ºmoscow Defense Brief 2-2006

CONTENTS
War And People

#2 (6), 2006
Russias Position on Iran: Motives and Constraints 3
PUBLISHER
Russia in the Mediterranean 5
Centre for
Analysis of Putin's Address and the Military 7
Strategies and
Technologies Russia Does Not Need a Pro Immigration Policy 9
CAST Director & Publisher Industrial Policy

Ruslan Pukhov
Editor-in-Chief Putin Meets with Nuclear Industry Chiefs 12
Evgeny Belyakov
2005 Rating of Russia's Largest Defense Companies 14
Advisory Editor
Konstantin Makienko
Researcher
Arms Trade
Ruslan Aliev The Algerian Deal 19
Researcher
Alexey Pokolyavin
Risk Factors of the Delivery of Russian Arms to Algeria 22
Facts & Figures

Researcher
Dmitry Vasiliev
Editorial Office Major Events in Russian Arms Trade and Defense Industry in
Suite 480, 45 Leninsky prospect str., January-June 2006 24
Moscow, Russia, 119334
phone: +7 495 135 1378
Ministry of Defense Research Institutes 26
fax: +7 495 775 0418
http://www.mdb.cast.ru/ Our Authors 28
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phone: +7 495 135 1378
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1
Centre for Analysis of Strategies and Technologies, 2006
Printed in Russia # 2, 2006 Moscow Defense Brief
Obituary
Paarami S.B. Kulatunge
Major General Paarami S.B. Kulatunge, the Sri Lanka Army's Deputy Chief of Staff,
was killed by a suicide bomber on June 26 in Colombo. Three others were killed and
several bystaders wounded when the bomber rammed his motorcycle into the Major
General's car while he was on his way to work at Army Headquarters. The Army blames
the LTTE for the attack, though the Tigers deny involvement. Major General Kulatunge,
a long-time colleague of CAST and a dear friend, held the third highest appointment in
the Sri Lanka Army.
Paarami S. B. Kulatunge joined the Sri Lanka Army as an Officer Cadet in July 1971,
and was commissioned into the First Battalion the Gemunu Watch, an Infantry
Regiment.
During his 35 years of service in the Army, Major General Kulatunge has served in
many parts of the Island in numerous capacities in internal security and anti-terrorist
operations. He has previously served as the Director of Training at Army Headquarters;
Deputy Commandant, Kotalawala Defense Academy (the only defense university in Sri
Lanka); Director General, General Staff, Army Headquarters; and Commander, Security
Force Headquarters, Jaffna.
Three times Major General Kulatunge has been awarded the "Ranasoora
Padakkama" medal for gallantry. He is also the recipient of ten other Army service
medals, including the Uththama Seva Paddakama, for his unblemished record in the
Army.
Major General Kulatunge was also a member of the Sri Lanka National Olympic
Committee and the Chairman of the National Rifle Association of Sri Lanka.
We dedicate this issue to his memory and give tribute to his courage and
dedication to his country.
2 # 2, 2006 Moscow Defense Brief

War And People
Russias Position on Iran:

Motives and Constraints
Ivan Safranchuk
Economic aspects of Russias position only in the Gulf, but also in the Caspian basin. It is commonly
overlooked that for Russia, this regional perspective is very
It is widely held that Russia is interested in economic important and has direct consequences for shaping its
cooperation with Iran, on projects ranging from the civilian position on Iran. Russia is struggling for influence and
nuclear industry to a future gas OPEC. One could imagine economic benefits in Central Asia. The Caucasus is the key
a breath-taking future for the Shanghai Cooperation region for the transit of Central Asian resources. Russia is
Organization, in which Russia and China are co-leaders and losing the influence game in the Caucasus as the US develops
Iran, currently an associate member, is seeking full relations with Georgia and Azerbaijan, and with both
membership. The SCO dominates in Central Asia, and Iran countries thinking about NATO membership. Georgia, or
as full member could provide access to Persian Gulf. This more precisely, its current leadership, is already seen as a
would make the SCO unique in its influence on oil and gas hopeless case. This leaves regime change in Georgia the only
markets since its members would have dominant or option for Russia.
important positions on three reserves of conventional oil: Azerbaijan, on the other hand, is not rushing to spoil its
the Persian Gulf, Russia and Central Asia. Such geographical relations with Russia. But growing cooperation between
scope would also make the SCO unique in its transit Baku and Washington has Russia worried. Russia may not
capabilities and access to world markets. Still, such realistically expect to reverse Azerbaijani interest in further
considerations are for the long term, and there is no ground cooperation with the West. Still, Russia is interested in
to believe that Russias position on Iran is formed by such Azerbaijan not inviting US/NATO military presence in
long-term considerations, in particular, because the future Caucasus and Caspian Sea. Azerbaijan has an incentive to
development of the SCO could turn out entirely differently. invite an outside military presence in the region. This has a
China could take dominant positions in economic projects direct connection to Iran.
within the SCO. Russia would have to counterbalance Azerbaijan and Iran portray their relations as normal.
Chinese influence in Central Asia, and would not be in a There is some economic cooperation and dialogue on the
position to interfere in the growing Chinese-Iranian political level. But in reality, both countries look at each other
cooperation. So Iran would provide Gulf access to China with a lot of suspicion.
rather than to Russia. On the one hand, this would raise In Iran, the Azerbaijani population is regarded as
US-Chinese tensions and competition over the oil market potentially non-loyal. Turkish secular influence has the
considerably. Russia could benefit from this, since as China potential to develop amid Azerbaijani nationals. Iranian
enters the American oil backyard, the US will be more authorities have every reason to worry about this, since
interested in Russia. On the other hand, Chinese influence Azerbaijanis constitute a 20 mln strong minority among
in Central Asia could easily go beyond a level acceptable to Irans population of 70 mln.
Russia, undermining Russias own interest in contracting Through Azerbaijani eyes the Shia Iranian leadership,
and transiting Central Asian reserves. In short, the long-term with control over a 20 mln Azerbaijani population,
considerations are complicated and have multiple constitutes a challenge and even a direct threat to Azerbaijan,
probabilities. They provide no firm basis for determining with its relatively small population of 8 mln. Who can
the current Russian position on Iran. guarantee that Iran will not attempt to take Azerbaijan under
control?
Azerbaijan is not interested in escalating problems in
Regional considerations of Russias its relations with Iran. This allows the two countries to
position on Iran portray relations as normal while huge tensions exist. But
this apparent normality does not prevent Azerbaijan from
The global context on Iran is obvious. If Iran goes looking for a security provider. The US/NATO are natural
nuclear, the Nuclear Non-Proliferation Treaty becomes choices.
meaningless. Russia does not want to see an outside military presence
The regional context is usually discussed in connection in the Caspian region, and will attempt to dissuade
with the Persian Gulf. But Iran has access and interests not Azerbaijan from inviting such a presence into the region.
# 2, 2006 Moscow Defense Brief 3
War And People
Azerbaijan had every reason to be worried by improving this threat. This is so because Russia cannot be sure that
Russian-Iranian relations. But since 2002, Russia has come tough diplomacy on Iran is not actually pursued with the
to share Azerbaijani concerns regarding Iran. In the regional idea of building a case of Iranian non-cooperation simply
context, Russia has shown an interest in counterbalancing in order to hasten to the realization of the threat against Iran.
Iran. This signals to Azerbaijan that Russia is not Irans These considerations make Russia extremely careful in
friend, that Russia is interested in keeping Iran constrained. taking a tough stance on Iran.
Russia tries to send the signal that it counterbalances Iran The only framework in which Russia is tough on Iran is
and that Azerbaijan does not have to worry. For the sake of Caspian region. Theoretically, Russia might consider the
dissuading Azerbaijan from inviting outside military following: Russia joins hard pressure on Iran in exchange
presence in the Caspian Sea, Russia is willing to be tough on for US commitment not to have a military presence in
Iran in the regional context. Azerbaijan. But such a deal does not fit into the global
Will a nuclear Iran be an incentive for US/NATO military context, within which Iran is described as challenger to the
presence in the Caspian Sea? Growing Iranian nuclear power non-proliferation regime, international peace and security.
would probably reinforce the Azerbaijani perception of the
Iranian threat. Under a nuclear umbrella, Iran may feel free
to extend pressure on Azerbaijan and threaten its oil reserves Tactical dynamics of Russias position on Iran
and Baku-Ceyhan transit. Consequently, Azerbaijani
interest in an outside military presence would be reinforced. Tactically, through the entire Iranian crisis, Russia has
All this stimulates Russian interest in preventing Iran from been avoiding making a choice the ultimate choice
acquiring nuclear weapons. between the West and Iran. Russia does not want to sacrifice
relations with the West for the sake of Iran. And Russia is not
interested in paying the price of abandoning ties with Iran
The limits of US-Russian understanding on Iran for the sake of relations with the West.
US diplomacy demonstrated some respect for this
The US got Russias agreement to exert more pressure Russian dilemma. On the contrary, it was Iran that raised the
on Iran. However, US diplomacy would like to see far more stakes, destroying any ground for compromise with the
resolution from Moscow to press Iran for concessions. But international community. Iran demonstrated an interest in
this is problematic. the Russian proposal for a joint venture on uranium
To raise international support for more pressure on enrichment, but forgot about it as soon as it served the
Iran, the US must first tackle the Iranian crisis in a global purpose of delaying the referal of the Iranian dossier to the
non-proliferation context. But within the global context, UN Security Council. It is hard to avoid the impression that
Russia is very unlikely to take a tough position on Iran. Iran was chewing on Russian proposal just to win time,
Russia does not want Iran to go nuclear. At the same time, which is very close to cynical manipulation. At the same
Russia is concerned about international law. Russia hesitates time Iranian authorities and experts, off the record, express
to accept the logic that the Iranian nuclear crisis should be confidence that Russia would not vote for a UN resolution
solved by any means. At a minimum, Russia will struggle to with sanctions. Iran demonstrated high levels of confidence
make this solution conform to international law. This that, if forced to make the ultimate choice, Russia would not
seriously limits the level of toughness that Russia can afford betray Iran. Russia does not like this.
to show in its position on Iran. The history of diplomacy in The overall impression is that in recent months Iran
2002 before the Iraq crisis is having a big impact on the was pushing Russia to make the ultimate choice between
Iranian crisis. The US diplomacy of 2002 is seen not as Iran and the West. It is hard to judge whether Iran did not
diplomacy meant to solve the Iraq crisis by peaceful means, understand Russias wish to avoid such a choice or whether
but as the building of a case to justify military action against it was just playing a trick to influence the Russian position.
Iraq. Now, when Russia is being asked to take a tough In any case, this push for the ultimate choice was beginning
position on Iran, the explanation goes that Iran will make to irritate Russia. Russia wanted to downplay the crisis, to
concessions only if it faces a united international de-escalate tensions and find compromise at the lowest
community with a common tough position. The problem possible level. But Iran was doing absolutely the opposite,
for Russia in this is the following: what if even in these probably with the assumption (incidentally not groundless)
circumstances Iran does not become cooperative? The that the higher the level of tension on which compromise is
answer should be obvious: Iran will be punished with found, the smaller the scope of the compromise to be made.
sanctions and the military option is likely to get more If forced to make the ultimate choice, Russia is likely to
attention. But Russia does not want to sign up to this. So make its choice against the one who pushed for this choice.
Russia is ready to join the expression of a threat to Iran, but Irritated by Irans escalation of this crisis, Russia may well
does not want automatically to sign on to the realization of surprise Iran.
War And People
Russia in the Mediterranean

Mikhail Barabanov
I n June 2006, Russian newspaper Kommersant unveiled

Russian plans to upgrade the servicing station it has
maintained since Soviet times at the Syrian port of Tartus.
not in itself determine or restrict the actual range of
activities that could go on there. Even if a group of ships and
support forces were actually based in Tartus, their official
The short-term goal is to enable Russian ships to dock at place of registration could remain in Sevastopol, which
Tartus, with a view to its transformation into a fully-fledged suggests that their stay in Syria could be only temporary. So,
naval base. Kommersants unidentified source in the in any case, it is unlikely that conditions would be
General Staff said the Navy plans eventually to relocate the established in Tartus for permanent residence of the crew
bulk of the Black Sea Fleet, currently in Sevastopol, to Syria. or serious ship repair capability, both of which are
Russia has already undertaken to deepen the port to necessary for the full scale functioning of a military naval
permit the docking of its largest fighting ships, and to build base.
a stationary mooring place. Moscow has also begun work Nevertheless, the appearance of Russian ships in Tartus
on a new mooring at the Syrian port of Latakia, which could for any period of time would represent a dramatic
also be used in the future to base fighting ships. In this reinforcement of Russias naval potential in the
respect it is worth noting that the Black Sea Fleet Project Mediterranean Sea, even when compared to the cold war
1164 Moskva guide missile cruiser called on Latakia in period. It is worth recalling that permanent access to the
February 2006. Kommersant got its information about the Mediterranean has been the dream of Russias rulers for
work at Tartus from Vladimir Zimin, the Russian Embassys several centuries. Already in the second half of the 18th
senior counselor for economic issues in Syria. century for operations against Turkey, squadrons of the
According to Kommersants source in the General Staff, Baltic Fleet were sent to the Mediterranean. At the end of
Moscow plans over the course of the next three years to the 19th and the beginning of the 20th century, Russian forces
establish a Naval Squadron in the Mediterranean
led by the Moskva guided The appearance of Russian ships in Tartus for any came to the aid of Greece,
missile cruiser, currently period of time would represent a dramatic linked through dynastic
the flagship of the Black Sea
Fleet. This squadron would
reinforcement of Russias naval potential in the ties to the Romanovs. In
1913 an agreement was
be permanently based in the Mediterranean Sea, even when compared to the cold reached with France for
Mediterranean Sea to war period the basing of Russian ships
participate in the NATOs at Bizerta (Tunisia) but
anti-terrorist Active Endeavour, and other operations. this agreement came to nothing as a consequence of the
For this reason, the base in Tartus and the mooring First World War and the Russian Revolution. As a sad irony,
under construction in Latakia are needed for the full Bizerta was the last port of call for those Black Sea Fleet ships
servicing of the Black Sea Fleet, and in the future, of the controlled by the White Forces leaving Sevastopol at the
Northern Fleet ships that will reinforce the Russian naval end of 1920.
forces in the Mediterranean. Tartus is being prepared as the The rebirth of Russias naval presence in the
base for this squadron. Anti-air defence for these forces will Mediterranean began in the 1950s with the aim of
be upgraded to the new S-300PMU2 Favorit (SA-20) SAM countering NATO forces and to support Moscows interests
systems. in the Middle East. In 1958, a permanent base for Soviet
The sharp escalation of military-technical submarines was established at Vlyora in Albania, but as a
cooperation between Syria and Russia lends credence to consequence of worsening Soviet-Albanian relations it was
these reports. The reported timeline for the upgrade of the closed. In the future, in spite of the establishment of close
servicing center into a base was repudiated by the press relations with a range of middle eastern Arabic states, the
service of the Russian MoD, but the fact of growing Russian Soviet Union never acquired a permanent naval base in this
naval and construction activity in Tartus and Latakia is not region, and the powerful Soviet naval forces in the
in question. At the same time, one must keep in mind that Mediterranean (Fifth Operational Squadron) had to
the mere designation of such sites as a servicing point, a anchor at small plots in the neutral waters off the coast of
mooring station or a naval base is quite loose and does Tunisia and Libya.

War And People
From 1964 to 1977 an agreement with Egypt established force, and the Black Sea Fleet, destined to form the basis of
a few servicing stations at Alexandria and Mersa Matruh a new Mediterranean squadron, is extremely weak and has
(and also, from 1967 to 1972, at Port Said), which were in only one more or less modern large warship, the above
essence just floating moorings with minimal infrastructure mentioned Moskva guide missile cruiser. The remaining
and good only for short term stays. Even these stations were four large surface ships (a Kerch antisubmarine cruiser and
closed with the worsening of Soviet-Egyptian relations, and three frigates) are hopelessly obsolete and have virtually no
were replaced in 1984 with analogous servicing stations at military value. Even with the addition of ships from the
Tartus which, along with Latakia, was used for calls by Soviet Northern Fleet (including one or two nuclear-powered
ships since 1971. submarines) and the theoretical possibility of transferring
After the closure in recent years of the former Soviet to this squadron the new Project 20380 Steregushy class
bases in Vietnam (Cam Ranh) and Cuba (Lourdes), the corvettes currently under construction, these forces will be
logistics, supply and servicing station at Tartus was the only in a position to handle only the most limited of tasks, little
remaining permanent Russian military presence outside more than showing the flag, and will hardly pose a serious
the CIS. As a result of the near total rolling up since 1991 of threat to the US Sixth Fleet. In any case, as mentioned above,
Russian naval forces in the Mediterranean, the station in it is likely that the Russian Mediterranean squadron will
Tartus was rarely used for its main purpose and until recent participate in joint missions with NATO countries.
times was in a sorry state. Russian military ships called very Nevertheless the political implications of a significant
infrequently, for example, in 1996 when the Admiral escalation of Russian military presence in Tartus are
Kuznetsov aircraft carrier made Tartus its sole distant obvious. It will undoubtedly solidify the position of Syria,
destination. which is feeling significant pressure from the US in general
In terms of logistics, the station in Tartus offers a and its military weakness with respect to Israel in
floating mooring with a small complex of onshore particular.
equipment: two prefabricated and demountable metallic Having offered Russia a base in Tartus, the regime of
storehouses, a diesel workshop, a barracks, mess-room, and Asad-Junior is avoiding isolation on the international
an administrative building. Ships are able to refuel and arena and is making of Russia a military factor that
receive potable water. A repair ship is maintained undercuts Israels options for an attack on Syria. Syrias
permanently in Tartus on the basis of six-month rotations desire to have a Russian presence in Tartus is demonstrated
from the Black Sea Fleet. by the fact that it is not charging for leasing the land to be
Thus, after nearly 240 years of military presence on the used by the current logistics and servicing support station,
Mediterranean, Russia has almost never held a permanent nor is it charging for the use of water or electricity.
base for its fleet there for an extended period. It is not Meanwhile, Russia will strengthen its role as a player in the
surprising that the news of the possible transformation of Middle East, including in the Israel-Palestine conflict. In
Tartus into a basing point for the Russian Navy has attracted this way, the decision of the establishment of a Russian
significant interest. Of course, even if this project is realized Mediterranean squadron can seen as a typical move by
it will have a primarily symbolic, rather than practical, Vladimir Putin, i.e., to carefully and to a large degree
character. symbolically restore the external attributes of Soviet
Russia, today and for the foreseeable future, can afford greatness, while maintaining a general course of
to relocate to the Mediterranean only a very insignificant cooperation with the West.

War And People
Putin's Address and the Military

Mikhail Barabanov
P resident Vladimir Putin laid great emphasis on the

development of the Russian military in his annual
Address to the Federal Assembly, delivered on May 10. He
Moreover, the new Project 677 conventional
submarine St. Petersburg was laid down in 1997 (and is now
undergoing tests), together with the Project 12441 Novik
described threats to national security as serious potential frigate. It is noteworthy that construction of the Novik was
obstacles to Russias broader economic and social stopped under Putin due to its complexity and cost, and is
development. being redesigned as the Borodino training ship.
Those parts of the address devoted to defense issues Putin also presented the current state of the armed
reflect a familiar leitmotif, namely, that all positive forces equipment in an overly optimistic light: a re-
developments in the country began in 1999. The equipping of army divisions with new and modernized
achievements of the current administration are presented models is underway. Massive, serial purchases have begun
in an extremely positive light while scorn is heaped on the this year to meet the needs of the Ministry of Defense. The
past, giving the impression that real progress has been fact is that for the vast majority of weapons types no such
made in recent years when compared to the Soviet era of serial purchases are being made, and certainly not for the
totalitarianism and the Yeltsin era of collapse. reequipping of army divisions. At most, one might speak of
The Soviet Union is blamed for having solved the purchase of a few experimental or pre-serial
problems of military development at the expense of the production systems. For example, with respect to
economy in general and the conventional forces, the air
social sphere. This was a Putin described a fairy tale of how a significant part force will indeed obtain
dead end policy, even if of the main problems facing the Russian armed forces two new Su-34 fighter-
the USSR developed its would be solved by 2011-2012, promising there bombers, two or three Mi-
military might in response would be no more reductions of fighting units 28N attack helicopters
to real threats to its security. (out of a planned eight),
Putin suggested that the Presidents 2006 Address seems intended to patch and no more than two Yak-
current policy represents a over the continuation of the deep, systemic crisis 130 trainer aircraft. But
positive alternative, noting facing the Russian armed forces and defense industry neither the Yak-130 nor the
our defense spending as a Mi-28N has gone through
percentage of the GDP is today comparable, or slightly less, the necessary testing, and the latter is still not fully combat-
than that of other nuclear powers, for example, France or ready. The serial models of which Putin spoke are likely
Great Britain. Putins statement regarding the lower just prototypes that require time for modifications. Even
percentage is not entirely accurate: Russias defense then, the first regiment of the 24 Su-34 is not expected
spending in 2006 will be 2.75% of GDP, while France spends before 2010, and even this schedule is subject to delays. The
2.5% and the UK 2.32%. first serial delivery of a batallion of S-400 Triumf SAM
As a critique of the state of the armed forces upon his system was delayed yet again, to 2007.
assumption to power, Putin said that from 1996 to 2000 The same could be said for purchases of land
not a single ship was laid down, while Russia today is equipment for the army, as these purchases are intended in
witnessing the revival of military shipbuilding, the the main to support the factories, rather than secure the
construction of all types of fighting ships. In the near future rearmament of the land forces. Clearly, the purchase of 31
two new nuclear-powered submarines with strategic T-90 main battle tanks and 165 APCs and AIFVs represents
weapons will enter the Russian Navy. In fact, construction an insignificant addition to an army possessing up to 20,000
of the main Project 955 nuclear-powered ballistic missile main battle tanks and 30,000 APCs and AIFVs. One could
submarine Yury Dolgoruky began in 1996, as did the hardly describe as massive the purchase of two Iskander
modernization of the second submarine mentioned by (SS-26) tactical missile launch systems or 10 BMD-4
Putin, namely, the Project 941UM Dmitry Donskoy. The airborne fighting vehicles, or the slow construction of three
program to develope the Bulava (SS-NX-30) submarine- corvettes.
launched ballistic missile for these submarines also began It is similarly difficult to understand how the planned
before Putin came to power. completion of one Tu-160 strategic bomber and a grand

War And People
total of six Topol-M (SS-27) intercontinental ballistic difficult to understand which problems facing the army
missiles (including three mobile), will fulfill the Presidents (technical equipping, war-readiness, reorganization,
stated goal of substantially upgrading the strategic nuclear transition to contract-based service, inadequate wages and
forces over the course of the next five years with modern housing for personnel) can be solved without a radical
long-distance aircraft, submarines and launching facilities increase in funding for the Ministry of Defense. And
for the special missile forces. If current trends in financing judging from Putins statements regarding the low level of
hold over the next five years only one or two bombers, two military spending as a percentage of the GDP, no such
or three nuclear-powered ballistic missile submarines and increase is in the works. It is highly unlikely that the
no more than 40-50 Topol-M missiles will be procured an ambitious goal of having an armed forces capable of
insignificant rate of acquisition in view of the actual fighting, if necessary, a global, a regional, and a few local
size of the nuclear forces, even after the planned conflicts is possible with such a low level of military
decommissioning of obsolete systems. spending, especially in view of how difficult this goal is
In the concluding section of his speech Putin described proving even for the US.
a fairy tale of how a significant part of the main problems On the whole, the Presidents 2006 Address seems
facing the Russian armed forces would be solved by 2011- intended to patch over the continuation of the deep,
2012, promising there would be no more reductions of systemic crisis facing the Russian armed forces and defense
fighting units. This seems an odd statement, as further industry. It is clear that not enough is being done to
reductions of air force units and the writing off of a overcome this crisis, and so we can only wonder whether
significant number of fighting ships without adequate the authorities understand the inadequacy of their
replacements are inevitable. This casts a shadow on the measures, or whether the Presidents address has crossed
other promises made by the head of state, insofar as it is the line from propaganda to self-deception.

War And People
Russia Does Not Need

a Pro Immigration Policy
Alexander Gorianin
J udging from recent debates at home and abroad, it would

seem axiomatic that Russia needs immigrants, and that if
urgent measures are not taken to resettle millions from the
After the war, in spite of the enormous losses among
the most productive age groups, the workforce proved
sufficient for the great projects of Communism, for the
CIS and the Third World, the country is doomed. And so ploughing of virgin lands, the construction of giant Siberian
discussions are now raging over how to make Russia a more hydro-electric stations, the Baikal-Amur railway, and the
attractive destination for foreign migrants, and how to further development of an incomparable defense industry
overcome the population's fear of migrants. The matter of and associated sciences and infrastructure. So why is it that
whether Russia actually needs these people is presented as today, now that the arms race is behind us, now that mega-
self-evident. We are told that a population of 143 mln is projects are no longer an option we still hear of the
inadequate, while Russia's workforce is larger today than catastrophic labor shortage that is allegedly a threat to
ever before. According to incomplete official data, the our national security?
working age population is 90.4 mln; 74.2 mln are Sergey Smirnov, Director of the Higher School of
economically active, of whom 54.2 work in urban areas. We Economics Institute of Social Policy views the solution as
follows: The Chinese and Central Asians could easily
are assured that these figures are catastrophic, but is this
really the case? relieve the problem of Russia's declining population.
Duma Deputy Vladimir Ryzhkov is also convinced that For
Russia would be good a few million Chinese. Zhanna
An insufficient work force? Zayonchkovskaya, head of the Migration Forecast
Laboratory of the Russian Academy of Science's Centre of
We might begin by asking why 143 mln is considered Demography believes that the Chinese population in Russia
to be so little. In 1979 the population of Russia (not the will reach 10-20 mln by the middle of the 21st century, and
Soviet Union, but Russia) was 137 mln, 117 mln in 1959 and suggests the following means of making this happen: It is
93 mln in 1926. And this was not considered to be a question of establishing a single social-economic space
inadequate. The year 1928 on the border with China,
marked the beginning of Half of guest workers quickly find work dealing in of creating a common
industrialization, a terribly counterfeit vodka and fake Gucci bags, or in the labor market for the
stressful mobilization of the
all available hands. Hundreds
worst-case scenario deal drugs and organize break- future. And the Director
of the State Statistical
of factories, foundries and ins and muggings Agency Vladimir
mines were built in the most Sokolin believes that by
labor-wasteful manner, almost by hand, and yet there were increasing the birth rate, the migration of Muslims could
enough people to do the job, moreover, in three shifts! play an important role in the reproduction of Russia's
Whose labor built the canals, roads, power stations and population. Mikhail Dmitriev, First Deputy Minister of
metros? Who toiled to fulfill the unprecedented armament Economic Development, is also concerned with Russia's
program of those years? Moreover, at the end of the 1920s salvation: in order to attain the ideal immigration rate of
80% of the working age population did not participate in about 1 mln per year, Russia has to look beyond the borders
the industrial drive, as they worked the land. The of the former USSR to countries of the Third World. The
economically active urban population barely reached 5 Russian news portal Lenta.ru presented these views under
mln, almost 11 times less than today! Thanks to the alarmist heading: Only Migrants will Save Russia.
collectivization in rural areas and extra-economic I fear that we are here dealing with a typical shock
compulsion, the figure of working urban population rose mode of social planning, i.e., that it is too late to discuss this
sharply towards the beginning of the WWII, to almost 12 issue and that all that remains to be done is to capitulate in
mln, but far from all of these people worked at strategic the face of the inevitable. And who stands to gain from such
enterprises and construction jobs. a capitulation, if not the decision-makers and employers

War And People
whose wealth is built on the cheap labor of migrants? Given annual budgets. Meanwhile, according to Rosstat, only
the financial interests at stake, they will ensure that the 10 000 Tajik citizens are officially working in Russia. We can
hysteria surrounding Russia's demographic decline assume there are several mln illegal guest workers in Russia
continues unabated. today. According to Georgy Satarov, President of the Indem
Information attesting to the fact that the official figures sociological centre, Russia's economy is undervalued by
of population of Russia is underestimated rarely sees the at least four times, and if those resources now circulating
light of day. Valery Tishkov, corresponding member of the in the shadow economy were legalized, then Russia's GDP
Russian Academy of Sciences and Director of the Institute would have long ago doubled and almost reached that of
of Ethnology and Anthropology came to the conclusion that Germany.
7% of the population was not captured in 2002 census. That
is, only 93% of the population was counted, leaving out 10.9
mln people! Demand for illegal workers and unemployment
The myth about Russia's hypermortality compared
to the civilized world is also due largely to counting Many cities and even whole territories in Russia were
problems. At any given moment there are about 15-20 mln established around single large state enterprise, and the
foreigners in Russia, and the border service counted 43 mln collapse of that company has left the inhabitants in a
border crossings in 2005. Those foreigners who die in Russia hopeless situation, with unemployment sometimes
are mistakenly added to our mortality rate, because the reaching 60%. There are no less than a hundred small and
information concerning permanent residence on the death medium sized cities stricken with poverty. In some cases
certificate is not properly factored, throwing all further an entire region, like the Kizel coal basin (Perm region),
calculations of Russia's demography into disarray. have been affected, or even an entire federal region like
the Ust-Orda Buryat autonomous district, where the
average spending per individual is thirty times less than in
Cheap labor has negative effects Moscow. Surely we could recruit enough people from
depressed regions to work in those areas where labor is in
The negative consequences of the downward pressure short supply. But for the employer this policy would impose
on wages caused by guest workers are never adequately the burden of providing support and social guarantees. It is
discussed. Indeed, it is assumed to be a positive factor giving all much simpler with guest workers: they have already
Russia an advantage in competing with developed arrived and are ready to work, for modest sums and
economies, but this is simply not the case. imposing no other obligations.
For the moment migrants are working mainly (and Of course, half of these people quickly find work
quite poorly) in construction, urban transportation and dealing in counterfeit vodka and fake Gucci bags, or in the
communal services, but they are being driven more and worst-case scenario deal drugs and organize break-ins and
more towards industrial production. This is troubling, muggings. The employers of guest-workers no doubt find
because in those sectors where labor is relatively expensive, this sorrowful, but their earnings from cheap labor out-
management is forced to invest in new equipment and weigh. That said, our current problems with foreign
technologies to improve efficiency. But where labor is migrants would seem like a pleasant pastoral after the
cheap, talk of the need for innovation is pointless. In this apparently inevitable entry of Russia into the WTO. The
way, immigration only reinforces Russia's technical harsh reformation of the economy that will come with this
backwardness. measure will drive another 10-12 mln Russians into
Low wages are: a) an obstacle to the formation of a fully- unemployment, in addition to the 5-6 mln currently without
fledged internal market, which is the only reliable stimulus work. To pump even more foreign language speaking
for the growth of the domestic economy; b) the main factor migrants into this social situation would inevitably raise
of the brain drain; c) the main obstacle to the reform of the number of ethnic-based criminal gangs.
the pension, social assistance and communal services, Why did the Soviet Union have sufficient labor for all
medical and educational systems; d) a factor contributing of its projects? Not only because of the totalitarian system,
to petty corruption and theft; e) an incentive to conduct but in large part because there was no other source of
business under the table; and f) a major social irritant. additional labor. Why do the planners at the Ministry of
The vast majority of migrants work in the gray or black Economic Development and Trade and other departments
markets. Konstantin Romodanovsky, chief of the Federal insist that Russia needs immigrants? Because they see an
Migration Service, told the Duma that transfers from easy source of external supply and are following the path of
migrants from Moldova constitute 30% of that nation's GDP. least resistance. If they were instructed to forget about
Transfers by guest workers from Tajikistan amount to two foreign supplies they would simply make a new plan relying
War And People
on domestic labor, and would quickly show how it could be different sexes. Even a three-bedroom is small for a three-
made to work. child family, especially if the grandparents live there too.
Europe would not have broken from the Middle Ages Single-room flats are suitable only for couples without
into Modernity were it not for the sharp deficit of labor and, children. To reproduce the current pattern of oppressive,
accordingly, the sharp rise in its cost, brought about by the cement neighborhoods is a dead-end policy.
Black Death, the plague of the 14th century, that killed In the USA the baby boom was a consequence of mass
almost half of the population of Western and Central migration from city centers to the suburbs, to the land, that
Europe. A high cost of labor in the long run always has began in the end of 1940s. Russia has now reached the level of
positive effects on the economy of a nation. One last automobile usage that would allow this model to be
example: Israel's army became one of the most effective in replicated. In Balabanovo (Kaluga region) I saw an enterprise
the world because it was formed from the very beginning producing fast-assembly single-family homes with 88 to 300
under conditions of sharp shortage of manpower. square meters selling at $100 per meter.
Clearly, we need legislation granting free fertility
treatment. About 15% of Russian families are infertile, and
Overcoming demographic pressures they all want children; otherwise, how would we know they
were infertile? We can only hope that the new law on military
Nevertheless, the drop in Russia's population remains service will retain the provision granting leave to young men
a cause of concern. How can we encourage a higher birth with two children. This is one means of avoiding military
rate? The economic solution of offering premiums on a service that we certainly can forgive, and even quietly
rising scale for every extra child was attempted in a range welcome.
of countries. In each case the premiums became an Finally, Russia needs a law on repatriation that should
essential source of income for the marginalized part of the give citizenship rights to all who belong to the Russian super-
population, but provided little incentive to middle-income ethnos. In addition to title nations of Russia (ethnic Russians,
families. Tartars, Kalmucks, Circassians, Karelians, etc.). In addition
The solution to this problem is to offer a rich premium to ethnic Russians, this should include Ukrainians and
of about $26 000 for the third child only not the first, Belorussians, who already account for almost 4 mln Russian
second or fourth. This scheme would not work in a country citizens. It should also include such former titular title nations
with a rich, spoiled society, but is appropriate for Russia's like the Germans who once had an autonomous status along
largely provincial population, and it can be afforded thanks the Volga, but lost it for no fault of their own. Descendants of
to Stabilization Fund. Civil War migrs and persons displaced during the Second
The standard housing of Russian cities is another World War, along with graduates from Russian universities
factor restraining the birthrate. One and two-bedroom constitute other categories for inclusion. In all other cases
apartments are appropriate for a one-child family, but are immigration should be allowed only to especially desirable
cramped with two children, especially if they are of individuals, a wise practice followed by many states.
Table 1. Total population of Russia

160 147 145
140 137
130 39
117 39
120 108 42
100 92 49
million
80 56
67 72
60 108 106
76 95
40 81
58
61
20 36
9 16
0
1897 1926 1939 1957 1970 1979 1989 2002
Urban population Rural population
Source: http://www.perepis2002.ru
Industrial Policy
Putin Meets with Nuclear Industry Chiefs

Andrei Frolov
P resident Vladimir Putin held a meeting with the

management of Russia's nuclear weapons and energy
complexes on 9 June, 2006. Judging from various media
to the nuclear weapons complex, all suggests that work on
nuclear weapons and the rearmament of the military will
continue, while disarmament and nuclear weapons
reports, the meeting outlined the leadership's vision for the reductions will, at a minimum, stabilize.
restructuring of the nuclear sector. The Director of the The statement of the director and general constructor
Federal Agency for Nuclear Industry, Sergey Kiriyenko, was of the Moscow Institute of Thermotechnics Yury
to have presented his plan for the sector in May, so the Solomonov is characteristic in this regard. He said that
holding of this meeting may be a sign that he has indeed cooperation among the 600 enterprises involved in Russias
done so. Publications on the details of the document that nuclear missile industry is sufficient to ensure the
appeared afterwards suggest that the document was rearmament of Russias nuclear missile shield. Equally
approved and will be put into action. interesting is the comment that by 2020 the number of
This meeting is virtually unprecedented, and warheads in Russias nuclear missile triad will be no less than
indicative of the attention that the nations leadership is 2000, and we will construct the necessary number of
currently giving to the launching systems to
nuclear complex. Indeed, it Cooperation among the 600 enterprises involved in support this number. It
offered an accounting of Russias nuclear missile industry is sufficient to seems clear that the
developments in the sector
over the course of the past
ensure the rearmament of Russias nuclear missile Armed Forces will place
significant demands on
year, the most important of shield. By 2020 the number of warheads in Russias the nuclear weapons
which included the nuclear missile triad will be no less than 2000, and we complex over the next few
appointment of Kiriyenko will construct the necessary number of launching years.
as the new head of Rosatom, systems to support this number. The meeting did not
as well as the insinuation of Yury Solomonov, give a clear answer to the
cadres close to the President question of the separation
into the leading export-
Moscow Institute of Thermotechnics
of the weapons and civilian
oriented enterprises, most notably, the appointment of programs of the former Ministry of Atomic Energy.
Putins chief of staff Sergey Sobianin as the head of the TVEL Government reform launched in March 2004 presumed the
Corporation board of directors. separation of the military and civilian parts of the former
The leaders discussed the reform of the nuclear Minatom, with the transfer of all military industries and all
complex, which, as the former Union Ministry of Medium science and research institutes to the Ministry of Defense.
Machine Building, has thus far undergone only cosmetic However, it seems that over the past two years, no work in
changes. this direction has been carried out. This may have been one
It seems that priority will be given to reforming the of the reasons for the dismissal of the former director of
nuclear weapons complex. For the President, the integrity the Federal Agency for Atomic Energy, Alexander
of Russias nuclear shield and the condition of Russias Rumyantsev.
nuclear weapons complex was described as a crucial aspect The main task of the new director of the sector is thus
of Russias status as a world power. Sergey Ivanov, for his part, to guide the divorce of the military and civilian parts of
said the Defense Ministry would focus on the development Rosatom through to its conclusion. The reform of the
of advanced computing facilities for the nuclear complex, French atomic industry offers a positive example of such a
the Novaya Zemlya archipelago test range, and the transformation, with the removal from the Commissariat
development of nuclear weapons technologies. Even of Nuclear Energy of all non-military elements and their
Kiriyenko emphasized that the reliable, effective formation into the Areva holding company, which has
development of the weapons complex is an absolute become a major player on the global markets of goods and
priority of the nuclear sector in Russia. services of the nuclear fuel cycle. The reform was gradual,
These announcements, together with the Presidents taking eight years to accomplish with an active phase of two
speech to the Federal Assembly and a range of statements years. This reform, by the way, did not stop France from
made by directors of enterprises and organizations related conducting nuclear tests in 1996.
Industrial Policy
However, no information on the separation of civilian 3. The mining of natural uranium in Russia with the
and military functions was forthcoming from the meeting, aim of securing the long term needs of Russian industry,
so it seems that the sector will have to meet the rather though the question of whether Russian production would
ambitious goals set for it under the old structure, in which be used exclusively for domestic needs or also exported
the military element is predominant. Based on what was remains open.
said at the conference, the following plan can be discerned: 4. The modernization and expansion of the nuclear
the creation of preconditions for the intensive and complex should be accompanied by measures to increase
extensive development of nuclear energy in Russia, and the reliability and safety, and should respect the nuclear non-
establishment of preconditions for the expansion of proliferation regime.
Russian nuclear technology and products on international Over the course of the meeting the following priorities
markets. were announced with respect to the foreign expansion of
With respect to nuclear energy in Russia, the following Russian nuclear industry:
components of a future program were announced: 1. The establishment of international nuclear centers,
1. The establishment of an industrial base for the which would provide all interested countries with access
construction of nuclear power plants. At a minimum, new to nuclear energy. This echoes the Presidents initiative of
construction should maintain the current share of nuclear January 2006 at the Eurasian Economic Community
energy in the overall energy balance (16-17%), that is, about Summit.
two reactors per year. These are the figures given in the 2. A level playing field for Russian nuclear enterprises
Federal Target Program for the development of nuclear on international markets and the removal of
energy and were announced at the meeting by Kiriyenko. discriminatory barriers against Russian technologies and
A higher level was suggested by the President; namely, to products.
bring the level of nuclear energy production to 25% of the 3. The marketing of Russian advanced technologies on
national level. world markets.
2. The development of new technologies, first of all in Each of these seven priorities of reform are largely
the area of small-scale nuclear energy, high temperature declarative, insofar as the public part of the meeting did not
reactors, oxygen and thermonuclear energy. The President specify any particular regulatory and legislative measures,
noted these priorities twice: once in his address to the such as the definition of federal ownership of nuclear
Federal Assembly and once during the meeting. It is clear materials, that would in practice enable a sharp increase
that these two last points must be counted among the long- in competitiveness, lower the foreign market risk and
term goals of Russian energy production on the whole, and attract both domestic and foreign investors to the Russian
to a degree these are presented as competing projects to nuclear industry. Nor was any information regarding
the conventional NPPs, planned for construction as per sources of financing for such ambitious projects provided,
point 1 above. It is symbolic that less than a week after the while the financial means of the Russian nuclear industry
meeting with the President, the director of Rosatomprom are not adequate even for investment currently planned.
signed with Sevmash, the Severodvinsk Industrial The Accounting Chamber has been highly critical of
Conglomerate, a contract for the construction of the first planned investment by Rosenergoatom, which, in the view
floating NPP by 2010. The floating NPP is seen as one of the of the auditors, are not backed by adequate financing.
main drivers of small-scale Russian atomic energy (the One can only hope that these issues were discussed and
President included in this category Russias leadership in clarified during the closed parts of the meeting. If they were
the development of nuclear icebreakers and submarines) not, it probably means that the ambitious projects
and will be actively marketed to foreign buyers. announced will fail.

Industrial Policy
2005 Rating of Russias Largest

Defense Companies
Konstantin Makienko
T he Centre for Analysis of Strategies and Technologies

has concluded its yearly rating of the leading companies
of Russias defense industry in terms of their economic and
sector of Russias defense industry for the first time
since 2001.
Nominal sales of the Top-20 continued to rise in 2005.
financial performance. However, if sales in 2004 grew by 13.9% compared to
We believe the Top-10 listed companies are highly 2003 (16.3% for military production), then they fell by
representative of the sector as a whole, except for the fact 8.3% from 2004 to 2005 (-0.1% for military
that our rating does not include enterprises involved in production). The growth rate of production in general
maintaining Russias nuclear deterrent. But since the focus almost halved and is now less than the rate of inflation
of this rating is specifically on the business performance of (10.9%), while even nominal measures of growth of
those companies currently competing on global markets, military production have slipped into the red.
we believe this exclusion to be justified.
Transparency is still an issue for Russias defense
industry. As before, the most opaque companies are Constant trends
producers of light armor (Kurgan and the Arzamas
machine-building plants), a few instrument making Several trends remain constant features of the Russian
companies (Fazotron NIIR Corp.), and ship-building plants defense industry:
with low turnover (Yantar, Amur). They are all incorporated The Top-20 companies remain highly dependent on
as joint-stock companies, but none has sales high enough exports. In spite of the growth of domestic
to warrant inclusion in the Top-10 of our rating. procurement, export orders continue to account for
about 60% of sales for the leading companies.
Production of civilian aircraft does not exceed 7% for
New trends rated aviation companies, due to the fact that Russia
has not yet come up with a competitive product in
Analysis of the 20 largest defense enterprises based on civil aviation. Engine and instrument builders show a
turnover in 2005 suggests the following new trends: higher level of diversification, especially Aerospace
For the first time since we began our rating in 1999, Equipment Corporation. But on the whole,
State defense procurement has had a marked considering that general production is growing faster
influence on the financial results of the Top-20 than purely military production, these numbers
companies. The share of domestic orders for these testify to a very slow rate of conversion for defense
companies rose from 32% in 2004 to 38% in 2005. This enterprises.
trend is especially noticeable in specific sectors and
for particular companies. For example, in terms of
production volumes, domestic orders reached 30% for Sector analysis
Almaz-Antey, Sukhoi and Tactical Missiles. One could
assume that these companies are involved in In 2005 the aggregate sales of the Top-20 companies
substantial R&D to develop new generation weapons reached $9.5 bln, up from 8.6 bln in 2004. Nominal income
(PAK FA, SU-27SM2 and SU-34 at Sukhoi; S-400 SAM grew at a rate of 8.3%, lower than inflation, indicating a
at Almaz-Antey). Small serial orders also play a role, decrease in actual output. This appears to contradict
for example, the 11 modernized Su-27SM fighters official statistics regarding defense procurement expenses
upgraded by Sukhoi. and export volumes.
A marked rise in the indicators for ship-building For the first time since 2001 ship-building sales and
companies took place in 2005, with total sales volumes their relative weight in the general output of rated
growing from $26 bln in 2004 to $57.7 bln in 2005. Given companies outpaced that of aviation companies. This can
the fall in aviation sales from a record $75.9 bln in 2004 be explained, on the one hand, by the export of six Project
to $43 bln in 2005, this makes ship-building the leading 636 Kilo class conventional submarines and one Project

2005 Rating of Russias Largest Defense Companies
Industrial Policy
956EM improved Sovremenny class destroyer , and on the The contract for the delivery of the latter should be signed
other hand, but the absence in 2005 of major export this year.
deliveries of the Su-30 heavy fighter. However if we take a Third and fourth place go to Admiralteyskie Verfi and
wide view of what constitutes the aviation sector, including Sevmash shipyards, respectively. It would appear that almost
engine building (Salut, Ufa MPO, NPO Saturn, Perm Engine all of the income of Admiralteyskie Verfi shipyard came from
Company) and instrument making (Aerospace Equipment the sale to China of three Project 636 Kilo class conventional
Corp.) companies, as well as producers of airborne attack submarines, as per the contract for eight such vessels signed
systems (Tactical Missiles Corp.), then aviation remains the in 2002. Two ships for this same contract were built at
main source of defense industry sales. The share of Sukhoi, Sevmash Shipyard and transferred in 2005. The Krasnoye
Irkut, MiG and the above-mentioned firms in the Top-20 Sormovo shipyard, having built just one Project 636
amounts to 40.6%. submarine for China is only in 13th place in the military
Sales of helicopters rose to $576 mln after a fall in 2004, rating. From this data one might deduce that the cost of one
but stopped short of the record set in 2003, especially after Project 636 submarine for export is about $190-210 mln.
taking inflation into account. The largest identified delivery Finally, Sukhoi broke into the Top-5, in spite of the fact
was of 10 Mi-171Sh and seven Mi-35 helicopters to the Czech that it sold no aircraft last year, thanks to deliveries of spare
Republic in exchange for canceling Russian debts. By all parts ($240 mln) and a large volume of R&D on the PAK FA,
accounts, it was precisely the contract that thrust Rostvertol Su-27SM2 and the RRJ projects.
Helicopter plant into the Top-20. Indeed, by volume of
military output this enterprise leads the other helicopter
building factories. Forecast
After a slight drop in 2004, the engine-building sector
attained the record set in 2003 ($1.31 bln), based mainly on In 2006 aviation companies will restore their dominant
higher output from Saturn. The enterprise in all likelihood position due to the transfer to India of probably
ramped up its work on Izdelie 117S (turbofan engines for 12 Su-30MKI fighters and 10-12 kits for their licensed
the Su-27SM2 upgrade fighters) thanks to increased state production, as well as the first deliveries of MiG-29SMT
financing, and also began to test the AL-55I turbofan engine fighters to Algeria. A contract for the delivery of Su-30MK
for the Indian contract of 2005. However, in light of the rate fighters to Indonesia may also be finalized. Irkut remains
of inflation, it makes more sense to speak of the stabilization the leader with $800 mln to $1 bln in sales. MiG will yet again
of sales in the engine-building sector rather than real growth. fall behind the producers of the Su-27/30 family fighters. This
should change by 2007, when deliveries of MiG29SMT for
the Algerian contract are boosted by the first deliveries for
Top-5 company profiles the Indian order of MiG-29K/KUB fighters.
Salut will remain at the top of engine building, and its
For the first time since we began our rating, the Almaz- lead over the Ufa MPO will be preserved at present levels
Antey air-defense concern has become the sales leader by a thanks to a growing number of orders for both companies.
big margin with total receipts of $1.8 bln. In 2004, this Salut will be busy with a range of large independent contracts
company was in second place (behind Sukhoi) with sales of for the delivery of AL-31F/FN turbofan engines to China,
$1.34 mln. The unusually high volumes for the concern this while Ufa will grow its deliveries of engines in the framework
year are due largely to the export of naval missile systems of the transfer of new Su-30MKI to India. Saturn has a chance
including the transfer of two battalions of S-300PMU-1 to catch up with the leaders through its participation in the
(SA-10D) SAM systems to Vietnam. Domestic military delivery of AL-31F to India. The Chernyshev and Klimov
procurement (up to $530 mln) also played a role, along with plants may break into the Top-20 through contracts to
significant civilian production (up to $177 mln). Producing deliver 100 RD-93 turbofan engines to China and engines
a diversified range of products with a high number of for the Algerian MiG-29SMT fighters.
companies, the Almaz-Antey concern could become the The Algerian contract will also raise the position of
Russian version of Raytheon or Thales, assuming that the Uralvagonzavod, which produced almost exclusively
consolidation of ownership within the concern continues. civilian products in 2005. We can also expect higher receipts
It would be appropriate to compare the indicators of this for the helicopter building plants thanks to large deliveries
concern with the aggregate sales of those companies that to Venezuela. Shipbuilding companies will take a more
taken together will form the Unified Aircraft Corporation. modest position, but we can still expect large returns to
Irkut is in second place, having transferred eight Severnaya Verf and Admiralteyskie Verfi shipyards, which
Su-30MKI fighter kits for licensed assembly to India, and will ship a second Project 956EM destroyer and the last
having begun production of 18 Su-30MKI fighter airframes. Project 636 submarine, respectively, to China.

Industrial Policy
Table 1. List of Russia's Largest Defense Companies by Revenue in 2005 (RAS)

Revenue, $ mln. Net profit / net losses, $ mln. Export
# Company Sector Type 2005 2004 2005 2004 share, %
1 Almaz-Antey air-defense concern LE S 1768.09 1326.39 63.55 59.03 60.0
2 Uralvagonzavod production association LE S 874.54 952.20 1.79 0.06 4.7
3 Irkut Corporation2 AE P 711.69 621.85 83.68 67.27 94.6
4 Admiralteyskie Verfi shipyard NE S 688.80 404.58 n/a n/a 90.01
5 Sevmash production association NE S 675.95 80.33 73.01 n/a 40.6
6 Aerospace Equipment Corporation IM S 584.55 583.00 47.78 67 1 68.0
7 Sukhoi Company (JSC) AE S 561.91 1262.20 8.10 55.38 65.0
8 Tactical Missiles Corporation W S 455.26 234.72 11.74 25.21 63.0
9 Severnaya Verf shipyard NE P 452.64 19.02 9.11 -1.19 80.9
10 MMPP Salut E S 402.61 388.89 5.27 16.32 71.3
11 Ufa MPO E MP 369.42 363.95 36.22 65.38 85.4
12 NPO Saturn E MP 306.27 234.03 3.07 16.71 18.5
13 Tula Instrument Design Bureau LW / W S 257.84 250.00 31.81 n/a 87.2
14 MiG Russian Aircraft Corporation AE S 245.68 427.42 4.48 n/a 99.0
15 Perm Engine Company E S 232.20 256.82 3.29 7.54 6.5
16 Krasnoye Sormovo shipyard NE MP 221.82 68.26 49.43 4.37 88.5
17 Kazan Helicopter Plant AE MP 211.55 192.67 5.33 6.61 72.4
18 Ulan-Ude Aviation Plant AE S 199.66 158.58 5.06 3.30 73.5
19 Rostvertol Public Limited Company AE P 166.14 70.59 10.76 4.53 68.7
20 V.A.Degtyarev Plant Public Company LW / W MP 131.98 134.90 -0.10 -5.03 13.0
Source: CAST
1 CAST estimates. In occasion of Perm Engine Company all production is dual-capable
2 Irkut Corporation data according to IFRS
Annex Sectors are divided as follows: aviation equipment

(AE), naval equipment (NE), space equipment (SE), land
This rating is based on information provided directly forces equipment (LE), instrument making (IM), artillery
from the companies and open source reports on their (AR), light weapons (LW), weapons (W), engines (E).
activities, including annual reports and press releases, and Companies are classified as private (P - joint-stock
is structured according to the following characteristics: corporations with state ownership less than 25%), mainly
Sales private (MP - joint-stock corporation with state ownership
Profit/Loss 25-49%), mainly state (MS - joint-stock corporation with
Export share of total sales state ownership 50-74%) and state (S - state unitary
Share of civilian production in total sales enterprises or joint-stock corporations with state
Number of personnel. ownership 75% or more).

Industrial Policy
Table 2. List of Russia's Largest Defense Companies by Defense Production Revenue in 2005 (RAS)
Revenue from defense Civil production share, % Number of

production sales, $ mln personnel,
# Company Sector Type 2005 2004 2005 2004 2005
1 Almaz-Antey air-defense concern LE S 1 591.28 1 193.75 10.0 1 10.0 1 87 500
2 Irkut Corporation2 AE P 697.46 603.20 2.0 3.0 10 509
3 Admiralteyskie Verfi shipyard NE S 654.36 343.89 5.0 1 15.0 1 n/a
4 Sevmash production association NE S 536.70 n/a 20.6 n/a 26 300
5 Sukhoi Company (JSC) AE S 522.58 1 236.95 7.0 2.0 more than
27 000
6 Severnaya Verf shipyard NE P 442.68 n/a 2.2 n/a 3500
7 Tactical Missiles Corporation W S 430.22 216.65 5.5 7.7 22 259
8 Aerospace Equipment Corporation IM S 403.34 444.25 31.0 23.8 38 900
9 MMPP Salut E S 351.48 311.11 12.7 20.0 13 519
10 Tula Instrument Design Bureau LW / W S 255.26 247.50 1.0 1.0 8200
11 MiG Russian Aircraft Corporation AE S 243.99 325.70 0.7 23.8 14 500
12 Perm Engine Company E S 232.20 256.82 100.0 1 100.0 1 7815
13 Krasnoye Sormovo shipyard NE MP 190.54 n/a 14.1 n/a 4500
14 Rostvertol Public Limited Company AE P 141.22 58.10 15.0 1 17.7 6957
15 Ulan-Ude Aviation Plant AE S 128.38 n/a 35.7 n/a 5700
16 Arzamas machine building plant LE P 68.27 49.59 5.0 1 5.0 1 5216
17 Machine Building Design Bureau (Kolomna)3 LE S 60.00 n/a 0.0 n/a n/a
18 Ufa MPO E MP 55.41 337.39 15.0 1 7.3 18 331
19 Kazan Helicopter Plant AE MP 43.58 154.14 79.4 20.0 6900
20 Uralvagonzavod production association LE S 42.85 150.45 95.1 84.2 35 200
Source: CAST
1 CAST estimates. In occasion of Perm Engine Company all production is dual-capable
3 Defense export

Industrial Policy
Table 3. Revenue of Russia's Defense Companies by Sectors in 2001-2005, $ mln (RAS)

Company Type 2001 2002 2003 2004 2005
Aircraft Industry
Sukhoi Company (JSC) S 1 522.00 1 040.00 1 446.72 1 499.09 561.91
Irkut Corporation1 P 230.89 562.15 426.22 621.85 711.69
MiG Russian Aircraft Corporation S 130.00 281.30 190.00 427.42 245.68
Sokol aircraft building plant (Nizhny Novgorod) MP 51.00 74.50 80.00 88.41 356.92
Total 1 933.89 1 957.95 2 062.94 2 636.78 1 519.28
Helicopter Industry
Kazan Helicopter Plant MP 246.40 198.86 218.89 192.67 211.55
Ulan-Ude Aviation Plant S 93.85 100.42 226.80 158.58 199.66
Rostvertol Public Limited Company P 130.00 60.10 135.40 70.59 166.14
Mil Helicopter Plant (Moscow) MP 17.10 35.00 41.00 23.89 46.56
Total 470.25 394.38 581.09 351.25 577.35
Ship-building Industry
Admiralteyskie Verfi shipyard S n/a 220.00 347.17 404.58 688.80
Baltiysky Zavod shipyard P 12.45 30.35 695.01 335.42 52.44
Sevmash production association S 155.40 n/a n/a 80.33 675.95
Severnaya Verf shipyard P 115.62 41.75 38.34 19.02 452.64
Krasnoye Sormovo shipyard MP 32.50 22.73 66.27 68.26 221.82
Almaz Shipbuilding Company P 72.70 3.24 39.27 83.85 8.33
Total 343.72 261.75 695.01 904.18 2 039.20
Engine-building Industry
MMPP Salut S 239.00 362.00 420.00 388.89 402.61
Ufa MPO MP 234.02 341.34 406.91 363.95 369.42
NPO Saturn MP 150.00 204.85 216.46 234.03 306.27
Perm Engine Company S 58.93 101.82 172.82 256.82 232.20
Total 681.95 1 010.01 1 216.19 1 243.70 1 310.50
Source: CAST

Arms Trade
The Algerian Deal

Konstantin Makienko
Dmitry Vasiliev
O n 10 March 2006, during a short visit to Algeria,

President Putin signed a set of contracts for the transfer
of several weapons systems to Algeria. Information
possibility that further agreements for another $2-3 bln will
still be signed. This is quite remarkable considering that at
the entire portfolio of Russian contracts at the end of the
disclosed to the public regarding the portfolio is far from nineties varied between $6-7 bln.
complete, though the aviation contract is relatively clear. The second noteworthy feature is the comprehensive
For $3.5 bln, Russia is to sell 28 Su-30MKA fighters ($1.5 bln), character of the deal, which includes deliveries of aviation,
28 MiG-29SMT and 6 MiG-29UBT fighters ($1.8 bln, of which naval, land and missile weapons, giving the Russian military-
up to $300 mln will go back to purchase 36 Algerian MiG-29 industrial complex a well-balanced load of orders across
as a trade-in), and 16 Yak-130 trainers ($200 mln). several sectors.
The delivery of Su-30MKA fighters should begin in This deal could not have been possible without an
2007 and continue for three years. The most likely schedule agreement to write off Algerias debts to Russia, which
is for eight fighters to be transferred in 2007, ten in 2008 and amounted to $4.7 bln. This part of the deal was criticized by
another ten in 2009. The Algerian version of the Su-30 will several observers and was quietly opposed by the Ministry of
be based on the Indian Su-30MKI version, but with Russian Finance. Nevertheless, it seems that a new mechanism for
rather than Israeli-made systems, which for the Su-30MKI promoting Russian armaments to former Soviet markets has
include head-up displays, digital map generators and been found, similar to that used in the 1990s, when Russian
overhead laser target indicators. armaments were transferred in exchange for the writing off
Deliveries of MiG-29 fighters are set to begin in 2006, of Soviet debts to Central and East European states, South
including three MiG-29UBT two-seat planes. The transfer Korea and a range of other countries. The cost of the contracts
of the first batch of Yak-130 trainers is planned for 2008, by signed with Algeria will exceed the sum of the forgiven debts,
which time the aircraft should be fully certified by the and by a large margin if all options are exercised.
Russian Air Force. A second production line is being set up In effect the deal converted foreign debts owed to Russia
at the Irkut plant to assemble the Algerian Yak-130, while the into orders for Russias defense industry. It seems that Libya,
Nizhniy Novgorod line of aircraft will be used by the Russian which has the resources to make similarly large purchases of
Air Force. Russian arms, might be the next country in line for a similar
Aside from a large purchase of aviation equipment deal.
Algeria will also receive many air-defence weapons and
armaments for its land forces: eight battalions of S-300PMU-
2 Favorit (SA-20) SAM systems, probably for $1 bln, and 300 Return to a traditional market
T-90S main battle tanks for another $1 bln, with the first 40
tanks to be delivered this year. The Algerian deal represents Russias return to one of its
Aside from these systems, Algeria intends to upgrade traditional markets. From 1962 to 1989, the Soviet Union
its current fleet of T-72S main battle tanks, and to purchase delivered approximately $11 bln worth of arms, including 210
Metis-M1 (AT-13) and Kornet-E (AT-14) anti-tank missile MiG-21 and MiG-23 fighters, Su-24MK bombers, T-55 tanks
systems, two Project 636 improved Kilo class submarines and about 300 T-72 main battle tanks, three Project 1159T Koni
with Club-S (SS-N-27) missile systems, and Tunguska-M1 class frigates, two Project 877EKM Kilo class submarines,
(SA-19) self-propelled anti-aircraft gun-missile systems. A missile corvettes, fast attack craft, patrol and landing ships
range of ships and submarines are to be repaired, and while and craft.
the content of the options is not known, it is likely that 12-20 In the 1990s the volume of trade between the two
MiG-29SMT fighters and 14-16 Yak-130 trainers will be countries fell dramatically as Ukraine and Belarus offered
purchased. similar products at dumping prices. These two countries
sold Algeria Mi-24V attack helicopters, T-72 main battle
tanks and BMP-2 AIFVs, Su-27 and MiG-29 fighters.
Main characteristics of the deal Important steps towards the reestablishment of Russian-
Algerian arms trading were made in 1999 and 2001, with the
The first and most important characteristic of the signing of intergovernmental agreements on military-
Algerian deal is its unusually large cost, at $7.5 bln, with the technical cooperation and strategic partnership.

The Algerian Deal
Arms Trade
Major contracts of recent years include an agreement Finally, in 1995 Russia supplied 150 BMP-2 AIFVs, for
signed in 2000 worth $120 mln for the delivery of 22 Su-24MK which more than 2000 anti-tank missiles for Fagot (AT-4)
bombers. The aircraft were taken from the Russian Air anti-tank missiles were purchased. In 1999, Algeria
Forcess surplus and were repaired and modernized at the purchased 18 Smerch 9A52 MLRS. In 1999, 324 air-air
Novosibirsk Aircraft Production Association (NAPO). missiles and in 2001 the Orion radio intelligence station were
Although a contract for the modernization of 22 Su-24M was purchased. And the latest information - on 28 June 2006
to be finished by the end of 2002, it was put off several times Rosoboronexport state concern and Algerian Navy signed a
and concluded only in 2005. According to the general director contract for delivery of two Project 636 Kilo-class
of NAPO Alexander Bobryshev (who left his position in May submarines.
2006), Algeria is the only current purchaser of Su-24MK
aircraft.
In June 2004 the Ulan-Ude Helicopter Plant completed Effect on the structure of Russian exports
the delivery of a batch of Mi-171Sh helicopters to Algeria. This
contract, signed in 2002, was for 42 helicopters priced at $200 The Algerian deal will have a marked effect on Russias
mln. In 1994-1995, Russia also sold 47 Mi-8T transport aviation industry and the structure of its arms exports.
helicopters. Algeria also purchased in 2000 eight IL-78 tanker First, all doubts regarding the future prospects of MiG
aircraft to service its tactical aviation. Corporation have been put to rest. This enterprise was in a
The upgrade of a single Project 1159T frigate at the deep and prolonged state of crisis throughout the mid-
Kronshtadt Naval Repair Yard and a single Project 1234E 1990s. The first steps towards its reanimation began in 1999
missile corvette for the Algerian Navy mark the only when contracts for the sales of inexpensive earlier models
significant ship-building contracts. The transfer of these of the MiG-29 fighters were concluded with several poor
ships was difficult. Due to delivery problems at Kronshtadt states in south and southeast Asia and Africa, and when R&D
the ship was sent partly unfinished, such that payment for the for the radical modernization of the MiG-29 fighters was
contract (about $100 mln) was received only after testing on launched, including the installation of the Zhuk-ME radar.
the Algerian shores was completed in 2002. Whilst waiting for The next step was connected with the successful
this payment, Kronshtadt was itself unable to pay its creditors program to deliver to the Yemeni Air Force 20 MiG-29SMT
and was put under external management. Negotiations are fighters, which was to conclude in 2005. The program
now underway to modernize another four ships of the foresaw the sale of 14 MiG-29B/UB as per a contract signed
Algerian Navy (two from each of the above mentioned in 2001, and their subsequent modernization to the MiG-
projects). It is expected that a firm contract will be signed in 29SMT/UBT standard and the delivery of another six new-
2006, to be executed by Northern Shipyards. build MiG-29SMT.
In 2000-2002 the St. Petersburg Dvigatel factory sent 24 The third step towards the revival of MiG was the
533mm TEST-71 torpedoes to Algeria. By some accounts the signing of a contract in 2004 for the delivery of MiG-29K
state Splav scientific-production enterprise transferred to carrier-based fighters to India. The noteworthy element of
Algeria 90P Zapad self-directing depth charges for the Project this program was the high level of technological risk
1159 frigates. Also in 2000, the delivery of 96 3M24E anti-ship together with very tight deadlines and financing envelopes
missiles of the Uran-E (SS-N-25) missile system created by that made it comparable with the Su-30MKI fighters
Zvezda-Strela scientific-production enterprise (part of program in terms of its complexity and influence on the
Tactical Missiles Corporation) for corvettes upgraded structure of the aviation sector as a whole.
according to Project 1234EM began. Zvezda companies Finally, the signing of the Algerian deal has at last
concluded a contract in the spring of 2004 for the delivery and evened out the position of MiG Corporation vis--vis
repair of size-type 16/17 diesel engines for the Algerian Navy. Sukhoi. In view of the expected exercise of at least half of the
The cost of this contract was 3.6 mln Euros. Indian option for 30 MiG-29K carrier-based fighters (i.e.,
The most recent ship-building contracts include a 2005 15 planes for a total of $750 mln) in 2006, and a potential
agreement worth $100 mln to repair and upgrade two Project contract for the upgrade of about 70 Indian MiG-29 fighters
877EKM Kilo class conventional submarines for the Algerian to the MiG-29SMT variant, MiGs total portfolio of orders
Navy. Admiralteyskie Verfi shipyard is the contractor and will will reach $3 bln, second only to that of Irkut. (This figure
complete the order by 2007. As distinct from the Indian ships does not include the 2004 contract of $732 mln for R&D and
being upgraded at Zvezdochka shipyard, the Algerian ships delivery to the Indian Navy of 16 MiG-29K/KUB, part of
will not be equipped with the Club-S anti-ship missile system. which has already been paid).
In June-July 2006 Admiralteyskie Verfi will sign another The Algerian contract provides MiG with sufficient
contract for the delivery of two Project 636 improved Kilo funds to ensure the successful completion of the contract
class conventional submarines for a total of about $400 mln. for the MiG-29K carrier-based fighters extremely

The Algerian Deal
Arms Trade
important from both the political and technical points of to develop a light fifth-generation fighter together with
view. Until recently, MiGs precarious financial situation Indias apparent interest in jointly developing such a fighter.
put in doubt its ability to conduct the necessary R&D and The signing of the Algerian deal also strengthens the
to build the MiG-29K. Now that MiGs finances are no longer position of the Irkut Alliance, or the informal union of
an issue, all that remains are ordinary technical and Irkut, MiG, the Yakovlev Design Bureau and the Sokol
organizational risks, and the latter have decreased since the Aircraft Building Plant. All three factions of this alliance
arrival of Alexey Fedorov and the mixing of personnel with will get their share of the pie in the form of orders for the
that of Irkut. Su-30MKA, the MiG-29SMT, the MiG-29UBT and the Yak-
In addition, MiG Corporations hand will strengthen 130. The factories of the alliance now have sufficient orders
considerably in the Indian Air Force tender for the to work until 2010, while Sukhoi Corporation has no
purchase of 126 (or 200, according to some sources) current orders whatsoever.
fighters to replace their stock of MiG-21 (both Soviet and Finally, the Algerian contract will have a marked effect
licensed Indian production). Finally, with the signing of the on the geographic distribution of Russias arms exports for
Algerian and possibly the Indian contracts for MiG-29, the the next three or four years at least. Up until now, between
ability of MiG Corporations to force a revision of the tender 70-80 % of Russias military exports have gone to China and
(won by Irkut) for the development of a Russian fifth- India. Algeria will now account for about 20% of Russian
generation fighter has increased considerably. This deliveries, and the share of China and India will shrink to
hypothesis is lent credibility by the stance taken by 30% and 20%, respectively. And with the Malay and
Vladimir Mikhailov, the Commander-in-chief of the probable new Indonesian aviation contracts, this
Russian Air Force, who occasionally comments on the need distribution will become even more diversified.
Table 1. Major Identified Contracts on Delivery of Russian Arms to Algeria

Delivery Price,
Name Amount Year period $ mln Transfer Contractors
Aviation Equipment
MiG-29SMT fighters 34 December 2005 - March 2006 2006-2009 1800 0 MiG Corp., Sokol aviation plant
Su-30MKA fighters 28 December 2005 - March 2006 2007-2009 1500 0 Irkut Corp., Sukhoi Company
Yak-130 trainer aircrafts 16 December 2005 - March 2006 2008-2009 200 0 Irkut Corp., Sokol aviation plant
Mi-8MTV-1 helicopters 47 n/a 1994-1995 235 completed Kazan Helicopter Plant
Mi-171Sh helicopters 42 2002 2002-2004 200 completed Ulan-Ude Aviation Plant
Su-24MK fighter-bombers 22 2000 2001-2005 120 completed Sukhoi Company
IL-78 tanker aircrafts 4 1998 2000 n/a completed n/a
Naval Equipment
Project 636 submarines 2 28.06.2006 n/a 400 0 Admiralteyskie Verfi shipyard
Project 1159T frigate and Project 1234E 1 / 1 2000 2001-2002 100 completed Kronshtadt Naval Repair Yard
missile corvette ugrade
Project 877EKM submarines repair and 2 2005 2007 100 0 Admiralteyskie Verfi shipyard
upgrade
Land Forces Equipment
S-300PMU-2 Favorit SAM systems 8 December 2005 - March 2006 n/a 1000 0 Almaz-Antey air-defense
concern
T-90S main battle tanks 300 December 2005 - March 2006 2006-2008 1000 0 Uralvagonzavod
T-72M main battle tanks upgrade 250 December 2005 - March 2006 n/a 200 0 Uralvagonzavod
Metis-M1 anti-tank missile systems n/a December 2005 - March 2006 n/a n/a 0 Tula Instrument Design Bureau
Kornet-E anti-tank missile systems n/a December 2005 - March 2006 n/a n/a 0 Tula Instrument Design Bureau
2S6M1 Tunguska-M1 self-propelled 24 December 2005 - March 2006 n/a n/a 0 Tula Instrument Design Bureau
anti-aircraft gun-missile systems
9A52 Smerch MLRS 18 1998 1999 n/a completed Motovilikha Plant
BMP-2 AIFVs 150 n/a 1995 75 completed Kurganmashzavod

The Algerian Deal
Arms Trade
Risk Factors of the Delivery of Russian

Arms to Algeria
Andrei Maslov
A ccording to the Director General of Rosoboronexport Another group of risks is related to concerns that a deal
Sergey Chemezov, agreements to transfer arms worth of this scale may reduce the political influence of Algerias
$7.5 bln to Algeria were signed during President Putins visit main partners the US, France and the UK, and to the
to that country. The Algerian press, for its part, noted that lobbying efforts of their respective defense industries.
Russia wrote off Algerian debts worth $4.74 bln in exchange Indeed, many influential representatives of the
for the delivery of industrial products. In light of these two political and military leadership of Algeria are pushing for
statements it seems that Algerias obligations amount to no closer partnership with NATO. Cooperation with NATO
less than $4.74 bln, with the understanding that Russian would allow Algeria to count on the assistance of the alliance
industrial products may include not only arms but also, for in dealing with a range of internal problems (territorial
example, oil and gas equipment. control, especially in the south) and give access to
Algerias debts to Russia will be forgiven as soon as, and significant financial resources available through NATOs
to the extent that new Russian deliveries are paid for, but partnership programs. Judging from the published results
Algeria has already of negotiations, NATO
achieved an important goal, A deal of this scale may reduce the political influence countries (first of all the
in that Russia has
withdrawn its objection to
of Algerias main partners the US, France and the US), are attempting to
counter Russian initiatives
Algerias early payment of UK, and to the lobbying efforts of their respective to sell heavy equipment
its debt to the Paris Club defense industries (that would be necessary in
(about $8 bln). On 15 March case of a full scale conflict
2006 Algeria gave the Paris To ensure the successful result, Russia should work with Morocco or Libya),
Club (where aside from closely not only with the Algerian General Staff, but programs to develop
Russia, France and Italy are with its oil and gas lobby as well mobile and quick reaction
its largest creditors) notice forces, the supply of special
of early repayment of its foreign debt. The request was equipment for anti-terrorist operations and the illegal
considered and an agreement was reached on 11 May 2006, armed groups active on Algerian territory.
according to which Algeria should pay the $8 bln in hard David Welch, US Assistant Secretary of State, visited
currency by the end of November. Algeria two days after Putins visit, on 13 March, to discuss
It is possible that the Paris Club settlement was the the joint fight against terrorism. On 18 March a delegation
principal motive driving Algerias negotiations during the from the National Nuclear Security Association was
arms deal with Russia. The restructuring and early payment received by Chakib Khelil, the Minister of Energy and Mines.
of its foreign debt to Russia and other Paris Club members From 1721 of April, Ahmed Gaid Salah became first
allow Algeria to save on interest payments and achieve a Algerian Chief of the Staff ever to visit the USA. The Algerian
higher credit rating. By the end of 2006, Algeria will have newspaper Libert wrote that negotiations concerned the
reduced its foreign debt by $8 bln, with an expected GDP of possible delivery to Algeria of US weapons and the training
more than $105 bln. As a share of its GDP, Algerias foreign of Algerian officers in America. On 3 May Major-General
debt will be about 7.5%, compared to 21% in 2005, 25% in Salah began a visit to France. La Tribune wrote that
2004 and 35% in 2003. Algeria had gold reserves of over $60 negotiations concerned the arms trade, including a visit to
bln in May 2006. the head office of GIAT and the Direction centrale du matriel
The timetable for writing off Algerias debt to Russia de larme de terre DCMAT. One might take note that the
depends on the schedule of its purchases of Russian Chief of the General Staff spent two days in France, three in
industrial products, but no deadlines for these purchases the US, and six (in 2005) in Russia.
have been made public. Theoretically, the process could be The possibility that France and the US will interfere
dragged out for 10 years or more, but until more with the delivery of Russian arms to Algeria cannot be
information concerning the deal is made public, one can dismissed. One means of doing so would be to strengthen
only speculate on this aspect of the deal. their ties with the Algerian oil lobby. Exports of oil and gas

Risk Factors of the Delivery of Russian Arms to Algeria
Arms Trade
to the US amounted to $10.3 bln in 2005. The largest foreign President. Moreover, unlike Murad Medelci, the Minister
companies active in Algeria is the American Anadarko, of Finance and co-chair of the Russian-Algerian
which invested $3.7 bln in drilling operations and which intergovernmental commission, he is not a member of the
extracted more than 22 tons of oil in 2005. Moreover, a Presidents Security Council, which must approve all major
significant volume of oil is purchased by American arms deals. However, Chakib Khelil plays an important role
companies from the Algerian state monopoly Sonatrach. in the formation of budget policy for the government as a
British Petroleum is the largest foreign player in Algerian whole. He is currently pushing for greater state investments
gas, extracting about 9 bln cubic meters of gas per year at In in infrastructure projects, especially in the oil and gas
Salah, and which has already invested about $4 bln. sector. According to an announcement of President
The Minister of Energy and Mines Chakib Khelil Abdelaziz Bouteflika made soon after his talks with Putin,
shoulders the greatest responsible for providing for the the government will invest internally about $60 bln over the
budget and for maintaining relations with Algerias western next five years. The bulk of these funds will be not only
partners. He grew up in Oujda in northern Morroco, which earned but spent under Chakib Khelils watch and the
is something to keep in mind given the potential conflict management of Sonatrach. Strict supervision of the
between the two states. He studied oil and gas engineering transparency of budget spending will be exercised, and the
in Texas, and then worked for several years in the US. From International Financial Corporation, a World Bank
1971 to 1980 he worked for Sonatrach and from 1980 to 1999 subsidiary, will play a role. It is entirely possible that the IFC
at the World Bank. He was appointed to his current position will raise the issue of whether the large increase in Algerias
in 1999, and from 2001-2003 was simultaneously director military budget, necessary to fulfill the arms agreement
of Sonatrach. In 2003 he transferred the management of the with Russia, is justified.
state monopoly to Mohamed Meziane, who remains at this In conclusion, it should be emphasized that the
post to this day. likelihood of the successful implementation of the Russian-
Chakib Khelil has no direct means of influencing the Algerian arms deal is very high. But in order to ensure this
military policy or decision-making in the area of arms result, Russia should work closely not only with the Algerian
imports, aside from his personal contacts with the General Staff, but with its oil and gas lobby as well.

Risk Factors of the Delivery of Russian Arms to Algeria
Facts & Figures
Major Events in Russian Arms Trade and

Defense Industry in the First Half of 2006
Exporter Importer Date Description Details
Russia India January Leninets Holding Company in cooperation with Contract value $205 mln.
Ilyushin Aviation Complex completed upgrade of Four more aircraft will
the first Indian maritime patrol aircraft IL-38 into be upgraded in 2006-2007.
IL-38SD version.
Russia, Poland Iraq January Ulan-Ude Aviation Plant and Kazan Helicopter Contract value $65 mln.
Plant delivered to Iraq 8 Mi-17 transport
helicopters under the contract of 2005 for
delivery of 10 helicopters.
Russia Czech Republic 24 January Rostvertol PLC completed the contract of 2004 Total contract value, including
for delivery of 10 Mi-35 attack helicopters. 16 Mi-171 - $185 mln
(in discharge of Russian debt).
Russia China 28 January Signing of a contract between Russia and China Contract value $200 mln.
for delivery of 24 Mi-171 transport helicopters. Contractor Ulan-Ude Aviation
Plant.
Russia India 16 February Zvezdochka Engineering Plant signed a contract Contract until 2009.
for servicing of 4 Indian Project 877EKM Kilo
class conventional submarines.
Russia Indonesia 27 February Signing of a contract between Russia and Contractor Rostvertol PLC.
Indonesia for delivery of 12 Mi-2 light
helicopters.
Russia Bulgaria 01 March Signing of a contract between Russia and Bulgaria Contract value $48 mln.
for repair of 16 MiG-29 fighters. Contractor MiG Corp. Corporation
failed to a similar contract of 2002.
New agreement tied up on the
initiative of the Head of MiG Corp.
Alexei Fedorov to restore reputation.
Russia, Ukraine NATO 22 March Ruslan SALIS joint venture won NATO tender for Deal value 650 mln. Contract
providing cargo operations. for 3 years with a possibility of
renewal until 2012.
Russia Bangladesh 24 April Arzamas machine-building plant fulfilled the
delivery of 60 BTR-80 armoured personnel
carriers for Bangladesh Armed Forces.
Russia Cuba 25 April Signing of military-technical cooperation No details available.
agreement between Russian and Cuba.
Europe Russia 16 May Signing of Memorandum between Airbus, EFW, The contract is to be confirmed
Irkut Corp. and MiG Corp. on foundation of joint by October 2006.
venture for conversion of A320/330/340 civilian
aircraft into all-cargo aircraft versions.
Russia 25 May Prime Minister Mikhail Fradkov signed According to the document,
government regulation About bankruptcy a specially created commission
prevention of strategic enterprises and defense will be deal with this.
industry companies.

Major Events in Russian Arms Trade and Defense
Industry in the First Half of 2006
Facts & Figures
Exporter Importer Date Description Details
Russia Belorussia 29 May Russia fulfilled the contract for delivery of They will operate under United
2 S-300PS (SA-10) SAM systems to Belorussia. Air-defense system of Russia and
Belorussia in westerly direction.
Russia Kuwait 30 May Signing of an agreement between Russia and The total amount of debt $1 bln
Kuwait about settlement of debt of Soviet Union. Russia will pay by money, the rate of
$600 mln by delivery of arms.
Russia China 30 May Admiralteyskie Verfi shipyard transferred the last Contract value $2 bln.
Project 636 improved Kilo class conventional
submarine to China Navy under the contract for
delivery of 8 submarines.
Russia 02 June Military Industrial Commission discussed and Total amount $175 bln., $110 mln
approved a project of State Arms Programme until (63%) for procurement of new
2015. arms. It is planned to purchase about
1000 aircraft and helicopters and a
few dozen ships, including 5 Project
955 strategic submarines.
Russia Venezuela 03 June Izhmash concern sold 33,000 AK-103 assault The other 67000 will be transferred
rifles to Venezuela under a contract for delivery of in 2006. Contract value $ 54 mln.
100,000 rifles.
Russia China 05 June Sevmash production association delivered Submarines were built under
2 Project 636 improved Kilo class conventional a 2002 contract.
submarines to Chinese Navy.
Russia 14 June Signing of a contract between Rosenergoatom Construction begins in 2007.
state concern and Sevmash production Contract value $ 323 mln.
association for construction of the first floating
low-power atomic station in the world.
Source: Russian press
All data concerning Algerian Deal see at page 19

Major Events in Russian Arms Trade and Defense
Industry in the First Half of 2006
Facts & Figures
Ministry of Defense Research Institutes

Mikhail Lukin (Kommersant Publishing House, special for Moscow Defense Brief)
Name Subjects Chief Post-address Phone
General Staff Center for Military Military strategic studies, General Lieutenant Vladimir 19 Znamenka str., K-190, (495) 696-40-01
Strategic Studies forecast and planning effort Ivanovich Ostankov Moscow, 103160
Military History Institute Military history study Colonel Alexander 14 Universitetsky prospekt n/a
Arkadievich Koltyukov str., V-130, Moscow, 117330
Center for Research of Military Forecast of military Prof.Vitaly Vyacheslavovich 86 Khoroshevskoe shosse str., n/a
Strength of Foreign Countries development of foreign Naumkin Moscow, 103160
countries
Central Research Institute # 1 Ship-building Rear Admiral Igor 30 Chapaeva str., Saint (812) 232-79-46,
Grigorievich Zakharov Petersburg, 197061 232-86-63
Central Research Institute # 2 Air defence and aerospace Major General Sergey 32 A. Nikitina naberezhnaya (4822) 31-88-29
defence weapon Vasilievich Yagolnikov str., Tver, 170005
Central Research Institute # 3 Missile artillery arms for armed Prof.Vladislav Ivanovich 10 Pogonny proezd str., (495) 169-55-20
forces Baydak Moscow, 107564
Central Research Institute # 4 Missilery 34 Tikhonravova str.,
Major General V.V. Vasilenko (495) 513-95-45
Yubileiny, Moscow region,
141080
Central Research Institute # 5 Signals warfare and Major General Anatoly 153 Krasnoznamennaya str., (4732) 56-16-63,
information protection Akulinin Voronezh, 394052 56-94-25, 56-00-86
Central Physicotechnical Nuclear weapon study Prof.Vladimir Mikhailovich Sergiev Posad - 7, Moscow (495) 584-99-97,
Institute # 12 Loborev region, 141300 296-52-97
State Research Institute # 13 Maintenance and repair of Major General Alexander 1 Moskovskaya str., Lyubercy- (495) 559-00-45
aircraft Krutilin 3, Moscow region, 140003
Central Testing & Research Engineer installations, Major General Alexander Nahabino-2, Krasnogorsk, (495) 561-21-85,
Institute # 15 technologies and ammunition Averchenko Moscow region, 143430 560-31-26
supplies, equipage
Central Testing & Research Wire service, fiber-optic, radio, Colonel Gennady Ivanovich 6 1st Rupasovsky pereulok (495) 582-46-00
Institute # 16 radiorelay communications, Azarov str., Mytishi, Moscow region,
troposphere and satellite 141006
communication
Testing & Research Automotive equipment Major General Vladislav 85 Krasnaya str., Bronnicy, (495) 996-90-57
Institute # 21 Viktorovich Shipilov Moscow region, 140170
Central Testing & Research Electronics, electrical Rear Admiral Yury Ivanovich 1st Rupasovsky pereulok str., (495) 586-94-40
Institute # 22 enqineering and electric power Stepanov Mytishi, Moscow region,
industry 141006
Central Research Institute # 24 Dissemination of Navy, fleet Rear Admiral Vladimir 17 Kominterna str., (812) 427-98-88
development, automatization L'vovich Vasyukov Petrodvorets, Saint Petersburg,
of control systems, 198516
radioelectronics arms
State Research Institute of oils Research of fuels, oil lubricants Major General Vladimir 10 Molodogvardeyskaya str., (495) 141-97-50,
and fuels # 25 and special liquids Vasilievich Sereda Moscow, 121467 140-40-67
Central Research Institute # 26 Military installation, coverage Andrei Konstantinovich Gagarina district, Balashikha, (495) 584-29-61,
for aerodromes and Belov Moscow region, 105179 524-06-29
cosmodromes
Central Research Institute # 27 Information systems and Major General Kharis 5 1st Khoroshevsky proezd (495) 945-71-75,
technologies Imamovich Saifetdinov str., Moscow, 123007 293-96-12

Facts & Figures
Name Subjects Chief Post-address Phone
Research Institute # 29 Geodetic surveying, map- Major General Valery 6 Popov proezd str., B-14, (495) 268-27-01,
making, topography, aerial Georgievich Elyushkin Moscow, 107014 268-02-93
photography
Central Research Institute # 30 Aviation materiel and arms for S.N. Shalaev Shelkovo-10, Moscow region, (495) 993-59-86
airforce 141100
State Design Institute of Special Project management of Colonel Alexander 19 Smolensky bulvar str., (495) 244-03-13,
Construction # 31 cosmodromes, production Mikhailovich Klimov Moscow, 119121 244-08-46
areas, civilian objects
State Testing & Research Military metrology and Prof. Viktor Nikolaevich 13 Komarova str., Mytishi-6, (495) 583-99-23,
Institute # 32 metrological support of armed Khramenkov Moscow region, 141006 583-99-48
forces
Testing & Research Armoured and fully-tracked Major General Vladimir Kubinka-1, Moscow region, (495) 992-20-79
Institute # 38 vehicles Fedota 141071
Main Research Institute of Development of technologies Vice Admiral Yury 4 Morskaya str., Lomonosov, (812) 422-42-64,
Rescue Missions, Diving and and equipment for deep-water Sukhachev Saint Petersburg, 189510 422-37-37,
Deep-water Missions # 40 rescue missions 422-81-16
Central Research Institute # 46 Integrated informational Prof.Vasily Mikhailovich 8 Chukotsky proezd str., (495) 189-92-20
telecommunicational control Burenok Moscow, 129327
systems, data bases
Central Research Institute # 48 Development of biological Prof. Evgeny Vasilievich 119 Oktyabrsky prospekt str., (8332) 62-75-28,
defence from dangerous Pimenov Kirov, 610000 62-18-13
infectious diseases
Central Design Institute # 49 Navy project management Vladimir Sobol'kov 12B Verkhneportovaya str., (4232) 41-49-71
Vladivostok, 690003
Central Design-Engineering Development of standard Leonid Grigorievich Gorbov 38 Angliyskaya naberezhnaya (812) 315-49-45
Institute of Shiprepairing # 51 organizational repair-technical str., Saint Petersburg, 190068
documents
Central Design Institute # 52 Project management Colonel O.O. Kaninsky 37 Lenina str., Khabarovsk, (4212) 23-42-12
680030
Central Design Institute # 53 Project management Vladimir Pugachev 20 Komsomolsky prospekt (495) 296-04-08
str., Moscow, 119021
Institute of Engineering Project management Anatoly Vladimirovich Shelkovo-7, Moscow region, (495) 296-65-25,
Surveys # 56 Shulgo 141100 526-46-84
Central Design Institute # 58 Project management of airforce Yury Vladimirovich Zatykin 15 Reshetnikova str., Saint- (812) 298-44-89,
support structure, airdefence Petersburg, 196105 298-23-53
and guided missile systems
State Testing & Research Military medicine, medical Major General Igor 12A Petrovsko- (495) 212-10-02
Institute of Military Medicine technology, pharmacy, Borisovich Ushakov Razumovskaya alleya str.,
ergonomics, biomedical shield Moscow, 127083
State Research Institute of Navigation and hydrography Captain I ank Sergey 41 Kozhevennaya liniya str., (812) 327-21-13,
Navigation and Hydrography Petrovich Alekseev Saint Petersburg, 199106 322-05-66,
217-35-18

Our Authors
Mikhail S. Barabanov. Graduated from the Moscow State University of Culture. Currently employed by the Moscow city
government. Independent expert on naval history and armaments.
Evgeny A. Belyakov. Graduated from the Institute of Mass Media of the Russian State University for the Humanities in
2006. From 2002 to 2004, worked as staff member in the Press-Service of the Ministry of Industry, Science and Technologies,
and worked as a proof-reader in Gazeta newspaper from 2004-2005. CAST researcher and editor-in-chief of the Moscow
Defense Brief journal since February 2006.
Andrei L. Frolov. Graduated with honours degree from the Faculty of Foreign Affairs of Saint Petersburg State University
and in 2003 from French-Russian Masters School of Political Science and International Relations. In 2003-2004 researcher
at the Center for Policy Studies in Russia (PIR-Center), executive editor of Yaderny Kontrol magazine (in Russian).
In 2004 project manager of Export control system transformation in Russia in 1999-2003 programme.
Alexander B. Gorianin. The author of numerous books and articles. Such as The demolition of the Cathedral of the Christ
the Savior (London, 1988), Myths about Russia and Nations Mind (Moscow, 2002). In 1999-2000 editor-in-chief of the
ITAR-TASS Publishing House. In 2000-2004 associate professor of Interuniversity Center for Russian studies in Peoples
Friendship University of Russia. Currently works as a project director of the Reitor independent rating agency.
Mikhail A. Lukin. In 1992 graduated from the journalism department of the Moscow State University. Since 1990 worked
as an editor of Postfactum press agency. In 1993 became a staff member of the XX century and the world think-tank, and in
1994-1997 worked as head of the information section in the National News Service. From 1997 was an executive in the
operational news group, deputy director of the information center of the Kommersant Publishing House. Since January
2003 director of the information center of the Kommersant Publishing House.
Konstantin V. 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.
Andrei A. Maslov. In 2001 graduated from the Faculty of Oriental Studies of Saint Petersburg State University.
In 2001-2004 deans assistant for scientific work. From 2003 director of the information company Af-Ro and publisher
of the Russian-African business magazine.
Ivan A. 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 V. Vasiliev. In 2004 graduated from the State University Higher School of Economics with a Masters Degree in
Strategic Management. 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.

ºmoscow Defense Brief 2-2006

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CONTENTS

War And People

CAST Director & Publisher Industrial Policy

Facts & Figures

Paarami S.B. Kulatunge

2 # 2, 2006 Moscow Defense Brief

Russias Position on Iran:

Russia in the Mediterranean

I n June 2006, Russian newspaper Kommersant unveiled

# 2, 2006 Moscow Defense Brief 5

6 # 2, 2006 Moscow Defense Brief

Putin's Address and the Military

P resident Vladimir Putin laid great emphasis on the

# 2, 2006 Moscow Defense Brief 7

8 # 2, 2006 Moscow Defense Brief

Russia Does Not Need

J udging from recent debates at home and abroad, it would

# 2, 2006 Moscow Defense Brief 9

Table 1. Total population of Russia

Putin Meets with Nuclear Industry Chiefs

P resident Vladimir Putin held a meeting with the

# 2, 2006 Moscow Defense Brief 13

2005 Rating of Russias Largest

T he Centre for Analysis of Strategies and Technologies

14 # 2, 2006 Moscow Defense Brief

# 2, 2006 Moscow Defense Brief 15

Table 1. List of Russia's Largest Defense Companies by Revenue in 2005 (RAS)

Annex Sectors are divided as follows: aviation equipment

16 # 2, 2006 Moscow Defense Brief

Revenue from defense Civil production share, % Number of

# 2, 2006 Moscow Defense Brief 17

Table 3. Revenue of Russia's Defense Companies by Sectors in 2001-2005, $ mln (RAS)

18 # 2, 2006 Moscow Defense Brief

The Algerian Deal

O n 10 March 2006, during a short visit to Algeria,

# 2, 2006 Moscow Defense Brief 19

20 # 2, 2006 Moscow Defense Brief

Table 1. Major Identified Contracts on Delivery of Russian Arms to Algeria

# 2, 2006 Moscow Defense Brief 21

Risk Factors of the Delivery of Russian

22 # 2, 2006 Moscow Defense Brief

# 2, 2006 Moscow Defense Brief 23

Major Events in Russian Arms Trade and

24 # 2, 2006 Moscow Defense Brief

Exporter Importer Date Description Details

# 2, 2006 Moscow Defense Brief 25

Ministry of Defense Research Institutes

Name Subjects Chief Post-address Phone

26 # 2, 2006 Moscow Defense Brief

Name Subjects Chief Post-address Phone

# 2, 2006 Moscow Defense Brief 27

28 # 2, 2006 Moscow Defense Brief

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