Russia’s arms export boom stalls; Wisconsin shipbuilding and Trump; Mattis meets industry leaders; and a lot more.
We spend a lot of time talking about U.S. and European defense companies and how they market weapons and equipment overseas. But how is Russia viewing the global arms market? It’s an opaque area that’s difficult to track, but it doesn’t look good.
Enter Sergey Denisentsev of the Moscow-based Center for Analysis and Technology, and a visiting fellow at the Center for Strategic and International Studies in Washington. The expert in the Russian arms trade was in the U.S. last week talking about Moscow’s stalled defense exports.
Arms exports rose rapidly from $6.12 billion in 2005 to $15.7 billion in 2013, according to data presented by Denisentsev. Those figures dipped to $14.5 billion in 2015 and then climbed back to $15 billion in 2016.
“[A]fter a fairly long period of growth from 2005 to 2012, Russia’s arms exports are flat,” he said. China and India accounted for about half of those exports. Russia’s willingness for tech transfer helped it win some business, particularly in India. China “essentially kept the defense industry afloat in the 90s,” Denisentsev said, buying Su-27 fighters, warships, and other weapons developed by the Soviet Union.
There has been a downside to all of the tech transfer. “In some areas the student has already surpassed the teacher,” Denisentsev said. “Russia has completely lost its share of the Chinese market for warships to Chinese shipbuilders.” Russia last delivered a destroyer to China in 2006, he said, while India has ramped up its indigenous production of Russian-designed systems. Now, New Delhi wants more high-tech weapons to come from the U.S. and Europe.
Tech transfer is a hot topic of debate today as U.S. arms makers try to sell weapons overseas. We have often discussed tech transfer and co-production as being wanted by Middle Eastern nations and India. Denisentsev said China is now only interested in more advanced weapons like the Su-35, S-400 surface-to-air missiles and aircraft engines. Other reasons for the stalled exports: the low price of oil, Asian defense companies stepped up their own exports, the collapse of Gaddafi’s Libya (a major importer of Russian weapons), U.S. and European sanctions on Iran, civil war in Syria, and sanctions on Russia.
Plus the Russian military has had a greater need for arms of late, Denisentsev said, which is a good segway to talk about Syria. For the most part, older Russian technology is being used there. More advanced weapons, like cruise missiles, are not exportable. “In general, the Syria campaign has a very limited effect on the Russian arms export outlook for the time being,” he said. Still, Russian companies have pointed to the use of their equipment in marketing arms to potential buyers. Denisentsev noted that the Su-34’s performance in Syria attracted Algeria to buy the planes. “For now, we don’t see any tangible effect of the Syrian campaign on Russian defense exports,” he said.
What about the future of Russian arms deals? New weapons that “represent a new level of technology” — like a fifth-generation fighter jet, tanks, and surface-to-air missiles — entering service in the Russian military “could help Russia to reboot it’s arms trade with its two main partners, China and India,” Denisentsev said. “But the potential for these new system exports is not obvious because they are expected to be expensive … near the western price tags.”
Some Russian experts are also critical on the new arms, Denisentsev said, because they do not follow the traditional Russian model of building “cheap and deadly” weapons. That means Russia needs to focus on new, niche markets and joint development programs, particularly with China and India.
“For now there is not enough political view and military need to launch proper research-and-development projects,” he said. “Over time, however, if the current political situation will deteriorate and there is growing tension between Russia and the west or between the United States and China, the situation could force the Russian and Chinese defense industries to pool their force and resources. That, however will lead to the risk of the Russian defense industry losing its self sufficiency.”
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With Trump in Wisconsin, Governor Pushes Shipbuilding
Lots of press this week about President Trump’s visit to promote American jobs at Snap-on tools in Wisconsin. Here’s something that hasn’t received as much attention. A few weeks ago, Wisconsin Governor Scott Walker wrote to the president touting different American jobs: shipbuilders. Marinette Marine and Lockheed Martin make the Freedom-variant Littoral Combat Ship, or LCS, in Marinette, Wisc., about 170 miles north of Milwaukee. Walker notes that the shipyard contributes more than 7,000 jobs in the Marinette area alone. Walker also points out that the Navy cut the LCS buy from 52 ships to 40 ships during the Obama administration. The governor goes on to write that the Navy now says it needs all 52 again so the Pentagon should fund three of those ships in its 2018 budget proposal, which Trump is expected to send to Congress in May. The Independence-class LCS is built in Alabama by Austal. The local politicians there would also likely support funding for LCS.
A Ship Report You Should Read
Not so fast! Congress should delay the Navy from spending $9 billion on 12 additional Littoral Combat Ships “until more information is known about the frigate's cost, design, and capabilities,” the Government Accountability Office warns in a new report out this week. Remember, a few years ago the Navy decided to add more firepower to the LCS, rebranding it a frigate. In reaction to this week’s GAO report, one source pointed out that the new frigate project has already been delayed in recent years because Congress has not passed annual budgets on time, thus preventing new work for starting.
Mattis Talks with Defense Industry Leaders
Defense Secretary James Mattis sat down with leaders from the three trade associations that represent the defense and aerospace industries last week. The meeting continues the routine dialogue between top Pentagon and industry leaders started under then-Defense Secretary Robert Gates. “The growing and changing threats facing our nation require a holistic approach, the right combination of robust, balanced and stable funding, as well as regulatory reform that speeds development and encourages new technology and capabilities,” said David Melcher, president and CEO of the Aerospace Industries Association. The National Defense Industrial Association and Professional Services Council were the other two groups at last Thursday’s meeting, which included many CEOs from major defense firms. Here’s a picture from inside the room posted by the Pentagon.
What to Expect During Quarterly Earnings
The short answer is not much deviation. Companies will remain upbeat about the potential for defense spending increases. From Byron Callan at Capital Alpha Partners: “We don’t discern shifts in international sales patterns or prospects.” An area to watch: air defense, which Callan calls a “battleground market.” And with all the talk right now about North Korea’s missile program, we’ll likely be hearing about about THAAD, Patriot, MEADS, and other missile defense projects on these calls.
New Passengers on the Trump Train
The White House announced Friday evening that President Trump plans to nominate Scott Garrett and Spencer Bachus to the Export-Import Bank. Garrett — who the Chicago Tribune called “vocal critic” of the Ex-Im — will be nominated as the bank’s president and Bachus as a board member.
Why does this matter? Because companies like Boeing rely on the bank to help finance its airplane sales to airlines around the world. Selling American-made planes means red-blooded American jobs. But the bank has its share of critics, including Trump himself on the campaign trail.
Someone else who might be in line for a senior position at the Pentagon: Jim “Hondo” Geurts, the acquisition executive at U.S. Special Operations Command. Jim McAleese of McAleese and Associates writes that a role for Geurts “is not yet clear,” but that the he has a “strong reputation for high-speed prototyping, responsiveness to SOF needs, plus accessibility to industry.”
The BBC and Baseball
Last summer, I visited Dynetics, the company that developed the MOAB, in Huntsville, Alabama. Last Thursday night, I went live on international television from a baseball game in Miami to talk about that MOAB, the “Mother of All Bombs.” It’s a fascinating, and frankly entertaining, story about reporting, sourcing and technology.
It began around 6 p.m. on Florida’s Turnpike. I was on the way to see my New York Mets face the Miami Marlins when my phone started buzzing. The caller ID displayed “Unknown.” I answered anyway. To my surprise, a polite BBC producer was on the other end from London. Earlier in the day, the U.S. military announced it had dropped a MOAB (for the first time) on an ISIS cave in Afghanistan. It was a big deal for a lot of reasons (which I won’t go into here) but the BBC wanted me to come on the air, live, to talk about the strike.
The request was not at all out of the ordinary, but I was in no place to make it happen. First, I was wearing a Mets t-shirt. Secondly, I had just my iPhone. Third, I’m going to be at a baseball game with thousands of screaming fans. There’s clearly no way I could find a quiet spot to go live from the game via Skype. But, the producer on the other end of the phone some 4,000 miles away wouldn’t take no for an answer. I agreed to scout out the scene at the stadium and get back to her in an hour to see if we could make it happen.
This is where sourcing comes in handy. Turns out, Justin Pallenik, who handles PR for us here at Defense One, went to college with a Marlins beat writer at one of the big South Florida newspapers. Maybe he could help put us in touch with the Marlins PR team? And maybe they could help find a quiet place for me to do a stand up? And just maybe I could pick up a collared shirt at the Marlins team store to look a little more presentable.
Justin explained the situation to the Marlins. They graciously agreed to help. The souvenir shop didn’t have polo shirts, so I opted for 2017 All Star Game quarter-zip. Before I know it, I found myself in a quiet conference room under Marlins Park talking about the MOAB strike in Afghanistan. As for the game, the Mets won 9-8 in 16 innings. All-in-all, a good, productive night.