SHAKE-UP LOOMS FOR RUSSIAN ARMS EXPORTERS.

The Kremlin has launched what could be yet another major restructuring of the country’s arms export establishment. Reports late last week said that President Vladimir Putin had issued a series of decrees merging Russia’s two state arms trading companies–Rosvooruzhenie and Promeksport–and removing the directors of the now defunct companies–Aleksei Ogarev and Sergei Chemezov, respectively. The state arms trading company created by the merger–Rosoboroneksport–will be headed by Andrei Belyaninov, the former deputy head of Promeksport (Itar-Tass, November 4; Reuters, November 5; Allnews.ru, November 6).

The merger announcement follows weeks of speculation that a shake-up of the arms export establishment was looming. It also follows the October 26 announcement of another Putin decree, this one apparently aimed at renationalizing, at least to some degree, Russia’s cash-strapped defense industries (AFP, Kommersant, October 27; Moskovsky komsomolets, November 2). The moves together appear, on the one hand, to signify a Kremlin push to reestablish its control over the country’s increasingly unwieldy arms export establishment and to improve its performance on foreign markets. At the same time, the upheaval is but the latest in a long line of shake-ups of the arms export sector since the dissolution of the Soviet Union. Those shake-ups, and this one with it, have also exhibited a purely political (and some might say monetary) element insofar as they reflect efforts by successive Russian government leaders to place their own people atop the head of these lucrative arms trading companies. In that regard, the ouster of Ogarev was a surprise to no one. He has long been seen as a close associate of former President Boris Yeltsin’s “inner circle” and, since Putin’s election, his days were thought to be numbered.

While it will probably take some time to sort out exactly what the merger of Rosvooruzhenie and Promeksport means, initial commentary in Russia suggested that it was a Promeksport victory. That is in itself somewhat surprising, given that Rosvooruzhenie was by the far the larger and more powerful, having accounted in 1999 for some US$2.83 billion in revenues out of US$3.5 billion in total Russian arms exports. Promeksport’s parallel figure was reportedly some US$180 million (Finansovaya Rossia, No. 41, November).

Sergei Chemezov, Promeksport’s director, was nevertheless said to have been angling for a takeover of Rosvooruzhenie. His effort was thought to have been aided by his being a close associate of Putin. The two served together in the German Democratic Republic in the 1980s and got to know one another then. The fact that Chemezov was not chosen to head the new Rosoboroneksport is thus another surprise. But, according to one Russian newspaper, the answer may lie in what it suggests was Chemezov’s uninspired performance as head of Promeksport. The paper said that the arms company had earned some US$250 million in 1998–before Chemezov took over–only to see its revenues fall during his stewardship in 1999 to under US$200 million. Further, during this same period, Promeksport managed to absorb what had been a third state arms trading organization–Rossiiskie Tekhnologii–but apparently was unable to convert the acquisition into increased revenues (Nezavisimaya gazeta, September 19).

Aside from trying to reestablish strong state control over the Russian arms export sector–a policy consistent with Putin’s centralizing efforts in other areas–and to place his own people in key arms posts, the latest Kremlin moves may also be aimed at improving what some experts have claimed is spotty performance by the country’s chief arms exporters. That assessment is in some respects belied by the facts. In its latest edition of “The Military Balance,” for instance, the London-based International Institute for Strategic Studies (IISS) reported that Russia had emerged as the world’s fourth-leading arms exporter in 1999 (after the United States, the UK and France), with its share of the total world’s arms market rising from 4.6 percent in 1998 to 6.6 percent in 1999. The respected defense think-tank estimated Russia’s 1999 earnings at US$3.5 billion. But IISS analysts also came to the conclusion that Russia’s relatively high arms turnover has been due not so much to the efforts of its arms exporters, but to other–and in some cases temporary–factors. Those include its reliance on old arms contracts concluded with China and India and the devaluation of the ruble (IISS, Overview: The Military Balance, 2000-2001; Vremya MN, October 21).

Indeed, Russia’s relative failure to break into new arms markets has been seen for some time now as a weakness which could, in the years to come, threaten its ability to continue earning significant arms export revenues. According to one Russian source, for example, Rosvooruzhenie contracts signed over the past fifteen months are dominated by sales to China (49.6 percent of the total) and to India (22.5 percent). Other sources have said that Chinese and Indian purchases make up 80 percent of all Russian arms sales (AVN, November 4; Vedomosti, October 12).

The Russian newspaper Finansovaya Rossia, moreover, reported recently that, as of early November, Rosvooruzhenie had not taken in even US$1.5 billion in revenues, despite its director’s earlier claims that the company would make more than US$4 billion this year. Promeksport’s revenues for this year were likewise said to be anemic, totaling only US$100 million. The paper appeared also to confirm that a package of exceedingly lucrative arms deals with India–which Putin signed with great fanfare during his September visit to New Delhi–have in fact not yet been finalized. They include the sale of 310 Russian T-90 battle tanks and a contract allowing New Delhi to produce Su-30MKI jet fighters in India under Russian license (Finansovaya Rossia, No. 41, November).

This is not to say that Russia’s arms exporters have had no recent successes. During a recent visit to Beijing by Russian Prime Minister Mikhail Kasyanov, for example, there were reports that Russia had the inside track on a billion dollar deal to supply China with early warning aircraft (AFP, November 5). But the Russian press has nevertheless frequently carried reports suggesting that missteps by Russian arms exporters–including competition among the top arms exports companies–have served to undermine the attractiveness of Russian arms on international markets. Putin’s decision to consolidate Rosvooruzhenie and Promeksport is presumably aimed at ensuring that Russian arms sale efforts are more carefully coordinated from now on. His earlier decree calling for increased state control over defense sector companies may also rein in the activities of the six Russian defense enterprises which have been given the right to peddle arms independently. What remains unclear is whether this sort of recentralizing will have a positive impact on Russian arms sales efforts. The Kremlin, after all, tried a “monopolistic” model earlier this past decade which centralized arms export authority in Rosvooruzhenie. The decision to loosen control and allow other organizations to sell arms–which is apparently now being reversed–was itself adopted in order to make Russia’s arms dealers more responsive, flexible and competitive abroad.

KALININGRAD: KREMLIN SCENTS VICTORY.