Defense Export from Russia

Dmitry Shugaev: ‘The current trend is to create new high-technology products in co-operation’

In accordance with the law of the Russian Federation, activities in the field of military-technical cooperation (MTC) with foreign countries shall be controlled and supervised by the Federal Service for Military-Technical Cooperation (FSMTC of Russia) that, among other things, shall ensure implementation of basic principles of the Russian government policy in the field of MTC. Dmitry Evgenyevich Shugaev, the Director of FSMTC, discusses main directions and tendencies in development of military-technical cooperation between the Russian Federation and foreign countries, the peculiarities of Russian military purpose product exporters’ activities at the present stage in his interview to the our magazine.

— Mister Shugayev, what are the principles, the system of cooperation in the field of MTC is based on today?
— Today the system of military-technical cooperation of Russia is built as a vertical relationship where Rosoboronexport is the only exporter of final military purpose products. Concurrently, there are so called ‘small’ parties of military-technical cooperation who are authorized to provide service of the equipment previously purchased by customers, to upgrade it and to supply spare parts for this equipment. These, in particular, include such integrated structures of the defense industry as United Aircraft Corporation, United Shipbuilding Corporation, Almaz – Antey Air and Space Defense Corporation and others. It is caused by the fact that these “small” parties are just the industry representatives, i.e. the factories that manufacture spare parts, components, etc.
Federal Service for Military-Technical Cooperation is an agency that controls and supervises all the activities related to military-technical cooperation and licensing, respectively. From strategic point of view the FSMTC of Russia plays the role of government policy ‘conductor’ in the field of military-technical cooperation and acts as a controlling and licensing agency at the same time.
However, all decisions regarding final supplies anyway are made at the highest level in Russia. That is, either an appropriate ordinance or instruction of the President or the Russian government should be issued. That’s why I call it ‘vertical relationship.’

— How can you describe the development and dynamics of Russian activities in the field of MTC?
— First of all, I’d like to note that Russian is steadily occupies the second line in the list of world top exporters of military purpose products. It is not a secret that last year it was a bit higher than $15 bln. The major part of this export is aviation equipment; export of the equipment related to aviation varies in the range of 40-50%. Of course, we positively appreciate this fact, and we wish exporters of other weapon types to achieve these figures as well.
At the same time we understand, that the market of military purpose products (MPP) is a very specific market having cyclic nature. A number of factors should be taken into account, including rearmament programs of armies, financial solvency of countries depending on their general economic health. Therefore, without being expecting any abrupt jumps, we build long-term relationships that allow us to speak with confidence about stable growth of export supplies.
It is important for us to participate in long-term programs, provide technical support to our clients, create maintenance stations with understanding that many of our clients are aimed at creation or improvement of their own industry, for example.

— Is Russia open today for new cooperations?
— Yes, we are open for new cooperations and we understand that this is the trend. Of course, the situation of ‘buy or look for it in another place’ is becoming a thing of the past. Naturally, sales of the final product is our main priority, but our partners increasingly aimed at building their national manufacturing facilities to develop their industries.
The relationship with partners in the ‘only export’ coordinate system are gradually replaced by cooperation in the field of creation of new high-technology products as a result of mutual efforts. And we are ready for this kind of cooperation as a country that has built its own defense industry. We are ready for cooperation and we will help our partners to create systems they need today.

— Can you give any particular examples?
— A bright example is the joint venture to manufacture Ka-226T helicopter, which is registered in India in accordance with appropriate intergovernmental agreement. It will start its active work soon. Another example of technological cooperation is BrahMos joint venture established in India.
In addition, the establishment of a chain of maintenance stations in the Latin America, in particular, in Peru and in Brazil can be mentioned as an example. We have a lot of cooperation projects with Chinese companies and so on.
Therefore, our foreign partners can be sure that we are ready for technological cooperation based on many years of experience and strong reputation of Russian weapons in the world...

— Is it really strong?
— Yes, it is. Russian weapons and military equipment have made a good showing in the world. Today experts state that our weapons are: first, highly technological; second, proving their ‘mission survivability’. In addition, it is relatively easy to maintain our weapons. Combination of the above mentioned factors explains why our products are so popular in the world.
At the same time today we offer the best value for money in the global market. This is recognized by everybody, including our competitors. I state this proudly and not for the purpose of advertising, because it is not only our opinion, but assessments of experts of the global market of military purpose products.
Thus, for example, despite the Afghan army has Mi-171 helicopters in use for a quite long time, pilots do not wish to refuse these machines and migrate to other, newer helicopters. By the way, the American pilots who use our special-purpose helicopters give similar assessments.

— And did the soviet equipment prove its high efficiency?
— Yes, it did. And it continues to prove its efficiency. For example, Vietnam is our partner in the field of military-technical cooperation for a long time for one reason only: Vietnamese army uses soviet military equipment for decades and is satisfied with it and with Russian products supplied as replacement of obsolete soviet equipment.

— In this is in the situation of evidently growing competition in the weapon market…
— We live in a real world and clearly understand that there is a sufficiently strong competition. It is absolutely normal situation. Also, all Russian manufacturers take into account tendencies in the global market of military equipment.
Today Russia is a manufacturer of a large number of advanced and very expensive weapons, including the most innovative. But this is not to say that we shall offer exclusive solutions only. Russia is aimed at active expansion of its niches in the global market participating in many international tenders for both exclusive weapons and quite traditional products. This stimulates national industry to manufacture the best products at the most competitive prices.

— What is impact (if any) of sanctions of some Western countries on the MTC of Russia with foreign countries?
— Sanctions is a bad thing in principle, they contradict the pure logic of free market development. It is suffice to say that WTO, where Russia is included as a member state, states that its members are free from any restrictions. However, we can often see that major international institutions intended to strengthen mutually beneficial cooperation do not work. And in this particular case we can see an absolutely politically motivated and unjustified discrimination. However, being realists, we have to work and find solutions in this reality.
In the beginning, after the sanctions were imposed (since it was done quite abruptly) our industry, of course, was faced certain difficulties related to embargo of component supplies, interruptions of cooperation relations we had, among others, with Ukraine (by the way, Ukraine has done it unilaterally).
But in spite of everything, today the system of military-technical cooperation with foreign countries has adapted to these changes. We have implemented a program of import substitution, which has timely oriented the industry to creation of certain systems previously supplied by our partners from abroad. Thus, a serious impulse was given to development of national industry, especially in the fields of engine manufacturing, radio electronics, manufacturing of special materials, including those used in military equipment. We found solutions for the contracts made with our partners before sanctions, which were exposed to serious risks.
However, the companies that are enforced to follow the sanctions imposed on Russian companies, have considerable losses as well. It will be very difficult to return to our market after cancellation of these sanctions (this will happen sooner or later). Perhaps it will be impossible at all: the niches are already occupied.
We hear claims for “fatigue” from sanctions with increasing frequency having face-to-face communication with partners from countries that imposed the sanctions at a sufficiently high level, and not only from business community. Everybody understands that this should be stopped, because nobody gains from it. We shall see how things turn out. The Russian Federation never burns out bridges, we take the situation in a pragmatic and unimpassioned way.

— That is the question, who suffered from the sanctions is still undecided?
— The biggest suffer is experienced by those who lost their markets. Nobody wants to lose the Russian market, but this is the scenario we face now. First of all our suppliers have suffered from sanctions. Especially this is related to Ukrainian suppliers. It's a pity, of course, but it is not our choice. You know, they have stopped unilaterally all the cooperation with the Russian Federation. But I repeat it again: our industry eventually gained from it. We started to manufacture everything by ourselves, that’s our gain. By the way, it is an important factor for our customers: when a product is manufactured completely in the country of supplier, with all components and equipment, it eliminates any issues of supplies in future.
I mean, first of all, the aftersales service. Today Russian manufacturers due to the imports substitution program and the search for new cooperation have minimum risk of the situation when their contractors refuse to supply some devices because of some reasons (mainly politically motivated) and the companies are enforced either to shift supply dates or to achieve other agreements with their customers. Nobody finds this situation comfortable. If a MPP is manufactured completely within the country, it is a guarantee for the national army that everything will be done in a timely manner. And it is a big competitive strength for foreign customers.

— What types of Russian arms and military equipment are well-known in the Middle East region? In what directions cooperation is the most active today?
— The countries of the Middle East and North Africa are our time-tested partners in various fields including the military-technical one. Therefore, they have been using almost all types of Russian military purpose products. However, armored machinery, aviation equipment, air-defense systems and naval equipment of Russian (Soviet) origin are in high demand in this region. And in all the above mentioned directions we cooperate closely.

— What main competitive advantages does Russian equipment have in terms of its operational capabilities in this region?
— No doubt, the main competitive advantage of the Russian equipment, from the point of view of any foreign customer, is its Quality-Price Ratio. As for its operation in the countries of the Middle East and North Africa I will add another important factor highly assessed by our partners after many years of usage. This is high efficiency and excellent capabilities of our weapons and equipment in extreme climatic conditions. I believe these two major advantages altogether make our military purpose products so popular with regional customers.

— How long have Russia and the countries of the Middle East and North Africa been cooperating in the military-technical field?
— We have been developing military-technical cooperation with the countries of the region from the middle of the 20th century, that is for more than 50 years. Symbolically enough, the inception of interaction in the military-technical field with the countries of the Middle East and North Africa coincided with the period when our system of military-technical cooperation was established. For our regional partners it was the time they obtained independence. Thereafter our cooperation in the military-technical sphere has developed steadily and in a constructive manner.

— How high is the potential of modernization and renovation in the Russian military equipment intended for the countries of the Middle East and North Africa? What can the Russian Federation offer today to the countries of the Middle East and North Africa in this regard?
— At present, some operators of our military equipment in the region are facing the necessity to repair and modernize the equipment produced in the USSR and supplied earlier. I can say with full confidence that all those products, as well as the Russian origin military equipment, have considerable potential for renovation. As an example, there are several large-scale projects on repair of domestic armored materiel and air defense systems under implementation that are quite successful.
Our country is ready to offer a comprehensive service program of maintenance, repair and upgrade of our military products according to the highest quality standards.

— What current offers of the Russian aircraft equipment and other defense solutions, according to experts of FSMTC of Russia, are more promising for the countries of this region?
— Long-term experience of successful cooperation with the countries of the Middle East and North Africa and the relationship of trust at bilateral level give us a strong cause for optimism about the future of military-technical cooperation with these countries.
Armor materiel, air defense systems and aviation equipment are traditionally in demand here because they enable our partners to optimize the protection of special infrastructural objects, which is of paramount importance.
However the need for a more integrated approach to the issues of
national security amid security challenges and looming threats compels the countries of the Middle East and North Africa to actively diversify and modernize their national Armed Forces. Therefore, we consider the regional market a promising one for a wide range of military purpose products.

— Is Russia ready to consider JVs in the countries of the Middle East? Is there any existing positive experience of such cooperation?
— A number of our partners from the countries of the Middle East and North Africa show interest in establishing joint ventures (JVs). The Russian Federation is ready to consider different models of cooperation, including various forms of JV. Some projects are already under implementation. We hope that they will be successfully fulfilled to further promote cooperation between the Russian Federation with the countries of the region.