MTC of the Russian Federation in 2019 : Main Trends

The ability of the participants of the arms market to follow existing trends and plan their progress in this area has always been unsteady, and today it is going through a stage of high turbulence. For successful export of military products, the development of new and more flexible approaches to cooperation with potential customers is required.

Such approaches are also required with traditional partners, cooperation with which has been verified over the years and confirmed by signing contracts.

The modern arms market is characterized by a change in the relations paradigm. Thus, customer-seller relations often change to partnership relations under agreements on joint development and production of military products. When signing the contracts, offsetting obligations become of high importance.

The list of possible foreign trade mechanisms is expanding. According to Alexander Mikheev, Director General of Rosoboronexport, the «offset programs, loans, counter-barter deliveries tested by the Russian Federation <...> allow to be flexible and adaptable to a constantly changing world»[i].

There is an increase in the market size, which can be explained by both increased tension in some regions of the world and an increase in prices of military products. Since 2000, the world arms market volume has grown from 28 to 85 (according to other sources - 92) billion dollars a year.[ii]

The number of exporters is also growing, and as a result, traditional market leaders retain their positions in absolute terms, and in relative terms their indicators are decreasing. This tendency also affects the Russian military-technical cooperation. It is interesting that exporting countries start to use the supply diversification process to maintain their performance indicators.

The change in the competition forms becomes an essential factor due to the increasing role of the political factor, including even the methods of direct intimidation, blackmail, and sanctions. We are no longer talking about healthy market competition. In 2019, the Russian Federation had to make contacts under these conditions.

Results in Figures and Facts

In general, the results of the year in the area of military-technical cooperation can be considered successful for the Russian Federation. By December, the total volume of deliveries reached a value of 13.7 billion dollars, more than 800 contract documents on new deliveries were signed, and the portfolio of orders amounted to about 50 billion dollars. During the year, the delivery volume trend showed a steady growth. Thus, in April, the products amounting to 4.9 billion dollars[iii] were delivered abroad, by September this figure increased to 8.5 billion dollars[iv], by November - up to 11 billion dollars[v].

In the export structure, the aviation sector traditionally took more than 40%. An increase was noted in the structure of the air defence equipment export from 15 to 20%, mainly due to the deliveries of the S-400 systems to China and Turkey under previously signed contracts. Since 2021, the deliveries of the same systems to India are expected. The deliveries of the S-400 systems, as well as potential deliveries of new Viking and Tor-M2E air defence systems, will allow increasing the percentage of the air defence sector in the sales structure up to 25-30%. The amount of naval armaments is traditionally low - it accounts for just over 5 billion dollars[vi], which is approximately 10%. More than 20% is the export of military equipment. Recently, the indicators of the small arms segment have increased, a significant role in which was played by the contract on delivery to India of the first batch of Russian AK-200 series, the production of which was launched in 2019 at the joint Russian-Indian enterprise Indo-Russian Rifles Private Limited in Corva.

In general, for all categories of weapons and equipment, 15–20% of the order portfolio is taken by after-sales services, which traditionally has not been a strong point of domestic exports[vii]. An increase in this share is expected.

Concerning the geography of deliveries, it is relatively stable. The countries of Africa - without specifying them - accounted for 35%, and in 2019 the volume of deliveries to these countries amounted to 4 billion dollars, while the order portfolio amounted to 14 billion dollars. The countries of the Middle East accounted for approximately 15%, and it was noted that the volume of annual exports to this region is at an average level of 2 billion dollars. The same indicators of 10-15% are achieved in China. India accounts for about 30%, and the portfolio of orders of this country amounted to more than 14 billion dollars. It is worth noting a new stage in the development of military-technical cooperation with this country - from 1991 to 2019, the products amounting to 70 billion dollars were delivered to Delhi, and the amount of 15 billion dollars falls in the period of 2017-2019[viii].

The military-technical cooperation with the CIS countries takes about 3–5%, and the Republic of Belarus should be marked here: the annual turnover in the military-technical cooperation sector with this country is 500–600 million dollars[ix], and 2/3 of this amount accounts for supplies from Belarus.

Legislation changes

We are likely to be able to evaluate the results of some changes in the military-technical cooperation system implemented in 2019 in the nearest future. We are talking here about some amendments to the Decree of the President of the Russian Federation dated September 10, 2005 No. 1062 «Issues of military-technical cooperation of the Russian Federation with foreign states» and the development of the military-technical strategy of the Russian Federation.

On April 4, 2019, Vladimir Putin signed a document amending Decree No. 1062[x]. The amendments simplify the procedure for making decisions on re-export or transfer of military products to third countries. Prior to these amendments, in the re-exporting situations a third party had to provide the Federal Customs Service of the Russian Federation with the End-user Certificate (which confirms that the military products will not be transferred to other third countries without the permission of the supplier, that is, in this case the «secondary» supplier purchases armaments from this «primary» supplier). In the current situation, it will be enough to provide this document to the exporter itself, and the exporter should notify the Russian Federation that the armaments will not be transferred further.

The aim of this legal maneuver is obvious. The explanatory note states: «The foreign states express interest in purchasing Russian military products, but fearing to get under the sanctions, refuse to purchase them». Thus, a simplified re-export mechanism will allow to conduct deals bypassing sanctions without unnecessary bureaucratic red tape. It is known that prior to these amendments some re-export operations have also been conducted, but the amount of them was small and was carried out mainly through the Republic of Belarus.

In order to improve military-technical cooperation, a draft document of the Military-Technical Cooperation Strategy has been prepared, which describes measures of a political, diplomatic, financial, economic and technical nature. The document containing the goals and objectives of the state policy on the military-technical cooperation was approved in October 2019. In this regard, the President instructed the Government to adopt a roadmap for implementing this Strategy[xi].

The President also asked to pay special attention to CSTO and CIS member countries. By the way, an active work is being conducted with these countries within the frameworks of the contracts on the development of military-technical cooperation (signed in 2009-2017). The contracts provide for special conditions, including an unlicensed supply chain, which allows enterprises to work directly with each other without the participation of a state intermediate party. This corresponds to the deliveries of military products with the same characteristics as the products used by the Russian Armed Forces.

The President noted that it is worth paying attention to the after-sales service of the equipment as well. It should be mentioned that works in this direction are already being conducted - the helicopter service centers have already been opened in Egypt, China, Brazil, Peru, Vietnam, and some more will soon be opened in Mexico and Azerbaijan. The engine service center has been opened in Vietnam; the similar ones are expected to be opened in China, the UAE, and Ethiopia. The possibility of constructing a special service center for helicopters and armored vehicles in Angola, Ethiopia, Uganda, Niger, and South Africa is being discussed. It is also planned to establish service centers in the countries-operators of the Pantsir-S1 air defence missile system.

An important area of the military-technical cooperation development is the establishment of joint ventures for the production of spare parts. «For this purpose, it is necessary to expand the rights of the military-technical cooperation entities and introduce amendments to the legislation base», Vladimir Putin said, thereby announcing the next series of amendments to the military-technical cooperation system.

What about intellectual property?

A chronic issue is the rights on the results of intellectual activities in the course of military-technical cooperation, and unauthorized copying of Russian armaments, military and special-purpose technologies abroad. Over the past 17 years, about 500 such cases have been identified[xii]. And how many have not been detected yet?.. Traditionally, the «copy-paste» leader is China, which, in fact, has copied aircraft engines, Su aircraft, and missile defence systems.

The difficulty lies in the fact that patents on military products developed in Russia are not registered abroad, and therefore, even if Russian specialists manage to identify cases of unlicensed copying, it will not be possible to claim anything in the international court.

In 2019, the measures were taken that should at least partially solve this problem. In October, Rosoboronexport announced the establishment of an advisory group on the protection of intellectual property rights in the military-technical cooperation processes. The main tasks of the group are the development of a common strategy for the military-technical cooperation participants to protect the rights on the results of intellectual activities in the Russian Federation, as well as implementation of some measures against counterfeiting and unfair competition in the military-technical cooperation area. The group includes the representatives of the Ministry of Defence, the Federal Service for Military-Technical Cooperation (FSMTC), Rospatent, the Russian Academy of Intellectual Property and a number of defence industry holdings.

In addition, in 2019, as the result of the promotion of Russian small arms to foreign markets, Rosoboronexport signed an agreement with the Kalashnikov Concern on the legal protection and commercial use of the results of the intellectual activities in the military-technical cooperation process. The similar agreements were signed earlier with the United Shipbuilding Corporation, Russian Helicopters Holding, Concern Almaz-Antey.

There is another story connected with violation of rights. In 2019, the Russian Federation received requests from some countries to repair MiG-29 fighters modernized in Ukraine. As it turned out, Ukraine has modernized the MiG-29 fighters at its facilities without having relevant technical documentation. The MiG Corporation noted that the developer is not responsible for the operation of aircraft modernized by an enterprise not having a corresponding developer license. In this regard, in order to protect itself from possible charges and claims in advance, Rosoboronexport in 2019 informed the media about the fact of repairs of the Afghan Mi-17V-5 helicopters in Slovakia without the participation of specialists from the Russian Federation, considering this incident as a violation of the Russian regulations. And these are only two cases identified last year. It is to be hoped that the measures taken in 2019 will change the situation for the better.

What is to be followed in 2020

The agreement with China on the joint development of the AC332AHL heavy helicopter is still being coordinated, the discussions with Malaysia of the questions concerning the supply of Mi-35 under the trade-in scheme and the supply of the Mi-8, Mi-17 and Ka-23A11BC helicopters, and with Mexico - on the supplies of Be-200 are still going. The contract on the supply of 16 Mi-171/Mi-17 helicopters to the Philippines is being discussed at the level of the technical working group, and Nepal is waiting for the conclusion of the Mi-17 deal (the technical commission is resolving the issue of payment). A deal is being discussed with Sri Lanka on the supply of Mi-17 and a patrol ship, for the purchase of which an export credit has been approved in Russia. A request was received from the UAE on the Pantsir-S1 anti-aircraft missile/gun systems, as well as on the conduction of demonstration tests of the Orion-E UAV in Russia. It is already known that there is a potential purchaser of the UAV - it is one of the countries in the Middle East, but it is reported that it is too early to talk about signing a contract.

Mi-171Sh is presented for the tender of Peru, Be-200 in Turkey (an official tender announcement is expected in the nearest future), Yak-130 in Malaysia, and in case of getting the tender on Yak-130, the Russian Federation is ready to construct a service center for servicing combat capable trainers. It is also known about the participation of MiG-29 in the Colombian and Argentinean tenders.

In 2019, the Russian submarines under the Varshavyanka project 636 did not get tenders in Thailand and Indonesia - decisions were made there not in favor of the Russian proposals. According to Mikhail Petukhov, Deputy Director of the Federal Customs Service of the Russian Federation, the tender basis assumes the interconnection of both objective and subjective factors, so the decisions of Thailand and Indonesia did not become a tragedy for the Russian Federation.

No matter what, we are waiting for positive decisions regarding domestic proposals and are studying the situation at the world market of military products.

[i] Rosoboronexport noted the progress of the Russian Federation at the arms export market // RIA Novosti, 26.11.2019

[ii] Arms trade as an instrument of political influence at the international scene, thesis by S. Goreslavskiy // Moscow State Institute of International Relations, 2019.

[iii] Rosoboronexport has signed contracts for 5.2 billion dollars since the beginning of 2019 // TASS, 7.09.2019

[iv] MAKS-2019: export contracts regardless of sanctions // Rosoboronexport, 1.09.2019

[v] Rosoboronexport summed up the results of 2019 on the global market // Rosoboronexport, 1.11.2019

[vi] Rosoboronexport is ready to discuss the transfer of marine technologies at IMDS-2019 // Rosoboronexport, 8.07.2019

[vii] Dmitry Shugaev, Director of the Federal Customs Service of the Russian Federation, about the existing difficulties and emerging prospects of arms export, interview // Kommersant, 6.02.2019

[viii] Prospects for the Russian-Indian military-technical cooperation following Defexpo India 2020, by Dmitry Bokarev // New Eastern Outlook, 25.02.2020

[ix] Defence partnership and export. What weapons were demonstrated by the Russian Federation and the Republic of Belarus at MILEX 2019 // TASS, 17.05.2019

[x] Decree of the President of the Russian Federation dated 04.04.2019 No. 146

[xi] Meeting of the Commission on military-technical cooperation // Official web-site of the President of the Russian Federation, 16.12.2019

[xii] Rostec told how Russian weapons are being illegally copied abroad // TASS, 13.12.2019

Olesya Zagorskaya
©"New Defence Order. Strategy"  

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