Moscow’s Declining Arms Exports

Analysis: Sanctions having negative impact on Russia’s defense industry, pushing Moscow towards deals with Iran

Vladimir Putin and Sergei Chemezov / AP
March 12, 2015

KIEV—Sanctions imposed on Russia after its invasion and occupation of both the Crimea and eastern Ukraine have had a negative impact on Russia’s defense industry, cutting off the supply of many important manufacturing components and leaving Moscow’s arms makers ready to consider fulfilling contracts for Iran.

Sanctions imposed by the United States, the European Union, Ukraine, and other nations have left many manufacturing components not currently produced in Russia unavailable to the country’s arms industry. But Moscow plans to substitute these components with indigenously produced options.

"Sanctions have given us a kick to produce our own," said Sergei Chemezov, the general director of the Russian state-owned defense conglomerate Rostec, who made the remarks Feb. 23 in Abu Dhabi, United Arab Arab Emirates, at the 2015 International Defence Exposition and Conference (IDEX), the largest land arms and weaponry expo in all of the Middle East. "Before sanctions we procured from Ukraine, which has many defense plants and factories. By 2017, we plan to substitute all our imports," he said.

Both Chemezov and Anatoliy Isaikin, the director of Rosoboronexport, the state arms export monopoly that Rostec administers, claimed that these sanctions would not put a dent in Russia’s arms business. Isaikin said Feb. 22 that Russia’s goal of exporting weapons worth $15 billion "will be met in 2015" despite the Western sanctions.

Chemezov was unabashed about what he considered good prospects for his industry offered by miltiary conflicts and other forms of instability around the globe, insisting that the Russian arms industry was not in decline.

"I don’t hide it, and everyone understands that the more conflicts there are, the more weapons are bought from us," Chemezov said. "Our volumes continue to grow, despite sanctions. In particular it’s Latin America and the Middle East." 

However, specialists familiar with the Russian defense sector said that the Russian state-controlled military industry and the Rostec corporation that controls it have more than their share of problems. Russia’s economy is struggling due to the precipitous drop in the value of the Russian ruble against all major currencies and the decline in oil prices, the single greatest source of export earnings for Russia.

"What is almost never mentioned is the fact that sanctions and these other difficulties are bringing hard times across the defense industry," said a Russian defense industry analyst based in Moscow. "This is cutting into the bottom line even for Rostec, which has always held a kind of privileged status in present-day Russia. They have been told that they have to reduce the 600-plus staff of their central headquarters in Moscow down to around 200—a two-thirds cutback."

Most defense plants are looking at reducing staffs—even though the official statements by the country’s arms salesmen say that the export business is booming.

A daunting obstacle that faces Russia’s industry is the large number of electronic components, what Russians call the elementnaya baza, that have long been sourced from external suppliers. Other components were manufactured in Ukraine either because there was no capability to produce them in Russia or because possible production runs were too small to be attractive to any Russian firms.

These components make up the electronic infrastructure of most modern weapons systems and are the key to being competitive with analogous western models, but this supply has now been abruptly cut by the sanctions. Prospects for its defense sector’s ability to produce effective substitutes for these electronic products are not rated as very high.

"You cannot hope to have a defense electronics sector suddenly begin turning out components when you have essentially put no funding into these companies for more than 20 years," said the Russian defense industry analyst. "The people who built these kind of electronics in Soviet times are gone, the equipment is out of date. The people in the Russian government decreeing Soviet-style like a five-year planner that these firms miraculously resolve all of the defense industry’s supplier problems in just two years just have no idea of how impossible a task this is."

A potential consequence of these economic pressures on Moscow and the falling out in relations with Washington is that Russia may now begin fulfilling contracts to states such as Iran.

The Russian state TASS news agency reported on Feb. 24 that Russia has now offered its latest Antey-2500 air defense system to Iran. Moscow never fulfilled a 2007 contract to provide the Iranians with the S-300 air defense system after pressure by western governments in 2010 forced cancellation of the delivery, but those restraints now appear to be a thing of the past.

"As far as Iran is concerned, we offered Antey-2500 instead of S-300," said Chemezov when asked about the offer made to Teheran announced at IDEX.

"They are thinking. No decision has been made yet," he said. The Antey-2500 is an advanced derivative of the S-300, which is comparable to some variants of the U.S.-made Raytheon Patriot system.

However, even if Russia starts shipping arms to Iran and other nations that Rostec officials have mentioned as potential customers, these sales are unlikely to compensate for the drop off in the past several years in exports to the People’s Republic of China (PRC), once one of Moscow’s largest customers.

India, which has been a long-time customer for Russian-made weapons, has been seen as the most promising market for growth in Russia’s export weapon sales. At this year’s AeroIndia aerospace expo at the Yelahanka Air Force Station in Bengaluru, India, a major push was made by Russian firms to expand their business with India’s military.

Observers at the event said that the United States and European nations will be increasing their defense business with New Delhi, likely at Moscow’s expense. This is largely because firms from those nations have far greater ability to invest in Indian industry and offer those firms far greater access to new markets.

While power in the Russian defense industry has been consolidated under President Vladimir Putin into the hands of those with backgrounds in other areas of expertise, funding for new weapons and other projects has increased rapidly.

"The new generation of so-called ‘efficient managers’ in the defense sector have come to their jobs with either finance or legal—or, more commonly, FSB—backgrounds. They have no technical or engineering skills," said the Russian defense industry analyst, referring to the initials of the Russian Federal Security Service, the successor to the KGB headed by Putin himself shortly before he became president in 2000.

"Putting these kind of persons in charge of defense enterprises—selecting them because of their political connections or for their talents in stealing money from the state budget rather than their knowledge of the industry itself—has been a complete failure," the defense analyst said.

He added: "The cost of pursuing the war in Ukraine, the economic disaster, falling weapons export markets: this is all making Russia—and the once-mighty defense sector that made it a world power—into a fallen giant."