Rdna 802 0064

Russia’s Arms Exports : Successes and Challenges
Tomas Malmlöf
Dans Revue Défense Nationale 2017/7 (N° 802), pages 64 à 71
Éditions Comité d’études de Défense Nationale
ISSN 2105-7508
ISBN 9782919639687
DOI 10.3917/rdna.802.0064
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Russia’s Arms Exports:
Successes and Challenges
Tomas Malmlöf
Researcher at FOI (Swedish Defence Research
Agency) with a focus on Russian defence industry.
He holds a M.Sc. in political science (2003) and a
B.Sc. in Economics (2003) from Luleå University of
Technology.
A
s Russia plans to cut back on its own military procurement1, revenues from
international arms sales will become more important as a financing source
for maintenance and further development of its defence industrial sector.
The ability of the Russian industry to adapt to the continuous adjustment of the
international arms trade environment will therefore have a significant impact on
its future.
Despite the fact that its defence companies are rather small compared to
major Western companies, Russia has managed to become a key supplier to the
global arms market2. In 2012–2016, according to SIPRI, its share in international
arms transfers amounted to 23 %, second only to the U.S. share (33 %). It was fol-
lowed by China, France, Germany and the United Kingdom – all lagging behind
Russia with as much as 17 to 19 percentage points3. In total, SIPRI identified 57
countries as exporters of major weapons in 2012–2016. However, according to the
so-called Herfindahl Index – a number equivalent of supplier concentration – the
concentration rate of the international arms market corresponds to a market of 5.5
equally sized selling countries. The international arms market has thus more fea-
tures in common with an oligopoly market, i.e. a market dominated by a small
number of sellers, than of a market with perfect competition where no single sel-
ler is large enough to influence the market price.
At first sight, Russia seems to have a strong position in this setting, in par-
ticular as the global volume of international arms transfers has grown more or less
1 See Julian Cooper’s article in this volume (editor’s note).
2 In the latest (data from 2015) SIPRI list of the top 100 arms-producing and military services companies based on sales
volumes, only eleven companies were Russian. Their combined sales volume amounted to $30.1 billion and they
employed 570,000 people. As a comparison, there were 39 U.S. companies on the list, with combined sales of $209.6
billion, employing 2 090 000 people. France had 6 companies on the list, combined sales of $21.3 billion, employing
176,000 people. The three biggest Russian arms companies are the missile manufacturer Almaz-Antey, sales volume $6.6
billion, United Aircraft Corp., $4.6 billion and United Shipbuilding Corp., $4.5 billion. As a rule, Russian defence com-
panies are more dependent on arms sales than Western companies, as the latter are usually more diversified with a large
share of civilian production.
3 The comparison is based on SIPRI Trend Indicator Values (TIV) expressed in U.S. dollars at constant 1990 prices. The
TIV allows for material comparisons between countries and over time, but it does not, however, measure the financial
value of arms transfers.
Revue Défense Nationale n° 802 - été 2017

64
LA PROJECTION DE LA PUISSANCE
continuously since 2002. Russian arms and military equipment have usually been
considered to be good enough for their purpose and for reasonable prices – an
attractive formula for middle-income countries. However, this comparative advan-
tage has faded in later years. What is more, the financial value of Russian interna-
tional deliveries of conventional arms peaked at 15.7 billion U.S. dollars in 2013,
and has since then stagnated at 15 billion U.S. dollars per annum4.
What are the strategic strengths and weaknesses of the Russian defence
industry that will form its future? The purpose of this article is to analyse the pros-
pects of the Russian defence industry related to the global arms market, and the
forces that will have a decisive impact on its further performance: customers, com-
petitors, subcontractors and the threats from possible substitutes or new entrants.
The evolving global arms market and Russia’s customer base
The global arms market is usually perceived as highly competitive.

However, its politicised nature implies that the competitive intensity might differ
from one purchasing country to another. It is also plausible that many arms selling
countries have benefited by the expanding arms market in later years that ought to
have created more opportunities for all, thus somewhat mitigating competition.
This expansive trend has so far been driven by oil-producing countries, such as
Saudi Arabia, United Arab Emirates, Qatar, Algeria, and Venezuela, as they have
invested their excess oil profits in military hardware. Their purchases have over-
lapped with the start of new armament cycles for a number of Asian countries like
India, Pakistan and Vietnam. The global arms market is now likely to go through
some new upheavals regarding sales volumes and ranking order of recipient coun-
tries, given an average lower oil price and the anticipated completion of the Asian
armament cycles. The competition intensity is therefore likely to increase in the
next coming years until a new market equilibrium is obtained.
In this environment, two of Russia’s apparent advantages are that it already

enjoys a fairly broad customer base and that the Russian government does not
impose strong political constraints on arms exports. For instance, its close defence
industrial cooperation with India has not prevented Russia from selling arms to
Pakistan. Russia also manages to sell arms to countries that are neither able nor
interested in buying U.S. or Western military systems – for example Venezuela,
Syria or Iran. In addition, Russia banks on trade relations dating back to the Soviet
period. It sells arms both to Armenia, a close Russian ally, and to Azerbaijan, which
is on the other side of the conflict over Nagorno-Karabakh. And it tries to streng-
then or recreate its trade relationship with former buyers of Soviet arms such as
Iraq, Algeria, Libya, and Vietnam.
4 Andrey Frolov, « Russian Arms Trade in 2016 », Moscow Defence Brief, no 1, 2017, p. 4-8.
65
As compared to that of the United States, however, the structure of Russia’s
customer base is concentrated around a handful of large and regular buyers,
making its arms export portfolio highly exposed to economic and foreign political
risks. Although, according to SIPRI, Russia sold arms to 38 countries in
2012–2016, 74 % of its arms exports went to five countries: India, Vietnam,
China, Algeria and Venezuela. India was by far the largest purchaser, with a share
of 38 %5. Russia’s portfolio of outstanding contracts is a mitigating factor to such
fluctuations. At the turn of 2015–2016, its contract portfolio peaked at 56 billion
U.S. dollars in current value. The volume thereafter shrunk to an estimated 50 bil-
lion dollars in late 2016 as orders were completed. This was the lowest yearly figure
for new contracts since 2011. While this trough had been anticipated, it still
emphasises the weaknesses of the present structure and composition of the Russian
customer base. Given the increased probability for higher competitive intensity in
the next coming years, this is a source of vulnerability. In contrast to Russia’s arms
export to countries with difficult relations with the West, which seems to have
solid prospects, it is likely that its efforts to expand into price-sensitive countries
in Africa, the Middle East and South-East Asia will meet resistance from already
established arms-selling countries.
A special concern for Russia is markets that it shares with other arms sel-
ling countries and where its present position is perceived to be under pressure.
India is a particular worry in this regard. Although both sides assure that the defence
industrial cooperation remains strong, France (Dassault Mirage 2000 and Rafale
combat aircraft, missiles), Israel (radar systems, missile systems, UCAVs/UAVs)
and the United States (transport aircraft, helicopters) have managed to make more
or less serious inroads into the Indian arms market. As India’s goal is to become
more self-reliant in defence, foreign companies prepared to share technology with
the Indian defence industry have an edge. Given the joint development of the
BrahMos cruise missile project, Russia at first sights appears to have that edge. On
the other hand, the co-development of a fifth generation fighter aircraft has taken
a hit as India had expected more technology transfers from Russia than Russia
seems willing to give away. As India strives for a more independent and technolo-
gically advanced defence industrial sector, it has clearly begun to hedge its special
relations with Russia on other relationships, thus improving its bargaining power.
Russian arms export and supply base
The Russian arms export portfolio is rather robust and diversified when it
comes to the sheer number of different arms systems. At a global level, however, it
appears more unbalanced due to the large predominance of aircraft systems – 40 %
5 Inasmuch as the yearly volume of contracts and deliveries to a certain country usually fluctuates significantly, the num-
ber of buyer countries and their relative position varies considerably over time. For instance, in 2014–2016, Venezuela
had ceded its position as the fifth largest buyer of Russian arms to Iraq, falling to the twentieth place.
66
of Russian total arms export in 2012–2016 according to SIPRI figures6. One post-
Soviet export success in this segment is fighter aircraft from the Su-27 family: the
Su-27 and Su-30/MK/MKI, and, since 2015, the Su-35. Other aircraft that have
figured in Russian export contracts since 2012 according to the SIPRI Arms Trade
Register are the MiG-29 family, the Su-25, the Yak-130 as well as helicopters (the
medium transport Mi-8MT/Mi-17, the combat helicopters Mi-28N, Ka-52 and
the Mi-24/35 family)7.
The air defence segment of Russia’s export portfolio has fluctuated around
7 % over the past five years – not counting the record year 2013, when it reached
almost 14 %. A main product is medium-range systems based on the S-300 family
tree. In recent years the S-300PMU-1/2, S-300PS and S-300VMK/Antey-2500
have featured in contracts with Iran, Kazakhstan and Venezuela. Russia also
exports the short-to-medium-range Tor, Buk, Pechora-2M systems and the com-
bined short-range missile and anti-aircraft artillery system Pantsir-S1.
In the same period the missile segment corresponded to 13 % of the
Russian arms export portfolio. It is a well-diversified complement to other seg-
ments such as aircraft, air defence and ships. The armoured vehicle segment
accounted for 10 % of the Russian export portfolio. One of the key products is the
export version of the main battle tank T-90, the T-90S. This tank is also produced
under license in India. Some other prominent products are the infantry fighting
vehicle BMP-3 and the armoured personnel carrier BTR-82A. The ship segment
share varies significantly over time due to high production costs and long lead
times from order to delivery. For instance, some of the most notable contracts with
Vietnam in the past five years relate to the fast attack craft Project-1241/Tarantul,
the patrol craft Project-10412/Svetlyak, the Project-636E/Kilo submarine and the
Gepard-3 frigate.
However, a shared weak point in many of these export products is that they
are in fact modernised versions of Soviet systems and equipment, and the need to
replace them with new generation systems is rapidly getting more pressing. The
export market for the Su-35 fighter will probably decline in the mid-2020s. The
light fighter MiG-35 that Russia had hoped to sell to India before the contract was
lost to the French Rafale has yet to be accepted for service by the Russian Defence
Ministry. It is therefore nearly imperative that Russia releases an export version of
the fifth generation PAK-FA T-50 under development in the mid-2020s.
On a more positive note, it should be stressed that the performance of the
Su-34 strike fighter over Syria has opened up the market for the Su-32, the export
version. Algeria ordered 12 planes in 2016, and Morocco, Nigeria and possibly
Uganda have also expressed their interest. In the air defence segment a generational
6 According to SIPRI Trend Indicator Values (TIV) expressed in U.S. dollars at constant 1990 prices.
7 See also Konstantin Makienko’s article in this volume (editor’s note).
67
shift to the S-400 and the cheaper and simplified S-350 Vityaz is under way. The
current short and medium range systems are still in demand, but some systems will
probably have to be replaced in the early 2020s. A generational shift is particularly
urgent within the vehicle segment. The T-90SM (the export version of T-90AM)
is most likely the last main battle tank of its kin, as this tank concept is just a
modern version of the T-72, which will turn 50 soon. It is expected that the BMP-3
and BTR-82A will reach their technological age limit by 2020. Export deliveries
of vehicles based on the new Armata, Kurganets-25, Bumerang and Taifun plat-
forms will most likely start by the mid-2020s at the earliest, as Russia will proba-
bly upgrade its own ground forces first.
The necessary transition from modernised Soviet arms systems to contem-
porary ones will certainly increase the cost of Russian arms and make them less
obtainable for present low-budget buyers. To retain and secure more affluent buyer
countries, it will have to put more emphasis on quality, technological sophistica-
tion and overall competitiveness of its defence industry. A particular concern, from
this point of view, is related to the effectiveness – or lack thereof – of its organisa-
tional structure. After a decade of consolidation, it now seems that the Russian
defence industry has reverted into much of the previous Soviet structure. The state
has resumed control by obtaining majority stakes in the most important industrial
entities and recreating links between suppliers and those prime contractors they
had previously served. Companies have also been grouped into sector-specific hol-
ding structures with a view to pooling resources and rationalising the industry. A
probable reason why companies have not been merged altogether is to uphold a
semblance of residual competition, at least on paper, and to maintain continuity
of established brand names. This top-down organisational structure implies a weak
bargaining position for Russian suppliers as they usually depend on a single prime
contractor. The lack of competition between domestic subcontractors entails lower
efficiency, which, in the end, might hit back at the prime contractors as well.
Overall, the current industrial organisation appears as one of the weakest points in
Russia’s adaption to the global arms trade environment8.
It was also a major setback to Russia that its military-industrial cooperation
with Ukraine and Western countries came to a halt in 2014 after its annexation of
Crimea and the beginning of the war in Donbass. The Ukrainian moratoriums and
the Western sanctions will have a negative impact on Russia’s armament plans and
arms exports well into the next decade, maybe longer. Allegedly, 400 Russian
defence companies were dependent on supplies from Ukraine for more than 3,000
parts, components and final products for more than 200 different arms systems,
including engines for helicopters, aircraft and surface ships. Western sanctions did
not only cause the premature termination of some notable contracts, such as those
8 Stephen Blank, « A Work in Regress? », in Roger N. McDermott, Bertil Nygren and Carolina Vendil Pallin (eds.), The
Russian Armed Forces in Transition: Economic, Geopolitical and Institutional Uncertainties, London and New York,
Routledge, 2012, p. 151–168.
68
on the French Mistral and the German combat training centre. At the much less
visible component level, especially as regards electronic components, Western
sanctions are a potential threat to the technological modernisation of Russia’s
defence industrial sector. Western efforts to restrict Russia’s access to dual-use tech-
nology, such as machine tools, also complicate its ambitions to modernise its pro-
duction base9. This might undermine its position on the global arms markets and
hurt its prospects in terms of gaining more markets.
Substitutes and potential new entrants
Given that Russia has more traits of a fairly adept follower rather than of a
leader in arms technology development, it is exposed to threats from substitutes or
larger leaps in weapons technology. Russia missed, for instance, the development
of modern UAVs based on the maturing and miniaturisation of applicable tech-
nologies in the 1980s and 1990s, and it is still catching up with this development.
Stealth technology is another area where Russia has lagged behind.
Public statements from leading Russian defence officials suggest that the
next soon-to-be-launched Russian procurement programme remains committed to
more high-technology assets – including systems “based on new physical prin-
ciples”. Should Russia succeed in this regard, it would strengthen its export port-
folio as well. However, Ukrainian and Western sanctions combined with its own
policies has put Russia on a path towards technological solitude and limited indus-
trial cooperation with others, which is at odds with the dominating trend towards
more transnational defence industrial collaboration. Russia’s long-term technolo-
gical development therefore risks becoming suboptimal and hampering the coun-
try’s ability to defend and develop its position as a reasonably advanced arms pro-
vider.
The threat of new entrants on the global arms market is usually weak, as
incumbents normally benefit from a stronger bargaining position. The potential
threat comes from countries aiming to move upwards on the defence-technologi-
cal ladder and limit their dependence on foreign arms providers and foreign
ownership of their defence industries. Hence the increased interest for technology
transfers in arms deals and for industrial participation (offsets10) that has emerged
in purchasing countries like India. However, to bulk up business and diffuse fixed
costs over more produced units, countries aspiring for a more capable domestic
defence industry ultimately need to move into overseas markets.
9 Tomas Malmlöf, « A Case Study of Russo-Ukrainian Defence Industrial Cooperation: Russian Dilemmas », The Journal
of Slavic Military Studies, 2016, no. 29:1, p. 1-22.
10 Offsets are industrial compensation practices that buying countries require from selling countries to enter into as a
condition of purchase in either government-to-government or commercial sales of defence products or services. Usual
practices can include, for instance, mandatory co-production, licensed production, technology transfers or foreign invest-
ment.
69
In this context, the most obvious potential competitor to Russia is China.
China is not exactly a new actor on the global arms market, but its growing tech-
nological capability implies that it prepares to move beyond its traditional role of
a low-cost, low-capability arms provider and to claim the market niche that Russia
currently occupies. Much of China’s defence technology is based on Russian tech-
nology, which it has obtained through arms purchases, technology transfers, license
production as well as reverse engineering in violation of Russian property rights.
Although technology transfers and offsets have become a common feature

of the global arms trade, it threatens to erode the technological lead of the major
exporters. To keep its current position, Russia needs to move itself into the upper
market of arms, which, inevitably, will meet resistance from Western arms provi-
ders within this niche.
Russia’s arms export revenues of 15 billion U.S. dollars are dwarfed by its
export of fuel and energy products that amounted to 134.7 billion U.S. dollars in
2016, according to the UN Comtrade database. Since 2014, export of agricultural
products and foodstuffs have surpassed Russia’s arms export; for 2016 this line
amounted to 17 billion U.S. dollars. Still, arms account for approximately 70 %
of Russia’s export of machinery and equipment. It is also an important source for
complementary revenues without which defence industrial marginal costs would
be higher.
Russia’s strategic strengths are its low-cost leadership in certain markets,

focus on specific markets (countries) and the diversity of its portfolio. It also bene-
fits by the investments in industrial capacities and their modernisation that has
accompanied the rapid growth in arms procurement since 2011. Its involvement
in the Syrian conflict has so far opened up interest for Russia’s export Su-32 figh-
ter bomber, and renewed interest in the T-90 main battle tank, for which it might
reap the fruits in the coming years.
One strategic weakness resides in the relatively low level of attention Russia
has devoted to after-sales support. This is, however, an area were Russia has recently
taken steps to improve performance. Another weakness is its strong reliance on the
Chinese and Indian markets. The Chinese market peaked already in the mid-
2000s, and its long-term stabilisation will probably be conditional on Russia’s
commitment to collaborative projects in order to support the Chinese defence
industry. India is Russia’s most important arms market, but given the importance
that India attaches to its ‘Make in India’ policy, Russia has been compelled to
increasingly rely on joint ventures offers and technology transfers to protect its
market shares. In the longer run, China and later on India are thinkable competi-
tors to Russia in the low-budget segment.
70
Possible ways for Russia to stay relevant in this environment are to remain
at least one technological step ahead of its customers and potential competitors
and to further develop its after-sales support. It could also choose to move into
more affluent countries, aiming for a new cost leadership position in this more
advanced market segment.
REFERENCES
Stephen Blank, « A Work in Regress? », in Roger N. McDermott, Bertil Nygren and Carolina Vendil Pallin (eds.),
The Russian Armed Forces in Transition: Economic, Geopolitical and Institutional Uncertainties, London and New York,
Routledge, 2012, p. 151–168.
Richard Connolly, Cecilie Sendstad, Russia’s Role as an Arms Exporter – The Strategic and Economic Importance of Arms
Exports for Russia, London, Chatham House, 2017, 30 pages.
Julian Cooper, Russia’s State Armament Programme to 2020: A Quantitative Assessment of Implementation 2011–2015,
Stockholm, FOI, 2016, 119 pages.
Aude Fleurant et al, « The SIPRI Top 100 Arms-Producing and Military Services Companies 2015 », Stockholm,
SIPRI, 2016, 8 pages.
Andrey Frolov, « Russian Arms Trade in 2016 », Moscow Defence Brief, no 1, 2017, p. 4–8.
Tomas Malmlöf, « A Case Study of Russo-Ukrainian Defence Industrial Cooperation: Russian Dilemmas », The
Journal of Slavic Military Studies, 2016, no. 29:1, p. 1-22.
Gudrun Persson (ed.), Russian Military Capability in a Ten-Year Perspective – 2016, Stockholm, FOI, 2016, 206 pages.
71

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Revue Défense Nationale n° 802 - été 2017

The evolving global arms market and Russia’s customer base

The global arms market is usually perceived as highly competitive.

In this environment, two of Russia’s apparent advantages are that it already

Russian arms export and supply base

Substitutes and potential new entrants

Although technology transfers and offsets have become a common feature

Russia’s strategic strengths are its low-cost leadership in certain markets,

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