The statistics of armaments sales from Russia for the first six months 1999 show that the crisis in the area of armament export, which occurred in 1997-98 years, is progressively receding. After achieving high record sales of 3,4 mlrd dollars in 1996, as is known, in 1997, there was the abrupt decrease in export volumes to 2,7 mlrd. dollars. In 1998, due to intensification of work of FGUP "Promeksport" and RPK "MAPO" the incomes were stabilized approximately at the same level of 2,7 mlrd. dollars. Whereby, the export of GK "Rosvooruzhenie" was continuing its fall and reached 2,046 mlrd dollars (1) (2,3 mlrd dollars taking into consideration the deliveries having passed from 1997 (2)). The preliminary information concerning results of export operations for the first five months allow to hope, that in 1999 the sales growth, which, however, have not reached 1996 record high figure, will occur.
Once again about the crisis
Today, discarding errors due to the proximity and the personal polemics between the old and new managers of Military Technical Cooperation system, one should try again to define the causes of the crisis which has happened. Among these causes it is possible to distinguish the following.
According to our idea, a major factor decisive for the failure of 1997-98, was a rigid financial Russian government policy applied between June 1996 and August 1998. As a result of this policy, the financial backing for armaments delivered as repayment of Russian State's debt (almost 25 % of export in 1996) has stopped, the military industrial complex enterprises were denied current assets, the credit resources were channeled to government current obligation market, the inflated exchange rate of rouble sharply decreased the economic competitiveness of armaments export.
At the end of 1996, the reserves of competitiveness growth in existing hyper-centralized structure of the military technical cooperation have been exhausted. GK "Rosvooruzhenie" as monopolistic exporter could no longer could ensure the growth and even simple the preservation of export volume. This company became a "bottle neck" with fixed performance capacity (3). The strategy of preferential promotion of the export of super-advanced military equipment followed by sales of license for manufacturing to importers has been also exhausted. China and India being main users of this equipment kept a purehasings rhythm, which in total ranged from 1 up 1,5 mlrd dollars per year and has weakly expressed tendency to smooth reduction of annual average values. A break-through on the new regular markets (4) has not happened.
One of causes of relatively low 1998 results was the collapse of Russian bank system, as a result of which all infrastructures of financial flows transfer have disintegrated, and the military industrial complex enterprises have lost their last current assets. Due to physical destruction of basic funds, the problems with execution by enterprises of already filed foreign orders for the first time arose.
In 1998, the Russian export was also under pressure of consequences of Asian crisis. The cancellation by Indonesia of 12 Su-30K fighters and 8 helicopters Mi-17-lB purchases led to loss in 1998 incomes of about 0,6 mlrd dollars.
Basis adverse factors, among which can be cited a geopolitic and technological marginalization of Russia, the reduction of its military - political weight, the poor general image of country and the contradictory image of its defense production, the low quality of Russian political quasi-elite, permanent personnel and institutional instability of the MTC system, had their ordinary background influence and in this sense were not triggers of the 97-98 crisis.
Recovery?
After August 1998, the new government of Evgeniy Primakov implemented the effective measures allowing to lay the foundation for overcoming the crisis in the MTC area. The fiscal policy of administration allowed to mitigate effects of 1998 financial crisis. The rouble devaluation sharply enhanced the economical competitiveness of export of high technology defense production. In the directions of "Rosvooruzhenie" and "Promeksport " at present are appointed managers possibly the most efficient in all period since 1994. Except for several attacks in the press, provoked mainly by the press service of "Rosvooruzhenie" against "Promeksport", the information wars around MTC system have almost ended.
In the end of the last year, the Minister of Economy Andrei Shapovalyants declared about possible armaments export increase in 1999 by 20 % (5). Later, the general director of GK "Rosvooruzhenie" Grigoriy Rapota has said that in 1999 the company is planning to obtain the export revenues of 2,5 mlrd dollars (6). In 1997 and 1998, the forecasts of annual export volume, which were made at the beginning of and in the middle of year, every time proved to be exaggerated. However, the incomes dynamics this year makes possible to expect, that this time, the forecasts will be accurate. For the first five months of 1999, to the accounts of "Rosvooruzhenie" have been transferred 1,085 rnlrd. dollars (7), and by the end of June, this figure has increased up to 1,3 mird dollars, which is an absolute record of incomes for the first six month for all history of existence of "Rosvooruzhenie" (8). As a rule, during first six months of year enter only 30-40 % of annual amount of payments. For example, in 1997 till August, "Rosvooruzhenie" obtained in total 800 million dollars, but the general annual result amounted to 2,7 milliards, dollar. If such dynamics of incomes will be characteristic also this year, the figure of 2,5 mlrd dollars seems more than realistic.
FGUP "Promeksport" is continuing to augment dynamically its portfolio of orders and volume of deliveries. In the past year, the enterprise signed contracts on the armaments deliveries for the amount of about 400 million dollars, including 140 million dollars worth military equipment from stocks of the Defense Ministry and 250 million dollars for the production of the defense industry enterprises (9). The supplies worth 200-250 million dollars (10) have already been executed. According to results of the first five months 1999, the portfolio of orders on hand "Promeksport" increased up to 670 million dollars (11). We estimate that the 1998 contract obligations of 150-200 million dollars passed to the current year. It means, that during five months, the contract has been concluded for the amount of 470-520 million dollars. If such dynamics will be preserved in the future, by the year's end, the orders portfolio of "Promeksport" will grow up to 1 mlrd. dollars. At present, the information concerning incomes dynamics of this enterprise is absent. According to our estimate, during 1999 they may increase to approximately 400-450 million dollars, i. e. will be doubled in comparison with the previous year. Concern Antey" has begun realization of contract on the shipment to Greece of 21 air defense missile systems "Tor-Mi". During 1999, should be delivered 6 systems for the sum of 150 million dollars (12).
The information concerning activities of other large armaments exporters among which are VPK "MAPO" and the KBP Tula, is absent for now. The experience of previous years show that these enterprises give in total 150-200 million dollars.
Consequently, in 1999, the armaments export from Russia could make up approximately 3,2 rnlrd. dollars and will approach record indicators of 1996 (3,3-3 ,4 mlrd dollars).
New opportunities and old risks
Over the past half a year, Russia has closely approached to the opening of two emerging markets, the total annual capacity of which can attain 300-400 million dollars.
First of all, in connection with expected removal of UNO Security Council sanctions the precontract preparation of activities in Libya has begun. In this connection, in Russia arose the overstately high expectations. However, it is necessary to notice, that in reality, one should not exaggerate the consequences of Libya's market opening. The volume of yearly purchases of this country won't exceed 300-400 million dollars. Russia will inevitably be faced on this market with strong competition of Ukraine, Belorussia and countries of Central and Eastern Europe, and in sector of a new expensive armament - with France. Therefore the growth of annual incomes of Russia resulting from the overture of Libya, will make in the nearest years not more than 200-250 million dollars.
Secondly, the active bilateral contacts with Syria were established. In the press appeared the information on eventual Syrian purchases of armaments in Russia for the amount of 2 mrld. dollars during following five years. However, reports on a signed contracts are also absent. The expected visit in Russia of the president of this country Hafez Assad has been cancelled for unknown reasons. At present, only one reason for which Russia can refuse to continue the military technical cooperation with Syria can be supposed, this is the USA pressures. Obviously, a threat of USA sanctions was a cause of unexplained delay in signing of big contracts. Whereby, the delay in relaunching a wide-scale military technical cooperation with this country could lead to re-orientation of Syria at other armaments sources: France, Ukraine CIS countries and China.. At present, in Syria the process of natural replacement of pro-Russia oriented military and political elite by younger officials and officers educated already in the West is taking place. Within three-five years, this process will be achieved, and Syria will become for Russia a very competitive market. The experience shows that on such markets the Russia unalterably loses to western competitors. Russia has already lost the opportunities, which arose in connection with arrival to power in South Africa of ANC administration, many representatives of which underwent military and political training in the USSR. Syria may well become the next market of lost opportunities.
Other risk connected with retards in taking decision on wide-scale military technical cooperation deployment with Syria, consists in instability of the dominant regime of Alaouite minority. In the case of Hafez Assad death a collapse of the present regime is quite possible, and in the worst case - the destruction of Syrian statehood.
It is necessary to note that the same risks appear and in connection with freezing Russian military technical cooperation with Iran. The general director of GK "Rosvooruzhenie" Grigoriy Rapota confirmed once more that Russia respects the liability to do not sign new contracts, which was assumed within frameworks of work of a commission Gore-Chernomyrdin. At present, there are many signs that Iran and USA are on the threshold of its normalization of their relations, after which also may occur the re-orientation at the western suppliers of armaments. The Russia's renouncement to enter the marginal markets under embargo (13) leads to their capture by China, and in case of transformation of these markets into normal competitive ones - to exclusion of Russian sales by the western ones.
When talking about risks, it is also necessary to mention a constantly persisting threat of new personal and institutional changes in MTC system. According to the situation at the end of June, the personnel changes in administration "Rosvooruzhenie" and "Promeksport" planned in connection with organization of a new management, have not occurred. However, high probability of personnel changes is maintained as before.
Besides, the organization of a new management and the beginning of simulation by this administration of new reforms improves the probability of next institutional shaking of MTC system. At present, most likely step in this direction is the unification, in that or other form under the "Rosvooruzhenie" guidance, of two other State's agencies - "Promeksport" and "Russian technologies". The idea of setting up holding company, imparting them the status of daughter enterprises of "Rosvooruzhenie", transmitting to the Gogolevski boulevard the rights to distribute orders arriving from foreign customers is discussed. As an indicator of such trend could be perceived the sudden declaration of Vice-Prime-Minister Ilya Klebanov that "Promeksport" had exhausted its operation capacity due to rapidly ending armaments resources at in the stocks of Defense Ministry. This declaration is ill-founded and can explain only the Vice-Prime-Minister's attempt to denote verbally his adhesion to the bureaucratic main stream.
The realization of any one of above listed variants will lead to the reproduction of the situation at the beginning of 1997 and will provoke the elimination of Russia from markets of surplus armaments. Whereby, namely the cheap sales of armaments from the arsenals of Defense Ministry and factories warehouses helped to stop a decline in exports in 1998 and will be favorable to growth of export in the current year.
Expansion on the market of surplus armaments
Activities of "Promeksport" and VPK "MAPO" in 1998 showed that in conditions of Russia's restraint to enter marginal markets under embargo, the expansion on the market of surplus armaments from Defense Ministry arsenals and factories warehouses becomes the major reserve of armament export growth. In 1996 and 1997, VPK "MAPO" completely ceased the export of MiG-29 fighters. In part this was caused by the internal crisis in the group, in part -with the aspiration of the group direction to carry out sales at prices not lower than Malaysian prices. It is reasonable to suppose that as a result of such approach, Belarus has managed to intercept the order for Russia to deliver 16 MiG-29 (probably, in variant 9-12 or 9-13) and 2 M1G-29UB (delivered, however, from the Nizhny Novgorod aircraft plant "Sokol") for the amount of 385 million dollars.
Moreover, it is widely known that in the Lukhvitse machine-building plant are stocked several dozens of MiG-29 in different state of readiness, which can be delivered on the market in extremely short deadlines and at extremely low price. In 1998, when the economic situation of Group became catastrophic, the strategy of bargain sales of Lukhvitse planes to the peripheral countries of Asia, Africa and Latin America has begun. As a result, within one year, to Eritrea and Peru, 9-12 MiG-29 for a total amount of 150 million dollars were sold. (14 had been delivered)
The Russian expansion at the market of surplus armaments, through activities of "Promeksport" and, in part, VPK "MAPO" (with old versions of MiG-29) would lead to the exclusion of Ukraine, Belarus, CIS countries and China from small markets of Latin American, Africa and South Asia, where the demand for simple and cheap armaments is predominant. In order to accomplish this end, Russia has to solve two problems. First of all, its price policy in respect of surplus armaments must be more flexible and determined exclusively by the factors of demand and competition. The free of charge supplies from Defense Ministry arsenals, under condition of payment of transport costs and pre-sale preparation by customers, are quite admissible. Secondly, the response time to customer requests should be abbreviated so as to ensure deadlines such as those being offered by Ukraine and Belarus.
In the logic of these considerations any changes of "Promeksport" status seem to be ill-timed and harmful. The August 1997 reform is beginning to yield results, and the new institutional changes will paralyze again the MTC system during one and a half-two years, the observed escape from crisis will not take place, the Defense Ministry instead of obtaining financial resources from armaments surplus export will be obliged to cover expenses on their conservation and storing.
Notes
1) Nizavisimoye voiennoye obozrienie. No 18,1999. p. 6.
2) Idem.
3) Author's estimation.
4) Concerning the essence of the concept of "regular" market, see Makienko K. « Regular and occasional markets of armaments export. «Eksport Vooruzheniy» No 1 1998 p. 17.
5) Interfaks, 26. 12. 98.
6) « Niezavisimoye voiennoye obozrienie », No 21,1999. p. 6.
7) Military Technical Cooperation, No 24,14-20 June 1999, p. 40.
8) Kommersant-Daily, 02.07.99. p. 2.
9) Press release of public relations office of PGUP "Promeksport" &om 28th June 1999.
10) Author's estimation.
11) Press release of public relations office of PGUP "Promeksport'' from 27th May 1999.
12) Author's estimation.
13) Concerning the concept of "marginal market under embargo", see Makienko K. « Prospects of Russian presence on armament markets of South Asian countries ».. Nuclear control. 1998. T. 38, No 2. pp. 63-74.
14) When the edition of this magazine was in the press, it became known about a signature of contract on the delivery of 8 MiG-29 to Bangladesh for the amount of 115 million dollars, which means that VPK "MAPO is continuing its strategy of 1998.
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