Russian arms exportation has experienced a rapid and stable growth over the past decade and had reached $8.35 billion by 2008. The exports may reach $8.56 billion in 2009, according to estimates of the Federal Service of Military-Technical Cooperation. By contrast, ahead of Vladimir Putin's coming to power, the exports used to fall to as low as $2.6 billion per year. Since then, an improvement has affected not only the volumes but also the structure and the level of geographical diversification of the exports.

Internal Policy: Centralization

Exportation growth came about with the beginning of arms-export centralization, which eliminated the factor of competition among Russian companies on foreign markets. In 2000, a step-by-step merger of three competing companies resulted in the formation of a single public intermediary in the sphere of military-technical cooperation: the Rosoboroneksport Federal Public Unitary Enterprise; however, several largest manufacturers retained the right to export their products independently. On December 1, 2000, Vladimir Putin signed the decree "On military-technical cooperation with foreign states," which established a committee for military-technical cooperation with foreign states and altered the status of the highest controlling body in the sphere, the commission for military-technical cooperation, which from then on was to be headed by the president.
A key role in integration processes in the system of Russian military-technical cooperation was played by Vladimir Putin's comrade in arms, Sergey Chemezov, who came to head the Promeksport Company in 1999 and promoted the idea of uniting all government arms-trade intermediaries into a single company. Until 2004, Chemezov was deputy director of Rosoboroneksport and was in direct control of the preparation of the most important contracts, and in 2004, he came to head the company. Sergey Chemezov's personal acquaintance with the president secured a solid government support of the projects of Russian exporters of weapons and military hardware.
Integrationist processes went beyond the establishment of Rosoboroneksport. In January of 2007, President Putin signed an edict that gave the right to export military products to Rosoboroneksport alone and thus made the company not only the sole government intermediary but also in fact the sole exporter of weapons and military hardware. From then on, companies manufacturing weapons and military hardware had to conclude all their sales agreements only via Rosoboroneksport; manufacturers could carry out direct supply of spare parts to and servicing of hardware sold earlier - a total of 22 factories and design bureaus have that right.
Still, Sergey Chemezov had plans for a further consolidation of control over the defense industry. To that end, Rosoboroneksport would actively buy industrial assets. In 2002, its subsidiary, Oboronprom, began creating a helicopter-building holding, Vertolyoty Rossii, and an iron-and-steel holding; at the same time, asset consolidation began in aircraft-engine building, electronics, and composite materials.
The buying of defense assets was a step preparing Rosoboroneksport to be transformed into a government corporation, the bill to establish which was signed into law by President Putin on November 24, 2007. The corporation was named Rostekhnologii - that was the name of one of the three companies that formed Rosoboroneksport in 2000. The government corporation was headed by Sergey Chemezov.
When the Russian chief executive visited developing countries, his visits as a rule were accompanied by the conclusion of agreements for arms supply. While in the 1990s and the first half of the 2000s weapons and military-hardware production in Russia almost entirely depended on orders from China and India, by the end of Vladimir Putin's rule, the Russian defense-industrial complex had acquired new sales markets and a diversified geographical structure of exports.

Largest Buyers: China and India

Until 2007, China was the largest importer of Russian weapons and military hardware. There were periods when China's share exceeded 50 percent of all Russian sales and never fell below 30 percent. Beginning from 1992, the People's Liberation Army of China obtained about 300 fighter planes of the SU-27/30 family, more than 100 of them in the shape of assembly packages for assembly under license. Russia supplied the Chinese Navy with four destroyers, 12 diesel-power submarines, and Rif-M and Shtil-1 shipborne antiaircraft missile systems. For air defense, Beijing obtained 20 battalions of S-300 antiaircraft missile systems and became the first buyer of the newest Favorit systems as well as 27 Tor-M1 antiaircraft missile systems.
What was typical of the Chinese demand for military production was that they used to buy large lots of tested series hardware. The Chinese contracts kept the production potential of the Russian defense industry alive in the 1990s. However, as of 2004, the role of China in Russia's arms exportation began to decrease. China's strategy consisted in moving from purchasing finished products to assembly under license and then on to own manufacture of similar products. India's approach to military-technical cooperation with Russia turned out to be more flexible, oriented toward implementing joint projects of developing new types of weapons, whereas China offered no such proposals.
At the same time, Chinese contracts on the whole lost their paramount importance for the Russian defense-industrial complex. Nevertheless, thanks to contracts concluded earlier, supply volumes in 2004-2007 remained large, from some $1.5 billion to some $2.5 billion per year.
Russia's second largest buyer of weapons and military hardware in the 1990s and up to 2007 was India. Its share in Russia's arms exports used to amount to 25-35 percent, and in 2007, decreased Chinese exports made India number-one buyer of Russian weapons. While India lagged behind China quantitatively, the qualitative characteristics of the products it purchased were incomparably better. The Indian contracts stimulated the Russian industry to use as much as possible its technological potential, whereas strict financial conditions under Indian contracts made it impossible to work with low efficiency. The Indian side made exacting demands on Russian suppliers: supply of high-tech systems being developed or created particularly to meet the buyer's needs with an integration of certain elements and systems manufactured by a third country (Israel, France), lengthy terms of implementation of military-technical-cooperation projects, and complex financial conditions of the contracts.
Thanks to India's contracts, the following competitive types of military hardware were created: the SU-30MKI fighter, the project 11356 frigate, and the MIG-29K shipborne fighter, as well as BrahMos antiship missiles, created jointly with India specially for the needs of the Indian military. In addition, military-technical cooperation with India means stiff competition with such major weapons exporters as France, Israel, and the United States, which invariably contributes to the formation of the most efficient management strategies.
In the near future, India will remain one of the most important markets for the Russian defense industry. Being successfully implemented now is the joint project of creating the BrahMos supersonic antiship missile. Prospective projects are those for a joint creation of the MTA transport aircraft and a fifth-generation fighter, intergovernmental agreements on which were signed in 2007. In addition, Russia is taking part in a tender for the purchase of 126 multipurpose planes. If successful, Russia will remain among the most important suppliers of military hardware to India.

Export Structure Diversification and New Markets

The first decade of this century has marked the opening of new sales markets for the Russian defense industry. In 2003, contracts worth up to $2 billion were concluded with countries of Southeast Asia: Malaysia, Vietnam, and Indonesia. In 2005-2006, large package transactions were conducted with Algeria and Venezuela, worth a total of up to $11 billion.
The overall worth of Russian-Algerian contracts signed in 2005-2006 (see Table 1) amounts to $8 billion, which made Algeria number-three buyer, after China and India. The signing of new contracts with Algeria was expected, and their worth was estimated at up to $7 billion. However, the success was marred by an unprecedented event: the Algerian side said it was returning the supplied MIG-29SMT planes due to their poor quality.

Table 1. Agreements Signed in 2005-2006 for the Supply of Russian Weapons and Military Hardware to Algeria
Item Name Qty, units Estimated cost, in $M Manufacturers
SU-30MKA fighter 28 1,500 Sukhoy, Irkut
MIG-29SMT fighter 34 1,800 MIG, Sokol
YAK-130 training plane 16 200 Irkut
S-300PMU-2 Favorit air-defense system 4 battalions 500 Almaz-Antey Concern
Pantsir-S1 air-defense missile system 38 600 Instrument-making Construction Bureau
T-90SA key tank 185 600 Uralvagonzavod
Modernization of Infantry Combat Vehicle-2 and other armored hardware Up to 400 700 Instrument-making Construction Bureau
Source: AST Center

Venezuela bought from Russia 24 SU-30MK2 fighters, 38 helicopters (34 MI-17V-5, two MI-35M, and two MI-26T2), and five helicopter flight simulators, as well as 100,000 AK-103 Kalashnikov automatics and a license for their production and Pechora-2M modernized air-defense systems. The conquest of new markets for Russia was associated with political costs that earlier used to make difficult Russia's traditional military-technical cooperation with Iran and Syria. Conflicts of interests arose with the United States, which painfully reacted to Russian arm traders' activity in Venezuela, and with France on its traditional Algerian markets.
One of the principal discoveries for Russian weapons exportation was the market of Persian Gulf countries, which prior to the disintegration of the Soviet Union used to be limited to Iran, Iraq, and Kuwait, while with most members of the Cooperation Council for the Arab States of the Gulf (CCASG) the Soviet Union did not even have diplomatic relations, except for Kuwait and the United Arab Emirates. However, the principal successes in this area were achieved back in the 1990s, whereas after 2001 the number and prices of contracts concluded by the Russian side with CCASG countries is small - their overall volume does not exceed $300 million.
Thus, in the 21st century, the importance of Russian military sales to the Persian Gulf region has rather diminished. At present, the largest agreement in the process of implementation is the supply to the UAE of Pantsir-S1 air-defense systems; the deliveries of Infantry Combat Vehicle-3 have been completed. Beginning from 1992, Russia has been exporting to CCASG countries almost exclusively hardware and weapons for ground forces.
The price indicators of Russian arms supplies to the region are relatively low: over the period of 1992-2007, the overall volume of signed contracts for the supply of Russian weapons with CCASG states may be estimated at $3.6 billion, of which $2.5 billion was the share of the UAE, approximately $1 billion was the share of Kuwait, and no more than $100 million was the share of the four remaining countries. That is a fairly insignificant portion of the overall military purchases of those states. For the sake of comparison, in 2006, Saudi Arabia alone concluded agreements for the purchase of weapons in the United States and France worth $13 billion.
At the same time, for Russia, the market of CCASG countries is fairly important. Although the total volume of Russian sales to those states has amounted to some 5 percent of the entire Russian defense exportation over the past 15 years, political aspects of those sales and high solvency make it fairly attractive.
Kuwait and the UAE would buy the most advanced Russian military systems, such as Infantry Combat Vehicle-3, and would do it in volumes that made possible the survival of their manufacturers, the Kurgan Mechanical Engineering Factory and the Tula Instrument-making Construction Bureau. Thanks to the contract of the UAE, the Instrument-making Construction Bureau has developed the new and modern Pantsir-S1 system.
At present, Russia's positions as the supplier of weapons to CCASG countries look indefinite enough. Russia may expect to receive new sizeable orders from Kuwait and the UAE (for both the supply of new hardware and the modernization of hardware supplied earlier) as well as achieve an historic breakthrough onto the defense market of Saudi Arabia with its T-90S tanks, Infantry Combat Vehicle-3, and air-defense systems.
Russia's military-technical cooperation with former traditional buyers of Soviet weapons is today insignificant. The cooperation with Iran, suspended in the late 1990s under U.S. pressure, was resumed after 2000 in minimal volumes and was limited to modernization of old systems and supply of air-defense systems: the Tor-M1 air-defense missile system. Also, a contract for the supply of S-300 systems has been signed, but its implementation is being postponed, apparently for the lack of political will.
Contracts with Syria that are being implemented include one for the supply of the Pantsir-S1air-defense missile system and modernization of the S-125 air-defense missile system, a contract for Strelets modules, and negotiations are under way where Syria wishes to buy MIG-29 and SU-27 fighters, S-300PMU-1 and Tor-M1 air-defense missile systems, Iskander-E missile systems, T-90S tanks, and other weapons and military hardware.

New President and New Problems

By the end of Vladimir Putin's term in office, the Russian defense-industrial complex had maximally used the technological potential, the export structure was characterized by a high diversification, and order portfolios had reached such volumes that in some cases they had turned from achievements into problems, due to difficulties with their timely implementation. Meanwhile, the production potential of the defense-industrial complex had not been growing, and today products of some of the most competitive companies (fighter planes, S-300 systems) are sold several years into the future.
However, years ago, in spite of impressive successes in both export-volume growth and the conquest of new markets, it was clear that the country's defense industry was working on the top limit of its production and technological potential in conditions of acute shortage of personnel, especially skilled workers. A continuation of the existing situation is fraught with a discontinuation of export-volume growth and its reduction in the future. For that reason, the new president, Dmitriy Medvedev, faces the task of creating conditions for qualitative changes in the industry, the end objective of which must be cost reduction due to the introduction of energy-saving technologies and optimization of managerial strategies and improvement of the quality and technological level of manufactured products with the preservation of competitive prices.
The establishment of the Rostekhnologii government corporation was called to neutralize negative tendencies in the Russian defense-industrial complex. Sergey Chemezov, who heads it, has so far demonstrated his ability to use efficiently the available administrative resources for the purpose of lobbying for relevant changes in the budget and legislative amendments to improve the situation in the industry. Vladimir Putin's departure from the presidential post must have reduced the apparat weightiness of the head of Rostekhnologii. At the same time, the financial meltdown is not a favorable background for the achievement of sought objectives, and signals about problems of financial nature are already coming from the industry. However, on one hand, crises are called to stimulate intellectual activity and nonstandard and most efficient decision making, which are in great demand in both the defense-industrial complex and the Russian industry as a whole. On the other hand, the incumbent president promises to provide government support to the defense industry in general and its most efficient enterprises in particular.