CONTENTS

International Policy
#4 (10), 2007
Russian Foreign Policy in 2007: Change of Tactics 2
PUBLISHER
Arktika-2007 Showcases Might of Russian
Center for Sea Power in the Arctic 4
Analysis of
Strategies and
Technologies International Cooperation
CAST Director & Publisher Russo-Indian Military-Technical Cooperation:
Ruslan Pukhov New Challenges and New Opportunities 6
Advisory Editor
Konstantin Makienko The Incredible Lightness of Boeing 8
Advisory Editor
Alexey Pokolyavin
Arms Trade
Researcher
Ruslan Aliev Anniversary of Russias First Offset Agreement 10
Researcher Preliminary Results of Russias Arms Trade in 2007 11
Dmitry Vasiliev
Researcher
Polina Temerina Industrial Policy
Editorial Office Russias Defence Industrial Complex in 2007 18
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Cover photo: India, New Delhi 26.01.2007. Russian-made
T-72 M1 Tank in the spotlight at Indias Republic Day parade.
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Centre for Analysis of Strategies and Technologies, 2007
Printed in Russia # 4, 2007 Moscow Defense Brief
 International Policy
Russian Foreign Policy in 2007: Change
of Tactics
Fyodor Lukyanov
R ussian and Western observers alike have interpreted
President Vladimir Putins speech to the Munich security
conference in 2007 as marking a shift in Moscows foreign
policy.
At the same time, the importance of Putins words in
Munich notwithstanding, his speech contained nothing new.
Dissatisfaction with dismissal of Russian claims and proposals
by leading western states have built up overtime. All of the
issues addressed in the February speech (the expansion of
NATO, the placement of American missile defence elements in
Europe, the refusal to ratify the modified Conventional Forces
in Europe (CFE) treaty, the erosion of the nuclear arms control
regime, including the Nuclear Non-Proliferation Treaty) have
been raised repeatedly by the President and other Russian
officials. Granted, Russias position has never been laid out
in such a focused and aggressive form. And it is precisely this
stylistic aspect that has set the tone for current relations.
Judging from the turn of events, Moscow has
not changed course in a cardinal manner, but has simply
reconsidered the means with which it advances its foreign
policy goals.
For the greater part of Putins presidency (until
the second half of 2006), the emphasis has been placed on
strengthening Russias position through various multilateral
forums. The G8 summit chaired by Russia in St. Petersburg
in July 2006 represented the pinnacle of this approach. This
was also the time when Russia made the greatest efforts to
join the World Trade Organization (WTO), sought to initiate
negotiations for a new agreement with the European Union
(EU), persisted in the effort to reform the Commonwealth
of Independent States (CIS) and to activate the Shanghai
Cooperation Organization (CSO).
However, this cooperative approach did not meet
Moscow s expectations. There are several concrete reasons
for this, for example, the tendency of Russias partners
(especially in the West) to exploit Russias integration efforts
for their unilateral benefit; as well as the rapid rise of China,
which led to a shift in the political balance between Russia
and China. However, a deeper cause lies in broad changes to
the global context.
The contemporary world is characterized by a
growth of global interdependence combined with a decline
of global governance and a crisis of international institutions.
This process is in part natural: the world is changing quickly
 # 4, 2007 Moscow Defense Brief
Russian Foreign Policy in 2007: Change of Tactics
and international institutions have not yet adapted to the
post Cold-War era. But it is also aggravated by the behaviour
of leading states especially the United States who are
governed first and foremost by the principle of maintaining
a free hand in their affairs.
This principle has been adopted by the Russian
diplomacy as well. Russia has been disappointed by
the inability of securing its national interests through
international rules, whether universal or specific to a
particular organization. From the Russian point of view,
which coalesced in 2007, existing rules need to either be
reworked to reflect the new global distribution of power, or
disregarded as irrelevant.
When seen through this lens, Moscows actions
trace a consistent line. The CFE moratorium, the hard line on
Kosovo, which has led to the removal of the Kosovo issue from
the UN Security Council, the advancement of an alternative
candidate as managing director of the International Monetary
Fund (IMF), the decline of interest in a new agreement
with the EU, the disregard for transformation of the CIS,
the slowdown in WTO accession negotiations, as well as the
effective rejection of the authority of the Organization for
Security and Cooperation in Europe (OSCE)
All of this reflects a general view of multilateral
institutions as ineffective. And because the other leading
states are not ready to empower the institutions with new
functions, then Russia should not accept any gratuitous
obligations of its own accord.
Notably, this view also pertains to new international
organizations. Thus, in spite of the importance of the SCO to
the diversification of Russias foreign policy, this structure
remains little more than a discussion group and Moscow
is not pushing for a more formalized structure. This is
understandable, given the difficulty of maintaining political
parity with China, which has a real chance of exercising sole
leadership within this organization.
The widely discussed idea of a gas OPEC provides
another example. From a propaganda point of view, the
organization could be advantageous to Russia (and to Iran,
the initiator of the idea) as a means of exerting psychological
pressure on the EU.However,on a practical level,the possibility
of forming a gas cartel has not been taken up seriously.
The domestic policy of the Kremlin is filled with the
spirit of strengthening the state, which continues to claw back

functions and capabilities that were lost in the preceding
period. An analogous approach has been adopted for foreign
policy, which reflects not only domestic trends, but also an
understanding of global processes. The majority of Russian
analysts concur that under conditions of growing global
anarchy, the role of the state as an actor is key.
To successfully compete in this arena, the state must be
consolidated, confident in its internal stability, and focused
on attaining results. This means that the regulatory role of
the state is growing, as highlighted by the pervasive growth
of protectionist moods and uncertainty flowing from global
financial instability.
So until the time is right to design a new set of
multilateral rules, it would be wiser to rely on the traditional
mode of interstate relations and agreements between leading
world powers on specific issues. Notably, the most successful
examples of recent international action were pursued in
specially tailored formats negotiated by participating states,
like the six on North Korea and the five on Iran. lessons to be drawn from 2007.
Indeed, efforts to work with existing institutions have
not produced any results. In the spring, Russia called an
OSCE summit to discuss the CFE, but the meeting came to a
naught. The same has been true for attempts to raise missile
defence at the European level and to engage the European
partners of the US and Russia from NATO and the EU.
Unfortunately, these organizations prefer to have the issue
decided on a bilateral level and are not willing to accept even
partial responsibility for strategic questions.
International Policy
In terms of concrete results for 2007, Moscows efforts
at foreign policy diversification are worthy of note. Relations
were pursued actively with a broad range of states: from Latin
America to the Persian Gulf (including the first ever visit by
a Russian leader to Saudi Arabia), the Far East and Africa.
Nonetheless, the main focus has remained towards the West.
Russias increasing activism on the international stage
is related to its relatively stronger position, as well as the
growing list of problems confronting the leading powers
(the Middle East for the US, institutional reform for the EU,
securing natural resources to sustain economic growth for
China and India).
The development of Russias foreign policy will depend
in large part on external conditions (the global economy
and the ability of the United States and Europe to deal with
their respective issues), as well as the stance adopted by the
new head of state. Dependence of Russias behaviour on the
personal characteristics of its leader is another of the main
Nonetheless, the type of behaviour that became the
norm after Vladimir Putins Munich speech is approaching
the limits of its usefulness. Russia has succeeded in drawing
attention to its position and compelling others to take it into
account. The task facing the new head of state will necessarily
be somewhat different a more delicate and flexible approach
will be necessary in order to prevent the formation of
international structures and rules that circumvent Moscows
interests or counter its strengthening.
# 4, 2007 Moscow Defense Brief 
Russian Foreign Policy in 2007: Change of Tactics
 International Policy
Arktika-2007 Showcases Might
of Russian Sea Power in the Arctic
Mikhail Barabanov
T he North Pole expedition led by the Academic Fyodorov
research vessel and the Rossiya nuclear-powered
icebreaker in July-August 2007, along with the celebrated
descent of the Mir-1 and Mir-2 submersibles, created a
scientific, technical, and political sensation the world over.
The goal of the Arktika-2007 expedition was to provide
political support Moscows legal claims to the continental
shelf of the Artic Ocean, as well as to collect scientific data in
support of this claim.
Russias ratification in 1997 of the UN Convention
on the Law of the Sea (UNCLOS) gives it the legal right to
claim the entire continental shelf beyond the 200 nautical
mile limit of its exclusive economic zone (EEZ). This allows
Russia to effectively control sub-soil resources in this area,
including minerals. However, UNCLOS gives states the right
to extend their EEZ to encompass the adjacent continental
shelf beyond 200 nautical miles only if the shelf consists of
a natural prolongation of the land territory, that is, of the
shoreline of the state in question. The UN Commission on
the Limits of the Continental Shelf must give its approval for
such extensions.
Russia is the first state to make such a claim, based on the
argument that the Lomonosov and Mendeleev ridges, which
extend under the Artic Ocean to the North Pole and beyond,
are natural prolongations of the Siberian fold of the Eurasian
continent. Russia thus claims that its EEZ should extend to an
area of 1.2 million square kilometres, covering an enormous
swath of the Arctic from the Kola Peninsula to Chukotka and
from there to the Pole, giving Russia exclusive rights to the
enormous natural resources to be found in this triangle oil
and gas first and foremost. The famous Shtokman field alone
is estimated to hold 3.8 trillion cubic meters of gas more
than all that was ever exported from the Soviet Union to
Europe. Since less than 5 percent of the Arctic shelf has been
explored to date, discoveries of enormous resource reserves
on the seabed are likely. Foreign prospectors will no longer
be allowed onto this territory.
Russia first brought its claim to the Commission in
December 2001. However, the claim was rejected under the
pretext that it relied too much on scientific suppositions, while
from a geological point of view, the evidence was inconclusive.
The primary goal of the Arktika-2007 expedition was thus to
find this evidence.
 # 4, 2007 Moscow Defense Brief
Arktika-2007 Showcases Might
of Russian Sea Power in the Arctic
Of course, whatever evidence Russia might bring to
bear in support of its claim, the UN Commission, composed
of representatives of other coastal states, is likely to make its
final decision based on political considerations. The West,
and especially those western states washed by the Arctic
Ocean, has met Russias claims with hostility. They have no
desire to cede control of potentially rich oil and gas fields
to Russia, and are naturally inclined to view Russia as the
eternal enemy on every possible issue.
Russia has few illusions and believes that its verbal
arguments will be ignored. Therefore, it is preparing to back
them up with concrete proof. With centuries of experience of
Arctic exploration, Russia possesses remarkable scientific,
naval, and strategic potential in the Arctic Ocean. The
necessity of maintaining the critical Northern Sea Route
prevented the authorities from selling off this heritage,
which was the case in many other sectors under the guise of
reform during the anarchic 1990s.
Russias assets include the most powerful icebreaker
fleet in the world, with unique, nuclear-powered icebreaker
ships. The fleet of the Murmansk Shipping Company
includes Project 10520 and 10521 nuclear icebreakers:
Arktika, Sibir, Rossiya, Sovetskiy Soyuz, Yamal and the
recently completed 50 Let Pobedy icebreaker, each with
a displacement of 24 thousand tonnes and 75 thousand
horsepower of propulsion, generated by two 160 megawatt
(MW) nuclear reactors. In addition, two smaller, shallow-
draft Project 1050 nuclear icebreakers (Taimyr and Vaigach)
were built in Finland, each with 18 thousand tonnes of
displacement and 51 thousand horsepower of propulsion.
Finally, Russia has the unique Sevmorput light carrier ship,
eight large diesel icebreakers, and a whole fleet of research
and Arctic transport ships.
After 1991 and until very recently, the condition of
the Russian nuclear icebreaker fleet was below standard
due to the paucity of resources dedicated to the overhaul-
period renewal of their nuclear reactors. As a result, the Sibir
icebreaker was decommissioned in 1993. Nonetheless, it
appears that today, there is an understanding of the need
to shape-up the icebreaker fleet: after almost 20 years of
construction, the 50 Let Pobedy icebreaker has just recently
been commissioned. Plans to commence the construction of
a new generation of nuclear-powered icebreakers, the Project

LK-60Ya developed by the Central Design Bureau in St.
Petersburg, within the next five years, have been announced.
Russia has a projected need to construct three nuclear-power
transport icebreakers with variable water draft and seven
diesel transport icebreakers before 2020. The government is
likely to find the funds to complete these projects.
Russias possession of powerful nuclear icebreakers
capable of navigating reliably at virtually any latitude is a
unique resource that greatly exceeds the capabilities of other
Arctic powers. For example, the U.S. Coast Guard has just
three diesel icebreakers, of which only the new Healy, with 16
thousand tonnes displacement and 30 thousand horsepower
is actually functional. Canada has only six diesel icebreakers
and none are capable of navigating the Pole. Moreover, it was
only in 2007 that the Canadian government short-sightedly
reneged on plans to build another three large, armed diesel
icebreakers, in favour of constructing a series of six to eight
Arctic patrol ships that cannot venture far beyond the
shoreline.
Russias Navy has also preserved its large Northern Fleet,
which includes nuclear submarines capable of operating
under the ice, including up to 20 multirole and strike
submarines of the Project 197 Akula class, the Project 945
Sierra class, Project 949A Oscar II class and the Project 971
Akula III class. One of these nuclear submarines reportedly
played an unpublicized role in support of the Arktika-2007
expedition.
International Policy
However, Russia is still struggling with the challenge
of preserving and maintaining its nuclear submarine fleet
in good condition. The Navy will have to take vigorous
action to repair and modernize existing ships and begin
the construction of next generation multirole nuclear
submarines.
The United States is the only other Arctic state that
possesses nuclear submarines.
Russias naval aviation in the North has degraded
considerably over the last 15 years. The main deficiency lies in
the obsolescence of the few patrol and anti-ship aircraft still
possessed by the Northern Fleet, especially the Il-38M. Russia
must take urgent measures to modernize this fleet, which is
nearing 40 years of operation. In addition, the Russian Navy
must decide on creation of a next generation long-range
patrol aircraft, which Russia would need to control the Arctic
sector from the air.
All of these capabilities provide Russia with the ability to
play hardball in the Arctic, and compel its Western partners to
compromise on the division of the Arctic Ocean into sectors.
Such a division of the Arctic would be beneficial to Russia,
as it would inevitably receive more territory than the others.
Perhaps, the West could agree to this so long as they got their
share of theirArctic regions. But to achieve this aim, Russia
will have to apply a combination of political will, firm and
consistent action, and demonstrations of effective sea power
in the Arctic.
# 4, 2007 Moscow Defense Brief 
Arktika-2007 Showcases Might
of Russian Sea Power in the Arctic
 International Cooperation
Russo-Indian Military-Technical
Cooperation: New Challenges and New
Opportunities
Konstantin Makienko
O ver the last few months, several new trends have surfaced
in military-technical cooperation (MTC) between
Russia and India. While some of these trends represent new
opportunities for Russia on the Indian market, others signal
a rise of new challenges.
The critical status of the contract for the modernization
and refitting of the Admiral Gorshkov aircraft carrier
represents the major negative news for the year. Aside
from the slippage of the delivery date from 2008 to 2010, at
the earliest, Russia has also admitted its inability to meet
contractual obligations on the terms agreed in 2004. This
is mainly due to the sharp fall in the value of the dollar and
the rise in operating costs within Russias defence industry.
Moreover, its likely that the price originally negotiated was
lower than what Sevmash Shipyard could have reasonably
agreed to even at that time. If so, this would be the second
time that Rosoboronexport has signed a contract on terms
that are virtually impossible for the industry to meet. The
first such contract, for delivery of 38 Il-76MD and Il-78MK
military-transport aircraft and refuelling tankers to China,
was ultimately cancelled. As for the Gorshkov, the Russian
party has reportedly asked for an extra 380 million USD for
completion of the project.
It should be noted that slippage and delays due to
technical problems have virtually become the norm in Russo-
Indian defence trade. For instance, these issues were present
at the early stages of the Su-30MKI program as well as during
the construction of the Talwar-class frigates. The problems
occurred in part because the Indian military set very high
specifications, considerably raising the technological risk of
each program. However, the Indians also displayed a certain
tolerance of the delays in both projects; in any case, they did
not impose penalties on the Russian producers.
An attempt to change the financial terms of the
contract would be unprecedented for Russo-Indian defence
cooperation. If such a demand was indeed made, it suggests
that the steep fall in the value of the dollar, the currency
in which most, if not all, Russian arms trade contracts are
denominated, is having a serious impact on the ability of the
Russian defence industrial complex to fulfil export contracts,
 # 4, 2007 Moscow Defense Brief
Russo-Indian Military-Technical Cooperation:
New Challenges and New Opportunities
especially the long-term contracts signed in 2003-2004.Aside
from the Gorshkov, the fall of the dollar is likely also have a
negative impact on the profitability of the 2003 Malaysian
contract for the delivery of 18 Su-30MKM fighters, programs
for the licensed production of the Su-30MKI in India, as well
as contracts for the delivery of eight divisions of S-300PMU2
Surface-to-air-missile (SAM) systems to China.
The second public crisis involves claims made by the
Indian Navy against the quality of the modernization of the Il-
38SD anti-ship aircraft, outfitted with the Sea Dragon targeting
system. Complaints about quality and performance are not
unusual and are not unique to Russo-Indian relations as, for
example, the technical problems that plagued the Polish F-16s
indicate. However, in this case, the categorical tone adopted
by the Indians suggests that they are genuinely disillusioned
with the effectiveness of the Sea Dragon system, developed by
the Leninets holding company. Moreover, as distinct from the
Gorshkov, where the Indian Navy has no substitute, the market
for anti-ship defence equipment is highly competitive, and a
customer can choose from a variety of offerings.
There are at least two reasons why problems with the
modernization of the Il-38 could have especially negative
consequences for Russia. First, the issues with the Sea
Dragon open the door for American offerings to India like
the Lockheed Martin P-3 Orion and the Boeing P8A Poseidon
patrol aircraft. However, in spite of the recent warming in
military and military-technical relations between India and
the U.S., concrete examples of American sales on the Indian
market remain scarce. Therefore, it would be vexing if a
Russian failure had the consequences of promoting U.S. sales.
Second, the problems of the Il-38 modernization project
would torpedo an analogous deal to modernize the Indian
Tu-142ME anti-ship aircraft, which in itself is a much more
interesting platform than the Il-38.
Notwithstanding the aforementioned difficulties, there
are positive developments, which indicate that a number of
successful Russo-Indian projects initiated in the 1990s have
stimulated further cooperation that should allow Russia to
maintain its status as one of Indias main military-technical
partners well into the future.

For example, two new, though previously anticipated,
contracts for the delivery of a total of 58 Su-30MKI fighters
were consummated in 2007. The first of these agreements is
for the delivery of 18 aircraft in exchange for the same number
of Su-30K, while the second agreement for the delivery of 40
fighters goes beyond the framework agreements reached in
1996, 1998, and 2000 for the deployment of 190 Su-30MKI
to India. Additionally, New Delhi has also signed a contract
for the delivery of 347 of T-90S main battle tanks valued at
1,237 million USD.
The BrahMos cruise missile project is moving forward
steadily. Along with the Su-30MKI and the Project 11356
(Talwar) frigates, it has a special place in the history of
Russian-Indian military-technical cooperation.The BrahMos
serves in effect as a pilot project for the joint development of a
new weapons system by Russia and India: the administrative,
legal and financial framework developed for this project
will likely be applied for the creation of a fifth-generation
fighter and a multi-role transport aircraft. The research and
development (R&D) for the BrahMos has been completed and
large-scale production of missile systems for the Indian Navy
has begun. With the deployment of land-based systems and
the creation of air and sea-launch versions, the total number
of orders could reach up to 1000 units. Notably, the success
of the BrahMos project facilitates the promotion of other
Russian air and naval (surface and undersea) platforms.
The most important accomplishment in Russo-Indian
relations during 2007 was the signature of the long-awaited
intergovernmental agreement on the joint development
of a fifth-generation fighter and the multi-role transport
aircraft. After two years the Indian Air Force finally chose
Sukhois T-50 over MiGs light fighter, which carried a greater
technological risk. Indias participation in development of the
advanced tactical frontline fighter (PAK-FA), formalized in
an intergovernmental agreement, gives the project greater
International Cooperation
financial sustainability because it is set to receive priority
financing as an international project.
In combination with the ongoing development of the Su-
30MKI project, Indias participation in the PAK-FA indicates
that Indias heavy fighter development will be oriented
towards Russian-origin equipment for the next few decades.
Of course, such a strong pro-Russian decision on the heavy
fighter leaves room for doubt as to Indias intentions with
respect to the medium and light fighters; that is, the tender
for 126 multi-role aircraft, which has finally been announced
at the end of August. One might also expect the stagnating
mid-range transport aircraft (MTA) project to pick up speed
once an intergovernmental agreement is signed.
Further, the finalization of the purchase of 80 Mi-17
helicopters is expected in the near future. India has already
purchased 40 such machines from Russia a few years ago.
A new contract for double the original number testifies
to Russias complete dominance on the Indian market
for military-transport helicopters as well as the highly
competitive stance of these machines in general.
The development of Russian-Indian military-technical
relations in 2007 was thus somewhat contradictory. Russias
defence-industrial complex has not only defended, but
strengthened its positions on the market for heavy fighters,
military-transport aircraft and helicopters, and main battle
tanks. At the same time, traditional problems like meeting
deadlines, production quality, and the ability to meet Indian
demands have become more pronounced. The inability
of the Russian industry to stay on budget due to currency
fluctuations and delays in securing materials and parts is
a new and worrisome development. These problems give
advantage to Russias competitors on the Indian market. They
could also lead to a relatively new phenomenon, such as direct
competition between the American and Russian producers
and exporters of arms and military equipment.
# 4, 2007 Moscow Defense Brief 
Russo-Indian Military-Technical Cooperation:
New Challenges and New Opportunities
 International Cooperation
The Incredible Lightness of Boeing
Aleksandr Ivanov
I n the early 1990s, Boeing began to establish design-
engineering centres in low-income jurisdictions as a cost-
saving measure. With the collapse of the Soviet aerospace
industry, Russia, with a surplus of highly qualified engineers
earning less than 100 USD per month, was an ideal location.
Today, the Moscow Boeing Design Centre (MBDC),
a subsidiary of Boeing Russia, is engaged in a wide range
of projects, including the design of new aircraft, upgrades,
and provision of engineering support for manufacturing.
Professor Sergey Kravchenko, doctor of technical sciences,
has been the director of MBDC since its establishment in
1993.
By the end of 2007, MBDC employed about 1,500
engineers (an increase of 30 percent over the year before) and
played a key role in Boeings strategy to penetrate the Russian
market. And with Aeroflots announcement of a tender for
a large purchase of airliners, the stakes have become quite
high.
However, this recent surge of activity masks a
fundamental problem with the business model of
Boeings design operations in Russia. The country today is
fundamentally different than it was in the early nineties, and,
therefore, the future of MBDC on the new Russian market is
unclear.
Current Activities
MBDCs design and engineering activities are divided
into three units: engineering support for manufacturing,
modernization of current models of aircraft, and the
development of new models.
The engineering support unit is engaged in projects
related to all models of Boeing civilian aircraft currently
under production: the 737, 747, 767 and 777, including all of
their modifications. In addition, the Centre designs service
equipment for the repair and servicing of aircraft. The
modernization work unit has the longest list of completed
and ongoing programs.
The new development unit began work on the Boeing787
Dreamliner in November 2004. Over 200 engineers are
currently designing components , including wing parts, the
nose of the fuselage, the central section of the fuselage, interior
elements, and the chassis, for this aircraft the Moscow unit.
The unit has also conducted integrity testing and reparability
analysis.
 # 4, 2007 Moscow Defense Brief
The Incredible Lightness of Boeing
Over 200 Russian specialists are currently working on
the Boeing 747-400 LCF project, which is one of the stages
of the 787 program. The 747-400 LCF is a giant transport
aircraft that will carry parts of the wing and sections of the
fuselage of the 787 to Boeings final assembly plant in Everett,
Washington.
In addition, over 30 percent of the design work for the
Boeing 777-200LR, an aircraft which is able to complete the
longest route in the world (16,983 km) without stopping,
is conducted in Moscow. The Centre has been engaged on
design work on the interior elements as well as several
elements of the fuselage. About 150 Russian engineers were
engaged in this particular project; while just as many worked
on the Boeing 777-300ER.
Since its inception, MBDC has completed over 350
medium and large aviation and space projects, including
some for the International Space Station. During the year
2007, the Centres staff was working at about 80 percent
capacity.
Business Model
To avoid the obligation to register its activities in Russia
as aircraft manufacturing, which would subject MBDC
to Russian legislation limiting foreign ownership of such
companies, Boeing does not directly employ the engineers
who work on its premises. Instead, it enters into general
engineering contracts with several firms that hire engineers
on a project-by-project basis, and pays these firms on the
number of man-hours they provide.
The Ilyushin Aviation Complex was Boeings first
Russian partner to provide engineering services. The
Ilyushin also housed MBDC on the premises of its complex
for the first three years of the Centres operations. MBDCs
other partners have been essentially intermediary firms,
formed by representatives of Russian aviation enterprises.
For example, NIK was formed by specialists from the
Myasishchev plant in 2003, and it currently employees about
400 former Myasishchev engineers on behalf of MBDC.
Khrunichev-Aviatekhnika, predictably a subsidiary of the
Khrunichev State Research and Production Space Centre,
has been engaged by Boeing on projects related to the
International Space Station. Progresstekh started working
with MBDC about seven years ago and employs about 600
engineers at present.

For the intermediaries, the arrangement has been
advantageous because of the ability to make immediate
revenue without investment in plant or training. However,
this structure is less attractive for the employees. Specialists
at Boeings head office in Seattle make all of the important
technical decisions, leaving mostly routine work orders and
no autonomy for the engineers based in Moscow.
Working for a foreign company was previously
considered prestigious and stable in Russia; however, this
is not necessarily the case today. Moreover, Boeing Russia
offers very few opportunities for advancement to Russian
engineers, while wages at Russian enterprises are rising every
year.
As a result, the MBDC has had trouble attracting new
talent. Each new recruiting drive in the recent past has set
lower requirements for candidates. Previously, they needed to
have specialized education, work experience and knowledge
of English. Now, any higher technical education will do.
Industry insiders estimate that MBDC is losing about twenty
employees per month at present.
Prospects
In retrospect, the MBDC has played a positive role on
the labour market for Russian aviation specialists. Having
created 1,500 jobs for aviation engineers, the Centre has
contributed to the stable growth of wages within the
profession. Many specialists received quality training and
raised their professional qualifications at MBDC.
International Cooperation
However, today, the future of MBDC appears cloudy.
The majority of its projects have been completed, while no
new projects for 2008 are in sight. Even the program for the
development of the Boeing 787 has almost been finished,
and the development of new models is not yet in the works.
Fewer work orders and staff downsizing seem likely for
MBDC.
The directors of MBDC often point to the growing
competition from analogous centres in India and China in
their discussions with employees. It appears that the MBDC
business model has reached its natural limit. Established as a
cost-cutting measure to save on wages in the U.S., the Russian
Centre now faces the same pressure from Boeing centres in
third-world locations.
Moreover, Boeing is a strategic asset of U.S. national
industry, and it will never become a truly multinational
company. Its task is to preserve Americas technological
edge, while exploiting the efficiencies offered by a global
economy.
This means that complex engineering tasks relating to
aerodynamics, choice of design, and front-end engineering
will never be transferred to the Moscow office. Due to the
fact that MBDCs engineers have mastered all other types of
engineering work, any further expansion of the operation
will be quantitative, rather than qualitative.
Thus, it appears that MBDC has reached the peak of its
development. In light of growing competition from India and
China as well as problems in attracting and retaining qualified
personnel, the business model adopted for the company in
the early 1990s has clearly outlived its usefulness.
# 4, 2007 Moscow Defense Brief 
The Incredible Lightness of Boeing
 Arms Trade
Anniversary of Russias First Offset
Agreement
Victor Dmitriev
T en years have passed since Russia first negotiated and
realized an offset agreement linked to the sale of arms
and military equipment. MAPO MiG and Rosvooruzhenie
were the first Russian companies to face offset obligations in
1994, when they agreed to deliver MiG-29 planes to Malaysia.
Rosvooruzhenie split the burden with MAPO MiG and had to
fulfill offset obligations estimated at 58.5million USD, or 40
percent of its share of the original contract. MAPO MiG took
on the remaining obligations, assuming responsibility for the
direct offset projects; that is, projects with a direct relationship
to the primary contract for the delivery of military equipment.
The Malaysian side offered Rosvooruzhenie to carry out the
indirect offset projects; that is projects which were unrelated
to the military goods delivered.
Upon examination of several projects proposed by the
Malaysian Finance Ministry in sectors prioritized within the
seventh Malaysian development plan, Rosvooruzhenie was
offered to establish an aerospace department at a Malaysian
institute. Consequently, Rosvooruzhenie conducted
negotiations with the Russian Ministry of Education, which
agreed to assist in the completion of the Malaysian project.
Though it involved a tremendous amount of work, the
project was of great interest to Russian specialists, who were
enthusiastic in taking up the challenge. In 1995 and early
1996, Rosvooruzhenie and the Russian Higher School Centre
for Invention (designated by the Ministry of Education as a
leader in the project) negotiated with the Malaysian Ministry
of Finance and several institutes of higher learning regarding
potential locations of the proposed aerospace department.
The University of Science, Malaysia (Universiti
Sains Malaysia USM), located on the Penang island in
the northwest of the country, was chosen to host the new
department. Rosvooruzhenie and USM jointly developed
and presented a business plan to the Ministry of Finance
with an offset value of 150 million USD. The National Offset
Committee of Malaysia (NOCM) approved the plan in July of
1996 and work on the project immediately commenced. It
should be noted that because the project was of great interest
to Malaysia, and the offset value was actually 91.5 million USD
greater than Rosvooruzhenies original offset obligations, the
parties agreed that the difference would count against offsets
arising from future deliveries of Russian arms.
Concurrently with the realization of the Malaysian offset
project, Rosvooruzhenie officials began to actively study
international offset practices. They participated in several
10 # 4, 2007 Moscow Defense Brief
Anniversary of Russias First Offset Agreement
international conferences on offset issues, where they had
the opportunity to get acquainted with practical realization
of offset agreements by other arms exporting countries and
consult with leading offset specialists from the US, Germany,
Switzerland and Australia.
As the Malaysian offsets project progressed, leading
Russian academics also became engaged in its realization.
Educators and administrators from institutes like the Bauman
Moscow State Technical University (provost I. Fyodorov)
the Moscow Aviation Institute (provost A. Matviyenko), the
Moscow Power Engineering Institute (provost E. Ametistov),
the Moscow Institute of Electric Technology, among others
participated in developing a curriculum, providing learning
aids and equipment, and sending highly qualified Russian
professors to deliver lectures to Malaysian students in
English.
Further, an aerospace exhibition, which displayed a
wide range of equipment, models and information dealing
with space exploration, was set up as a part of the project. The
exhibition was very popular among Malaysian specialists as
well as ordinary Malaysians. Russia was represented at the
opening of the exhibition by V. P. Savin, a test pilot, cosmonaut
and twice a Hero of the Soviet Union, while the Minister of
Education Dato Sri Mohd Najib, now the Minister of Defense,
represented Malaysia.
In February 1999, Rosvooruzhenie received official
confirmation that it had successfully fulfilled its offset
obligations from the Ministry of Finance.
To conclude the story of Russias first successful
completion of an offsets project, it bears adding that the
aerospace department of USM (http://aerospace.eng.
usm.my) is graduating highly qualified aerospace cadre
annually. Three Russian professors from the Moscow
Aviation Institute are currently teaching at the institute on
contract alongside their American, German, French and
British colleagues. Furthermore, the successful outcome of
the offsets project was likely to have influenced subsequent
offset projects tied to arms transfers from Russia. For
example, Russia agreed to launch a Malaysian cosmonaut
into space as an offset to the contract for the delivery of
Su30 planes to Malaysia.
We can expect that this type of cooperation will continue
to promote the expansion of bilateral relations between our
two countries in the aerodefence sector, the exploration of
outer space, as well as other sectors.

Preliminary Results of Russias Arms
Trade in 2007
7.5 billion USD another record year
Russias arms exports in 2007 once again surpassed
the record set in the previous year. According to preliminary
estimates, the figures have reached 7.5 billion USD, with
Rosoboronexports revenue estimated at 6.1 billion USD
(see Figure 1).1 Accounting for the fall in the value of the U.S.
dollar (from 27.14 to 25.55 roubles/USD),2 and the U.S. dollar
inflation (4.1 percent)3, this makes for a real annual growth
rate of about 5 percent.
With a 32 billion USD order portfolio, the industry can
count on similar successes in the near future. However, the
saturation among Russias traditional customers as well as
potential failures on new markets, especially North Africa
and the Near East, could lead to a significant drop in export
revenues in just a few years time. Moreover, production
facilities are already working at close to full capacity to meet
export as well as domestic orders, and without significant new
investments they will be unable to break the current plateau.
Conclusion of new contracts without due consideration to the
current limits of the productive enterprises may lead to halts
in deliveries, as the recent experiences with China and India
have shown. However, the creation of Russian Technologies
State Corporation, intended to couple the production of
Russian defence goods with their marketing, should help to
solve this problem.
Figure 1. Russias Arms Exports from 2003-2007
6126
5780
5400 5120 5226
5075
Million USD
220 366
2003 2004 2005
Source: Federal Service for Military-Technical Relations; CAST
Arms Trade
Main Features of 2007
1. Rosoboronexport (ROE) was given a monopoly
on the export of defence goods. The former independent
exporters (MiG, the Instrument Design Bureau, the
Machine Building Design Bureau and the Machine Building
Scientific Industrial Association) can now only complete
export contracts previously signed. Considering the time
it takes to implement these contracts, this process could
take 3-4 years, while the volume of deliveries from the
independents is set to be no less that 1 billion USD per
year (not counting transfers of spare parts). Assuming that
the total portfolio of orders is 32 billion USD, ROEs account
constitutes only 25 billion USD.
2. The arms trade between Russia and India has
reached a qualitatively new level in 2007. The signing of
intergovernmental agreements to develop a fifth-generation
fighter and a multi-role transport aircraft have elevated
Indias status to strategic partnership with Russia.
3. A post-Soviet record was set with the export of
49Su30MK,a mainstay of Russian arms exports.A similar level
was reached only in 2003 with the export of 46Su30MK.
4. Deliveries of arms and military equipment for the land
forces grew sharply with the signature of several contracts
that are set to secure a significant place for land armaments
among Russian exports in the coming years.
7500
6460
6100
5300 Total deliveries
Rosoboronexport
Independent equipment
suppliers
300 349
2006 2007 (estimate)
# 4, 2007 Moscow Defense Brief 11
Preliminary Results of Russias Arms Trade in 2007
 Arms Trade
5. Problems with a few major contracts arose for
technical and/or political reasons, especially the delivery of
MiG-29 to Algeria and a several agreements with India.
6. The fall of the dollar has eroded the profitability of
some contracts. ROE has proposed to India that long-term
contracts be converted to Euro.4
Identified Deliveries
Details concerning the export of Russian arms worth
only 5.44 billion USD, or about three quarters of total
announced revenues. This level of details is higher than
last year, when only about 60 percent could be identified.
Consequently, the following analysis is based on the details of
arms transfers as published in open sources, and, therefore,
the nature of the figures presented should be considered
provisional until new and complete official information
becomes available.
Exports by Type of Arms
The structure of deliveries according to the type of
armament in question is quite unusual. While transfers of
aviation once again played a dominant role at 61 percent,
transfers of land armaments unexpectedly rose to second
place at 21 percent (see Figure 2). This change occurred
because of the deliveries of T-90 tanks and Smerch multiple
launch rocket systems.5
The third and fourth spots were taken by air defence
systems and naval armaments (10percent and 8percent,
respectively). However, due to the lack of transparency on
export of this type of defence goods, our figures are lower
than reality. For example,Vladimir Pakhomov, ROEs Deputy
Figure 2. Structure of Identified Deliveries of Russian Arms in 2007 by Type and Destination
Land armaments
21%
Aviation
61%
Air Defence
10%
Ships
8%
Source: CAST
12 # 4, 2007 Moscow Defense Brief
Preliminary Results of Russias Arms Trade in 2007
Director General stated in mid-2007 that ROE alone delivered
ships and naval armaments valued at about 2 billion USD.6
Aviation. We have identified the deliveries of aircraft
valued at 3.28 billion USD in 2007, which is probably likely to
be close to reality.7 Deliveries of 49 Su-30MK fighters account
for an estimated 2.27 billion USD of this figure, including 24
aircraft to India (as well as eight kits), 12 to Venezuela, 10 to
Malaysia and three to Algeria.8 These deliveries in turn drew
an accordingly large scale delivery of air-launched weapons
systems. According to Boris Obnosov, Director General of
Tactical Missiles Corporation, exports from his company
increased by almost 1.5 times this year.9 Extrapolating from
published figures for 2006, this would amount to about 18
billion roubles for 2007, or 730 million USD.
Implementation of the contract to deliver three A-50IE
long-range radar detection and observation (DRLO) planes
equipped with the Israeli Phalcon radar system has begun in
2007. The Taganrog Beriev Aviation Scientific and Technical
Complex probably handed over the first modernized aircraft
to Israel for outfitting. 10 In addition, repairs and limited
modernization of the first Tu-142ME anti-ship aircraft for
the Indian Air Force were completed.11 This evidently refers
to the aircraft equipped with the NK-12MPT engine built
in Samara. A contract for the delivery of six such engines to
India was signed in 2005.
China and Venezuela were the principal recipients of
helicopters in 2007. China received 12 Mi-171 helicopters,12
while Venezuela received at least two Mi-35M combat
helicopters and two Mi-26T2 transport helicopters. 13
Helicopters of the Mi-8/17 family were delivered to
Kazakhstan, Croatia (the first two out of ten Mi-171Sh in the
order), the UK (two helicopters for special operations in the
mountain regions of Pakistan)14 and, most likely, Burkina
Faso and Uganda. Repair and modernization work took place
Venezuela
16%
Algeria
14%
China
21%
Malaysia
9%
Vietnam
5%
India Other
28% 7%

in Peru and Hungary. Deliveries of civilian Ka-32 helicopters
to South Korea are likely to have continued, while another
Ka-32 was delivered to Japan for testing.
Several aircraft engine transfers to China and India
took place, including deliveries of the AL-31F and RD-93
to China according to a contract signed in 2005, and the
licensed production and manufacture of 120 RD-33 engines
in India.15 In addition, India is likely to have received all of the
200 TRDD-50MT engines for its Lakshya target drone.
On the negative side, the contract with India for the
modernization of the Il-38 anti-ship aircraft was suspended
due to claims from the Indian party regarding the quality of
the work.16 Algeria similarly has complaints regarding the
first batch of MiG-29s received in 2007 under the contract
signed in 2006. This will likely affect subsequent delivery
of MiGs and other items that are part of the Algerian
Package.17 Delays affecting the refitting and modernization
of the Admiral Gorshkov aircraft carrier for India18 will likely
push back the deadlines for the delivery of the associated
MiG-29K and Ka-28 and Ka-31 anti-ship helicopters (in any
case, the delivery of these items was not noted in the press).
Finally, in January 2008, the foreign press noted delays in
the implementation of the contract for the development and
delivery of 180 AL-55I engines for the Indian HJT-36 and
HJT-39 trainers. Partly for this reason the Indians are once
again looking at possible purchases of this type of aircraft
from elsewhere (BAE Systems Hawk Mk 132).19
Land Forces Armaments. Deliveries of arms for the
land forces amounted to 1.3 billion USD in 2007, the highest
showing in several years. However, this figure is subject to a
high degree of variation, given the difficulty of identifying
the many small transfers of land armaments.
In addition to the aforementioned transfers of tanks
and air defence systems, several contracts for modernization
were signed, including for the T-72VS for Syria, the BMP-
2VS for Algeria and the BMP-3 for the United Arab Emirates
(UAE).20 Moreover, 120 BTR-80 and 30 modernized BTR-70M
were reportedly exported.21 Additionally, BTR-80A were also
transferred to Kazakhstan22 and possibly to Indonesia.
The second batch of AK-103 assault rifles was delivered
to Venezuela, while construction of the factory for the licensed
production of the rifle (with ammunition) should also have
commenced. 23 According to ROE figures, Russia exports
about 200 million USD in small arms annually.24 Finally,
deliveries of the Kornet-E anti-tank assault weapon to India
(licensed production), Algeria, Jordan, Eritrea and Oman
may have taken place.
Air Defence Systems. Identified deliveries of air defence
systems in 2007 amounted to 520 million USD. This probably
understates the real amount, because statements by former
Director General of ROE Sergey Chemezov indicate that the
export of air defence systems should account for about 10-
13percent of total ROE deliveries (610-800 million USD).25
Arms Trade
Judging from previously published schedules for
contract implementation, deliveries of the first Favorit S-
300PMU2 air defence missile systems to China , which would
account for the bulk of air defence systems exported this year,
are likely to have taken place. Morocco may also have received
several Tunguska-M1 systems. It is nearly impossible,
however, to estimate the implementation of other contracts
in this sphere, i.e., for the delivery of Tungunska-M1 systems
to India and Syria, or the modernization of Egyptian and
Iranian air defence systems.
Naval Armaments. Identified deliveries of naval
armaments in 2007 amounted to 510 million USD. But
considering the statements made by cited above, this figure
is probably significantly understated.
Published sources attribute the bulk of naval export
this year to the transfer of two Project 12418 Molnia missile
boats to Vietnam under a contract signed in 200326 that also
included the licensed production of an additional 10 vessels
at Vietnamese shipyards. The two boats are estimated to
have cost 200 million USD. India may have received the
third Shtil-1 air defence system for its Project 17 frigates.
Additionally, Zvezdochka shipyard has probably completed
the modernization of two Project 866EKM diesel submarines
for the Algerian navy. However, the schedule for repairs to
the same type of diesel submarine for Iran remains known.
Finally, the Rubin Central Design Bureau and Fincantieri
conducted joint design work on the S-1000 submarine,
although no further details concerning the contract or its
schedule are known.
On the negative side, India refused to accept the
Sindhuvidjai Project 877EKM diesel submarine that had
been repaired and modernized by Zvezdochka due to an
unsuccessful test of the newly installed Club-S cruise missile
system. As a result, the schedule for delivery has experienced
a setback.27
Other deliveries. Additional deliveries included
contracts on outer space concluded through the mediation of
ROE. Two German SAR-Lupe radar reconnaissance satellites
were launched,28 while deliveries of the RD-180 engine for
American space launchers continued.
The year also saw transfers of several trainers.
Aerokosmicheskoe Oborudovanie Corporation transferred
trainers to India for the Su-30MKI and to Kazakhstan for
the MiG-29.29 In addition, the company signed a statement
of intent with the Indias Hindustan Aeronautics (HAL) to
create a joint venture to train pilots for the Indian Air Force.30
Further, P.E.T. Kronshtadt transferred trainers to Vietnam
for their Molnia cutters,31 and to Venezuela for their Mi-17
helicopters.
There was no information published in 2007 regarding
the accomplishments of the independent exporters of spare
parts. In all likelihood Sukhoy and Salyut led the pack with
their popular Su-27/30 family of fighters and engines.
# 4, 2007 Moscow Defense Brief 13
Preliminary Results of Russias Arms Trade in 2007
 Arms Trade
Regional Structure
India took first place in terms of the volume of arms
received (28 percent of all exports), largely due to the transfer
of a large batch of Su-30MKI fighters. China took second place
with 21 percent, thanks to the transfer of the S-300PMU2 air
defence systems. Venezuela was in third, having received 12
Su-30MK2V fighters (16 percent). Algeria fell to fourth place,
although, if it were not for problems with certain deliveries,
it would have been in second place. Malaysia and Vietnam
closed the list of the main recipients of Russian arms. Thus,
the geographic distribution of Russian arms exports in 2007
was quite diversified.
Identified Contracts
By Type of Armament
Judging from compiled press reports, the total dollar
value of contracts signed in 2007 was 5.52 billion USD, of
which 65 percent come from aviation deals. Contracts for
the delivery of land armaments followed at 27 percent, while
air defence and naval armaments were at 4 percent each
(see Figure 3). The relatively high value of contracts for land
armaments stands out compared to other years due mainly
to contracts for the delivery of T-90S tanks to India and an
additional batch of Smerch systems to India.
Aviation. According to our estimates, aviation
contracts amounted to 3.62 billion USD. This includes a
contract with India for an additional batch of Su30MKI
(aircraft and kits), for a total value of 2.35 billion
USD. 32 In addition, Russia and India signed important
Figure 3. Structure of Identified Arms Export Contracts in 2007 by Destination and
Type of Armament
Land armaments
27%
Aviation
65%
Ships
4%
Air Defence
4%
Source: CAST
14 # 4, 2007 Moscow Defense Brief
Preliminary Results of Russias Arms Trade in 2007
intergovernmental agreements for the joint development
of a fifth-generation fighter and a multi-role transport
aircraft (MTA). 33
The energetic marketing of the MiG-31E interceptors
in early 2007 was noteworthy. On the one hand, it revealed
that the government clearly wishes to get rid of its excess
MiG-31 stock and preserve the capability to manufacture
such aircraft. On the other hand, it also shows that Russia
is prepared to offer ever more advanced weapons systems
for export. Signing of a firm contract for the export of the
MiG31 would mark the first time that an aircraft of this type
was sold abroad.
ROE did reach an agreement with Syria for the delivery
of five MiG-31E. 34 However, it seems that the Russian
government has not yet ratified this contract. An agreement
was also reached with Kazakhstan for the repair and
modernization of 10 MiG-31 valued at 60 million USD.35
An agreement with Indonesia for the delivery of three
Su-27SKM and three Su-30MK2 valued at 355 million USD
was signed, giving India a total of 10 Su27/30 aircraft.36 It
appears that Indonesia has also become the largest purchaser
of Russian helicopters. In 2007, the country contracted
to purchase 10 Mi-17 and three Mi35M for an estimated
105 million USD. In 2007, Indonesia also took out a loan
of 1 billion USD for the purchase of Russian arms, so we
can expect further new contracts to be announced in the
future. 37 Kazakhstan, 38 Iran, 39 Pakistan 40 and the United
Kingdom have also signed agreements to purchase Russian
helicopters.
Separate contracts for the delivery of aircraft engines in
2007 were signed with China and India. The Chinese contract
was for another batch of AL-31FN,41 while the India contract
consisted of the licensed production of RD-33 (for their
modernized fleet of MiG-29).42
Indonesia
8%
China
6%
India Syria 4%
73% Algeria 4%
Other 5%
 Arms Trade

Land Armaments. Contracts for the delivery of land Outlook

armaments valued at 1.5 billion USD were concluded in 2007.
The biggest contract was with India for the delivery of 347 T-
90S tanks estimated at 1.24 billion USD.43 In light of the other
existing tank contracts with India and Algeria, it appears
likely that Uralvagonzavod will be kept busy filling these
orders until at least 2010.
An agreement with Greece for the delivery of 415 BMP3
estimated at 1.2 billion Euro was reached in December.44 If
this agreement is ratified by the Greek Parliament, which
will consider the issue during the summer of 2008, it will
strengthen the place of land armaments in the structure of
Russian arms exports.
Air Defence and Naval Armaments. The contract
with Iran for the delivery of five divisions of the S-300PMU1
air defence system was the biggest news of the year, when
announced by the Iranian Defence Minster Mostafa
Mohhamed Nadzhar.45 However, information regarding when
the contract was signed or the schedule of its implementation
was not revealed.
Further, agreements with Syria and Egypt were also
publicized: for delivery of the Buk-M1-2 to Syria 46 and the
Shilka-Strelets to Egypt.47 The latter system is a modernized
version of the ZSU-23-4 Shilka.
Finally, a contract with Algeria for the repair of a Project
1234E small missile ship and a Project 1159T patrol ship was
also reportedly signed.48
Geographic Distribution
The bulk of identified contracts signed during the year
73 percent were with India. No large new agreements were
concluded with China, Algeria or Venezuela. Taking into account
the intergovernmental agreements reached in 2006, we could
conclude that the arms trade in 2007 was almost completely
devoted to India in terms of quantity and strategic value. The
current portfolio of orders ensures that India will retain its
strategic status in the future. While China and other countries
may remain significant importers of Russian arms, they do not
have the status of a military-technical partner like India.
As noted above, the 32 billion USD portfolio of orders
should allow Russia to maintain its current level of arms
exports at about 7-7.5 billion USD for the next 4-5 years.
In 2008, deliveries of Su-27/30 to India (about 20
kits and two new Su-30MKI), Algeria (10-12 SU-30MKA),
Venezuela (eight Su-30MK2V), Malaysia (eight Su-30MKM)
and Indonesia (2-3 Su-27/30) will continue. Further transfers
of MiG-29 fighters are expected to India (for the Admiral
Gorshkov aircraft carrier) and Algeria (10-12 planes). The
first six Yak-130 trainer-fighters are scheduled to be delivered
to Algeria. Finally, implementation of the contract with Jordan
for the delivery of two Il-76MF transport planes may begin.
Therefore, the volume of aircraft deliveries may again lead
deliveries of all other types of armament.
In the air defence systems sphere, we are likely to see
the completion of the contract with China for the delivery
of the Favorit S-300PMU2 systems. Transfers of the S-300 to
Algeria and Iran may also begin. In addition, we can hope to
see the first deliveries of the Pantsir-S1 to the UAE and, likely,
to Syria and Algeria.
Further, repairs and modernization of another
Sindhukirti Project 877EKM diesel submarine should be
completed. The licensed production of Project 12418 cutters
in Vietnam should begin, and Algeria should receive two new
Project 636 diesel submarines.
Finally, the delivery of T-90S tanks to India and Algeria
will account for the main transfers of land armaments.
As for new contracts, negotiations with Iran for
the purchase of engines for the fighters currently under
development are taking place. In addition, it is likely that
Indonesia will make use of its loan from Russia to purchase
two Project 636 diesel submarines, while Greece may ratify
its purchase of 415 BMP-3. Moreover, China may purchase
seven divisions of the S-300PMU2, if it had not already
done so in 2006, an issue to which Chemezov referred to
obliquely in a recent statement.49 Finally, we can expect an
agreement with Venezuela for the delivery of Top-M1 air
defence systems.

1 Nikolskij A. Venesujela vyvela na record, Vedomosti, 23.01.2008.

2 www.cbr.ru.
3 Data from The Economist.
4 Nikolskij A. Oboronka perehodit na evro, Vedomosti, 04.06.2007.
5 Indija planiruet zakupit partiju novejshih rossijskih tankov Minoborony RF, Interfaks-AVN, 28.05.2007;
Grickova A., Lantratov K., Indiju nakroet Smerchami Kommersant, 11.04.2007.
6 Obem prodazh voenno-morskoj tehniki v 2007 g. po linii Rosoboronjeksporta sostavit okolo 2 mlrd doll.
ARMS-TASS, 27.06.2007.
7 V 2007 g. obem eksporta rossijskoe boevoj aviatehniki sostavit okolo 3 mlrd doll. ITAR-TASS, 21.08.2007.

# 4, 2007 Moscow Defense Brief 15

Preliminary Results of Russias Arms Trade in 2007
 Arms Trade

8 Data from Sukhy and Irkut.

9 Obem eksporta korporacii TRV v tekushem godu v poltora raza prevysit pokazateli proshlogo goda,
ARMSTASS, 12.11.2007.
10 Samolet radiolokacionnoj razvedki budet peredan indijskim VVS do konca goda TANTK im. Berieva Moskva
// Interfaks-AVN, 07.12.2007.
11 Na vooruzhenie Vostochnogo komandovanija VMS Indii postupil samolet Tu-142, ITAR-TASS, 03.10.2007.
12 Aviastroiteli Burjatii zavershili postavku v KNR 24 vertoletov Mi-171, ITAR-TASS, 02.05.2007.
13 Dva boevyh vertoleta Mi-35M otpravljajutsja v Venesujelu, ARMS-TASS, 18.12.2007.
14 Velikobritanija pokupaet u Rossii dva vertoleta Mi-17 i planiruet zakupit rakety-misheni attashe, Interfaks-
AVN, 06.07.2007.
15 Indija osvoit licenzionnyj vypusk dvigatelej RD-33 za chetyre goda, ARMS-TASS, 26.01.2007.
16 Grickova A., Lantratov K., Morskoj zmej topit indijskie kontrakty Iljushina, Kommersant, 07.09.2007.
17 Grib N., Lantratov K., Zygar M. Odnostoronnee sotrudnichestvo, Kommersant, 13.12.2007.
18 Ministr oborony Indii predstavil nizhnej palate parlamenta otchet, ARMS-TASS, 23.11.2007.
19 Bedi R. HAL, BAE Enter Advanced Talks for More Indian Hawk Trainers, Janes Defence Weekly, 11.01.2008.
20 Rynki vooruzhenij, # 45, 2007: 8, 18.
21 V 2007 g. Arzamasskij zavod proizvedet bolee 300 BTR, Lenta.Ru, 29.06.2007.
22 Rynki vooruzhenij, # 45, 2007.
23 RF postroit v Venesujele dva zavoda po proizvodstvu strelkovogo oruzhija, RIA Novosti, 06.08.2007.
24 Obem postavok rossijskogo strelkovogo oruzhija v zarubezhnye strany vozrastaet i sejchas sostavljaet
porjadka 200 mln doll. v god Rosoboronjeksport, RIA Novosti, 05.07.2007.
25 Solovev V. Chego MAKSu ne hvataet do maksimuma, Nezavisimaja gazeta, 20.08.2008.
26 Pervye dva raketnyh katera Molnija budut postavleny vo Vetnam v konce goda, ITAR-TASS, 01.07.2007.
27 Srok peredachi VMS Indii modernizirovannoj v Severodvinske podlodki otlozhen po tehnicheskim prichinam,
Interfaks-AVN, 16.01.2008.
28 Germanskij kosmicheskij apparat voennogo naznachenija vyveden na orbitu po kontraktu
Rosoboronjeksporta, Interfaks-AVN, 01.11.2007.
29 Korporacija Ajerokosmicheskoe oborudovanie sozdast rossijsko-indijskoe predprijatie po podgotovke
letchikov, ARMS-TASS, 25.04.2007.
30 Ibid.
31 Kompanija Kronshtadt postavila kompleksnyj trenazher Laguna dlja voenno-morskih sil Vetnama,
ARMS-TASS, 28.12.2007.
32 Lantratov K., Grickova A.,Rossija i Indija obmenjalis istrebiteljami, Kommersant, 12.04.2007; Lantratov K.,
Indija kupila eshche 40 Su-30MKI,Kommersant, 12.10.2007.
33 Nikolskij A., Nebesnaja druzhba, Vedomosti, 19.10.2007; Lantratov K., Grickova A., U rupijnogo dolga
vyrastajut krylja, Kommersant, 13.11.2007.
34 Lantratov K., Asmolov G., Istrebiteli dvojnogo naznachenija, Kommersant, 19.06.2007.
35 Litovkin D., Ugo CHaves pokupaet pochti sotnju rossijskih samoletov, Izvestija, 24.08.2007.
36 Rossija prodala Indonezii shest istrebitelej Suhogo, Lenta.Ru, 21.08.2007.
37 Indonezija objavila o zakupke partii vooruzhenij v Rossii, Polshe i Kitae, Interfaks-AVN, 24.10.2007.
38 Kazahstan poluchil iz Rossii dva novyh voennyh vertoleta Mi-17, ITAR-TASS, 09.11.2007.
39 Rossija postavit Iranu pjat vertoletov Mi-171 dlja Obwestva Krasnogo Polumesjaca, ARMS-TASS,
14.11.2007.
40 Rossija postavit Pakistanu dva vertoleta Mi-171 dlja borby s narkotikami, ARMS-TASS, 14.11.2007.
41 Lantratov K., Iran pokupaet izrailskie istrebiteli, Kommersant, 23.10.2007.
42 Indija osvoit licenzionnyj vypusk dvigatelej RD-33 za chetyre goda, ARMS-TASS, 26.01.2007.
43 Kiseleva E., Grickova A., Rossijskie tanki dvinulis v Indiju, Kommersant, 04.12.2007.
44 Kontrakt s Greciej na postavku modernizirovannyh BMP-3 planiruetsja podpisat blizhe k letu, RIA Novosti,
24.12.2007.
45 Poroskov N., Kreml dal Allah vzjal, Vremja novostej, 27.12.2007.

16 # 4, 2007 Moscow Defense Brief

Preliminary Results of Russias Arms Trade in 2007
 Arms Trade

46 Nikolskij A. Sirija pod zashitoj Buka, Vedomosti, 28.08.2007.

47 Konovalov A., Rossija nachala podgotovku egipetskih voennosluzhawih v ramkah kontrakta na postavku
Egiptu kompleksov PVO Shilka-Strelec, ITAR-TASS, 19.09.2007.
48 Kudrjashov D. Severnaja verf pomozhet Alzhiru, RBK Daily, 22.10.2007.
49 Sergej Chemezov: U Rossii net planov po postavke istrebitelej v Siriju i Iran, AviaPort.Ru, 22.06.2007.

# 4, 2007 Moscow Defense Brief 17

Preliminary Results of Russias Arms Trade in 2007
 Industrial Policy
Russias Defence Industrial Complex
in 2007
R ussias defence industrial complex (DIC) saw the
following key developments in 2007:1
The appointment of a new Defence Minister, a new
Deputy Minister of Industry and Energy for the DIC,
and a new head of the Federal Agency for Industry
(Rosprom);
The creation of Russian Technologies state corporation
from Rosoboronexport (ROE) and its holdings,
intended to promote the development of Russian
industry and the DIC;
Oboronprom, a subsidiary of ROE, 2 was given yet
another important mandate: in addition formation
of the Helicopters of Russia holding, Oboronprom is
now responsible for consolidation of Russias engine-
building industry;
The ongoing consolidation processes within the
DIC through the creation of new sectoral holdings
in shipbuilding, engine building, and armour
construction;
The approval of a new federal target program for the
development of the electronic components industrial
base and radio electronics from 2008-2015, reflecting
renewed interest in the development of the sector.
New people in power: Serdiukov and Manturov
Key appointments in 2007 include Anatoly Serdiukov
as Defence Minister, Denis Manturov as Deputy Minister
of Industry, and Andrey Dutov as the head of Rosprom.
Manturovs appointment came with the change of government
during the fall of 2007.
Anatoly Serdiukov, former Chief of the Federal Tax
Service, was appointed Defence Minister in February,
replacing Sergey Ivanov, who was promoted to First Deputy
Prime Minister, with responsibility for the DIC and the states
innovation policy.
Serdiukov initiated a reshuffle among the leadership
of the defence ministry and the armed forces. Aleksandr
Kolmakov, former Commander-in-Chief of the Airborne
Troops, was appointed First Deputy Minister. New
commanders-in-chief were appointed to the Air Force, the
Navy and the Airborne Troops: Colonel General Aleksandr
Zelin, Admiral Vladimir Vysotsky, and Lieutenant General
Valery Evtukhovich, respectively. Further, Aleksandr
Moskovsky, Chief of Armament, Anatoly Mazurkevich,
18 # 4, 2007 Moscow Defense Brief
Russias Defence Industrial Complex in 2007
Chief of the Directorate for International Military Relations,
and Nikolai Reznik, Chief of the Directorate for Morale
and Welfare, were dismissed. According to media reports,
Serdiukov is prone to dismiss those reluctant to live within
their assigned budgets.3
Denis Manturov, previously the Director General of
Oboronprom, was appointed Deputy Minister of Industry
in September. In his new post, Manturov is responsible for
the development of the DIC and civilian machine building.
Notably, Manturov replaced Andrey Reus, who was in turn
appointed Director General of Oboronprom.
Finally, Deputy Director of Rosprom Andrey Dutov
replaced his boss Boris Alyoshin as head of Rosprom. After a
long term as Director of the agency, Alyoshin was appointed
President of AvtoVAZ in September.
Rosoboronexport is now Russian
Technologies
Russian Technologies State Corporation was created
on 23 November 2007 in accordance with federal legislation
signed by the Russian President, crowning the industrial
expansion of ROE that has taken place over the last few years.
In 2002, ROE created Oboronprom, which subsequently
consolidated Russias helicopter production facilities and
bought up several other enterprises. ROE also took over
AvtoVAZ in 2005, the titanium corporation VSMPO-Avisma
in 2006, as well as the Krasny Oktiabr metallurgical plant
in 2007. Control over these enterprises was intended as
the first step towards further consolidation of Russian
industry.
The future plans of Russian Technologies are
ambitious. The corporation intends to consolidate not
only helicopter design and production facilities, but
also engines, armour, artillery, radio electronics, special
steels, composite materials, auto parts, aviation bearings
and explosive materials. Moreover, it is engaged in a
multitude of related and unrelated projects ranging from
the organization of an exhibition centre at Zhukovsky,
the MAKS air show, electric power production, housing
construction, modernization of airport refuelling
systems and sponsorship of sports activities. Russian
Technologies is also set to take over the main function
of its subsidiary ROE, i.e., of managing Russias military
exports. 4

Russian Technologies appears to be on its way to
becoming a large, diversified corporation, consolidating the
entire life cycle of industrial goods: from the initial design
and testing to deliveries of raw materials, production and
marketing. The influence of this structure on the Russian
economy could be eventually become comparable to that of
Gazprom and Rosneft.
The official goals of the company are to facilitate the
design, production and export of high-technology industrial
products and to draw investments to various industrial
sectors, including the defence industrial complex. In spite
of this somewhat vague formulation, the first step has been
revealed, as preparations for initial public offerings of its
subsidiaries by 2012 is underway, with Helicopters of Russia,
VSMPO-Avisma and AvtoVAZ as the first candidates for IPOs
as early as 2009.
A longer-term strategy is not yet evident. One might
suppose that as the assets of its subsidiaries are sold on the
market and private capital comes to play a larger role in the
industry, Russian Technologies will transform itself from a
management company to a regulator for various industrial
sectors. Its not for nothing that some have already christened
it a shadow ministry of industry.5 However, as distinct from
a ministry, Russian Technologies will have a direct interest
in the activities of its subsidiaries. While this may assist in
attracting investment and promoting development, it may
also lead to conflicts of interest with private capital.
Leaving aside the question of whether the creation of
Russian Technologies was necessary in principle, there are
at least three negative aspects regarding the way this task
was accomplished.
The first is the low level of transparency within the new
corporation. The only form of accountability is the audited
annual report. It appears that the report would be of value
only if it were audited by one of the big four international
accounting firms. Otherwise, the independence of the auditor,
especially when auditing the results for a bad year, would
be questionable. Moreover, as the corporation deals with
state secrets, it will be all too tempting to simply classify any
unfavourable developments and hide them from the public.
Secondly, Russian Technologies answers only to the head
of state. The President personally appoints the governing
board, including the Chair, as well as the Director General.
The risk of business mixing with politics is thus very high,
and at the very highest levels of power.
Finally, although incorporated as a non-profit
organization, the corporation is not subject to existing
systems of control over non-profit organizations, nor is it
subject to Russias bankruptcy legislation. In essence, Russian
Technologies is a holding company with a special immunity
against normal instruments of state control and regulation.
Meanwhile, it falls to the newly-appointed members
of the governing board to monitor the companys activities:
Industrial Policy
Defence Minister Anatoly Serdiukov (Chair), Director of the
Federal Service for Military-Technical Relations Mikhail
Dmitriev, Minister of Regional Development Dmitry Kozak,
Deputy Head of the State Legal Directorate of the Presidential
Administration Sergey Kommisarov, Minister of EconoDIC
Development and Trade Elvira Nabullina, Presidential
Aide Sergey Prikhodko, First Deputy Chair of the Military
Industrial Commission Vladislav Putilin, and Minister of
Industry and Energy Viktor Khristenko.
Sergey Chemezov, former Director General of ROE, was
appointed President of Russian Technologies (as well as an ex
officio member of the Board). Aleksey Alyoshin and Nikolay
Volobuyev, colleagues of Chemezov at ROE, were the first of
his new deputies to be appointed, along with Vneshtorgbanks
former deputy chairman Igor Zavyalov, who will deal with
financial issues. Chemezovs former deputy Anatoly Isaikin
was appointed to head ROE, and will also hold the position
of Vice President of Russian Technologies once ROE is
incorporated as a subsidiary joint stock company.
Notably, the power to appoint the director general of
ROE, members of its board and audit committee, to make
changes to its charter and other critical issues are all explicitly
assigned to the President of Russian Technologies, even
though such powers flow naturally to the parent company
over its direct subsidiary. This suggests that Chemezov is
keen to maintain personal control over ROE.
Oboronprom takes on engines
The most important of Oboronproms new projects is
oversight of the merger of several Russian engine-building
enterprises into a holding. The sector is to be organized into
three integrated structures, with Oboronprom mandated to
form the largest of the three the United Engine-Building
Corporation from NPO Saturn, the Ufa Engine-Building
Industrial Association, and the Samara and Perm engine-
building clusters.6 Another two independent structures are
apparently set to be created on the basis of MMPP Salyut
and the engine-building divisions of MiG Corporation.
However, since Manturov announced immediately upon his
appointment as Deputy Minister that all of the enterprises in
the sector are interdependent, Oboronprom will likely play a
major role in the reform of the entire sector.7
However, Oboronproms task is complicated by the
participation of other majority shareholders in key assets of
the new holding: Saturn and Ufa, which respectively design
and produce the Al-31F, the most popular Russian military
engine. The state owns a 37 percent stake in Saturn, while
Oboronprom holds 12 percent, while the Bashkortostan
government holds a golden share of the Ufa-based firm.
Other shareholders are unwilling to merge their assets on
Oboronproms terms and plan to create their own holding
# 4, 2007 Moscow Defense Brief 19
Russias Defence Industrial Complex in 2007
 Industrial Policy
on the base of these two enterprises. At the end of 2007,
there was little clarity as to how the situation would be
resolved.
On August 23, Saturn and Ufa indicated that they intend
to create a joint management company for the production of
the AL-31FP, the development of Product 117C, the AL-55,
and terrestrial power generation. A day later, Oboronprom
closed a deal to purchase twelve percent of Ufa (as described
above) from JSC United Finances, reputedly linked to Ufa
management, giving rise to rumours of Oboronproms
imminent victory. However, in December, Saturn announced
its purchase of a 20 percent stake in Ufa from that companys
management for a market price of 81 million USD, initiating
a merger of the two companies. Oboronprom stated that
the purchase was void because the federal property agency
(Rosimushchestvo) had allegedly challenged the legality of
Ufas privatization. This allegation was immediately refuted
by Ufa, which argued that Rosimushchestvos challenge was
turned down by the courts in late November, therefore, the
share purchase was legal.8
Oboronprom has faced fewer problems in Samara. There,
the state owns 60 percent of the Kuznetsov Samara Scientific
and Technical Complex (SNTK, the main design bureau of
this regional cluster), and this share will be managed by
Oboronprom, which has already successfully lobbied for
676.5 million roubles of state subsidies for wage and tax debts
owed by the company.
However, the situation with the regions production
units (Motorostroitel and Metallist-Samara), which produce
engines for both aircraft and spaced launchers, remains
unclear, since Roskosmos would also like to have a say in the
holdings management. The owners of the Kazan MPO9 (yet
another production unit for the aircraft engines produced by
SNTK) have stated their opposition to Oboronproms plans.
Negotiations have been complicated by the close ties between
Kazan MPO and the local authorities, typical of all large
industrial enterprises in Tatarstan.
Oboronprom faces no problems with the Perm engine-
building complex (PMK). The state owns 71.6 percent of the
Perm engine building plant and 55 percent of the Aviadvigatel
design bureau (with inclusion of Vneshtorgbanks share), the
principal assets of PMK.Aside from the U.S. company Pratt &
Whitney, which holds a blocking share of each firm, no other
significant private capital is involved.
Notably, Oboronprom is still negotiating a purchase
of shares in Motor Sich of Ukraine. Russia has not yet
determined a firm policy whether to localize all helicopter
engine production on its own territory or to continue
purchases from Ukraine. For its part, Russian Technologies
is lobbying for the latter.
In 2007 Oboronprom also created Avtokomponenty to
produce car parts and Oboronpromstroi to build housing for
enlisted servicemen.
20 # 4, 2007 Moscow Defense Brief
Russias Defence Industrial Complex in 2007
New holdings for ships, engines, armour and
artillery
During 2007, President Putin signed decrees on
the creation of three new defence holdings: the United
Shipbuilding Corporation (OSK) in March, and the Salyut
Scientific Industrial Centre for Gas Turbine Manufacturing as
well as the Uralvagonzavod Scientific Industrial Corporation
in August.
OSK is an open joint-stock company fully owned by
the state, incorporated in June. It will include three regional
sub holdings: a northern one, based on the Severodvinsk
shipyard, a western one, based on the St. Petersburg and
Kaliningrad shipyards, and a far eastern one. Coordination
with the privately owned St. Petersburg shipyards (Baltic
and Northern), however, has proven to be a challenge,
while negotiations with their owner, the United Industrial
Corporation, have so far been inconclusive. Moreover, it is still
not clear which entity would transfer the production units
of the Baltic shipyard to the site of the Northern shipyard, or
how. There have been some indications that Vneshtorgbank
would provide a 550 million USD loan to the project over six
years.10
The formation of OSK is proceeding extremely slowly,
due to the apparent lack of experienced government
managers.Aleksandr Burutin, whom the government initially
recommended for the job, was appointed First Deputy Chief
of the General Staff. Yury Yarov, Director of the Northern
design bureau, replaced him. Directors of the sub holdings
were appointed in November. Alexander Buzakov (Director
General of the Sredne-Nevsky shipbuilding plant) was
appointed to head the western, Vladmir Fomenko (deputy
Director General of Zvezdochka shipyard) the northern,
and Pavel Popov (Deputy Governor of Primorsky Krai) the
far eastern. Sergey Naryshkin, Chief of the Government
Apparatus, was appointed to chair the board of OSK.
The Salyut Scientific Industrial Centre for Gas Turbine
Manufacturing was incorporated as a Federal State Unitary
Enterprise on the basis of the existing Salyut and Baranov
plants, as the first of the three planned engine-building
holdings.
Finally, the Uralvagonzavod Federal State Unitary
Enterprise is being reincorporated as a joint stock company
with full state ownership. The aim is to establish a holding for
the development and production of armour and artillery. In
a related development, the Transport Engine Building Design
Bureau (KBTM) of Omsk has purchased a majority share in
Omsktransmash at an auction for the opening price of 700
million roubles,a sum that the government had just transferred
to the design bureau. KBTM is set to become a repair and
modernization facility for the T-80 tank,incorporated as a joint
stock company and folded into Uralvagonzavod. Three billion
roubles are to be invested in the repair and modernization

facility, while the non-core assets of Omsktransmash will be
sold off and the company liquidated.11
Rosoboronexport has also been active consolidating
the Kurgan and Azarmas light armour manufacturers, and
is currently negotiating with their owners: Traktorny Zavody
and GAZ.12 Given these efforts, and the large number of
export contracts recently signed (a few hundred T-90 tanks
for Algeria and India, a large batch of BMP-3 infantry combat
vehicles for the Russian armed forces, and a memorandum
of understanding for the delivery of 415 BMP-3 to Greece),
this process is likely to proceed rapidly. Russian Technologies
already holds a 25 percent stake in the Motovilikhinsk plant.
Old holdings: Helicopters of Russia, United
Aircraft Corporation, Almaz-Antey
The formation of Helicopters of Russia continued in
2007. In May, ROE made an offer to purchase almost 50
percent of the Kazan helicopter plant. However, judging from
ROEs website, a deal has not yet been concluded. In any case,
considering that ROE and Oboronprom jointly hold about 51
percent of the Kazan plant, the state should ultimately be able
to acquire full ownership of the enterprise.
In July, Oboronprom closed a deal to acquire an
additional 25.1 percent of Mil and now controls 61.4 percent
of the Moscow-based helicopter plant. After an additional
issue of Rosvertol shares, the state, through Rosimushchestvo
and Oboronprom, gained control of 25.01 percent of the
firm. In addition, the President issued a degree to fold the
Kumertau aircraft manufacturing plant and 50 percent plus
one share of the Progress aviation plant into Helicopters
of Russia. Oboronprom gained control of the production
engineering facilities for the Kamov in 2006.
Yuri Ivanov, an advisor to the Director General of
Oboronprom, was appointed the first Director General of
Helicopters of Russia in April 2007. He was, however, replaced
in November by Andrey Shibitov, the acting Director of Mil.
Ivanov, for his part, was appointed his Deputy for Industrial
Policy.
Helicopters of Russia also set up a production line for
the licensed assembly of Agusta Westland A119 and AW139
helicopters with take-off weights of 2-3 and 6.5 tonnes
respectively. Negotiations for the joint development and
production of a new 4.5 tonne helicopter were also held with
the Italian company.13
Oboronprom estimates the 2007 sales receipts of
Helicopters of Russia at 1.1 billion USD. Judging from plans
made public in September, this is a result of the delivery of
130 Mi and 20 Kamov helicopters.14
In 2007, the United Aircraft Corporation (UAC)
concentrated on integrating MiG and the Kazan Aircraft
Industrial Association. In addition, First Deputy Prime
Industrial Policy
Minister Sergey Ivanov announced in July that the Tashkent
Chkalov aircraft plant would join UAC.
The creation of UAC, which should have been completed
by April 1, 2007, a date the valuation of the corporations assets
performed by Deloitte & Touche in September 2006 was set to
expire, is running behind schedule. Ernst & Young have been
commissioned to conduct a new valuation, however, a new
timeline has not yet been set.
Finally, the President signed a decree in November
transferring the states shares of 31 enterprises to the
founding capital of the Almaz-Antey industrial concern.
Almaz-Antey was already the majority shareholder of these
companies, and the state will in most cases retain no more
than a golden share of the individual enterprises. Almaz-
Antey itself remains fully owned by the state. This decree
completes the formation of Almaz-Antey concern, which
began in 2002.
The State focuses on the development
of electronics
Concern over Russias electronics industry was apparent
in 2006, when the government adopted a program for the
development of the industrial base for electronic components
from 2007-2011 as part of the broader federal target program
to develop the national technological base. However, the
critical state of the industry required a larger and more
focussed effort. As a result, in 2007, the government has
approved an independent federal target program for 2008-
2015 focused on electronics.
The new program fits with the overall strategy for the
development of the electronics industry to 2025, developed
by the Ministry of Industry and Energy and approved by the
government in 2007.According to that strategy, by 2015, a total
of 182.1 billion roubles are set to be invested in the sector, of
which 112.7 billion will come from extra budgetary sources.
From 2016 to 2025, additional 185-215 billion roubles will be
invested into the sector, including some 115-135 from extra
budgetary sources.15
Intended to restore a basic level to the electronics
industry in Russia, the federal target program also supports
the development of conditions for manufacturing of devices,
which use GLONASS and GPS. 16 The first stage will focus
on the development of microelectronics, benefiting the
Zelenograd Micron plant owned by Sitronics and Angstrem.
Oboronproms latest initiative is noteworthy in this
context. In September 2006, the company announced that
it would create a specialized radio electronic holding. 17 In
2006, after his appointment as Deputy Minister, Manturov
confirmed that discussions as to which Federal State Unitary
Enterprises and private firms would be part of this holding
were underway.
# 4, 2007 Moscow Defense Brief 21
Russias Defence Industrial Complex in 2007
 Industrial Policy

1 Unless otherwise indicated, references for the events summarized in this article can be found in prior issues of
MDB published in 2007.
2 Formally, Rosoboronexport owns just 31.13 per cent of Oboronprom, and another 51.01 per cent is owned by
the federal property agency Rosimushchestvo.
3 A. Nikolsky. Serdiukov uskoril rotatskii, Vedomosti, 18.09.2007.
4 While formally the right to export armaments remains with ROE (the state corporation is given only marketing
functions) the dependence of ROE on its parent structure makes this a moot issue.
5 E. Kiseleva. Korporativnoe dvizhenie, Kommersant, 04.09.2007.
6 The Samara enterprises were initially expected to form their own separate structure and thus there would have
been four holdings.
7 Interview with Deputy Minister of Industry Denis Manturov, Kommersant, 17.09.2007.
8 Oboronprom and UMPO press release, 25.12.2007.
9 The real owners are hidden behind nominal shareholders. The government of the Republic of Tatarstan owns
a golden share.
10 E. Kisileva, A. Gritskova, A. Pushkarskaya. Baltiyskiy zavod poshol pod snos, Kommersant, 14.08.2007.
11 A. Shestakov, Tankoviy zavod postaviat na relsy, Kommersant Sibir, 28.12.2007.
12 A. Gritskova, D. Belikov. Gosposrednik peresazhivaetsia na BMP, Kommersant, 29.11.2007.
13 A. Gritskova, K. Lantratov, Italianskim vertoletam nashals ploshchadka v Rossii, Kommersant, 22.06.2007.
14 I. Rusanova, Okhotnik I sobiratel, SmartMoney, 03.09.2007.
15 Elektronaya strana. Official site of Minpromenergo [minprom.gov.ru] 11.09.2007.
16 Osnovnye itogi deiatelnost federalnykh organov ispolnitelnoi vlasti v 2007 g. I zadachi na 2008 g.
[www.government.ru] 29.12.2007.
17 Kommersant Yug, 15.08.2006.
18 Interview with Deputy Minister of Industry Denis Manturov, Kommersant, 17.09.2007.

22 # 4, 2007 Moscow Defense Brief

Russias Defence Industrial Complex in 2007
 Facts & Figures

Major Identified Contracts for Delivery

of Russian Arms Signed in 2007
Recipient Weapon designation No. ordered Year(s) of deliveries Contract value, mln Notes
USD

China AL-31FN jet engines 100 2008-2009 320 For Chinese J-10 (Super-10)
fighters
India Su-30MKI fighters 18 2007 750 Total contract value is 750 mln
USD. Russia will buy out 18 used
Indian Su-30K fighters (this will
take 250 mln USD)
Su-30MKI kits 40 2008-2010 1,600
RD-33 (series 3) 120 2007-2010 300 For MiG-29 fighters upgrade
jet engine license
production
T-90S main battle 347 2008-2011 1,237
tanks
Smerch MLRS 14 2008-? 200
systems
Indonesia Su-27SKM / 30MK2 3/3 2008-2010 335
fighters
Mi-17/ Mi-35 10 / 3 n/a 105 The contract was signed in
helicopters September 2007 as part of an
agreement, according to which
Russia would provide Indonesia
with 1 bln USD for purchase of
Russian arms
Algeria Ship repair program 1 / 1 2009 200
(Project 1234E /
1159T)
Kazakhstan MiG-31 interceptors 10 2008 60
repair and upgrade
program
Syria Buk-M1-2 SAM n/a n/a 200
systems
Sources: Russian press; CAST estimates.

# 4, 2007 Moscow Defense Brief 23

Major Identified Contracts for Delivery
of Russian Arms Signed in 2007
 Facts & Figures

Major Identified Deliveries of Russian

Arms in 2007
Recipient Weapon No. Year of Year(s) of Delivered in 2007 Delivered by Notes
designation ordered contract deliveries 2008, units
mln USD units

China Mi-171 24 2006 2006-2007 100 12 complete Contract value 200 mln USD. Helicopters
helicopters are in civilian modification
AL-31F jet 180 2005 2006-2007 430 140 complete Contract value 550 mln USD. For Chinese
engines Su-27/30 fighters previously bought in
Russia
RD-93 jet engines 100 2005 2006-2008 71,4 30 60 Contract value 238 mln USD. For Chinese
JF-17 Thunder (FC-1) fighters. MRO center
for these engines will be built in China
during 2006-2011
AL-31 jet engines 2005 2005-2008 33.3 Contract value 100 mln USD. This three-
spare parts year agreement was signed in summer
2005
S-300PMU2 8 2004 2007-2008 490 4 4 Contract value 980 mln USD
Favorit SAM
systems
India Su-30MKI kits 140 2000 2004-2012 190 8 39 Contract value 980 mln USD. Russia to
(2014) complete delivery of kits by 2012, India to
complete assembly by 2014
Su-30MKI 18 2007 2007-2008 666 16 16 Contract value 750 mln USD. Russia will
fighters buy out 18 used Indian Su-30K fighters
(this will take 250 mln USD)
Su-30MKI 4 2007 2007 4 complete
simulators
Conversion of 3 2003 2007-2009 50 1 1 Contract for delivery of AWACS airplanes
Beriev A-50 is signed between India and Israel. Russian
AWACS platform firms are acting as Israeli subcontractors
for installing IAI and are tasked with conversion of three A50
Phalcon radar AWACS platforms to install Phalcon radars.
Contract value 1 bln USD, Russian firms
will receive about 150 mln USD
NK-12MPT jet 6 2005 2007 n/a 6 complete For Tu-142ME long-range antisubmarine
engines planes
RD-33 (series 3) 120 2007 2007-2010 62,5 25 25 Contract value 300 mln USD. For MiG-29
jet engine license fighters upgrade
production
Smerch MLRS 38 2005 2007-2008 225 19 19 Contract value 450 mln USD
systems
BrahMos antiship 1 batt. 2005 2007 135 1 batt. complete Value is estimated based on Russian share
missiles in BrahMos Aerospace joint-venture
49.5%. Total contract value is 275 mln
USD.

24 # 4, 2007 Moscow Defense Brief

Major Identified Deliveries of Russian Arms in 2007
 Facts & Figures

Recipient Weapon No. Year of Year(s) of Delivered in 2007 Delivered by Notes

designation ordered contract deliveries 2008, units
mln USD units
Vietnam Molniya missile 12 2003 2007-2010 200 2 2 Contract value 1 bln USD. Ten out of 12
boats (Project ships will be built in Vietnam under license
12418)
Laguna simulator 1 2006 2007 n/a 1 complete
for missile boats
(Project 1241RE
and 12418)
Malaysia Su-30MKM 18 2003 2007-2008 505 10 10 Contract value 910 mln USD, Malaysia
fighters will pay 30% in palm oil. Also a Russian-
Malaysian joint venture for maintenance
and overhaul of these aircrafts is to be
established
Algeria Su-30MKA 28 2005 2007-2009 160 3 3 Contract value 1.5 bln USD
fighters
T-90SA main 185 2006 2006-2011 320 60 90 Contract value 1 bln USD
battle tanks
BMP-2 IFVs 300 2005 2007-2010 175 75 75 Contract value 700 mln USD
upgrade program
Kilo class (Project 2 2005 2007 100 2 complete Contract value 100 mln USD
877EKM)
submarine
upgrade program
Venezuela Su-30MK2V 24 2006 2006-2008 750 12 16 Contract value 1.5 bln USD
fighters
Mi-17B-5 / Mi- 34 / 2 2006 2007-2008 70 ?/2/2 ?/2/2 Contract value 484 mln USD
35M / Mi-26T2 /2
helicopters
Construction of a 2006 2007-2010 Contract value 474.6 mln USD
plant for license
production of
AK-103 assault
rifles and 7.62
mm cartridges
Syria Ural-4320 trucks 221 n/a 2007 9 221 complete
T-72 main battle 1000 2006 2007-2010 100 200 200 Contract value 500 mln USD
tanks upgrade
program
Morocco Tunguska-M1 air 6 2005 2006-2008 33.3 2 4 Contract value 100 mln USD
defense systems
UAE BMP-3 IFVs 653 2005 2007-2009 60 200 200 Contract value 195 mln USD. These
upgrade program BMP3 were purchased in Russia during
1990s
Germany Launch of 5 2003 2006-2008 22.4 2 3 Contract value 400 mln Euro
Sar-Lupe
reconnaissance
satellites

# 4, 2007 Moscow Defense Brief 25

Major Identified Deliveries of Russian Arms in 2007
 Facts & Figures

Recipient Weapon No. Year of Year(s) of Delivered in 2007 Delivered by Notes

designation ordered contract deliveries 2008, units
mln USD units
Bulgaria MiG-29 fighters 16 2006 2007-2008 18 6 6 Contract value 48 mln USD. Aircraft life
overhaul program cycle will be expanded till 2015
Serbia MiG-29 fighters 5 2006 2007-2008 26.9 4 4 Contract value 24 mln Euro
upgrade program
Croatia Mi-171Sh 10 2006 2007-2008 13 2 2 Contract value 65 mln USD (offset of
helicopters Russian debt to Croatia)
Sources: Russian press; CAST estimates.

26 # 4, 2007 Moscow Defense Brief

Major Identified Deliveries of Russian Arms in 2007
Our Authors
Mikhail Barabanov. Graduated from the Moscow State University of Culture. Currently employed by the Moscow city
government. Independent expert on naval history and armaments.

Victor Dmitriev is an advisor at the Federal Service for Military and Technical Cooperation of Russia. He has been working
in arms trade field since 1972. Since the middle 1990s he took significant activity in creating and developing a new unit
responsible for the offset deals in state arms export company Rosvooruzheniye. This kind of deal first appeared with signing
a contract to deliver MiG-29 fighters to Malaysia, when the Russian side successfully fulfiled the obligations to establish the
School of Aerospace Engineering at the Malaysia University of Science (Universiti Sains Malaysia).

Fyodor Lukyanov is Editor-in-Chief of the Russia in Global Affairs journal, published in Russian and English with participation
of Foreign Affairs, and an international columnist with the Kommersant daily, Vedomosti, The Moscow Times and Gazeta.ru
online source; leading national radio stations and TV channels. Fyodor Lykyanov graduated from Moscow State University 1991
as a Germanist. He worked as a correspondent, commentator and editor for many Russia media. Member of the Presidium of the
Russian Council on Foreign and Defense Policy, an influential independent organization providing foreign policy expertise.

Konstantin Makienko. Graduated from the Oriental Department at the Moscow State Institute for International Relations
in 1995 and the French-Russian Masters School of Political Science and International Relations in 1996. Head of a project on
conventional armaments at the Center for Policy Studies in Russia (PIR-Center), 19961997. Since September 1997, Deputy
Director of CAST. Author of numerous articles on Russias military-technical cooperation with other countries.

# 4, 2007 Moscow Defense Brief 27