Yuri KHOZYAINOV
State Secretary - Deputy Chairman of the Russian Federation Committee
for Military-Technical Cooperation with Foreign States (CMTC)

Military-technical cooperation (MTC) has an important role in raising national economies, advancing cooperation and strengthening the defense alliance in the former Soviet Union (FSU). This industry contains enormous scientific and technological potential, created over the decades; and the skillful and coordinated use of this potential could allow FSU countries to hold a proper place in the international community.

Development of the Russian MTC system

Unfortunately, during the last year, the problems of CMTC and its organizational development have not been resolved. A mechanism for cooperation is slowly evolving between the Committee and other Russian government bodies and agencies in charge of MTC. Russian MTC participants are beginning to understand the role and place of CMTC as the coordinating government body in this sphere.

Despite this, CMTC is working closely with the presidential administration, government and federal agencies to offer comprehensive and goal-oriented state support to the designers, manufactures and exporters of armaments.

Thus, in the interests of the strategic development of Russian MTC with foreign nations, the Committee has worked out the following documents:

• the Concept of government policy on MTC with foreign countries through 2010,
• the Concept of Russian MTC with member countries of the May 15, 1992 Collective Security Treaty - approved by President Vladimir Putin on July 2, 2001,
• proposals on procedures, conditions, volume and schedule for implementing pressing measures to advance MTC with countries of the Collective Security Treaty - approved by President Vladimir Putin in October 2001,
• the Security Council draft Resolution "On measures of state support for the export of military-use goods and their implementation mechanisms" - approved by President Vladimir Putin on January 19, 2002.

In addition, the Committee and relevant federal executive bodies are currently drafting joint proposals to improve marketing in MTC as well as concrete programs for promoting particular types and models of Russian armaments and military hardware in foreign countries that are potential importers of Russian armaments.

To lobby priority export programs, a decision was made to annually submit proposals to the federal budget on increasing direct loans to solvent foreign countries for the purchase of Russian military-use goods and covering Russian foreign debts by deliveries of such goods. The Russian Industry and Science Ministry chose 24 science-intensive projects in the defense industry for priority funding from state coffers.

In order to simplify the issue of export passports and lists and to improve the documentation of export licenses, the Committee is increasingly using its right to make decisions on the delivery of military-use goods without submitting the issue to the government or the president as part of the effort. This has significantly accelerated foreign trade deals from the moment a client submits a bid and until actual delivery. Currently the Committee makes some 50% of the decisions on deliveries of arms and military hardware. The optimization of the licensing mechanism has also significantly reduced decision-making time.

Mechanisms for rationally using foreign currency returns from arms exports are being developed, in order to advance the Russian defense industry.

The internal political and economic aspects of MTC are constantly analyzed. The purposeful government policy that is being carried out has the following objectives:

• to guarantee equal opportunities to all MTC participants,
• to rule out the revision of decisions on contractors for the delivery of military-purpose goods,
• to render legal assistance to Russian parties to MTC on questions of international law,
• to prevent unhealthy competition between MTC parties, unauthorized participation in MTC and the use of dumping prices,
• to help MTC enterprises to choose operation modes - independently or through the government mediator company,
• to promote the formation of well-organized scientific-industrial integrated companies (holdings, concerns) capable to self-financing, development and sustaining competition,
• to allow independent foreign trade transactions with second tier military-purpose goods (spare part and tool kits, maintenance services etc).

The draft of "The fundamentals of the government policy of the Russian Federation in the legal protection of intellectual property in military, special and dual purpose goods through 2010" is currently under development. In addition, efforts are made to restore the rights of the Russian Federation to intellectual property transferred to foreign countries under licensed production in those countries of weaponry developed in the former Soviet Union or the Russian Federation. The government Resolution of October 1, 2001 No. 703 approved a standard agreement between the Russian and a foreign government on mutual protection of intellectual property used and obtained in the process of bilateral military-technical cooperation. The draft agreement was sent to over 15 foreign countries as a communique from the Russian Foreign Ministry.

To promote the formation of scientific-industrial integrated entities, on October 11, 2001, the government issued Resolution No. 713 "On the federal program for reforming and advancing the defense industry complex for 2002-2006," which provided for the establishment of major corporate entities in the defense industry. By now, decisions have been made on the establishment of the Sukhoi Aircraft Holding, the State Scientific and Production Center Zvezda-Strela for Tactical Missiles, and Almaz-Antey Air Defense Concern.

To simplify independent business operations, on December 10, 2001, President Vladimir Putin signed Decree No. 1417 which gives defense companies the right to foreign trade transactions with military-purpose goods for deliveries of spare parts, maintenance services and repairs of military hardware.

With an eye to introducing deliveries and sales of military-use goods by consignment, proposals are being drafted for submission to the president on comprehensive servicing of Russian (Soviet) arms and military hardware, of makes exported in the past or present, and particularly on opening technical maintenance and repair centers abroad.

In MTC, much attention is paid to shaping a media policy and tackling problems of information security. For instance, proposals are being drafted on the formation of a single MTC information and analysis system and on supporting arms exports under the coordination of the CMTC, namely the creation of a joint center of the Committee and MTC enterprises for offering relevant analytical services.

To increase MTC efficiency, federal government bodies are concentrating their efforts in the following directions:

• Reviewing legislation on the financing of the export section of the government defense contract from sources other than the government budget. The April 2, 2002 Resolution No. 91 of the State Duma Defense Committee points out the need for amendments to the Federal Law of December 27, 1995, No. 213-FZ "On the government defense contract." Such amendments would be concerned with the revision of the formation and financing of the contract. The Economics Ministry has drafted a new edition of the federal law "On procurements for government needs," which has been submitted to the government for a second review. The amendments are meant to cancel the law "On the government defense contract" and include its key provisions in the new law "On procurements for government needs."
• Work on the bill "On offset operations."
• The improvement of the existing system of control over foreign currency returns. Amendments are considered to p. 10 of Article 1 of the Law of October 9, 1002 No. 3615-1 "On currency regulation and currency control" to allow special exporters to prolong the term for conducting current foreign currency transactions to 180 days.

Federal legislative bodies have also been advised to amend customs legislation: to introduce special norms regulating the transfer of Russian-made military-purpose goods previously delivered to foreign clients across the border in order to make the repairs and upgrades of military hardware in Russia profitable. According to the acting Customs Code, this issue does not require a legislative decision and may be settled by regulatory acts of the Russian government and the State Customs Committee. The possibility of repairing/upgrading military hardware under customs control would eliminate the need for making advance customs payments on armaments imported to Russia, which will provide more beneficial conditions for such operations to parties in MTC.

The operations of Russian parties to MTC are increasingly meeting the interests of the government policy in the sphere. In particular, efforts are applied in the following directions:

• raising the standards for arms and military hardware maintenance services and the standards for training experts, creating the necessary infrastructure in countries importing Russian armaments, expanding the exports of spares and tool kits and preventing their illegal exports, [1]
• applying various flexible forms of settlements for deliveries with consideration of the financial and economic potentials of the importer countries, pursuing a flexible price policy and reasonably utilizing offset programs,
• raising the competitiveness of Russian armaments by reducing maintenance costs,
• developing weaponry on order for individual foreign customers, [2]
• enhancing military-industrial and R&D cooperation with CIS countries and fully utilizing the existing prospects of MTC with countries in Central and East Europe,
• actively defending the intellectual property of designers and manufacturers of military-purpose goods whose interests are being protected.

Russia's prospects on the world arms market

The Russian Federation currently belongs to the top five arms exporting countries in the world. Its share in overall world arms exports stands at about 12%. Russia is involved in MTC with dozens of countries throughout the world; its main partners include China, India, Greece, the United Arab Emirates, Yemen, Kuwait, Sudan, Myanmar and the CIS countries. Unfortunately, only China and India remain major importers.

The spectrum of Russia's current MTC is quite broad. It includes export deliveries of up-to-date aircraft and aircraft armaments, surface-to-air missiles and artillery systems, tanks and armored vehicles, ammunition and small arms; the construction, upgrading and repairs of submarines and surface ships of various classes for foreign clients; assistance in organizing licensed production, repairs and upgrading of Russian-designed arms and military hardware abroad; joint R&D; and launches of foreign military- and dual-use spacecraft. Aircraft and missiles are in the greatest demand among Russian military-use goods with aircraft constituting about 60% of Russian arms exports.

In order to preserve and strengthen these positions in MTC, all Russian participants in the industry must carefully consider the main tendencies and specifics of the current world arms market:

• The growing demands of importer countries for economic and national security efficiency in MTC.
• Growing competition between key exporter countries which seek to keep their positions on the world arms market at a time when supply exceeds demand.
• The appearance of new exporter countries on the world arms market.
• The determination of importer countries to diversify sources of arms deliveries.
• Increasing demand for high tech products and the growth of their share in overall procurements.
• Rising interest in a number of importer countries in delivery vehicles for weapons of mass destruction, missile systems and high precisions weapons.
• Declining purchases of new types of armaments by countries with limited financial capabilities (which tend to choose to upgrade weaponry purchased in the past).
• The growing tendency in importer countries to acquire modern technologies and conduct joint R&D.
• A rise in the number of states purchasing military-purpose goods through third countries or front companies for resale to conflict areas and the circumvention of UN embargoes.
• The growing determination of certain countries to acquire arms and components the proliferation of which is banned by international conventions and treaties.
• The application of more flexible forms of settlements for arms deliveries and the expansion of the practice of offset agreements and swaps.
• The continued settling of government debts through arms deliveries.
• The increasing activity of foreign special services and organizations to oust competitors from international arms markets.

Need for international cooperation

It should be noted that, today, the development of advanced competitive arms systems is a long process requiring multi-billion investments, which often even the most economically and technically advanced country cannot afford on its own. It is no coincidence that leading arms and military hardware manufacturers worldwide are increasingly resorting to various forms of cooperation in the development of future arms systems. The most striking examples are the Eurofighter-2000, made jointly by the UK, Germany, Italy and Spain; the American program of developing the fifth-generation JSF fighter, which already involves nine countries; and the European program of creating a space navigation system.

Russia is also increasingly pursuing such projects. Successful examples include the following joint ventures: the Russian-Indian BrahMos program, involving the Machine-Building Research and Production Association (NPOmash); the Russian-German MAPS, involving RAC "MiG;" and the Russian-Ukrainian Medium Transport Aircraft consortium.

Overall, the integration of Russian and foreign defense industry designers and manufacturers has become increasingly relevant. While European military-industrial companies consolidate and new economic entities capable of competing with major American corporations as equals appear on the arms market, Russia generally continues to enter this market with primarily domestic output. In order to develop more competitive military-purpose goods, integration and cooperation with interested foreign arms manufacturers must be encouraged and new joint projects on arms markets must be constantly promoted, though without obstructing national interests.

Export control

It is important for Russia not to remain outside the process of shaping the new international control regime over conventional armaments - the Code of Conduct on Arms Exports. As a signatory of the Wassenaar Arrangement, Russia must take a more active part in the process of safeguarding its own interests, including:

• The prevention of the compilation and adoption as official documents of black lists of arms importers that may include Russia's traditional partners in MTC, such as Syria, Libya, Iran, North Korea and Cuba,
• The inclusion of provisions on the impermissibility of unfair competition in the Code of Conduct which would meet the letter and spirit of the document. We find it unacceptable when propaganda campaigns are conducted to discredit Russian armaments and when political and economic pressure is exerted on developing countries to prevent them from military-technical cooperation with Russia,
• Russia could and should suggest its own wording for the criteria of permissibility of arms and military hardware deliveries to foreign countries.

Russia also is objectively interested in studying the experience of West European countries in harmonizing their export policy in conventional arms trade. Within the framework of the EU, member-countries had to find a consensus between the strict norms typical of Germany and the more liberal approaches of France. Russia faces similar problems in the Customs Union formed with a number of CIS countries. The present challenges include optimizing the mechanism of arms transfers within the Union and improving government control over the process of arms deliveries beyond the union.

The West European experience could be quite useful for Russia and Belarus in the framework of their Union State. Below are the most relevant tasks, the solution of which would improve the coordination of the export operations of Russian and Belarussian arms traders:

• compiling a unified list of controlled armaments (Russia does have such a list),
• developing coordinated criteria for allowing arms sales to certain foreign countries (Russia has a special list of such countries),
• defining procedure for coordinating decisions on arms export licenses, the lawfulness of which may contradict the approved criteria.

Intellectual property

A pressing problem in Russia's MTC is restoring intellectual property rights for military, special and dual-use goods transferred to foreign countries for the licensed production of arms and military hardware designed in the Soviet Union or the Russian Federation.

For example, companies from other countries on the international markets of upgrading Russian aircraft are behaving somewhat audaciously. However, in reality, only Russian designers and manufacturers can guarantee substantial improvement of the combat capabilities of the upgraded Soviet/Russian-made aircraft or the full safety of its operation. Negative consequences include the crashes and accidents involving MiG-21 fighters of the Romanian and Indian Air Forces that were repaired and upgraded without Russian involvement. At other times, many Western companies did not coordinate their activity with the designers in upgrading Soviet/Russian helicopters that are used all over the world, including West and East Europe. This has resulted in many accidents and catastrophes involving Mi helicopters.

Unauthorized repairs and upgrades not only damage the prestige of famous arms trademarks, but also threaten the lives and safety of pilots and others. Russia is not opposed to the involvement of foreign companies in military hardware upgrades, but only as long as Russian specialists are invited.

This applies primarily to Central and Eastern European countries, whose Air Forces have Soviet-made aircraft since socialist times. Russian companies are now offering new modernization programs that are meant, among other things, to adjust aircraft to NATO standards. It is evident that the production culture in Russian aircraft manufacture is much higher than in the countries that are now entering the market of components for Russian or Soviet-designed aircraft.

There is the successful example of Russian-German cooperation in ensuring the correct operation of MiG-29 fighters of the German Air Force. Moreover, in January 2001, Russia and Germany signed an intergovernmental agreement on cooperation in upgrading and servicing MiG-29 aircraft in European countries that raises this interaction to an intergovernmental level. We invite all countries interested in Russian advanced technologies to cooperate in the same constructive spirit.

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The term "military-technical cooperation" implies interaction between different countries. Given the present conditions and specifics of the world arms market, one country cannot cope with MTC problems on its own. International cooperation is necessary. Russian and foreign arms designers and manufacturers must integrate. Russia must be more active in international export control efforts and it should pursue a more aggressive policy in defining the criteria for allowing arms sales to certain foreign countries.

[1] A good example is the formation of the Russian-German JV MAPS involving RAC "MiG" for the repairs and upgrading of Soviet-made MiG aircraft.
[2] One example is the 1999 contract of the Instrument Building Design Bureau for the development and delivery of the Pantsyr-S1 short-range surface-to-air missile system to the United Arab Emirates.