#16 - JRL 7215
Moscow Times
June 9 2003
Arms Export Boom Is Losing Steam
By Lyuba Pronina

Russia's military-industrial complex enjoyed its third consecutive year of growth in 2002 on the back of lucrative arms export deals, according to a report to be released Monday. But the report's authors say the expansion is running out of steam and could fizzle out altogether as early as 2005.

The Center for Analysis of Strategies and Technologies, or CAST, a Moscow-based independent defense think tank, on Monday will issue its annual rating of the nation's top 20 defense companies, with fighter jet maker AHC Sukhoi retaining the top spot despite revenues dropping by roughly a third on the year to $1 billion.

Konstantin Makiyenko, deputy head of CAST, said the drop in revenue for AHC Sukhoi, which unites the Sukhoi design bureau and two production facilities in Novosibirsk and Komsomolsk-on-Amur, was mainly due to fewer aircraft deliveries to China, its major client.

Makiyenko said new contracts signed this year with China and Indonesia could see a rise in fighter exports next year, but after that, with China nearly satiated, AHC Sukhoi's revenues will begin to dry up unless new contracts are signed before 2005.

AHC Sukhoi chief Mikhail Pogosyan has said that some 60 Sukhoi fighters were exported last year, but not all were made by his company.

In stark contrast is Sukhoi's main competitor Irkut, which is 14.7 percent owned by AHC Sukhoi and makes its own version of the famous jet. Due mainly to a $3 billion order book from India for its Su-30MKI fighters, the Irkutsk-based company saw its revenues more than double last year to $562 million, making it Russia's No. 2 defense concern.

But it is already No. 1 in several regards. The only defense company to have its books audited to Western accounting standards, Irkut next year plans to tap Western capital markets to the tune of $200 million -- $100 million from a eurobond issue and a $100 million initial public offering in London, both of which will be firsts for the industry.

Irkut delivered 10 Su-30MKIs to India and 10 Su-27UBKs to China last year, and earlier this year secured a $900 million deal with Malaysia for 18 Su-30MKMs, which will keep it busy through 2006.

In all, Pogosyan said last week, more than 160 Sukhoi fighters have been sold abroad in the last seven years and a similar number, worth some $8 billion, is expected to be delivered over the next five years. In addition, more than 250 jets will be manufactured under license abroad.

State-owned arms export agency Rosoboronexport has signed contracts worth some $2 billion for Sukhoi craft alone this year.

In addition to the Malaysian order, China signed up for 24 Su-30MK2s and Indonesia commissioned two Su-27s and two Su-30s and several Mi-35 helicopters.

Sukhoi rival MiG, which delivered a total of 25 jets to Myanmar, Yemen and Eritrea, ranked No. 5 last year, according to the report, netting $27 million on revenues of $281 million.

Helicopter companies in Kazan, Ulan-Ude, Rostov-on-Don and Moscow posted collective revenues of $383.5 million in 2002.

Other major players include aircraft engine makers Ufa MPO and NPO Saturn, which netted $71 million and $51.5 million on revenues of $341 million and $204.8 million, respectively.

In all, Makiyenko said, aircraft manufacturers accounted for more than half of all arms exports last year, or $2.5 billion.

Russia delivered a total of $4.8 billion worth of arms last year and received revenues of $4.5 billion, a third consecutive post-Soviet record.

Nizhny Tagil-based Uralvagonzavod earned $474 million and netted some $60 million in profit last year, delivering on a 2001 contract with India for 124 T-90C battle tanks. The company also makes rail cars.

Neither Almaz-Antei, which makes the S-300 long-range and shorter range Tor-M1 air defense systems, nor Tula-based Priborostroyenia design bureau, or KBP, which makes anti-aircraft and anti-tank missiles systems, provided CAST with their financials for the year.

The head of the State Committee on Military and Technical Cooperation with Foreign Countries, Mikhail Dmitriyev, said in February that Antei delivered $60 million worth of systems last year, while KBP Tula delivered systems worth $350 million.

Rosoboronexport chief Andrei Belyaninov said early this year that he expects 2003 to be a breakthrough year for producers of naval and air defense systems.

Arms exporters also said they expect to export some $4.5 billion in arms in 2003.

CAST's Makiyenko said the goal seems likely, noting that some $1 billion should be received this year with the delivery of three naval frigates for India. In addition, India and China are scheduled to take delivery of dozens of Sukhoi fighters by the end of the year, he said.

Also, KBP Tula will begin deliveries of Pantsir-S1 air defense systems to the United Arab Emirates.

If Russia does not intensify its promotion of aircraft carriers and nuclear submarines, as well as bomber aircraft such as the Tu-22M3 Backfire, defense exports will plummet in 2005 or 2006, when most of the current aircraft contracts will come to an end, Makiyenko said.