CONTENTS

#1(7), 2007
Official View Point
Russias Relations with Europe in Aerospace, Shipbuilding
PUBLISHER
and Defense Industries 2
Centre for
Analysis of
Strategies and
Technologies
War And People
North Korea: the Bush Administrations Strategic Fiasco 4
CAST Director & Publisher
Ruslan Pukhov The Globalization of NATO: Prospects and Consequences 6
Advisory Editor
Konstantin Makienko
Industrial Policy
Researcher
Ruslan Aliev Challenges to the Reform of Defense R&D in Russia 9
Researcher
Russias Defense Industry in 2006 14
Alexey Pokolyavin
Researcher
Dmitry Vasiliev Arms Trade
Researcher
Polina Temerina
The Venezuela Contracts 16
Researcher Russia-India Military-Technical Cooperation: Current
Ilya Nevorotov Issues and Perspectives 19
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Centre for Analysis of Strategies and Technologies, 2007
 Official View Point
Russias Relations with Europe in
Aerospace, Shipbuilding and Defense
Industries
Vladimir Vasiliev
T he past decades have seen a remarkable rise in the
scale and cost of aviation, space and defense projects.
For example, R&D for the Boeing 787 or the Airbus A380
costs over ten billion euros, and such investments take
many years to recoup. Similarly, it costs billions of euros to
develop fighting aircraft, helicopters and missile systems.
As a result, the internationalization of both civilian and
military programs to develop the next generation of high-
tech products is inevitable. Even the US, with the largest
defense, space and R&D budgets in the world, has been forced
to take this path. Europe launched on this process with the
creation of the Airbus consortium three decades ago, and has
since integrated several large defense and aerospace holdings
into EADS. Shipbuilding, missile manufacturing and even
armour, the most conservative of industries, have been
subject to the same process of international integration.
Russia and Europe have begun over the past fifteen
years to work together on high-tech projects, first of all in
the aviation, helicopter and space sectors. These efforts have
met with some challenges. For example, the MiG-AT training
aircraft and the Mi-38 transport helicopter programs
were launched during an era that was extremely difficult
for Russia, with precious little financing, and inadequate
market research. However, even such relatively unsuccessful
programs helped to lay the foundation for future cooperation,
by creating networks and promoting understanding of
different work methods and cultures.
Several Russian-European programs are proceeding
successfully, particularly on joint projects for third countries.
For example, French companies are providing navigation and
display systems for Su-30MKI fighters destined for India. The
Indian naval forces have chosen to equip Russian MiG29K
carrier-based fighters with French helmet-mounted targeting
systems, and French equipment also graces the Malaysian
Su30MKM.
Russia and Italy are working together to create a new
generation of training aircraft. Due to the close relations
between the Yakovlev design bureau and Aeromacci, each
country now boasts a highly effective training aircraft at the
final stages of testing. Alenia corporation is on the verge of
joining the Sukhoi Superjet1 00 Russian regional jet project
as a full partner, not just as a supplier of equipment. Similarly,
 # 1, 2007 Moscow Defense Brief
Russias Relations with Europe in Aerospace,
Shipbuilding and Defense Industries
Fincantieri and the Rubin design bureau have launched R&D
on the development of a next generation submarine.
These examples demonstrate a positive development,
whereby politically-motivated programs initiated by the
state are being replaced by pragmatic, business-oriented
projects initiated by business, which are only subsequently
accorded political support. Other examples include the joint
project to develop SaM-146 engine for the Superjet100
regional jet, the creation in Russia of a centre for the
conversion of A320 aircraft to transport versions, the project
to use Russian booster rockets at the Kourou cosmodrome
in French Guiana, and possible Russian participation in the
A350 project and in the development and production of the
medium class aircraft series to replace present European
best-sellers Airbus A320/321.
On the European side, EADS and Safran are most
active in joint projects, along with Russian companies that
comprise the United Aircraft Corporation, and the Saturn
Scientific Industrial Association.
Several factors that promote the integration of Russian
and European aviation, space and other high-tech machine-
building sectors will continue to grow in importance over the
next few years.
First, Russia and Europe already have a strategic
relationship on energy issues. In spite of all of the problems
that have arisen, cooperation in this sphere will only increase,
and it is only logical to expect such cooperation to extend to
high technology sectors.
Second, the rapid growth of the Russian market, while
it cannot be compared to the Chinese or Indian markets,
will nevertheless continue, making Russia into one of the
major markets of the world. The expansion of Aeroflots
plans to acquire long-range carriers is symptomatic of
this potential. If Russias national carrier first intended to
purchase 12 aircraft, it is now considering a purchase of 44,
which brings it into the same league as the largest airlines
of Asia or Europe.
Third, the predicted weakening of the US dollar will
force European companies to move more production into the
dollar zone. While this includes the US itself and East Asia,
Russia could also serve as a location for European production
in the dollar zone.

Finally, the scientific and industrial complexes of Russia
and Europe are complementary. As demonstrated by the
technical problems associated with the serial production
of the A380 and the delays to the full-scale launch of the
A350 project, Europe is beginning to suffer from a deficit of
resources in its competition with the US on a wide range of
products, and new difficulties lie ahead in the niche for short-
range carriers.At the same time, Russia, in spite of its colossal
Official View Point
losses during the 1990s, has preserved a strong capacity for
innovation, to which it has devoted significant resources in
recent years. There are areas in which Russia remains a world
leader, for example, in the sphere of piloted spaceflight and
satellite navigation. Thus, a strategic partnership in high-
tech between Russia and Europe would by no means be a one
way street. Russia has much to offer, and the competitiveness
of both parties would benefit.
# 1, 2007 Moscow Defense Brief 
Russias Relations with Europe in Aerospace,
Shipbuilding and Defense Industries
 War And People
North Korea: the Bush Administrations
Strategic Fiasco
Ivan Safranchuk
W hen North Korea withdrew from the Non-Proliferation
Treaty (NPT) in 2003 and declared itself to be a nuclear
power, the prevailing view was that it was bluffing. Isolated
and dependent on humanitarian assistance, it was hard to
imagine that it had truly developed nuclear weapons capacity.
As a result, even if Pyongyang had bluffed earlier for the sake
of getting better positions at negotiations, it now had no other
choice but to prove its claim. Otherwise, the regime would
have faced complete political bankruptcy.
The Bush Administration thought it had learned
some lessons from the Clinton years. In 1994, the Clinton
administration promised economic benefits to North Korea
in exchange for a freeze on its nuclear program. From this,
the Bush administration concluded that first, the North
Korean program was not mature enough in 1994 to warrant
the success of Pyongyangs blackmail; second, the freeze on
nuclear activities was an empty commitment because it is
reversible; and thus, only the comprehensive and verifiable
de-nuclearization of North Korea should be considered as a
valid option for negotiations.
The problem with these perceived lessons is that in 1994
the international community was still in the heat of revelations
of the Iraqi nuclear program. The subsequent discrediting of
the allegations against Iraq in 2003 should not overshadow
the very different international climate that prevailed in 1991.
After the first Gulf War the Iraqi nuclear program appeared
to be far more mature than most intelligence agencies and
analysts had predicted. IAEA safeguards did not prevent Iraq
from clandestine activities on a larger scale than suspected.
Such were the dominant views of the time. So in 1993-1994,
when North Korea attempted to withdraw from NPT, which
it had joined only in 1985, its nuclear program was easily
subject to exaggeration. It is likely that North Korea exploited
this tendency to outbid the Clinton administration. But the
lesson the Bush administration took from this not to give
into Pyongyangs blackmail was incomplete, to say the
least.
Kim Jong-il seems to understand the Bush
administrations logic. Clinton was ready to buy a glimpse nuclear weapons represents an extraordinary risk for the
of a bomb. Bush thinks he is a tough guy, so he wont buy just
a glimpse. Kim Jong-ils reasoning was likely to be: OK, he from rushing to China, Russia or South Korea, we are all safe to
will get a real bomb.
The first reaction from Washington and its allies such
as Japan was to disbelieve the North Korean nuclear test
indeed, it is tempting to deny the reality of something
 # 1, 2007 Moscow Defense Brief
North Korea: the Bush Administrations Strategic Fiasco
long thought to be a bluff. But now that the nuclear test has
destroyed such illusions, the Korean crisis might finally be
tackled seriously.
The main options are: 1) military action against North
Korea on a limited scale to destroy critical infrastructure, or
on a larger scale to overthrow the regime; 2) full isolation
of North Korea, hoping that a social-economic crisis will
bring changes to Kims behavior; 3) regime change from the
through the promotion of civil unrest or an elite coup detat;
4) reconciliation with North Korea through negotiations.
Limited or large scale military action against North
Korea would be very unfavorable for Russia and China, who
share borders with the country and do not wish to experiment
with the consequences of military action, which could result
in massive waves of refugees and the use of WMD. Military
action is also unacceptable to South Korea, whose capital
of Seoul is located within range of North Korean artillery,
which is allegedly armed with not only conventional, but
also chemical shells. The US cannot hope to persuade Seoul,
Beijing and Moscow of the wisdom of using military force
even as a threat. The three capitals do not want this option to
be considered in any manner whatsoever.
The full isolation of North Korea is also a painful option
for its neighbors. Beijing and Seoul could dramatically limit
or even cease humanitarian assistance, financial exchanges
and economic cooperation with North Korea, but they are
unlikely to be consistent in this policy. Even though both
South Korea and China are very disappointed in Kim, they
would not participate in an effort to isolate North Korea to the
point that it either collapses or gives up. And without the full
participation of North Koreas neighbors, a real blockade is
impossible. A limited, mostly sea blockade, is not a problem.
However, full isolation is out of the question.
Regime change through civil unrest is another
nightmare scenario for the neighboring countries. First of all,
nobody believes that a sufficient scale of social unrest could
be provoked that would overthrow the government. More
importantly, social unrest in a extremely poor country with
neighboring countries. So long as Kim prevents his citizens
criticize his dictatorship and police rule over the population.
But if authority as such collapses in North Korea and masses
of Koreans become free to knock on the gates of South Korea,
China or Russia, then these three countries would probably

need to take forceful measures to keep people within North
Koreas borders, and then take measure to manage their life
within these borders.
Authority in North Korea must remain intact. This is
a critical concern for the neighboring countries, and one
that is not addressed by any scenario for military action,
full isolation or civil unrest/revolution. But regime change
through an elite coup detat is a different story.
Throughout both of its terms, the Bush administration
urged,with Japanese assistance,South Korea and China to take
stronger approach to North Korea. In the wake of the North
Korean missile and then nuclear tests in June and October
of 2006, South Korea needs to make some adjustments to its
cooperative approach toward North Korea. South Korea could
afford a more independent foreign policy while the North
Korea threat was in decline or at least was expected to steadily
dwindle. But now, in an aggravated security environment,
Seoul needs to be more in line with the US. Nevertheless,
South Korea does not favor a regime change.
Beijings elite was furious over the North Korean nuclear
test. North Korea as it is now is less and less useful to China.
China can not allow the US and Japan to solve the crisis on
their own terms. This forces China to act as an apologist for
North Korean. China does not like the job, but has no way
out. The Chinese response to this dilemma has been smart
and balanced; namely, to act consistently to deescalate the
crisis.
Both China and South Korea recognize that they have
to change something in their policy toward North Korea,
but they cannot simply adopt the US-Japan position. All
four countries feel they need a common position on North
Korea, but fundamental differences in regional politics do
not simply vanish, even after a nuclear test.
A reasonable compromise may be to remove Kim through
an elite coup detat in North Korea. South Korea wants to have
somebody without the Kim family legacy. China needs to get
rid of Kim as trouble-maker and convert the Korean problem
into a stable, manageable and long term issue.
South Korea needs some response from North Korean
on economic cooperation. China needs the crisis to be
manageable. Albeit from different perspectives, both China
and South Korea have come to the common conclusion that
Kim does not serve their interests. Beijing may hesitate to
shift fully to an active anti-Kim position, and may prefer to
give him one last chance, but surely Beijing will be prepared
War And People
to support a change of leader in North Korea, should the
opportunity arise.
While for Seoul and Beijing a change of leader is a
maximalist position, for the United States and Japan it is an
acceptable minimum: OK, lets get rid of Kim, if nobody is
ready for more. The anti-Kim solution is a compromise that
would allows China and South Korea, on the one hand, and the
US and Japan, on the other, to overcome their disagreement
and form very strong common position, one which they all
truly need.
Of course, it remains a big question as to how precisely
an elite coup should be managed. However if China gets down
to business, Kim may be in real trouble within the next year
or two.
The Russian position in recent years has been very
close to that of Beijing and Seoul. But with South Korea
and China prepared to dispose of Kim, Russia may become
diplomatically isolated. Russia is so used to having China and
South Korea as diplomatic partners on the Korean issue that
it seems to underestimate the fundamental shift that both
Seoul and Beijing may be ready to take in their approach
toward Kim.
Russia wants the North Korean crisis to return to the
sphere of diplomacy. It is a fact that the Bush administration
did not want to have direct negotiations with North Korea and
was not always cooperative at the Six-Party talks. Of course,
North Korean diplomats are anything but nice partners. Still,
Washington was always willing to exploit their tricks as an
excuse for not taking steps toward compromise. Russia and
China were only occasionally successful in their efforts to
deescalate the crisis that Pyongyang and Washington were
willing to escalate.
As the anti-Kim consensus emerges as a possible ground
for a US-Japanese-Chinese-South Korean compromise on
North Korean, Kim is likely to be given a last chance. The
next round of Six Party Talks is precisely this last chance.
This new round of talks is fundamentally different from the
previous, not in the agenda or positions of the parties, but in
the sense that the major task of the talks is to examine Kim
(who surely will manage his delegation in direct, manual
mode from Pyongyang). The new round should be judged
and measured not by the quantitative parameters of accords
achieved or not achieved through lengthy negotiations, but
by the quantitative, binary parameter of whether or not Kim
will be dropped as hopeless case after these talks.
# 1, 2007 Moscow Defense Brief 
North Korea: the Bush Administrations Strategic Fiasco
 War And People
The Globalization of NATO: Prospects
and Consequences
Fedor Lukyanov
A mong NATO supporters and sceptics alike, expectations
for the November 2006 summit in Riga ran high. The
location was highly symbolic: leaders of the worlds most
powerful military-political alliance met on the territory
of its former principal adversary for very the first time.
Rumours that Ukraine and Georgia would be invited to
join the alliance at Riga had people in Moscow on edge. For
his part, NATO Secretary-General Japp de Hoop Scheffer
designated outreach, or the extension of the alliance beyond
its traditional areas, as the key issue.
In the end, nothing sensational happened. Those
gathered apparently decided not to taunt Russia, and
membership was promised only to Croatia, Albania and
Macedonia. Kyiv and Tbilisi would have to make do with
the existing Intensified Dialogue track. As for NATOs global
reach, no radical innovations were envisaged. The Summit
Declaration blandly suggests only that NATO is adapting to
the 21st century security environment, through its operations,
transformed defence capabilities and deeper engagements
with countries in and beyond the Euro-Atlantic Area, as well
as continued internal reform.
Leaders endorsed the Comprehensive Political Guidance,
a conceptual piece that describes terrorism and weapons of
mass destruction as the likely principal threats to the alliance
over the next ten to fifteen years. Other challenges include
instability and threats from failed states, more sophisticated
conventional weapons, and the disruption of the flow of
natural resources. This last item provoked much commentary
in Russia thanks to the statements, made on the eve of the
summit, by US Senator Dick Lugar to the effect that NATO
should focus on the energy security of its members. This
notion was not seriously taken up at the summit itself.
The confrontation with terrorism drove the mobilization
of NATO forces to Afghanistan. All agreed that the operation
is a decisive test of NATOs ability to measure up to the above
listed threats of the future. But it is precisely in Afghanistan
where the future for NATO looks rather grim.
This new, and by no means glorious, page in the
history of the North Atlantic alliance began just over five
years ago. It then became clear that the threats of the twenty
first century would have little in common with those of the
twentieth. The tragic day of 11 September, 2001 was a turning
point for NATO, when its members declared for the first time
in the history of the alliance their readiness to act under
 # 1, 2007 Moscow Defense Brief
The Globalization of NATO: Prospects and Consequences
Article 5 of the Washington Agreement and provide military
assistance to an ally that had come under attack.
However, the US response proved to be even more fateful.
The immortal words of Donald Rumsfeld:the mission defines
the coalition, were quickly adopted as a White House slogan.
The forceful American renunciation of the very concept of a
permanent coalition post 9/11 was extremely worrisome for
NATO, in spite of subsequent efforts by US officials to soften
the blow. At the Riga Summit, for example, US Assistant
Secretary of State for European and Eurasian Affairs Daniel
Fried noted how the Bush Administration no longer spoke of
a coalition of the willing, because its all NATO.
But at the time the sole superpower, shocked by the
attack, thanked its allies but decided to proceed without
engaging the alliance. This decision gave concrete form to the
image of NATOs irrelevance that analysts had been drawing
for the past decade. Since the end of the Cold War the North
Atlantic alliance has defined neither a new mission nor a
role for itself in meeting the challenges of changing times.
Subsequent events would only reinforce this conclusion.
Nevertheless, western politicians and alliance officials
indefatigably cite the same events of recent years to refute
the thesis of NATOs inadequacy in addressing contemporary
global challenges: the peacekeeping mission in Afghanistan,
the training of Iraqi security forces, support for the African
Unions mission to Darfour, and even purely humanitarian
missions like assistance to victims of the tsunami in Indonesia,
the earthquake in Pakistan, o r Hurricane Katrina.
On this shaky ground, US academics Ivo Daalder and
James Goldgeier optimistically state in the pages of Foreign
Affairs that with little fanfareand even less noticethe
North Atlantic Treaty Organization has gone global.Moreover,
they are convinced that as the worlds premier multinational
military organization, comprising many prosperous nations
with a vested interest in maintaining global stability, NATO
is uniquely suited to meeting such demands.
However, with the exception of the Afghan operation,
where NATO has taken on real responsibility (even though the
majority of troops stationed there are not part of the NATO
framework), the remaining operations are clearly of a purely
technical character.
This reflects both the American approach to NATO
(political declarations aside, US strategists do not view the
alliance as a provider of reliable support when it comes to

American security), as well as the unwillingness of European
allies (with the exception of the UK) to engage in serious
operations in far off lands.
Efforts to stimulate the Europeans to a more active role
in global security have been afoot since the mid-1990s, once
it became clear that, with the disappearance of the Soviet
threat, the Old Worlds commitment to force development
has declined considerably. The European Unions attempt
to formulate a European Security and Defense Identity
(ESDI) failed, and the US played a role in this failure, since it
saw the ESDI as an attempt to circumvent the transatlantic
dimension of the alliance. But in the final analysis, Europe
stopped well short of insisting on an independent defense
policy. During the Cold War, Europeans became accustomed
to rely upon the American guarantee of security. As RAND
Corporation analyst James A. Thomson wrote in 1997: why,
after all, should Europe commit resources to a larger security
role if the United States is going to take care of those problems
anyway?
Anticipating that NATO would increasingly be called to
act beyond its customary territories, Thomson called for the
creation of a third NATO command, in addition to SACEUR
and SACLANT. This new command would be charged with
crisis response and the projection of force beyond NATOs
zone of responsibility. To increase Europes stake in a
stronger alliance, Thomson recommended that a European
be appointed to head this third command.
NATOs 1999 operation in Kosovo is often portrayed
as a great success; but even leaving aside the shaky moral
basis of that campaign, its net effect seven years later is
dubious. One can hardly describe the appearance of yet
another weak Albanian state on the map of Europe, where
the ethnic cleansing of the Serbian population has de-facto
been legalized, as a positive outcome.
Since then, Europe has not increased its role in political-
military affairs. On the contrary, it has clearly demonstrated
its inability to formulate a common position. Decisive
support for the US after 9/11 was a singular exception. In all
other cases the close ties linking some EU members to the
US have paralyzed the efforts of the Old World to play a an
autonomous role, while the reluctance of the Old Europe to
get mixed up in global power games prevents it from lending
unconditional support to the US position.
Thanks to the symbolic capital it acquired during the
Cold War, NATO retains a good measure of authority. And
with the European Union recoiling from expansion fatigue,
nations of the former Soviet Union and south-eastern Europe
view NATOs membership as the their only chance to join an
elite club of states.
Their desire for inclusion is graciously rejoined by the
grander members of NATO who view it as a convenient and
natural means of tying down volatile states (especially
War And People
those who have declared their intent to distance themselves
from Russia).
Moscow takes an exceptionally negative view of this,
and only partly due to the residual mistrust of its former
potential adversary. NATO seems possessed by an incapacity
to explain the purpose of its expansion, if any such purpose
exists, aside from endlessly repeating that it is not directed
against Russias interests. However, reference to Natos new,
global mission rings hollow in the context of Estonia or
Georgias North-Atlantic role.
Of all the states that joined NATO at the end of the 1990s,
only Poland has made a real contribution to its capacity.
Warsaw has indeed been extremely enthusiastic, insofar as
it quite rightly views the alliance as an effective means of
promoting Poland on the world stage. By answering the call
in September 2006 for additional forces, sending 1000 of the
2500 troops requested by NATO command, Poland de-facto
saved the mission.
Other allies showed no enthusiasm whatsoever and
agreed with great reluctance to the larger contingent. The US
and UK worked hard at Riga to convince Germany, Italy, Spain
and France to remove the restrictions they have placed on the
engagement of their forces in Afghanistan. As it turns out, the
Old Europe is prepared to serve in the relatively peaceful
northern parts of Afghanistan, but not in the south, where
active combat is the norm.
Ukraine has the potential to become a second
Poland; that is, a country ready to make a real contribution
to the operations of the organization, and could even put
NATO membership at the centre of its international self-
identification. However, the internal situation in Ukraine
and Russias strong opposition make Ukraines potential
membership a problematic issue for the time being.
In a Washington Post article published in March 2006,
Ronald Asmus and Richard Holbrook asserted that if it had
not expanded in 1990s, NATOwould probably have atrophied
and become increasingly irrelevant, because it would have
failed to address the historic security issues of that decade:
stopping ethnic cleansing in the Balkans and helping to create
a new Europe. The authors go on to argue that since this last
task has been completed, the alliance should move onward
to address global problems.
However, further expansion in the spirit of 1999 and
2004 would not signal a new agenda, but simply reinforce
the algorithm of the Cold Wars conclusion. A cardinal shift
of mission and re-orientation towards other theatres, such as
the Middle East and the Pacific (to the extent that China grows
in influence and ambition), require a completely different
perspective on who could act as a partner for NATO.
This theme has been discussed actively since the
beginning of 2006. The US ambassador to NATO (and former
aide to Dick Cheney) Victoria Nuland said in a Financial
# 1, 2007 Moscow Defense Brief 
The Globalization of NATO: Prospects and Consequences
 War And People
Times interview that Washington sees the alliance as first
and foremost a political alliance devoted to strengthening
and defending our democratic values at home and around the
world. In her opinion, NATO should transform itself into a
globally deployable military force, whose area of operations
include virtually the entire globe, partnered closely with
countries like Australia, Japan and South Korea.
Nicholas Burns, the US Undersecretary of State for
Political Affairs, asserts that the transformation of the alliance
would entail the development of partnerships with countries
beyond NATOs borders: We can train more intensively from
a military point of view and grow closer to them because we
are deployed with them. Australia, South Korea and Japan
are in Afghanistan. They have all been in Iraq... They have all
been in the Balkans.
Ivo Daalder and James Goldgeier write:NATO no longer
needs to have an exclusively transatlantic character. Other
democratic countries share NATOs values and many common
interests including Australia, Brazil, Japan, India, New
Zealand, South Africa, and South Koreaand all of them can
greatly contribute to NATOs efforts. These authors suggest
that the North Atlantic Treaty must be amended, particularly
Article 10, which currently limits new membership in NATO
to European countries.
The former Spanish prime minister Jose Maria Aznar,
who in his time strongly supported the US operation in
Iraq, made a presentation March 2006 to the Institute for
Contemporary Affairs in Jerusalem, where he said:If we trace
the line between the West and the rest, Israel is on the same
side as Europe, the U.S., Japan, and Australia. We defend the
same values against the same enemies. Mr. Asnar explained
that by the same enemies he means Islamic extremism and
terrorism,and to confront its enemiesNATO must undertake
 # 1, 2007 Moscow Defense Brief
The Globalization of NATO: Prospects and Consequences
a wide set of reforms, both conceptual and structural. The
ex-premier then called for serious consideration of Israels
membership of the alliance.
Granted, Asnars position is exceptional for continental
Europe. In her answer to the US call to give NATO a more global
mission, the French Minister of Defense Michele Alliot-Marie
wrote in Le Figaro: The development of a global partnership
could...dilute the natural solidarity between Europeans and
North Americans in a fuzzy entity. It would send a bad
political message, that of a campaign launched by the West
against those who dont share their ideas. What a pretext
we would offer to those who promote the idea of a clash of
civilisations.
Clearly, the debate does not yet indicate that NATO will
move in precisely this direction, nor is there any guarantee
that a serious transformation will in fact be launched. The US
is confronted with many serious problems, many of its own
doing, and under such conditions Washington may simply
lack the authority and strength to give the alliance a new form
that would still respond to its needs.
However, should the scenario for a global NATO begin
to take form, staunch opposition can be expected from Russia
(which has not been invited to take part in a renewed alliance),
China and the Islamic world. The expansion of NATO on a
global scale would provoke the creation of alternative alliances.
Instead of promoting the resolution of global problems, it
would lead to a new confrontation of military blocs. During
the Cold War the confrontation of two camps was a source
of both tension, but also a guarantee of stability. However, in
the 21st century, the emergence of non-state actors has made
the world a much less manageable place. The emergence of
system of opposing camps would likely generate a great deal
of tension, but without securing stability.

Challenges to the Reform of Defense
R&D in Russia
Ruslan Pukhov, Mikhail Barabanov
I n the 1980s, the Soviet Union was a world leader in science
and technology, second only to the United States. It spent
enormous sums on both civilian and military research and
development, producing a broad spectrum of advanced
military technologies and defence systems. In 1990, the
Russian Federation could boast of over 4600 military and
civilian science and research institutes, and spent 2.03% of
its GDP on R&D, close to the OECD average.
With the collapse of the Soviet Union, science was
among the principal victims of the stalled transition to a
market economy. To date, the number of science and research
institutes has fallen to 2900, while scientific-research funding
now accounts for a mere 0.3% of GDP. From 1990 to 2003,
the number of planning organizations among science and
research organizations decreased by a factor of 7.8, the number
of design bureau by 3.6, while the number of industrial R&D
departments decreased by a factor of 1.8. The number of
specialists working in R&D decreased by more than double,
from 1.9 million in 1990 to 872,000 in 1999.
Severe cutbacks to military spending were the principal
cause of this state of affairs. In nominal terms, military
spending in 1999 was seven times less than the Soviet defence
budget of 1989. But if one takes into consideration price
increases during this period, real Russian military spending,
reflecting the decreasing purchasing power of the rouble,
decreased by thirty times from 1989 to 1999.
As a result, Russias defense budgets throughout the
1990s served principally the social needs of the armed forces,
with the bulk of spending going to salaries, pensions, as well
as housing and other services to soldiers sent to the reserves.
On average, 53% to 63% of the military budget was spent
in the social sphere, while other categories of expenditure
were cut down to the bare minimum. Not surprisingly,
R&D spending was hit hard. After the sectoral ministries
responsible for creating arms and military equipment were
disbanded in 1991-1993, responsibility for the financing
Spending Under the Russian Federation Budget Category National Defense
Year 2000 2001 2002
Million rubles 209 445 214 668 284 158
Million dollars 7 480 7 162 9 472
Note. These figures were derived from the market rate for dollars/roubles for each year. This methodology does not reflect the real purchasing power of the
rouble in the military and defence industry sectors.
Industrial Policy
of science, technology, experimental and design work fell
upon the shoulders of the Ministry of Defence alone, and its
capacity to fulfill this role was marginal at best. The share of
R&D spending in the Defence budget fell from 18.6% in 1990
to 5.7% in 1996. As a result of non-payments by the state, a
total of 1149 individual R&D projects commissioned for the
governments procurement program were cancelled.
Since 1999, Russian defence spending has increased
steadily, reflecting the policy orientation of governments
under Vladimir Putin as well as strong economic growth.
Expressed in US dollar equivalents, Russias military spending
quadrupled from 2000 to 2007.
After the collapse of the Soviet Union,new arms purchases
for Russias aging arsenal were put off indefinitely. Under Boris
Yeltsin, the first significant purchase of arms was planned
for 1996, but was postponed to 2000, and even then was not
really implemented. The armaments programs adopted by
the Russian government for 1995-2005 and for 2001-2010
emphasized military R&D and the creation of prototypes
rather than serial production, which was to resume at a later
date, under better economic conditions and in the context of
the mass rearmament of the military. By 2000, the share of
defence budget funds allocated to military R&D grew to 13%.
This was still a relatively small amount of money and was
not sufficient to prevent the ongoing degradation of Russias
defence-science potential. Nevertheless, this policy did in fact
help some sectors; the strategic nuclear forces in particular,
survive to see a better day.
Chronic under-financing of the state armaments
programs of 1996-2005 and 2001-2010 meant there was no
significant procurement until 2004-2005, when increases
in military spending finally brought some real money to
the table, and led to the revival of the internal market for
military production. In 2005, 183 billion rubles were spent on
purchases of arms and military equipment; with 237 billion
budgeted for 2006 and 302.7 billion planned for 2007.
2003 2004 2005 2006 2007
344 525 413 700 531 133 667 257 821 172
11 484 14 266 18 969 23 831 30 415
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 Industrial Policy
In light of the de-facto collapse of the two previous state
armaments programs, Russias leadership decided to adopt a
new program for 2007-2015 at a meeting of the governments
Military-Industrial Commission on 2 June, 2006. A total
of 4939.4 billion rubles (approximately $186 billion at the
current exchange rate) is to be spent over the course of this
program, with 63% for the purchase of new types of arms and
equipment, and the remaining 27% on defense R&D.
Although several new defense products will begin
serial production in 2006-2007, the program prudently puts
off major purchases to 2009-2010. Meanwhile, the priority
remains on the development of prototypes. In general, the
figures used to state the volumes of future purchases should
be taken with a grain of salt, as prices in Russias defense sector
have grown by as much as 20% in recent years, or twice the
general rate of inflation. The government thus far has failed
to take this into consideration when drawing up its forecasts,
much less act to counteract this trend.
Structural Transformation of Military R&D
While the injection of rubles is welcome and clearly
essential, financing alone will not save Russian R&D, which
is also characterized by complex structural problems. The
near-total concentration of R&D in large, specialized design
bureaus and scientific-research institutes, structurally
segregated from the factories engaged in the serial production
of their designs, was a defining feature of the Soviet military-
industrial complex. The design bureau was an independent
organization with its own single-run production facilities and
was managed, as a rule, by an authoritative director-designer
who enjoyed a high degree of political influence.
This institutionalization of the design bureau as the core
of Soviet R&D has remained practically unchanged in todays
Russia. In spite of the overwhelming reductions of funding
to the defense-industry complex during the post-Soviet
period, not one of the large bureaus has been closed, and
each one continues its work as before, at least on paper. The
Myasishchev aviation design bureau is an excellent example.
During the Soviet period it specialized in the development of
strategic bombers, and later, on the Buran Soviet space shuttle
and high-altitude reconnaissance-planes. But although it lost
almost all of its qualified personnel and has re-equipped most
of its facilities to produce automobile parts, there has been no
change to the bureaus charter of incorporation and it might
well even receive some symbolic resources from the state
defense procurement budget.
At the same time, there have been some changes that will
assist in the governments plans to encourage the horizontal
integration of design bureau. During the Soviet period there
was a division of labor among design bureaus that specialized
in specific niches. For example, the aviation design bureaus
10 # 1, 2007 Moscow Defense Brief
Challenges to the Reform of Defense R&D in Russia
Sukhoi and Mikoyan specialized in the development of
fighters; Ilyushin in passenger and military-transport planes;
Tupolev in passenger planes and bombers; Yakovlev in pilotless
systems and vertical take-off/landing planes. Faced with severe
budget cuts, these bureaus were often forced to stop work on
their area of specialization and concentrate their resources
on projects for which there was some demand in the market.
Thus, Yakovlev stopped its work of deck-landing aircraft and
focused on the development of the next-generation Yak-130
training aircraft. Simultaneously, the design bureau worked
on foreign commissions, taking part in the development of
ATR turboprop aircraft, the IAI Galaxy business jet, the sale
of documentation for the creation of the Aeromacci M-346
training plane, and the Chinese L-15 trainer.
Virtually all aviation and shipbuilding design bureaus
saw their activities diversify in a similar fashion. The decision
of Sukhoi, which had never worked on passenger planes, to
become involved in the Rissian regional jet (RRJ) program,
is the most extreme example of this phenomenon. Such
developments provoked a mass migration of engineers and
technicians from one bureau to another, to the extent that
individual design bureaus have lost, to a degree, their once very
distinct identities built on entrenched traditions and work
methods. This fusion of personnel and even top-managers
could be observed in the mid-to-late nineties between the
Sukhoi and Mikoyan bureaus.
There is no justification for the preservation of an excess
number of design bureaus,given the limited number of projects
that are actually being funded. Moreover, with the mass exodus
of engineers and technicians from defense industries since the
1990s, most design bureaus are experiencing severe shortages
of qualified personnel. Even those facilities that preserved
the greatest scientific capacity are unable to conduct full-
scale research and are forced to cooperate with competing
design bureau. For example, Sukhoi, which suffered least of
all from resource shortages over the past fifteen years, has
a severe shortage of specialists for testing the endurance
of materials. As a result, Sukhoi was forced to invite the
Ilyushin and Yakovlev design bureaus to participate in its
principal civilian project, the Sukhoi Superjet-100 regional
plane (formerly called RRJ). After these two design bureaus
withdrew from the project, Sukhoi began a mass recruitment
of their engineers and technicians. In a similar fashion, Irkut
plans to include not only the Ilyushin and Tupolev design
bureaus, but also to recruit specialists from the Ukrainian
Antonov design bureau, to begin work on the 18-tonne class
multi-functional transport plane. In this fashion, a kind of
spontaneous integration among various design bureaus is
underway, and the de-facto establishment of ad hoc project
teams for the execution of specific programs.
This spontaneous practice will be codified to a large
degree with the establishment of the United Aircraft
Corporation. In the framework of this mega firm, which will

bring together the vast majority of all facilities active in the
aviation industry, three aircraft-making divisions will be
created: combat, military-transport and civilian aviation.
Each of these divisions will in turn establish integrated
centers that unite the qualified personnel active in all current
design bureaus.
The same processes are even more evident the design of
surface ships and submarines. Historically, the shipbuilding
sector has been marked by a lesser degree of competition
among its design bureaus than the aviation industry, where
the inherent technical, bureaucratic and political competition
among bureaus was as a rule supplemented by personal
antipathy or even hatred among the chief designers. By way
of contrast, in shipbuilding, the work of each bureau occupied
a clearly defined niche, and they were almost all concentrated
in St. Petersburg (Leningrad), far from the center of political
and bureaucratic struggle. This specialization and collective
isolation promoted a greater degree of cooperation and good-
will during Soviet times.
At present, the Northern project-design bureau, which
developed the Project 11356 (Talwar Class) frigate and the
next generation Project 22350 (Fleet Admiral Gorshkov Class)
frigate for the Russian Navy, appears to have the most potential
for future success. The Severnoe project-design bureau is
also engaged in a project to design a family of corvettes with
2000 ton displacement, though the Russian Navy has decided
upon the Almaz design bureaus more simple and inexpensive
project. This project is currently building four Project20380
corvettes, with the Steregushchiy as the lead ship.
It is well known that at the beginning of the 1990s the
practice of so-called contractual relations became widespread
in Russian shipbuilding. This meant that when one bureau was
awarded a contract for a particular project, it would be obliged
to hire on a temporary basis a few dozen designers from other
bureaus located in St. Petersburg. Thus, for the past decade a
large contingent of engineers and designers, each of whom
remains formally employed a specific individual bureau, has
already been working as a spontaneously integrated structure.
This practice is characteristic in the design of surface ships
(between the Northern and Nevskiy design bureau and
Almaz), as well as in the submarine construction sector, where
bottom-up integration has affected the Rubin and Malakhit
bureau.
The governments plan for the restructuring of
shipbuilding sector takes this process fully into account.
According to the Federal Agency for Industrys plan for the
restructuring of the shipbuilding sector, two engineering
centers are to be established, each of which shall unite those
design bureau that remain under state control. One center will
be established in the framework of a submarine construction
holding, uniting Rubin and Malakhit. The second will unite
surface shipbuilding design bureau, including the Northern,
Nevskiy and Almaz, as well as Zelenodolsk. Both centers
Industrial Policy
will be incorporated as open joint-stock companies. The
submarine holding will be fully owned by the state, while the
surface ship design center will include some private capital.
It is thought that submarine projects will be commissioned
only by the state, that is, from the Navy and other security
agencies, so 100% state ownership of the center is logical.
On the other hand, the surface ship center, in addition to
fulfilling state orders, may well design or purchase licenses to
build commercial ships for use in oil and gas exploration in
the Arctic and the Far East. This could include ice-breakers,
tankers for use in frozen waters and ships to transport
liquefied natural gas from the Shtokman field to the Barents
Sea. Insofar as these projects will involve private capital, the
FAI will open the future surface ship design bureau to non-
state participants.
Finally, a horizontal consolidation of the design capacity
of the air defense sector has already taken place. The Almaz-
Antey Concern was established in 2002, uniting the vast
majority of designers and producers of anti-air defense
products, from long-range SAM systems with an active
range of 200 kilometers (S300PMU and S-300B [SA10/20
and SA12]) to the Tor-M1 (SA15) SAM systems. The
management of the Concern was faced with the complex task
of integrating various bureaus, each of which was aggressively
promoting its own products. This was particularly difficult
with respect to the Almaz (S300P) and the Antey (S300B)
design bureau. The chiefs of these two bureaus, academicians
Efremov and Bunkin, have been competing with each other
since the 1950s, and over the years have developed a deep
personal enmity. Nevertheless, a single engineering-design
center for the Concern was established in the summer of
2006, which is now conducting R&D for the development of
next-generation systems. The integration of design talent
should allow, aside from the elimination of duplication, the
creation of multi-service anti-air defense systems that will
replace the missile systems of the army, land air defense, and
the long-range naval air defense system.
Export Dependence
The almost total cessation of arms purchases by the
Ministry of Defense in the mid-1990s drove the Russian
military-industrial complex to the verge of collapse. Exports
became the only practical means of survival, and has locked
many enterprises in a hypertrophic orientation towards the
demands of foreign markets. This applied equally to the
conduct of R&D, as only those programs oriented towards
projects with some export potential were supported. Many
design bureaus for the first time in their history initiated
programs designed to create weapons exclusively for export,
or offered custom-designed systems to one or another
purchaser.
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Challenges to the Reform of Defense R&D in Russia
 Industrial Policy
For its part, in order to preserve the defense industrial
base, the Defense Ministry began to finance R&D programs
that did not have direct application to the needs of the Russian
armed forces (i.e., products that the Russian armedforces
would not purchase in any significant quantity), but
which were aimed at foreign markets. In this manner, one
might speak of the appearance of a unique symbiosis of
Russias defense administration and its defense industry in
supporting the export of arms.
It is precisely this symbiosis that explains the significant
successes that Russia has demonstrated on the international
arms markets in the last few years and the annual increase
of arms deliveries abroad by $1 billion. By 2000, according
to several estimates, as much as 70% of military R&D
conducted in Russia was in support of export products.
The Ministry of Defense itself finances projects with
export potential that it also plans for the use of its own
forces. The Sukhoi program for the grand modernization
of the Su-27 fighter, known as the Su-35, as well as the
establishment of the Almaz-Antey air-defense version with
vertical launch of the Shtil-1 (SA-N-12) SAM complex,
destined above all for deliveries to India.
This strategy of risk-sharing with foreign partners
in promising R&D projects has become so deeply
entrenched that attempts are being made to apply it
to such key national programs such as the creation of a
fifth-generationI21fighter. Russias leadership has been
extremely keen to involve other countries in this project,
especially India. At the same time, in parallel to the internal
version, an export version called the I-21E is being planned.
The contrast of the Russian approach to American fears of
leaks of crucial technologies associated with the F-22 or
JSF fifth-generation fighter program to foreign countries is
remarkable.
The Subjective Factor as an Obstacles
to Rational Planning
The hypertrophied role of the defense design bureau
director that developed during the Soviet period has
brought an element of subjectivity and arbitrariness to
the planning of defense development, the distribution of
contracts and decisions to launch products in to serial
production. Frequently, the decisive factor is neither military
nor production considerations, but the bureaucratic and
political influence of one or another design bureau director.
During the administrative and political chaos of the 1990s,
the struggle for scarce state funding sharpened to such a
point that industry reform amounted to little more than a
shakedown of existing hierarchies, while the political factor
became dominant in the distribution of contracts, reflecting
the lobbying power of one or another firm.
12 # 1, 2007 Moscow Defense Brief
Challenges to the Reform of Defense R&D in Russia
This led to a significant redistribution of power in the
military-industrial complex of Russia. Even though MiG
over several decades had become synonymous with Soviet
military aviation, Sukhoi gained a dominant position in this
sector during the 1990s, while MiG suffered a deep setback.
This was in part related to the export success of the Su27 on
world markets, but also reflected the back-room negotiating
talents of the Sukhoi leadership. Irkuts success in obtaining
the historic Indian contract for the development of the
Su30MKI is related to a large degree to the links maintained
by the management of this company with not only Russian,
but Indian political circles.
The Kamov design bureau offers another example, as it
gained the upper hand over the traditionally dominant Mil
design bureau during the 1990s. Moreover, Kamovs success
was due not only to traditional forms of political influence,
but also to methods of informational warfare. In 1995 Sergey
Mikheyev, the head of Kamov, secured a place for his Ka50
attack helicopter with Russian military. But after 2000, with
the changeover in the Russian military and political elites, the
Mil design bureau got its bureaucratic revenge, and was able
to have the Ka50/52 replaced with the Mi28N in the service
of the armed forces.
In order to limit this kind of bureaucratic lobbying,
there were attempts during the mid-1990s to introduce a
competitive system of defense contracts, including for R&D
projects. These efforts have seen only partial success. The
system of competitive tenders works only for relatively small
projects and for contracts issued by the Ministry of Defense
(though even here the occasional corruption scandal erupts),
but as for large contracts and those of essential importance
for national security, these competitions are largely for
show. Here, as elsewhere, the deciding factor remains the
bureaucratic influence of the participant, as well as the
subjective preferences of highly placed military and political
decision makers. The decision of the Russian Air Force to
choose the Mi-28N as its main attack helicopter and to launch
serial production is an excellent example, since the Mi-28N
had not even begun testing, and was far behind its competitor,
the Ka-52, in terms of readiness.
The influence of the industrial generals has had a range
of negative effects. First, the directors of the more influential
design bureau tend to hoard resources, leaving precious little
from state contracts for second and third level subcontractors.
The second drawback of this politicized system is the ability
of the design bureau directors to continue to attract state
financing for R&D projects that objectively show little
relevance to current needs. This situation is exacerbated by the
existence of ultra-specialized Soviet-era design bureau that
remain focused on their traditional topics. With inadequate
financing, they continue to pursue an enormous number of
projects that have been dragging on for years, many of which
overlap in purpose and duplicate each other. In several cases

attempts to introduce competitive tenders for R&D have in
fact served to conceal this situation, as projects that simply
duplicate efforts could be presented as competing with one
another.
For its part the Ministry of Defense, after showing
preference to one developer, is often unable to resist the
political pressure emanating from other design bureau to
provide them with consolation prizes, and thus continues
not only to finance redundant R&D but also to purchase
redundant serial production. Having announced, after twenty
years of indecision, its choice of the Mi28N as the main
combat helicopter, the Ministry of Defense simultaneously
extended work on the Ka50 and Ka52, with the aim of using
these for special tasks. Similarly, although the Yak130 was
adopted by the Air Force as its principal training aircraft,
financing continues to be given to the competing program to
develop the MiG-AT.
The result is that Russias security and defense agencies
are in fact conducting too much R&D, given the limited
resources available, while reference to that very same lack of
money allows a few developers to drag their work on for an
indefinite period and to appropriate funds without any real
accountability for results. This situation is of course an ideal
breeding ground for industrial corruption.
Obviously, Russias system of military R&D can be
improved only with the minimization of such subjective and
arbitrary factors in the planning and execution of projects.
Indeed, over the past few years serious efforts have been made
in this direction.
First, the accelerated consolidation of Russias defense
industry into sector-integrated holdings is resulting in fewer
overlapping and duplicate projects within these holdings
themselves, and leading to the eventual establishment of
a single design bureau for each holding. The Almaz-Antey
air defense Concern has gone the farthest in this direction,
having this year united five design bureaus into a single
engineering and design center for the Concern as a whole. The
managers of the other newly-established defense-industry
conglomerates will be forced to take a similar path. The
fact that such consolidation will occur at the internal level
within each holding will minimize the political factor, when
compared to the unsuccessful attempts of the government to
exercise its outside influence directly upon the historical
design bureaus.
Another means of reducing the number of projects is
to expand the number of inter-service R&D, including the
establishment of unified arms systems for the various services
of the Armed Forces.
In administrative terms, the emphasis is on improving
coordination among R&D systems and purchases. Beginning
in 2000, with Vladimir Putins coming to power, a step-by-step
transition to a system of unified procurement was put into
motion. This implies the creation of a single structure that
Industrial Policy
plans weapons development, exercises general coordination
over military R&D, and works on the commissioning,
production and use of military equipment. Until 2000, within
the framework of the Ministry of Defense alone there were
no less than 57 purchasing departments, poorly coordinated
among one another and wasting even those limited resources
at their disposal.
In the framework of the first stage of reform, as
approved by the Russian Security Council in September
2000, the number of arms procurement offices within the
Defense Ministry was to be reduced to 20 by 2002; a unified
procurement office was formed for the Air Force, the Navy
and the Rear of the Russian Armed Forces; the number of
individuals able to sign off on State purchases in the military
sphere was reduced from 200 to 51; and a mandatory
centralized register of all state contracts was established.
By the end of 2004 the formation of a unified
procurement system was initiated within the Ministry of
Defense. It is headed by a Chief of Armaments for the Armed
Forces with the rank of Deputy Minister of Defense, and
directly supervises the general procurement departments
corresponding to the various services, the number of which
has been reduced to 12. In this manner, the department
responsible for the development of armaments has been
for the first time in Russian practice separated from the
department exercising operational command of the forces.
In order to supervise R&D and arms purchases a separate
Federal Service for Defense Purchases was formed under the
Ministry of Defense (Rosoboronzakaz).
Finally,in May 2006,the Military-Industrial Commission
(MIC) was established within the government to coordinate
the activities of the defense industry and the creation of
new armaments, de facto recreating a body analogous to
the one operative during the Soviet period. It is expected
that arms procurement on behalf of the Ministry of Defense
and other agencies will conducted by a civilian Procurement
and Contracting Agency for Arms and Military Equipment,
established under the aegis of the MIC. The Defense
Ministrys unified system of procurement will then take on
the planning of R&D and purchases, while the new Agency
will take care of the contracting details. It is further expected
that the Federal Service for Defense Procurement will be
removed from the Defense Ministry portfolio to become
a government-wide body that supervises the work of the
Procurement and Contracting Agency and the unified system
of procurement.
These measures should lead to the formation of a
unified, civilian and relatively autonomous center for the
management of defense R&D and procurement. The extent
to which this system, imposed upon the military-industrial
complex from the outside, proves able to overcome the
consequences of the collapse and chaos of the 1990s in this
sphere, will be determined in the near future.
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Challenges to the Reform of Defense R&D in Russia
 Industrial Policy
Russias Defense Industry in 2006
Dmitry Vasilyev
T he year 2006 saw several important developments
that promise to shape the Russian military-industrial
complex for years to come. First, a standing governmental
Military-Industrial Commission, chaired by Sergey Ivanov,
Deputy Prime Minister and Minister of Defense, was created
in March. The Commission is charged with coordinating the
development and production of armaments, mobilization
training, the development of military industry and
technologies, and also to oversee the export and import of
arms.
One of the results of the Commissions work in
2006 was the development of a State Arms Program for
20072015aprogram funded by 4.96 trillion rubles, of
which 3.41 trillion are earmarked for new serial production
purchases. The Minister of Defense said that the program
marks the beginning of the rearmament of the armed forces.
However, in spite of the large volume of funds allotted to
the program, officials have not specified precisely where all
themoney is coming from, which suggests that the program
will be dependent upon high oil prices.
The highlight of the year in the aviation industry was the
formation of the United Aircraft Corporation (UAC), meant
to consolidate state shareholdings in the aviation industry.
The President signed a degree on the UAC in February, but
the corporation was formally registered only in November
a delay attributed to competing interests and views on the
valuation of the several shareholdings merged into a single
company. In the end, the UAC at this interim stage has been
valued at 96.8 billion rubles and the states ownership share
at 90.1% (see table 1).
The formation of the UAC is to be finalized by April
1, 2007. By that date the Kazan Aviation Production
Association and the MiG Russian Aircraft Corporation
should be reincorporated as joint-stock companies and
their shareholdings, together with privately-held shares
in aviation companies, will have been consolidated in the
UAC. At that point the value of the company should be 150
billion rubles, with a state share of 76%. The company will
conduct an initial public offering of its shares sometime
before 2010.
It is worth noting that in its valuation of the UAC, Deloitte
& Touche gave the cost of each shareholding in terms of a
bracket or range. In order to maximize the states ownership
share in the UAC, its shareholding in individual companies
was consistently priced at the top of the range. Moreover, in
order to boost the valuation of MiG, the state plans to write
off the companys debt of some 19.5 billion rubles.
14 # 1, 2007 Moscow Defense Brief
Russias Defense Industry in 2006
Meanwhile, Oboronprom (a de-facto subsidiary of
Rosoboronexport),continued to consolidate the shareholdings
of Russian helicopter manufacturing companies. Following
its purchase of the Rostvertol additional share issue in 2006,
Oboronproms share in that company reached 25%. It also
initiated a deal to purchase 20% of the Kazan Helicopter
Plant, apparently from the management of that company,
bringing its total ownership to 51%.
Rosoboronexport Director General Sergey Chemezov
announced that the helicopter holding might be folded
into the UAC. This might be interpreted as an attempt to
bolster the holdings of the UAC before a potential exchange
of share with EADS, or as an indication of the inability of
Oboronprom to properly manage the helicopter companies
it is acquiring.
In 2006 Vladimir Putin approved amendments to
the law on state regulation of the aviation industry, giving
foreign companies the right to acquire over 25% of the
shares of Russian aviation companies, but only with the
permission of the head of state. This was done first of all to
allow Finmeccanica to acquire 25% of Sukhoi Civil Aircraft
Company. The two companies signed a letter of intent in 2006
to enable the Italian company to participate in the Sukhoi
Superjet-100 Russian regional jet project.
The highlight of the year in engine-building was the sale
by Vneshtorgbank in August of its shares of engine-building
companies in the Perm region AFK Sistema. The bank sold
81.25% of its shares in the Sales company, which control the
Perm Motor Plant (71.6%), the Aviadvigatel design bureau
(10%) and a number of other companies located in Perm.
The total value of the deals is estimated at $120 million.
These events suggest that Sistema has been tasked by the
authorities, together with Rosoboronexport, to consolidate
the engine manufacturing sector.The first stage of this process
should consolidate the shareholdings of the Perm region
manufacturers, the Saturn Scientific Production Association,
the Ufa Engine Construction Production Association, as well
as, in all likelihood, Motor-Sich, the Ukrainian manufacturer
of helicopter engines. By some accounts, the shares of this
last company are already controlled by Oboronprom.
Oboronprom had already made an earlier attempt
to consolidate the engine manufacturing sector. An
announcement was made in May that the company had
submitted a plan to the Military-Industrial Commission
to create an aviation engine construction holding. The plan
would have included the state-owned Chernyshev, Salyut and
Klimov plants together with the privately-owned Ufa facility.
 Industrial Policy

Table 1. Valuation of the Participants of the UAC

Capitalization, Percent of Shares transferred Valuation of share in the UAC,
Company
billion rubles to the UAC, % billion rubles.
Sukhoi Aviation Holding Company 52.4 100 52.4
Aviaeksport 2 15 0.3
Ilyushin Finance Co. 11.7 38 4.4
Komsomolsk on Amur Aircraft Production 38 25.5 9.7
Association (KNAAPO)
Ilyushin Aircraft Company 11.9 86 10.2
NAZ Sokol 3.1 38 1.2
Novosibirsk Aviation Production Association 2.7 25.5 0.7
(NAPO)
Tupolev 4 90.8 3.6
Finance Leasing Company 8 58 4.6

Irkut Corporation 25 38.2 9.6

Total 96.8
Source: UAC. Authors calculations

However, there have been no subsequent announcements
concerning this plan.
In shipbuilding, the government approved a strategy on
the development and reform of the sector to 2030. The details
of this strategy were not published, except that in place of a
single integrated structure like the UAC, the state intends to
establish three holdings, corresponding to the three major
geographic shipbuilding centres in the North, West and Far
East. The Defense Minister suggested that geopolitical factors
and the need to support Russian industry in the Far East lay
behind this decision.
The Russias electronics industry got a lot of attention in
2006. The Ministry of Industry and Energy devised a strategy
for the development of the sector to 2025, with a high priority
given to military electronics. The ministry should submit a
detailed plan to the government by February 2007 on how to
spend the 23 billion rubles allocated to the sector. The first
likely beneficiaries of this largess are to be the Mikron (owned
by Sitroniks) and Angstrem facilities in Zelenograd.
Oboronproms consolidation efforts also extended
to electronics. In September, the company announced the
creation of a subsidiary, Radio-Electronic Warfare (REW),
that would consolidate the leading companies in the sector,
similar to how Oboronprom has attempted with respect
to helicopter construction. The announcement suggested
that formalities concerning the formation of REW would be
complete by the end of the year, but no further information
on this initiative is available.
Finally, Rosoboronexports industrial expansion reached
new heights in 2006.Aside from its involvement in the reform
of engine manufacturing and electronics, Rosoboronexport
has delved into the consolidation of the metallurgical
industry. In January, Rosoboronexport and Aviatekhnologia
established a joint-venture called AT-Spetstekhnologia to
manage metalurgical companies producing special metals
and alloys for the defense-industrial complex. Over the
course of the year Rosoboronexport acquired 66% of VSMPO-
Avisma, the largest producer of titanium in the world, and
launched negotiations to acquire shares of Red October, a
manufacturer of special steels.
In early December Rosoboronexport created a joint-
venture with Alfa-Bank which is to take an active role in
implementing the Federal program for the reform of the
defense industrial complex for 2007-2011. According to
official reports, the joint-venture will assist in the financing,
debt restructuring and trust management of the states
shareholdings in defense industries. With every passing
year, as Rosoboronexport is diversifying and becoming more
involved in the reform of the sector, such arms exports have
become just one of its functions.
In summary, the main result of the year was the
establishment of a legal framework for the restructuring of
several key sectors of the defense-industrial complex. The
positive dynamic of increased funding continued from last
year, driven by a large portfolio of export orders plus growth
in the state defense order.

# 1, 2007 Moscow Defense Brief 15

Russias Defense Industry in 2006
 Arms Trade
The Venezuela Contracts
Konstantin Makienko
I n July 2006, Russia and Venezuela signed a series of
contracts for the delivery of Russian arms worth $3 billion
during Venezuelan President Hugo Chavezs visit to Russia.
The prospects for this level of trade between Russia and
Venezuela were discussed as early as 2001-2002, when a
large (up to 50 units) delivery of MiG-29SMT fighters was
considered. However, due to political instability in Venezuela,
Russias caution in pursuing military-technical cooperation
with an anti-American regime, and the opposition of a
pro-American bureaucracy in Venezuela itself, the first real
contracts for the delivery of helicopters and small arms were
concluded only in 2005. In July 2006 new contracts were
concluded that resemble, in both scale and variety, the Algeria
deals concluded in March 2006.
What Do We Know?
Full and reliable information on the contracts is not
available to the public. The aviation deals are thus far the most
clearest. First, the contract for delivery of 24 Su30MK2s for a
probable sum of $1.5 - 2 billion. Such fighters had earlier been
delivered to the PLA (24 units) and the Vietnam Air Force
(four units). The first four units were delivered to Venezuela
in December 2006, that is, just four months after the closing
of the deal. This tight schedule suggests that in spite of the
fact that it secured no orders in 2005, the KNAAPO has kept
its production capacity in good shape. A full production
cycle of the Su-30 requires about 18 months to complete,
and so the delivery of the remaining 20 fighters will most
likely proceed in batches of ten units, from 2007-2008. But
one cannot exclude the possibility that all 20 units will be
delivered before the end of 2007. According to some sources,
in addition to this contract, Venezuela negotiated an option
to purchase another batch of 24 Su-30MK2. However, the
likelihood of Venezuela exercising this option, if indeed it
does exist, depends of several factors, first of all the stability
of the regime of Hugo Chavez. Moreover, by 2008 Russia will
have developed the new Su-35 fighter with fifth-generation
avionics, modernized engines and a new array of weapons.
Chavez has already expressed his interest in this aircraft, and
so Venezuela could well place the first foreign order for it.
Details on the helicopter acquisitions also were published.
As early as 2005, two contracts for a total of $201 million were
signed for the delivery of 15 helicopters, including 6 Mi-
17B5, 8 Mi35M and one Mi26T. The first contract for $120
million envisaged the delivery of 10 aircrafts (six Mi-17, three
16 # 1, 2007 Moscow Defense Brief
The Venezuela Contracts
Mi35M and one Mi-26T). The second was for the transfer of
five Mi-35M for a probable cost of $81 million.
On the eve of the July visit, a new contract for 18 helicopters
was signed, including 14 Mi-17B5, two Mi-35M and two Mi-
26T. In addition, it appears as though another contract for the
delivery of 20 Mi-17, including two VIP versions, was agreed
upon. The cost of all 38 helicopters amounts to $484 million.
Thus, the total size of Venezuelas helicopter programs, which
includes the delivery of 40 Mi-17, 10 Mi-35M and three Mi-
26T amounts to $685 million. This would be the largest (by
cost) single post-Soviet sale of helicopters. Taking into account
earlier purchases of Mi-17s from Israeli aviation companies,
Venezuela stands alongside China and India as the largest
purchasers of helicopters of Russian post-Soviet production.
Information regarding other likely purchases must be
considered preliminary. For example, there is oblique evidence
of Venezuelan interest in Russias air-defense systems. In any
case, during his visit to Izhevsk, Chavez visited not only the
small arms factory, but also the Kupol plant which produces
the Tor-M1 missile system. An air-defense system purchase
would be fully consistent with the logic of Venezuelas military-
technical policy, one of the priorities of which is to protect the
airspace of the country after the decommissioning of its F-16s,
which are no longer combat-ready due to the US embargo on
deliveries of spare parts.
The deal to sell Venezuela a batch of Russian AK-103
assault rifles and licenses for their production of is noteworthy,
because this is the first time that Russia has made a deal not
just to deliver arms but to construct a turn-key facility for their
manufacture.
Finally,Venezuela has demonstrated its interest in Russian
An-74 military-transport aircraft. Earlier, Caracas intended
to purchase twelve CASA-C-295 light transport aircraft of
European production, but this deal was blocked by the USA,
which supplies its engines. In October, a Venezuelan delegation
visited the Omsk Polyot factory that produces the An-74. There
have also been reports that the Russian Project 677 conventional
submarine won a tender conducted by the Venezuelan Navy for
the purchase of next-generation submarines, but the contract
itself, it seems, will be signed at a later date.
Qualitative Analysis
This series of Venezuelan contracts is the second
concluded in 2006 (after the Algerian contracts) which include
the following elements:
 Arms Trade

1. A multi-billion dollar scale, far exceeding the usual
level for Russian arms exports. Only the contract for the
licensed production by India of the Su-30MKI, worth $3.3 -
3.5 billion, can compare to the cost of the Algerian package, at
$7.5 billion, and the cost of the Venezuelan package, at about
$3 billion.
2. A geographic expansion beyond Russias traditional
customer base in India and China. Algeria has now become
a significant importer of Russian defense and aerospace
equipment, it purchased significant amounts of Russian arms
and has modernized its stocks, but it was also a significant
purchaser of Soviet armaments in the past. Venezuela, on
the other hand, has never made major purchases from either
Russia or the Soviet Union.
3. A wide variety of weapon types, including defense
and aerospace equipment for air and land forces, and very
likely for the air defense and the navy.
As for the volume of the Algerian and Venezuelan
packages, taken together they amount to over $10
billion, making up half of the current portfolio held by
Rosoboronexport. Moreover, for the first time in Russias post-
Soviet history its exports are well-balanced geographically,
going beyond the Indo-Chinese reservation. One can now
speak of a group of five to six states that will remain the major
purchasers of Russian aerospace and defense equipment
Table 1: Identified and Supposed Contracts
System Number
until 2009-2010. This includes the traditional customers
India and China, and the new additions of Venezuela and
Algeria. In a few years, once deliveries of the Su30MKM
begin, Malaysia will join this club. It is also reasonable to
suppose that relatively large sales will be made to Syria and
Iran.
Diversity is another distinguishing feature of the
Algerian and Venezuelan packages. The range of products
includes military aviation, naval equipment, air-defense
and land forces armaments. This suggests that Russia has
moved beyond the mere sale of individual types of arms that
characterized its trade in the 1990s, to deals with better heeled
customers for comprehensive solutions to their military
security challenges. Transcending the purely commercial sale
of arms, Russia is now in the process of becoming a provider of
security, a more complex and inevitably political relationship.
The rise of Russian export volumes, the widening range of
product types, and especially the geographic diversification
of importers all indicate the increasingly integral power of
Russia, now recognized by importing states as at least the
equal of France or the UK. Indeed, with the exception of
China, for which Russia remains practically the only available
source of armaments, both Algeria and Venezuela could
have turned to the Europeans to satisfy the majority of their
defense equipment needs.
Cost Date of Signature Source and Comments

Confirmed Contracts
Su-30MK2V fighters 24 $1.5 billion* 17.07.2006 Kommersant, Vedomosti
Mi-17 transport helicopters 3 $26 million
Transport and attack helicopters 6 Mi-17, 3 Mi-35M, $120 million 2005
1 Mi-26
Attack helicopters 5 Mi-35M $81 million 2005
Transport and attack helicopters 2 Mi-35M, 2 Mi-26, $484 million 15.07.2006 Kommersant
34 Mi-17
AK-103 assault rifles 100 000 $54 million 03.07.2006 Kommersant
Factory to produce AK-103 assault $474.6 million 12.07.2006 Kommersant
rifles, factory to produce 7,62 mm
ammunition
Total $2 739,6 million
Supposed and possible future contracts
Tor-M1 SAM systems NA NA; likely a few Vedomosti
hundred million dollars
Patrol boats NA Vedomosti
Project 677 conventional submarines 2 Tender by Venezuelan Navy
An-74 transport planes 6 $72 million
*estimate
Source: table by the author
# 1, 2007 Moscow Defense Brief 17
The Venezuela Contracts
 Arms Trade
The Venezuelan contracts are also indicative of an
important geopolitical process. After a decade and a half
of forced passivity in the Latin American region, Russia is
reestablishing its presence in this soft underbelly of the USA.
Moreover, Russias return is felt not on an ideological plane,
but on two important geopolitical and geoeconomic fronts,
namely, in military-industrial cooperation and in energy.
As distinct from Soviet times, when the Soviet presence was
based on Cuba, Russia now relies on Venezuela, with its much
richer base of resources. To secure this toehold Russia will
most likely promote cooperation not only in the delivery of
arms and joint energy projects, but also in the area of civilian
18 # 1, 2007 Moscow Defense Brief
The Venezuela Contracts
machine-building. This could include deliveries of Il-96 and
Tu-204 passenger aircraft to Venezuela and other states in the
region. In addition, Russia could renew the Soviet practice
of making discounted and subsidized deliveries of defense
and aerospace equipment to the poorer states in the region,
many of which, like Cuba, have not renewed their stocks of
arms in over two decades. Against the backdrop of growing
leftist and anti-American sentiment in Latin America, Russia
has a unique opportunity to provide a worthy, asymmetric
response to US activity in Russias sphere of interest in the
near abroad.

Russia-India Military-Technical
Cooperation: Current Issues
and Perspectives
Konstantin Makienko
Current Situation: Rising Competition on the
Indian Market
The past few years have seen a sustained rise in the
presence of French and Israeli arms manufacturers on the
Indian market, while the US has also just recently launched
upon a new strategy of engagement.
The French and Israeli efforts date to the early 1990s.
With the collapse of the Soviet Union and the danger of
interruption of supplies from Russia, the Indian military
sought to diversify its sources of arms procurement. The
relative success of the French and Israelis was enhanced
by the growth of Indian demand into market segments
where Russia had only weak offerings, including unmanned
aerial vehicles (UAV), command, communication and
reconnaissance systems, as well as non-nuclear submarines
with air-independent propulsion systems. It is worth noting
that in the majority of cases the Indian military chose a
non-Russian system only when there was no Russian option
available, or when the Russian offering was patently non-
competitive. The decision of the Indian Air Force to purchase
the British BAE Systems Hawk trainers was perhaps the only
time when Russia had a reasonable chance to win a contract
and failed.
A newer threat to Russian positions is posed by the
US decision to launch a vigorous military and political
engagement with India, with the aim of bringing India into a
global anti-Chinese league, together with Japan, Taiwan and
South Korea. The Americans intend to increase their share of
the Indian market to 20-25% by 2015. Aside from air-defense
systems, US companies have the best chance to succeed in
support, rather than combat systems. Thus, Lockheed Martin
is actively marketing its C-130 Hercules transport aircraft,
but not its military fighters.
At present, the most likely deliveries of American arms
to India include the following:
P-3 Orion or P-8A maritime patrol aircrafts. Enabling
factors include delays in finalizing the Russian Sea
Snake anti-ship target search and track system,
installed on old Il-38 aircraft, but the high cost of the
P-8A in particular remains an obstacle;
Arms Trade
Delivery or leasing of C-130 Hercules MTA. The slow
development of an Indo-Russian MTA might enable
such deliveries. Russia could lose the entire Indian
market for MTAs to the US and Ukraine should the US
manage too sell a large batch of Hercules to India;
Deliveries of Patriot PAC-3 air defense missile systems
with enhanced anti-missile capacity. Indias interest
in the Patriot derives from the stoppage of joint
production of the S-300B, though Russia retains a fair
chance at selling the S-300P and/or the S-400 on the
Indian market.
Nonetheless, in spite of Western activity on the Indian
market, demand for Russian arms revived since the pause
from 2004-2005 that followed the large contract for the
Gorshkov aircraft carrier and MiG-29K. For instance, a second
order for Talwar-class frigates was placed in the summer of
2006, worth $1.6 billion, and a decision was made to purchase
additional batches of T-90S tanks and Mi-17-V5 helicopters.
The contract to develop AL-55I engines for the Indian HJT-
36 trainers is also important in this regard. In addition, a
decision in principle was made to modernize the entire fleet
of MiG-29 to the MiG29SMT, and to purchase a second batch
of carrier-based MiG29K fighters. Thus, Russia still appears
to enjoy good or even preempted prospects of selling its
products on the Indian market.
The following factors will determine whether Russia
maintains its positions on the Indian market:
Competition for the Indian Air Force tender for 126
multirole fighters;
The development of the Indo-Russian MTA project;
Programs to develop a fifth-generation fighter.
The Tender for 126 Fighters
The purchase of 126 multirole fighters is likely to be
the largest single Indian program in the coming years.
Historically, it began with the notion of directly purchasing
the French Mirage 2000-5 fighter, however, after the conditions
for this purchase were changed, the Indians decide to hold a
new tender. Aside from the Mirage 2000-5, all other fourth
# 1, 2007 Moscow Defense Brief 19
Russia-India Military-Technical Cooperation:
Current Issues and Perspectives
 Arms Trade
generation fighters currently available on the market have
entered the competition, from ultralight to medium aircraft.
These include the Russian MiG-35, the American F/A18E/F
and F16, the European Eurofighter Typhoon, the Swedish
Gripen and, in addition to the Mirage20005, the French
Rafale. In 2005 the Indian Air Force distributed a Request
for Information (RFI) and also established the details of a
Request for Proposal (RFP), though the latter document has
not been issued due to personnel shuffles in the Ministry of
Defense and the occasional corruption scandal.
On the whole, the Russian MiG-35 has a good chance
of wining this tender. However, to succeed, the following
conditions have to be met:
Full support at all levels of government right up to the
head of state. It is only at this level that an effective
linkage could be made between support for military-
technical programs and access for Indian companies to
Russian energy projects;
Rapid progress on the Indo-Russian MTA project would
create a positive political and psychological atmosphere
for the promotion of the MiG-35;
A domestic order of at least some MiG-35 or closely-
related fighters would provide a strong stimulus to the
MiG-35s chances in India;
A competitive offer of air-launched weapons and
active phased-array radar would also sharply improve
the odds for the MiG-35. More state financing for
the development of such next-generation systems is
desperately required.
The successful integration of Russias aviation industry
would enable Sukhoi, Russias best design bureau, to
support the interests of the MiG aircraft company. The
prospect of applying the results of Sukhois work on
a fifth-generation fighter or the Su-35 to the MiG-35
project is promising.
MiG corporation has been showing some positive
signs recently. Its financial position has improved, while its
production and scientific-technical potential are growing.
MiG has shown progress on the creation of a Russian active
phased-array radar. In 2007, Fazotron-NIIR plans to install the
first prototype of the Zhuk-A radar on a flying laboratory. All
preconditions for the successful major modernization of the
RD-33 engine are in place. Thus, the corporation is in its best
shape it has seen since the collapse of the USSR to compete
for the Indian tender. On the other hand, postponements to
the holding of the tender leave time for Delhi and Washington
to develop closer relations. Rafale might also conclude its first
export contracts, which would reduce the cost of the French
fighter.
20 # 1, 2007 Moscow Defense Brief
Russia-India Military-Technical Cooperation:
Current Issues and Perspectives
Other Joint Programs
In general, Russias strategy to retake the Indian market
should be founded on a new paradigm for military-industrial
cooperation: from one based on direct sales or at most
licensed production to a paradigm of joint projects based on
the sharing of risks. India is an ideal partner for such projects
for the following reasons:
Russia still maintains a certain technological
superiority, which allows it to play the leading role;
There are no military-political risks to such cooperation.
On the contrary, the military development of India is in
Russias national interest;
India has demonstrated a clear interest in the
implementation of such projects.
Russia and India are already implementing one such
project the heavy long-range supersonic anti-ship PJ-10
(BrahMos) missile. However, this program does not envisage
purchases by the Russian Navy.
The next major cooperative project will be the program
to create the MTA multirole transport aircraft. Together with
an acceleration of work on the MTA, it is essential to begin
preparatory work on a project to create a light fifth-generation
fighter in the sub 20-ton class, which India has expressed
an interest in pursuing. These three projects: MTA, light
fifth-generation fighter and the purchase of 126 multirole
fighters, could also be linked together. A dynamic start to the
MTA program would demonstrate Russias ability to execute
joint military programs with India on the basis of risk-
sharing. This in turn would establish a foundation for work
on a joint Russo-Indian fifth-generation fighter. Meanwhile,
an awareness on the part of Indias military leadership of the
schedule of work for the fifth-generation fighter would could
lead them to reduce their requirements for the tender of 126
aircraft and opt for a more conservative interim measure to
purchase additional MiG29SMT and Mirage 20005.
On the whole, the prospects for further military-
industrial cooperation between Russia and India depend
not so much on the activities of competitors as the ability
of the Russian defense industrial complex to overcome its own
organizational problems and to secure state support in the
form of lobbying for its products on the highest political level,
the modernization of legislation, and finally the targeting of
funds to support the domestic purchase of weapons systems
destined for the Indian market.

The Indo-Russian Transport Plane Project:
Background, Status and Perspectives
Ruslan Pukhov
D iscussions on the creation of an Indo-Russian transport
plane were launched towards the end of the 1990s, once
the Russian Air Force had determined its future needs in
the area of military-transport aviation. It was assessed that
the modernization of the aging fleet must begin with the
class of light MTAs, replacing the An-26 with the Il112V.
The next priority would be to purchase a new generation of
medium transport to replace the An12. The An70, designed
in 1987, was originally earmarked for this purpose, but the Air
Force was now looking for a more up-to-date option. With its
excessive takeoff and landing requirements, the An70 does
not match the specifications of the 20-ton payload class. The
project has been confounded by serious technical problems,
having to mainly with the promising but not fully developed
D-27 engine, as well as the lack of clarity in Russias political
relations with Ukraine.
The Tupolev project Tu-204-300 (Tu-330VT) is one
possible alterative to the An-70. However, Tupolev has not
shown much dynamism in taking this project forward, and
it remains at an early stage of development. Moreover, the
Tu330 has turned out to be rather heavy as a replacement
for the An-12. As of 2006, it is clear that the financial and
innovation capabilities of Tupolev leave little room for hope
that this project will succeed.
Under these circumstances, the most realistic option
for the creation of a medium transport aircraft remains the
Indo-Russian project. Irkut, Ilyushin and Rosoboroneksport
are the Russian participants in the program, while the Indian
party is represented by HAL. Since the Irkut corporation
gained a controlling stake in the Yakovlev design bureau, the
latter has also become increasingly involved in the project.
Nikolai Dolzhenkov, first vice-president of Yakovlev and vice-
president of Irkut, is serving as the director Irkut and Ilyushin
joint programs.
This project has several important benefits.First,technical
and financial risks are divided between two partners. Secondly,
the aircraft matches precisely the class-specifications of a
replacement for the Lockheed C130 and the An12. Third, the
aircraft is being designed from the start for dual-use, satisfying
military requirements but with commercial potential as well.
Finally, the participation of two nations guarantees a base
number of orders. For its part, the Indian Air Force has signed
a letter of intent to purchase 45 aircraft with an option for a
second batch of the same number. The Russian Ministry of
Defense plans to purchase no fewer than 100 aircraft by 2025.
International Cooperation
The military-operational requirements of the aircraft
were jointly established in 2005, which required some
harmonization of the requirements of the Russian and Indian
air forces. One of the main points of contention concerns the
engine unit. The Indian party prefers to equip the aircraft
with an engine of Western production, such as the V2500
or the CFM-56. These engines are already in use in large
numbers with Indian commercial airlines, and so their use
in the Indian version of the MTA has a strong economic
rationale. The Russian military naturally would prefer an
engine of Russian design, for example the promising PS12,
the Ukrainian AI43612 or a modernized D30KP3 (Burlak).
A likely compromise would have each customer maintain
the right to choose the engine for the planes it orders, an
established practice among commercial airlines in their
purchases of civil aircraft.
Russia and India signed an intergovernmental
agreement on the MTA project in January 2007, which sets
out the following schedule. Preliminary design will begin
in 2007, with detailed design to begin in the third quarter
of 2008. The first flight is planned for late 2010, and testing
will be completed by 2012, followed by serial production.
It should be noted that any delays to the start of full-scale
design work increases the risk that serious competitors will
emerge, leading to a corresponding loss of interest of the
Indian party in this project. The Indian Air Force has an
urgent need for this class of aircraft, and they will be forced to
seek alternatives if the Russian project fails to deliver. Given
the recent warming of political relations with the US, some
kind of agreement to purchase or lease the American C-130J
MTA is entirely possible.
Potential Markets and Competitors
Current estimates place the demand for MTAs to 2025
at 390 units, with 100-150 for India and Russia, and the rest
to third country markets. Its notable that of the 1300 An-12
medium transport planes ever produced, 183 were exported,
with 95 still in active use.
The Indo-Russian MTA faces four potential competitors:
the deep modernization of the American C-130J Hercules, the
European A200M (an adjusted-to-scale twin-engine version
of the A400M), the Japanese KawasakiCX project, and the
modernized Chinese Y-8. Only the American craft is in serial
# 1, 2007 Moscow Defense Brief 21
The Indo-Russian Transport Plane Project:
Background, Status and Perspectives
 International Cooperation
production, but the excessively high price tag of $70 million
for this class of MTA pushes it out of the market for many
customers. Moreover, in spite of the major modernization of
the base model, this MTA is still based on a very old design
that will hardly be able to compete with a truly new aircraft.
It is unlikely that Europeans will be able to begin full-
scale work on the A200M before the A400M goes to serial
production or before the many problems confronting the
A380 and the A350 are solved. Japans products are generally
extremely expensive, its domestic law places stringent
restrictions on military exports, and the country remains
politically dependent upon the US, which has proven
successful in blocking the development of the aviation
industry of its satellites.
Thus, the most dangerous competitor to the Indo-
Russian MTA on third-country markets could in fact be a
deep modernization of the Chinese Y8, which in its time
was modeled on the An12. Chinese success at endlessly
modernizing the MiG21 shows that PLC engineers are fully
capable of developing technology from the 1950s. In any case,
one might conclude that, for the time being at least, the MTA
project enjoys a window of opportunity to fill an empty niche
on the market.
According to current estimates, the cost of R&D and
preparation for production, excluding the engine, is $600
million, to be divided equally between Irkut and HAL. This
estimate is likely on the low side, and the actual investment
will probably exceed $1 billion.
The product is being promoted as an aircraft that will
retain its technological edge for ten years after it hits the
market, that is, until 2022-2025. Designed from the ground
up as a dual-use aircraft, it meets military requirements as
22 # 1, 2007 Moscow Defense Brief
The Indo-Russian Transport Plane Project:
Background, Status and Perspectives
well as civilian standards. The project will maximize the use
of electronic components and reduce hydraulic systems to a
minimum. The designers have aimed to create an aircraft that
is 150% more effective in its transport role than the C130J,
at half the ticket price (no more than $35 million), and with
minimal operating costs.
Significance of the Project
The MTA project is of a cardinal importance to the
emergence of Russias aviation industry from its prolonged
crisis. Aside from the specific case of the Be-200, Russias
aerospace engineers have not produced a new civilian or
transport aircraft in 20 years. And until at least one such
aircraft is successfully commercialized, the crisis cannot be
considered to be over. Sukhoi is currently engaged in such a
project the creation of a regional jet. But the Supetjet100
program is extremely risky and its success is by no means
assured. Therefore it stands to reason that Russia needs a
backup program that can serve to integrate those parts
of its aviation industry that are not working on military
projects.
The MTA is ideal in this regard, insofar as the risks
associated with its commercialization are lower than the
Supetjet100 or the MC21 projects, given the fact that it
already has a de-facto order for 45 units plus an option for the
same again. This project has the potential to restore Russias
ability to develop new civilian aircraft. Finally, the experience
gained in the development of the MTA could prove useful for
the development of new military aircraft, a project for which
India remains Russias most promising partner.
Structure of Russian Ministry
of the Interior

Source: scheme by CAST.

Structure of Russian Ministry of Defense

Source: scheme by CAST.

 Facts & Figures

Major Events in Russian Arms Trade

and Defense Industry in the Second
Half of 2006
Importer (contractor) Date of event Description Details

1. New contracts and agreements

Venezuelan contracts
Venezuela 17.07.2006 Signing of a contract between Russia and Contract value $1.5 bln. Contractor
Venezuela for delivery of 24 Su-30MK2 Sukhoi company, units will be built
fighters by KNAAPO
Venezuela 15.07.2006 Signing of a contract between Russia and Contract value $484 mln. Contractors
Venezuela for delivery of 34 Mi-17V-5, two Kazan Helicopter Plant and
Mi-35M and two Mi-26T helicopters. Rostvertol
Venezuela 12.07.2006 Signing of a contract between Russia and Contract value $474.6 mln
Venezuela for construction of plant for
license production of AK-103 assault rifles
and 7.62 mm rounds
Venezuela 03.07.2006 Signing of a contract between Russia and Contract value $52 mln. Contractor
Venezuela for delivery of 100000 AK-103 Izhmash concern. Earlier Venezuela
assault rifles had directly bought another 100,000
AK-103 assault rifles
Other contracts
India 19.07.2006 Signing of a contract between Russia and Contract value $1.6 bln. Contractor
India for delivery of 3 Talwar-class frigates Yantar shipyard
(Project 11356)
China 08.08.2006 Signing of a contract between Russia and Schedule times 2006-2011. Contract
China for repair under license RD-93 for delivery of 100 RD-93 engines in
turbofan engines 2006- 2008 for Chinese aircrafts FC-1
was signed in 2005
USA 11.08.2006 Signing of an agreement between VSMPO- The agreement also includes
Avisma corporation and Boeing company purchasing of Russian titanium during
about establishing a joint venture for 30 years to the total amount of $18 bln
producing titanium semi-finished materials
China 12.10.2006 Signing of a contract between Russia Contract value $1 bln. Contractor
and China for delivery of 8 battalions of Almaz-Antey air defense concern
S300PMU2 Favorite SAM systems (SA-20)
India 04.09.2006 Signing of a contract between Russia and Contract value $250 mln. Contractors
India for license production of 120 RD-33 Chernyshev machine-building
turbofan engines enterprise, Klimov plant. Delivery of
engine patterns will begin in 2007
Vietnam 22.12.2006 Signing of a contract between Russia and Contract value $250 mln. Contractor
Vietnam for delivery of 2 Gepard-3.9 Zelenodolsky shipyard. Delivery
corvettes (Project 1661) terms 2009
Importer (contractor) Date of event Description Details

# 1, 2007 Moscow Defense Brief 25

Major Events in Russian Arms Trade and Defense Industry
in the Second Half of 2006
 Facts & Figures
Major Events in Russian Arms Trade and Defense Industry in the Second Half of 2006
2. Authorities news
14.10.2006 Russian President Vladimir Putin confirmed
State Arms Program for 2007-2015
25.10.2006 Russian President Vladimir Putin
signed amendments for the federal Law
of Governmental Control of Aviation
Development
02.11.2006 Russian Government took decision to form
United Aircraft Corporation (UAC)
World market 15.12.2006 Russian President Vladimir Putin signed
a decree, according to which from 1st
March 2007 only Rosoboronexport will be
allowed to export arms and defense finished
production
3. Corporate events
24.10.2006 Lockheed Martin corporation sold its
share in Russian-American joint venture
International Launch Services
Europe 16.10.2006 Vneshtorbank (VTB) increased its share in
EADS from 5.02% to 6-7%
4. Sanctions
Iran 19.11.2006 US Department of State lifted sanctions
against Sukhoi company
Iran, Syria 28.12.2006 US Department of State imposed sanctions
against Rosoboronexport (ROE), KBM
machine-building design bureau and KBP
instrument design bureau
Source: Russian press
26 # 1, 2007 Moscow Defense Brief
Major Events in Russian Arms Trade and Defense Industry
in the Second Half of 2006
Program realization will take about
$185 bln (4.94 trln rubles)
As result, foreign companies now
can buy more than 25% of shares in
Russian aircraft-building companies,
but only after permission of Russian
President
Russian Defense Minister Sergey
Ivanov was appointed as the UAC
Chairman, and Director General of
RSK MiG Alexey Fedorov as the UAC
President
Producers will be allowed to export
only spare-parts and support
previously sold units
The 50:50 joint venture was formed
by Lockheed Martin and Khrunichev
space center in 1995. American share
was bought by Mario Lemme, director
and co-owner of Space Transport and
also a consulter of Lockheed Martin on
space projects in Russia
Other EADS major shareholders are:
Daimler Chrysler (22.47%), Lagardere
& French State (29.96%), SEPI (5.48%)
Sanctions against Sukhoi and
Rosoboronexport were imposed
on 27th July 2006. Formal cause was
violation of Iran Nonproliferation Act
of 2000. Sanctions terms 2 years
Sanctions terms 2 years. Formal
cause was violation of Iran and Syria
Nonproliferation Act of 2005. ROE was
sanctioned for the second time, KBP
for the forth time
 Facts & Figures

Our Authors
Mikhail Barabanov. Graduated from the Moscow State University of Culture. Currently employed by the Moscow city
government. Independent expert on naval history and armaments.
Fyodor Lukyanov is Editor-in-Chief of the Russia in Global Affairs journal, published in Russian and English with participation
of Foreign Affairs, and an international columnist with the Kommersant daily, Vedomosti, The Moscow Times and Gazeta.ru
online source; leading national radio stations and TV channels. Fyodor Lykyanov graduated from Moscow State University 1991
as a Germanist. He worked as a correspondent, commentator and editor for many Russia media. Member of the Presidium of the
Russian Council on Foreign and Defense Policy, an influential independent organization providing foreign policy expertise.
Konstantin Makienko. Graduated from the Oriental Department at the Moscow State Institute for International Relations
in 1995 and the French-Russian Masters School of Political Science and International Relations in 1996. Head of a project on
conventional armaments at the Center for Policy Studies in Russia (PIR-Center), 1996-1997. Since September 1997, Deputy
Director of CAST. Author of numerous articles on Russias military-technical cooperation with other countries.
Ruslan Pukhov. Director of the Centre for Analysis of Strategies and Technologies (CAST) since 1997. In 1996 he graduated
from the School of International Information of MGIMO University under the Russian Foreign Ministry. In 1996-1997 post-
graduated student of the French-Russian Master dEtudes Internationales Sciences Po MGIMO. In 1996-1997 researcher
of Conventional Arms Project in the Center for Policy Studies in Russia (PIR Center). Author of a number of research articles
on the conventional arms trade and the defense industries of Russia and France.
Ivan Safranchuk. Ph. D. Political Sciences. Graduated from the Moscow State Institute for International Relations. From 1997-
2001 was a researcher at PIR-Center and director of a project on nuclear arms control. Since July 2001, Head of the Moscow
Office of the Center for Defense Information. Author of a number of scientific articles and reports on nuclear policy, nuclear
disarmament, nonproliferation of WMD and Russian foreign policy.
Dmitry Vasiliev. Graduated from the State University Higher School of Economics with a Masters Degree in Strategic
Management in 2004. From 2003 to mid 2004, worked as an analyst at Absolut Bank in the Department of Risk Evaluation.
Currently working since July 2004 as CAST researcher and editor-in-chief of the Eksport vooruzheniy (Arms Export)
journal.
Vladimir Vasiliev. Ph. D. Graduated from the All-union Correspondence Juridical Institute and Academy of Ministry of the
Interior, USSR. Worked for law enforcement agencies, took up positions of the First Deputy Minister of the Interior of Russian
Federation Head of Organized Crime Headquarter, Deputy Secretary of Security Council of Russia. Colonel-general of police.
State Duma member from Tver single-member constituency #173 (Tver region). Member of political faction Edinaya Rossiya.
Chairman of State Duma Security Counsel of the Federal Assembly of Russian Federation. Deputy Director of State Duma
Coordinating Committee on Russian security law development. Representative of the Federal Assembly of Russian Federation
permanent delegation in NATO Parliamentary Assembly.

# 1, 2007 Moscow Defense Brief 27

Major Identified Contracts for Delivery
of Russian Arms Signed in 2005