shareholdings in the aviation industry. The President signed a degree on the UAC in February, but the corporation was formally registered only in November – a delay attributed to competing interests and views on the valuation of the several shareholdings merged into a single company. In the end, the UAC at this interim stage has been valued at 96.8 billion rubles and the state’s ownership share at 90.1% (see table 1).

The formation of the UAC is to be finalized by April 1, 2007. By that date the Kazan Aviation Production Association and the MiG Russian Aircraft Corporation should be reincorporated as joint-stock companies and their shareholdings, together with privately-held shares in aviation companies, will have been consolidated in the UAC. At that point the value of the company should be 150 billion rubles, with a state share of 76%. The company will conduct an initial public offering of its shares sometime before 2010.

It is worth noting that in its valuation of the UAC, Deloitte & Touche gave the cost of each shareholding in terms of a bracket or range. In order to maximize the state’s ownership share in the UAC, its shareholding in individual companies was consistently priced at the top of the range. Moreover, in order to boost the valuation of MiG, the state plans to write off the company’s debt of some 19.5 billion rubles.

Meanwhile, Oboronprom (a de-facto subsidiary of Rosoboronexport), continued to consolidate the shareholdings of Russian helicopter manufacturing companies. Following its purchase of the Rostvertol additional share issue in 2006, Oboronprom’s share in that company reached 25%. It also initiated a deal to purchase 20% of the Kazan Helicopter Plant, apparently from the management of that company, bringing its total ownership to 51%.

Rosoboronexport Director General Sergey Chemezov announced that the helicopter holding might be folded into the UAC. This might be interpreted as an attempt to bolster the holdings of the UAC before a potential exchange of share with EADS, or as an indication of the inability of Oboronprom to properly manage the helicopter companies it is acquiring.

In 2006 Vladimir Putin approved amendments to the law on state regulation of the aviation industry, giving foreign companies the right to acquire over 25% of the shares of Russian aviation companies, but only with the permission of the head of state. This was done first of all to allow Finmeccanica to acquire 25% of Sukhoi Civil Aircraft Company. The two companies signed a letter of intent in 2006 to enable the Italian company to participate in the Sukhoi Superjet-100 Russian regional jet project.

The highlight of the year in engine-building was the sale by Vneshtorgbank in August of its shares of engine-building companies in the Perm region AFK Sistema. The bank sold 81.25% of its shares in the Sales company, which control the Perm Motor Plant (71.6%), the Aviadvigatel’ design bureau (10%) and a number of other companies located in Perm. The total value of the deals is estimated at $120 million.

These events suggest that Sistema has been tasked by the authorities, together with Rosoboronexport, to consolidate the engine manufacturing sector. The first stage of this process should consolidate the shareholdings of the Perm region manufacturers, the Saturn Scientific Production Association, the Ufa Engine Construction Production Association, as well as, in all likelihood, Motor-Sich, the Ukrainian manufacturer of helicopter engines. By some accounts, the shares of this last company are already controlled by Oboronprom.

Oboronprom had already made an earlier attempt to consolidate the engine manufacturing sector. An announcement was made in May that the company had submitted a plan to the Military-Industrial Commission to create an aviation engine construction holding. The plan would have included the state-owned Chernyshev, Salyut and Klimov plants together with the privately-owned Ufa facility.

# 1, 2007 Moscow Defense Brief ��Russia’s Defense Industry in 2006

Industrial Policy

However, there have been no subsequent announcements concerning this plan.

In shipbuilding, the government approved a strategy on the development and reform of the sector to 2030. The details of this strategy were not published, except that in place of a single integrated structure like the UAC, the state intends to establish three holdings, corresponding to the three major geographic shipbuilding centres in the North, West and Far East. The Defense Minister suggested that geopolitical factors and the need to support Russian industry in the Far East lay behind this decision.

The Russia’s electronics industry got a lot of attention in 2006. The Ministry of Industry and Energy devised a strategy for the development of the sector to 2025, with a high priority given to military electronics. The ministry should submit a detailed plan to the government by February 2007 on how to spend the 23 billion rubles allocated to the sector. The first likely beneficiaries of this largess are to be the Mikron (owned by Sitroniks) and Angstrem facilities in Zelenograd.

Oboronprom’s consolidation efforts also extended to electronics. In September, the company announced the creation of a subsidiary, Radio-Electronic Warfare (REW), that would consolidate the leading companies in the sector, similar to how Oboronprom has attempted with respect to helicopter construction. The announcement suggested that formalities concerning the formation of REW would be complete by the end of the year, but no further information on this initiative is available.

Finally, Rosoboronexport’s industrial expansion reached new heights in 2006. Aside from its involvement in the reform of engine manufacturing and electronics, Rosoboronexport has delved into the consolidation of the metallurgical industry. In January, Rosoboronexport and Aviatekhnologia established a joint-venture called AT-Spetstekhnologia to manage metalurgical companies producing special metals and alloys for the defense-industrial complex. Over the course of the year Rosoboronexport acquired 66% of VSMPO-Avisma, the largest producer of titanium in the world, and launched negotiations to acquire shares of Red October, a manufacturer of special steels.

In early December Rosoboronexport created a joint-venture with Alfa-Bank which is to take an active role in implementing the Federal program for the reform of the defense industrial complex for 2007-2011. According to official reports, the joint-venture will assist in the financing, debt restructuring and trust management of the state’s shareholdings in defense industries. With every passing year, as Rosoboronexport is diversifying and becoming more involved in the reform of the sector, such arms exports have become just one of its functions.

In summary, the main result of the year was the establishment of a legal framework for the restructuring of several key sectors of the defense-industrial complex. The positive dynamic of increased funding continued from last year, driven by a large portfolio of export orders plus growth in the state defense order.

Table 1. Valuation of the Participants of the UAC

Company Capitalization, billion rubles

Percent of Shares transferred to the UAC, %

Valuation of share in the UAC, billion rubles.

Sukhoi Aviation Holding Company 52.4 100 52.4Aviaeksport 2 15 0.3Ilyushin Finance Co. 11.7 38 4.4Komsomolsk on Amur Aircraft Production Association (KNAAPO)

38 25.5 9.7

Ilyushin Aircraft Company 11.9 86 10.2NAZ Sokol 3.1 38 1.2Novosibirsk Aviation Production Association (NAPO)

2.7 25.5 0.7

Tupolev 4 90.8 3.6Finance Leasing Company 8 58 4.6

Irkut Corporation 25 38.2 9.6Total 96.8

Source: UAC. Author’s calculations

# 1, 2007 Moscow Defense Brief��The Venezuela Contracts

Arms Trade

The Venezuela ContractsKonstantin Makienko

In July 2006, Russia and Venezuela signed a series of contracts for the delivery of Russian arms worth $3 billion

during Venezuelan President Hugo Chavez’s visit to Russia. The prospects for this level of trade between Russia and Venezuela were discussed as early as 2001-2002, when a large (up to 50 units) delivery of MiG-29SMT fighters was considered. However, due to political instability in Venezuela, Russia’s caution in pursuing military-technical cooperation with an anti-American regime, and the opposition of a pro-American bureaucracy in Venezuela itself, the first real contracts for the delivery of helicopters and small arms were concluded only in 2005. In July 2006 new contracts were concluded that resemble, in both scale and variety, the Algeria deals concluded in March 2006.

What Do We Know?Full and reliable information on the contracts is not

available to the public. The aviation deals are thus far the most clearest. First, the contract for delivery of 24 Su-30MK2’s for a probable sum of $1.5 - 2 billion. Such fighters had earlier been delivered to the PLA (24 units) and the Vietnam Air Force (four units). The first four units were delivered to Venezuela in December 2006, that is, just four months after the closing of the deal. This tight schedule suggests that in spite of the fact that it secured no orders in 2005, the KNAAPO has kept its production capacity in good shape. A full production cycle of the Su-30 requires about 18 months to complete, and so the delivery of the remaining 20 fighters will most likely proceed in batches of ten units, from 2007-2008. But one cannot exclude the possibility that all 20 units will be delivered before the end of 2007. According to some sources, in addition to this contract, Venezuela negotiated an option to purchase another batch of 24 Su-30MK2. However, the likelihood of Venezuela exercising this option, if indeed it does exist, depends of several factors, first of all the stability of the regime of Hugo Chavez. Moreover, by 2008 Russia will have developed the new Su-35 fighter with fifth-generation avionics, modernized engines and a new array of weapons. Chavez has already expressed his interest in this aircraft, and so Venezuela could well place the first foreign order for it.

Details on the helicopter acquisitions also were published. As early as 2005, two contracts for a total of $201 million were signed for the delivery of 15 helicopters, including 6 Mi-17B5, 8 Mi-35M and one Mi-26T. The first contract for $120 million envisaged the delivery of 10 aircrafts (six Mi-17, three

Mi-35M and one Mi-26T). The second was for the transfer of five Mi-35M for a probable cost of $81 million.

On the eve of the July visit, a new contract for 18 helicopters was signed, including 14 Mi-17B5, two Mi-35M and two Mi-26T. In addition, it appears as though another contract for the delivery of 20 Mi-17, including two VIP versions, was agreed upon. The cost of all 38 helicopters amounts to $484 million. Thus, the total size of Venezuela’s helicopter programs, which includes the delivery of 40 Mi-17, 10 Mi-35M and three Mi-26T amounts to $685 million. This would be the largest (by cost) single post-Soviet sale of helicopters. Taking into account earlier purchases of Mi-17’s from Israeli aviation companies, Venezuela stands alongside China and India as the largest purchasers of helicopters of Russian post-Soviet production.

Information regarding other likely purchases must be considered preliminary. For example, there is oblique evidence of Venezuelan interest in Russia’s air-defense systems. In any case, during his visit to Izhevsk, Chavez visited not only the small arms factory, but also the Kupol plant which produces the Tor-M1 missile system. An air-defense system purchase would be fully consistent with the logic of Venezuela’s military-technical policy, one of the priorities of which is to protect the airspace of the country after the decommissioning of its F-16s, which are no longer combat-ready due to the US embargo on deliveries of spare parts.

The deal to sell Venezuela a batch of Russian AK-103 assault rifles and licenses for their production of is noteworthy, because this is the first time that Russia has made a deal not just to deliver arms but to construct a turn-key facility for their manufacture.

Finally, Venezuela has demonstrated its interest in Russian An-74 military-transport aircraft. Earlier, Caracas intended to purchase twelve CASA-C-295 light transport aircraft of European production, but this deal was blocked by the USA, which supplies its engines. In October, a Venezuelan delegation visited the Omsk Polyot factory that produces the An-74. There have also been reports that the Russian Project 677 conventional submarine won a tender conducted by the Venezuelan Navy for the purchase of next-generation submarines, but the contract itself, it seems, will be signed at a later date.

Qualitative AnalysisThis series of Venezuelan contracts is the second

concluded in 2006 (after the Algerian contracts) which include the following elements:

# 1, 2007 Moscow Defense Brief ��The Venezuela Contracts

Arms Trade

1. A multi-billion dollar scale, far exceeding the usual level for Russian arms exports. Only the contract for the licensed production by India of the Su-30MKI, worth $3.3 - 3.5 billion, can compare to the cost of the Algerian package, at $7.5 billion, and the cost of the Venezuelan package, at about $3 billion.

2. A geographic expansion beyond Russia’s traditional customer base in India and China. Algeria has now become a significant importer of Russian defense and aerospace equipment, it purchased significant amounts of Russian arms and has modernized its stocks, but it was also a significant purchaser of Soviet armaments in the past. Venezuela, on the other hand, has never made major purchases from either Russia or the Soviet Union.

3. A wide variety of weapon types, including defense and aerospace equipment for air and land forces, and very likely for the air defense and the navy.

As for the volume of the Algerian and Venezuelan packages, taken together they amount to over $10 billion, making up half of the current portfolio held by Rosoboronexport. Moreover, for the first time in Russia’s post-Soviet history its exports are well-balanced geographically, going beyond the Indo-Chinese “reservation.” One can now speak of a group of five to six states that will remain the major purchasers of Russian aerospace and defense equipment

until 2009-2010. This includes the traditional customers India and China, and the new additions of Venezuela and Algeria. In a few years, once deliveries of the Su-30MKM begin, Malaysia will join this club. It is also reasonable to suppose that relatively large sales will be made to Syria and Iran.

Diversity is another distinguishing feature of the Algerian and Venezuelan packages. The range of products includes military aviation, naval equipment, air-defense and land forces armaments. This suggests that Russia has moved beyond the mere sale of individual types of arms that characterized its trade in the 1990s, to deals with better heeled customers for comprehensive solutions to their military security challenges. Transcending the purely commercial sale of arms, Russia is now in the process of becoming a provider of security, a more complex and inevitably political relationship. The rise of Russian export volumes, the widening range of product types, and especially the geographic diversification of importers all indicate the increasingly integral power of Russia, now recognized by importing states as at least the equal of France or the UK. Indeed, with the exception of China, for which Russia remains practically the only available source of armaments, both Algeria and Venezuela could have turned to the Europeans to satisfy the majority of their defense equipment needs.

Table 1: Identified and Supposed ContractsSystem Number Cost Date of Signature Source and Comments

Confirmed Contracts

Su-30MK2V fighters 24 $1.5 billion* 17.07.2006 Kommersant, Vedomosti

Mi-17 transport helicopters 3 $26 million

Transport and attack helicopters 6 Mi-17, 3 Mi-35M, 1 Mi-26

$120 million 2005

Attack helicopters 5 Mi-35M $81 million 2005

Transport and attack helicopters 2 Mi-35M, 2 Mi-26, 34 Mi-17

$484 million 15.07.2006 Kommersant

AK-103 assault rifles 100 000 $54 million 03.07.2006 Kommersant

Factory to produce AK-103 assault rifles, factory to produce 7,62 mm ammunition

$474.6 million 12.07.2006 Kommersant

Total $2 739,6 million

Supposed and possible future contracts

Tor-M1 SAM systems NA NA; likely a few hundred million dollars

Vedomosti

Patrol boats NA Vedomosti

Project 677 conventional submarines 2 Tender by Venezuelan Navy

An-74 transport planes 6 $72 million

*estimate Source: table by the author

# 1, 2007 Moscow Defense Brief��

Arms Trade

The Venezuela Contracts

The Venezuelan contracts are also indicative of an important geopolitical process. After a decade and a half of forced passivity in the Latin American region, Russia is re-establishing its presence in this soft underbelly of the USA. Moreover, Russia’s return is felt not on an ideological plane, but on two important geopolitical and geoeconomic fronts, namely, in military-industrial cooperation and in energy. As distinct from Soviet times, when the Soviet presence was based on Cuba, Russia now relies on Venezuela, with its much richer base of resources. To secure this toehold Russia will most likely promote cooperation not only in the delivery of arms and joint energy projects, but also in the area of civilian

machine-building. This could include deliveries of Il-96 and Tu-204 passenger aircraft to Venezuela and other states in the region. In addition, Russia could renew the Soviet practice of making discounted and subsidized deliveries of defense and aerospace equipment to the poorer states in the region, many of which, like Cuba, have not renewed their stocks of arms in over two decades. Against the backdrop of growing leftist and anti-American sentiment in Latin America, Russia has a unique opportunity to provide a worthy, asymmetric response to US activity in Russia’s sphere of interest in the near abroad.

# 1, 2007 Moscow Defense Brief ��Russia-India Military-Technical Cooperation:

Current Issues and Perspectives

Arms Trade

Russia-India Military-Technical Cooperation: Current Issues and PerspectivesKonstantin Makienko

Current Situation: Rising Competition on the Indian Market

The past few years have seen a sustained rise in the presence of French and Israeli arms manufacturers on the Indian market, while the US has also just recently launched upon a new strategy of engagement.

The French and Israeli efforts date to the early 1990s. With the collapse of the Soviet Union and the danger of interruption of supplies from Russia, the Indian military sought to diversify its sources of arms procurement. The relative success of the French and Israelis was enhanced by the growth of Indian demand into market segments where Russia had only weak offerings, including unmanned aerial vehicles (UAV), command, communication and reconnaissance systems, as well as non-nuclear submarines with air-independent propulsion systems. It is worth noting that in the majority of cases the Indian military chose a non-Russian system only when there was no Russian option available, or when the Russian offering was patently non-competitive. The decision of the Indian Air Force to purchase the British BAE Systems Hawk trainers was perhaps the only time when Russia had a reasonable chance to win a contract and failed.

A newer threat to Russian positions is posed by the US decision to launch a vigorous military and political engagement with India, with the aim of bringing India into a global anti-Chinese league, together with Japan, Taiwan and South Korea. The Americans intend to increase their share of the Indian market to 20-25% by 2015. Aside from air-defense systems, US companies have the best chance to succeed in support, rather than combat systems. Thus, Lockheed Martin is actively marketing its C-130 Hercules transport aircraft, but not its military fighters.

At present, the most likely deliveries of American arms to India include the following:

P-3 Orion or P-8A maritime patrol aircrafts. Enabling factors include delays in finalizing the Russian “Sea Snake” anti-ship target search and track system, installed on old Il-38 aircraft, but the high cost of the P-8A in particular remains an obstacle;

Delivery or leasing of C-130 Hercules MTA. The slow development of an Indo-Russian MTA might enable such deliveries. Russia could lose the entire Indian market for MTAs to the US and Ukraine should the US manage too sell a large batch of Hercules to India;

Deliveries of Patriot PAC-3 air defense missile systems with enhanced anti-missile capacity. India’s interest in the Patriot derives from the stoppage of joint production of the S-300B, though Russia retains a fair chance at selling the S-300P and/or the S-400 on the Indian market.Nonetheless, in spite of Western activity on the Indian

market, demand for Russian arms revived since the pause from 2004-2005 that followed the large contract for the Gorshkov aircraft carrier and MiG-29K. For instance, a second order for Talwar-class frigates was placed in the summer of 2006, worth $1.6 billion, and a decision was made to purchase additional batches of T-90S tanks and Mi-17-V5 helicopters. The contract to develop AL-55I engines for the Indian HJT-36 trainers is also important in this regard. In addition, a decision in principle was made to modernize the entire fleet of MiG-29 to the MiG-29SMT, and to purchase a second batch of carrier-based MiG-29K fighters. Thus, Russia still appears to enjoy good or even preempted prospects of selling its products on the Indian market.

The following factors will determine whether Russia maintains its positions on the Indian market:

Competition for the Indian Air Force tender for 126 multirole fighters;

The development of the Indo-Russian MTA project; Programs to develop a fifth-generation fighter.

The Tender for 126 FightersThe purchase of 126 multirole fighters is likely to be

the largest single Indian program in the coming years. Historically, it began with the notion of directly purchasing the French Mirage 2000-5 fighter, however, after the conditions for this purchase were changed, the Indians decide to hold a new tender. Aside from the Mirage 2000-5, all other fourth

# 1, 2007 Moscow Defense Brief20

Arms Trade

Russia-India Military-Technical Cooperation: Current Issues and Perspectives

generation fighters currently available on the market have entered the competition, from ultralight to medium aircraft. These include the Russian MiG-35, the American F/A-18E/F and F-16, the European Eurofighter Typhoon, the Swedish Gripen and, in addition to the Mirage 2000-5, the French Rafale. In 2005 the Indian Air Force distributed a Request for Information (RFI) and also established the details of a Request for Proposal (RFP), though the latter document has not been issued due to personnel shuffles in the Ministry of Defense and the occasional corruption scandal.

On the whole, the Russian MiG-35 has a good chance of wining this tender. However, to succeed, the following conditions have to be met:

Full support at all levels of government right up to the head of state. It is only at this level that an effective linkage could be made between support for military-technical programs and access for Indian companies to Russian energy projects;

Rapid progress on the Indo-Russian MTA project would create a positive political and psychological atmosphere for the promotion of the MiG-35;

A domestic order of at least some MiG-35 or closely-related fighters would provide a strong stimulus to the MiG-35’s chances in India;

A competitive offer of air-launched weapons and active phased-array radar would also sharply improve the odds for the MiG-35. More state financing for the development of such next-generation systems is desperately required.

The successful integration of Russia’s aviation industry would enable Sukhoi, Russia’s best design bureau, to support the interests of the MiG aircraft company. The prospect of applying the results of Sukhoi’s work on a fifth-generation fighter or the Su-35 to the MiG-35 project is promising. MiG corporation has been showing some positive

signs recently. Its financial position has improved, while its production and scientific-technical potential are growing. MiG has shown progress on the creation of a Russian active phased-array radar. In 2007, Fazotron-NIIR plans to install the first prototype of the Zhuk-A radar on a flying laboratory. All preconditions for the successful major modernization of the RD-33 engine are in place. Thus, the corporation is in its best shape it has seen since the collapse of the USSR to compete for the Indian tender. On the other hand, postponements to the holding of the tender leave time for Delhi and Washington to develop closer relations. Rafale might also conclude its first export contracts, which would reduce the cost of the French fighter.

Other Joint ProgramsIn general, Russia’s strategy to retake the Indian market

should be founded on a new paradigm for military-industrial cooperation: from one based on direct sales or at most licensed production to a paradigm of joint projects based on the sharing of risks. India is an ideal partner for such projects for the following reasons:

Russia st i l l maintains a certain technological superiority, which allows it to play the leading role;

There are no military-political risks to such cooperation. On the contrary, the military development of India is in Russia’s national interest;

India has demonstrated a clear interest in the implementation of such projects.Russia and India are already implementing one such

project – the heavy long-range supersonic anti-ship PJ-10 (BrahMos) missile. However, this program does not envisage purchases by the Russian Navy.

The next major cooperative project will be the program to create the MTA multirole transport aircraft. Together with an acceleration of work on the MTA, it is essential to begin preparatory work on a project to create a light fifth-generation fighter in the sub 20-ton class, which India has expressed an interest in pursuing. These three projects: MTA, light fifth-generation fighter and the purchase of 126 multi-role fighters, could also be linked together. A dynamic start to the MTA program would demonstrate Russia’s ability to execute joint military programs with India on the basis of risk-sharing. This in turn would establish a foundation for work on a joint Russo-Indian fifth-generation fighter. Meanwhile, an awareness on the part of India’s military leadership of the schedule of work for the fifth-generation fighter would could lead them to reduce their requirements for the tender of 126 aircraft and opt for a more conservative interim measure to purchase additional MiG-29SMT and Mirage 2000-5.

On the whole, the prospects for further military-industrial cooperation between Russia and India depend not so much on the activities of competitors as the ability of the Russian defense industrial complex to overcome its own organizational problems and to secure state support in the form of lobbying for its products on the highest political level, the modernization of legislation, and finally the targeting of funds to support the domestic purchase of weapons systems destined for the Indian market.

# 1, 2007 Moscow Defense Brief ��The Indo-Russian Transport Plane Project:

Background, Status and Perspectives

International Cooperation

The Indo-Russian Transport Plane Project: Background, Status and PerspectivesRuslan Pukhov

Discussions on the creation of an Indo-Russian transport plane were launched towards the end of the 1990s, once

the Russian Air Force had determined its future needs in the area of military-transport aviation. It was assessed that the modernization of the aging fleet must begin with the class of light MTAs, replacing the An-26 with the Il-112V. The next priority would be to purchase a new generation of medium transport to replace the An-12. The An-70, designed in 1987, was originally earmarked for this purpose, but the Air Force was now looking for a more up-to-date option. With its excessive takeoff and landing requirements, the An-70 does not match the specifications of the 20-ton payload class. The project has been confounded by serious technical problems, having to mainly with the promising but not fully developed D-27 engine, as well as the lack of clarity in Russia’s political relations with Ukraine.

The Tupolev project Tu-204-300 (Tu-330VT) is one possible alterative to the An-70. However, Tupolev has not shown much dynamism in taking this project forward, and it remains at an early stage of development. Moreover, the Tu-330 has turned out to be rather heavy as a replacement for the An-12. As of 2006, it is clear that the financial and innovation capabilities of Tupolev leave little room for hope that this project will succeed.

Under these circumstances, the most realistic option for the creation of a medium transport aircraft remains the Indo-Russian project. Irkut, Ilyushin and Rosoboroneksport are the Russian participants in the program, while the Indian party is represented by HAL. Since the Irkut corporation gained a controlling stake in the Yakovlev design bureau, the latter has also become increasingly involved in the project. Nikolai Dolzhenkov, first vice-president of Yakovlev and vice-president of Irkut, is serving as the director Irkut and Ilyushin joint programs.

This project has several important benefits. First, technical and financial risks are divided between two partners. Secondly, the aircraft matches precisely the class-specifications of a replacement for the Lockheed C-130 and the An-12. Third, the aircraft is being designed from the start for dual-use, satisfying military requirements but with commercial potential as well. Finally, the participation of two nations guarantees a base number of orders. For its part, the Indian Air Force has signed a letter of intent to purchase 45 aircraft with an option for a second batch of the same number. The Russian Ministry of Defense plans to purchase no fewer than 100 aircraft by 2025.

The military-operational requirements of the aircraft were jointly established in 2005, which required some harmonization of the requirements of the Russian and Indian air forces. One of the main points of contention concerns the engine unit. The Indian party prefers to equip the aircraft with an engine of Western production, such as the V-2500 or the CFM-56. These engines are already in use in large numbers with Indian commercial airlines, and so their use in the Indian version of the MTA has a strong economic rationale. The Russian military naturally would prefer an engine of Russian design, for example the promising PS-12, the Ukrainian AI-436-12 or a modernized D-30KP-3 (Burlak). A likely compromise would have each customer maintain the right to choose the engine for the planes it orders, an established practice among commercial airlines in their purchases of civil aircraft.

Russia and India signed an intergovernmental agreement on the MTA project in January 2007, which sets out the following schedule. Preliminary design will begin in 2007, with detailed design to begin in the third quarter of 2008. The first flight is planned for late 2010, and testing will be completed by 2012, followed by serial production. It should be noted that any delays to the start of full-scale design work increases the risk that serious competitors will emerge, leading to a corresponding loss of interest of the Indian party in this project. The Indian Air Force has an urgent need for this class of aircraft, and they will be forced to seek alternatives if the Russian project fails to deliver. Given the recent warming of political relations with the US, some kind of agreement to purchase or lease the American C-130J MTA is entirely possible.

Potential Markets and CompetitorsCurrent estimates place the demand for MTAs to 2025

at 390 units, with 100-150 for India and Russia, and the rest to third country markets. It’s notable that of the 1300 An-12 medium transport planes ever produced, 183 were exported, with 95 still in active use.

The Indo-Russian MTA faces four potential competitors: the deep modernization of the American C-130J Hercules, the European A200M (an adjusted-to-scale twin-engine version of the A400M), the Japanese Kawasaki C-X project, and the modernized Chinese Y-8. Only the American craft is in serial

# 1, 2007 Moscow Defense Brief��The Indo-Russian Transport Plane Project:

Background, Status and Perspectives

International Cooperation

production, but the excessively high price tag of $70 million for this class of MTA pushes it out of the market for many customers. Moreover, in spite of the major modernization of the base model, this MTA is still based on a very old design that will hardly be able to compete with a truly new aircraft.

It is unlikely that Europeans will be able to begin full-scale work on the A200M before the A400M goes to serial production or before the many problems confronting the A380 and the A350 are solved. Japan’s products are generally extremely expensive, its domestic law places stringent restrictions on military exports, and the country remains politically dependent upon the US, which has proven successful in blocking the development of the aviation industry of its satellites.

Thus, the most dangerous competitor to the Indo-Russian MTA on third-country markets could in fact be a deep modernization of the Chinese Y-8, which in its time was modeled on the An-12. Chinese success at endlessly modernizing the MiG-21 shows that PLC engineers are fully capable of developing technology from the 1950s. In any case, one might conclude that, for the time being at least, the MTA project enjoys a window of opportunity to fill an empty niche on the market.

According to current estimates, the cost of R&D and preparation for production, excluding the engine, is $600 million, to be divided equally between Irkut and HAL. This estimate is likely on the low side, and the actual investment will probably exceed $1 billion.

The product is being promoted as an aircraft that will retain its technological edge for ten years after it hits the market, that is, until 2022-2025. Designed from the ground up as a dual-use aircraft, it meets military requirements as

well as civilian standards. The project will maximize the use of electronic components and reduce hydraulic systems to a minimum. The designers have aimed to create an aircraft that is 150% more effective in its transport role than the C-130J, at half the ticket price (no more than $35 million), and with minimal operating costs.

Significance of the ProjectThe MTA project is of a cardinal importance to the

emergence of Russia’s aviation industry from its prolonged crisis. Aside from the specific case of the Be-200, Russia’s aerospace engineers have not produced a new civilian or transport aircraft in 20 years. And until at least one such aircraft is successfully commercialized, the crisis cannot be considered to be over. Sukhoi is currently engaged in such a project – the creation of a regional jet. But the Supetjet 100 program is extremely risky and its success is by no means assured. Therefore it stands to reason that Russia needs a “backup” program that can serve to integrate those parts of its aviation industry that are not working on military projects.

The MTA is ideal in this regard, insofar as the risks associated with its commercialization are lower than the Supetjet 100 or the MC-21 projects, given the fact that it already has a de-facto order for 45 units plus an option for the same again. This project has the potential to restore Russia’s ability to develop new civilian aircraft. Finally, the experience gained in the development of the MTA could prove useful for the development of new military aircraft, a project for which India remains Russia’s most promising partner.

Structure of Russian Ministry of the Interior

Source: scheme by CAST.

Structure of Russian Ministry of Defense

Source: scheme by CAST.

# 1, 2007 Moscow Defense Brief ��Major Events in Russian Arms Trade and Defense Industry

in the Second Half of 2006

Facts & Figures

Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006

Importer (contractor) Date of event Description Details

1. New contracts and agreements Venezuelan contracts

Venezuela 17.07.2006 Signing of a contract between Russia and Venezuela for delivery of 24 Su-30MK2 fighters

Contract value – $1.5 bln. Contractor – Sukhoi company, units will be built by KNAAPO

Venezuela 15.07.2006 Signing of a contract between Russia and Venezuela for delivery of 34 Mi-17V-5, two Mi-35M and two Mi-26T helicopters.

Contract value – $484 mln. Contractors – Kazan Helicopter Plant and Rostvertol

Venezuela 12.07.2006 Signing of a contract between Russia and Venezuela for construction of plant for license production of AK-103 assault rifles and 7.62 mm rounds

Contract value – $474.6 mln

Venezuela 03.07.2006 Signing of a contract between Russia and Venezuela for delivery of 100 000 AK-103 assault rifles

Contract value – $52 mln. Contractor – Izhmash concern. Earlier Venezuela had directly bought another 100,000 AK-103 assault rifles

Other contractsIndia 19.07.2006 Signing of a contract between Russia and

India for delivery of 3 Talwar-class frigates (Project 11356)

Contract value – $1.6 bln. Contractor – Yantar shipyard

China 08.08.2006 Signing of a contract between Russia and China for repair under license RD-93 turbofan engines

Schedule times – 2006-2011. Contract for delivery of 100 RD-93 engines in 2006- 2008 for Chinese aircrafts FC-1 was signed in 2005

USA 11.08.2006 Signing of an agreement between VSMPO-Avisma corporation and Boeing company about establishing a joint venture for producing titanium semi-finished materials

The agreement also includes purchasing of Russian titanium during 30 years to the total amount of $18 bln

China 12.10.2006 Signing of a contract between Russia and China for delivery of 8 battalions of S-300PMU2 “Favorite” SAM systems (SA-20)

Contract value – $1 bln. Contractor – Almaz-Antey air defense concern

India 04.09.2006 Signing of a contract between Russia and India for license production of 120 RD-33 turbofan engines

Contract value – $250 mln. Contractors – Chernyshev machine-building enterprise, Klimov plant. Delivery of engine patterns will begin in 2007

Vietnam 22.12.2006 Signing of a contract between Russia and Vietnam for delivery of 2 “Gepard-3.9” corvettes (Project 1661)

Contract value – $250 mln. Contractor – Zelenodolsky shipyard. Delivery terms – 2009

Importer (contractor) Date of event Description Details

# 1, 2007 Moscow Defense Brief��Major Events in Russian Arms Trade and Defense Industry

in the Second Half of 2006

Facts & Figures

2. Authorities news14.10.2006 Russian President Vladimir Putin confirmed

“State Arms Program for 2007-2015”Program realization will take about $185 bln (4.94 trln rubles)

25.10.2006 Russian President Vladimir Putin signed amendments for the federal “Law of Governmental Control of Aviation Development”

As result, foreign companies now can buy more than 25% of shares in Russian aircraft-building companies, but only after permission of Russian President

02.11.2006 Russian Government took decision to form “United Aircraft Corporation” (UAC)

Russian Defense Minister Sergey Ivanov was appointed as the UAC Chairman, and Director General of RSK MiG Alexey Fedorov – as the UAC President

World market 15.12.2006 Russian President Vladimir Putin signed a decree, according to which from 1st March 2007 only Rosoboronexport will be allowed to export arms and defense finished production

Producers will be allowed to export only spare-parts and support previously sold units

3. Corporate events24.10.2006 Lockheed Martin corporation sold its

share in Russian-American joint venture International Launch Services

The 50:50 joint venture was formed by Lockheed Martin and Khrunichev space center in 1995. American share was bought by Mario Lemme, director and co-owner of Space Transport and also a consulter of Lockheed Martin on space projects in Russia

Europe 16.10.2006 Vneshtorbank (VTB) increased its share in EADS from 5.02% to 6-7%

Other EADS major shareholders are: Daimler Chrysler (22.47%), Lagardere & French State (29.96%), SEPI (5.48%)

4. SanctionsIran 19.11.2006 US Department of State lifted sanctions

against Sukhoi companySanctions against Sukhoi and Rosoboronexport were imposed on 27th July 2006. Formal cause was violation of Iran Nonproliferation Act of 2000. Sanctions terms – 2 years

Iran, Syria 28.12.2006 US Department of State imposed sanctions against Rosoboronexport (ROE), KBM machine-building design bureau and KBP instrument design bureau

Sanctions terms – 2 years. Formal cause was violation of Iran and Syria Nonproliferation Act of 2005. ROE was sanctioned for the second time, KBP – for the forth time

Source: Russian press

Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006

# 1, 2007 Moscow Defense Brief ��

Facts & Figures

Major Identified Contracts for Delivery of Russian Arms Signed in 2005

Our AuthorsMikhail Barabanov. Graduated from the Moscow State University of Culture. Currently employed by the Moscow city government. Independent expert on naval history and armaments.

Fyodor Lukyanov is Editor-in-Chief of the Russia in Global Affairs journal, published in Russian and English with participation of Foreign Affairs, and an international columnist with the Kommersant daily, Vedomosti, The Moscow Times and Gazeta.ru online source; leading national radio stations and TV channels. Fyodor Lykyanov graduated from Moscow State University 1991 as a Germanist. He worked as a correspondent, commentator and editor for many Russia media. Member of the Presidium of the Russian Council on Foreign and Defense Policy, an influential independent organization providing foreign policy expertise.

Konstantin Makienko. Graduated from the Oriental Department at the Moscow State Institute for International Relations in 1995 and the French-Russian Masters’ School of Political Science and International Relations in 1996. Head of a project on conventional armaments at the Center for Policy Studies in Russia (PIR-Center), 1996-1997. Since September 1997, Deputy Director of CAST. Author of numerous articles on Russia’s military-technical cooperation with other countries.

Ruslan Pukhov. Director of the Centre for Analysis of Strategies and Technologies (CAST) since 1997. In 1996 he graduated from the School of International Information of MGIMO University under the Russian Foreign Ministry. In 1996-1997 – post-graduated student of the French-Russian Master d’Etudes Internationales Sciences Po – MGIMO. In 1996-1997 – researcher of Conventional Arms Project in the Center for Policy Studies in Russia (PIR Center). Author of a number of research articles on the conventional arms trade and the defense industries of Russia and France.

Ivan Safranchuk. Ph. D. Political Sciences. Graduated from the Moscow State Institute for International Relations. From 1997-2001 was a researcher at PIR-Center and director of a project on nuclear arms control. Since July 2001, Head of the Moscow Office of the Center for Defense Information. Author of a number of scientific articles and reports on nuclear policy, nuclear disarmament, nonproliferation of WMD and Russian foreign policy.

Dmitry Vasiliev. Graduated from the State University – Higher School of Economics with a Master’s Degree in Strategic Management in 2004. From 2003 to mid 2004, worked as an analyst at Absolut Bank in the Department of Risk Evaluation. Currently working since July 2004 as CAST researcher and editor-in-chief of the Eksport vooruzheniy (Arms Export) journal.

Vladimir Vasiliev. Ph. D. Graduated from the All-union Correspondence Juridical Institute and Academy of Ministry of the Interior, USSR. Worked for law enforcement agencies, took up positions of the First Deputy Minister of the Interior of Russian Federation – Head of Organized Crime Headquarter, Deputy Secretary of Security Council of Russia. Colonel-general of police. State Duma member from Tver single-member constituency #173 (Tver region). Member of political faction “Edinaya Rossiya”. Chairman of State Duma Security Counsel of the Federal Assembly of Russian Federation. Deputy Director of State Duma Coordinating Committee on Russian security law development. Representative of the Federal Assembly of Russian Federation permanent delegation in NATO Parliamentary Assembly.