Russia Defence & Security Report Q1 2008

Russia's defence exports rose considerably in 2007 due to a number of high-profile orders secured with Venezuela, Iran, India, Algeria and most recently Indonesia. In the fourth quarter of 2007, Indonesia secured a US$1bn loan from a Russian bank to purchase six Sukhoi fighter aircraft. It is probable that Indonesia will have to request additional finance from overseas banks given that the defence budget is small compared to its relatively ambitious procurement programme. The budget remains under 1% of GDP, despite the 13% increase from the 2006 to the 2007 general budget. However, despite the boom in overseas demand for Russian defence products, there are obstacles to the Russian industry benefiting from the deals. It is estimated that Russia may require up to 100 patents to fully protect its defence exports, but there are currently only 15 defence systems that are under patent protection. Consequently, Russia's defence industry may be in danger of losing between US$5bn-$6bn per annum due to a failure to patent military hardware that is regularly exported.

Other defence industry developments in 2007 include the Russian government confirming plans to establish three shipyard holding companies. The firms have not been selected yet but some have been mentioned, namely Severnaya Verf and Baltiisky Zavod, which are majority-owned by Mezhprombank through United Industrial Corporation. The Kalingrad-based Yantar shipyard was also named as a possible candidate. The selected companies will cover a range of production lines, including naval ship and submarine production into a streamlined process. In Q307, Sukhoi Aviation and the Italian Aeronautica signed a US$25mn contract to jointly produce commercial aircraft. In recent years Sukhoi has managed to corner much of the Asia Pacific market, with significant orders from Indonesia. Indeed, following the success of Sukhoi-designed jets, the Russian aviation industry has managed to establish itself as a principal player in the global US$500bn military fighter and transport plane market. The Sukhoi-Aeronautica contract represents one of the first joint ventures into commercial aircraft.