15 November 2008  Once the largest customer of Russian weapons, China is rapidly turning into a formidable rival in the arms market

Russia & CIS Observer, №4 (23) November 2008 (http://www.ato.ru/rus/cis/archive/23-2008/)

Konstantin Makienko

Only recently, China was the largest export customer of Russian weapons and military equipment. Up until 2007, the share of Chinese orders in Russia's total arms exports hardly ever dropped below 30%, occasionally peaking at more than 50%. Beijing would buy armaments in large batches, and its technology requirements were relatively low. But the first signs of a slowdown in Chinese import started emerging after 2004. The first such signal came when Beijing decided not to firm up its option on some 100 Sukhoi Su-27SK fighter jet kits, which were to have been assembled under license at Shenyang Aircraft. China previously had received 100 such kits from 1998 to 2004, and had launched steady production of adequate-quality J-11 fighters (the local designation for license-built Su-27SKs). Now Beijing appears set to "clone" this aircraft — a J-11B version, which is reportedly to be fitted with indigenous engines and radar. It is known that one J-11 currently is flying with a Chinese WS-10A engine (equivalent to Russia's AL-31F power-plant from NPO Saturn) installed in place of one of the two standard-issue Russian powerplants.

Russia's hope of getting China to order a second regiment-sized batch of Su-30MK2 multirole fighters has likewise been squashed. The first 24-aircraft batch of these fighters, which are optimized for anti-ship operations, was delivered to the Chinese navy in 2004. It now appears that there will be no follow-on order.

China's last known contract for Russian airborne platforms — 34 llyushin I1-76MD military transports and four I1-78MK tankers — was signed in 2005. One year later, it became clear that the Uzbekistan-based TAPO plant would be unable to build the aircraft due to the depletion of its Soviet-era reserves, as well as the sinking dollar rate and the originally underestimated contract costs. Russia's latest successfully-executed Chinese contract for military aircraft dates back to 2003. Ever since that time, any new orders from Beijing would be for modernization of previously-delivered aircraft, for airborne ordnance and aero engines, and also for ship-based strike and air-defense systems. The only exception is China's continuing procurement of Russian Mil Mi-17 assault/transport helicopters. Accordingly, the total value of Chinese contracts has been gradually declining. In 2007, the figure was estimated at $700-800 million. As a result, China's ranking was lower in 2006-2007 than Algeria, India or Venezuela in terms of the value of arms orders with Russia.

Nevertheless, the value of Russian arms deliveries to China between 2004 and 2007 remained significantly high — at least $1.5 billion to $2.5 billion a year — thanks to earlier contracts. This figure was primarily due to the deliveries of eight Project 636M diesel-electric submarines, two Project 956EM destroyers, and consignments of airborne ordnance and ship-based weapons systems to the Chinese navy. China remained the leading importer of Russian arms throughout this period, to be overtaken by India in 2007.

Causes of the crisis

In the 1990s, Russia and China were critically dependent on each other in the defense sphere. The European embargo on arms sales and technology transfers to China made Russia the only source of advanced weaponry and technological knowledge for Beijing. Israel could theoretically have become an alternative supplier, but Tel Aviv's historical dependence on "Washington's financial and military assistance put numerous external restrictions on its arms trade. Moscow, for its part, valued China as its key customer whose contracts accounted for one-third to one-half of the Russian defense industry's total revenues.

The situation took a sharp turn in the mid-2000s. Russian arms manufacturers lost their status as the exclusive suppliers to the Chinese market. China's defense industry had moved ahead with technological breakthroughs over the previous 15 years, emerging as a serious rival in the global arena.

All of the Russian experts who have been granted access to China's aerospace, propulsion and shipbuilding production facilities were unanimous in their appreciation of the high level of Chinese technology. The overall qualification of Chinese workforce also has significantly increased, as has the level of scientific and engineering competence in the country. In addition, Chinese specialists try to replicate any Russian weapon design they lay their hands on. Apart from the information about the J-1 IB fighter version, China has reportedly attempted to reverse-engineer the S-300 surface-to-air missile system, along with ship-based anti-aircraft missile systems and aero engines. These efforts have so far yielded limited success. However, if China's prior experience reproducing and perfecting second-generation Soviet weapon designs (particularly the Mikoyan MiG-21 fighter) is anything to go by, sooner or later its industry will be able to solve this task.

The situation in Russia has dramatically changed over the past few years. The country has managed to diversify the destinations for its arms exports.

Moscow signed up to $2 billion worth of contracts in 2003 with three Southeast Asian countries: Indonesia, Malaysia and Vietnam. This was followed in 2006 by two hefty package deals with Algeria and Venezuela for a combined amount of SI 1 billion. There are also indications that large arms contracts were signed in 2006-2007 with several Middle Eastern countries. Currently, it is India — not China — that the Russian defense industry relies on the most for filling its coffers. As of late 2007, Indian orders accounted for one-half of Russia's S32-billion arms export backlog.

In fact, Russian companies have accumulated so many foreign military orders that the successful execution of these contracts is starting to pose a problem. Throughout the 1990s, the Russian backlog of export orders generally stayed in the ballpark of $6-7 billion. There were still significant production reserves left over from the Soviet times, as well as qualified workforce and engineers. Since then, the backlog has grown nearly two-fold in real prices (and more than four-fold in nominal prices), but the defense industry's production potential has contracted, instead of expanding. As a result, several defense enterprises — Irkut Corporation, AJmaz-Antey Concern, and a number of helicopter manufacturers whose output is especially in demand within the arms market — have their production lines fully booked until 2012.

All this signifies that Chinese arms contracts have lost their former importance to Russia's defense industry in general, although the decline in orders from China is posing a clear difficulty for some individual manufacturers

Given this state of affairs, it is only logical that the Russian military is opposing the idea of offering China more advanced weapons designs and military technologies. The Russian military command and political leadership are understandably concerned about the growing misbalance in the two countries' potential. In previous years, the prospect of the national defense industry disintegrating into non-existence — which would have been the case in the absence of Chinese contracts — was justly evaluated as a much greater security threat than a potential rise in the strength of its eastern neighbor. Nowadays, the industry's survival and successful development no longer hinge on Chinese money.

It appears that Russia can hardly expect any more sizeable arms contracts from China. What's more, the completion of work on the fairly competitive F-10 and FC-1 fighters might help China return as a major international arms exporter, which was the case in the 1980s. The most probable markets for the Chinese fighters would be Russia's historical customers — the African, Latin American and Middle Eastern countries that currently purchase Su-27/30 and Mikoyan MiG-29 fighters. It is therefore quite possible that China, once the largest customer of Russian military aviation equipment, will shortly turn into Russia's rival in the global arms market.