Amidst the Ukraine crisis, Russian President Vladimir Putin is calling for more independence of Russia’s military-industrial complex from components made by foreign companies. With this in mind, Russia Direct analyzes how Russia and Ukraine have been competing for deals in the foreign arms market.

A Ukrainian soldier, supported by armoured personnel carriers, mans a checkpoint near the town of Slaviansk in eastern Ukraine. Photo: Reuters

After the collapse of the Soviet Union, Ukraine inherited a disproportionate share of the Soviet military-industrial complex, including missile technology and nuclear warheads. As a result, Ukraine quickly gained a foothold in the world arms market, often competing with Russia as a rival for lucrative arms sales. While both Russia and Ukraine have attempted to thrive independently of each other, it’s becoming increasingly clear that both need each other more than they would care to admit.

The Soviet military-industrial complex, which employed about 3 million people at its peak, left 3,594 enterprises in Ukraine. Almost all of these Ukrainian enterprises had cooperative ties with companies remaining in Russia at a time when the Soviet military-industrial complex fell victim to the severe economic dislocation of the 1990s.

For the new authorities in Ukraine, it was easier and more profitable to sell weapons from Soviet-era warehouses, the benefit coming from the massive stockpiles left behind in the wake of the fall of communism. They did this throughout the 90’s, supplying military equipment at bargain prices to hotspots such as Yemen, Sudan, Somalia and the Central African Republic.

By 1997, due to the lack of government orders, defense enterprises in Ukraine decreased by five times. Instead of 350 aircraft per year, the production output in Ukraine dropped to zero. Instead of 800 tanks, in 1994 not even a single one was produced. Ukrainian shipbuilding, which took on 40 percent of all orders for vessels in the USSR, was almost completely destroyed.

However, Ukraine remained competitive when it came to aviation, tank and rocket production, as well as in the production of components and assemblies, without which they could not sustain Russian companies going onto the world market. Therefore, by the mid-90’s, Ukrainian enterprises survived the years of hardship and began to seek overseas earnings.

The Third World: A conflict of interests

In addition to the historically predetermined military-technical cooperation with Russia, large export contracts with the countries of Africa, Pakistan, Iraq, India, Thailand, China and Latin America helped to stop the epic collapse of the Ukrainian military-industrial complex. Through these contracts, Ukrainian arms exporters began to put pressure on Russia, which viewed these countries and regions as its most important markets.

The first major contract Ukrainian weapons manufacturers received was from Pakistan in 1996, which has been deprived of its military strength by the U.S. Ukraine beat out Russia for the contract and supplied the Armed Forces of Pakistan 300 T-80 UD tanks. This large purchase by Pakistan eventually played into the hands of Russia, which finally convinced India of the need to purchase the T-90. Besides the tanks, Pakistan acquired engine-transmission compartments, and this partnership between the two countries continues to this day.

Ukraine found that it could even make an offer to Pakistan’s main rival, India. It all started in 1995 with supply trucks. Today, however, this has evolved into cooperation for the modernization of a fleet of 900 T-72 tanks and 600 T-55 tanks, which has caused a direct clash of Ukrainian and Russian interests. Moreover, Ukraine is successfully promoting on this traditionally “Russian” market its Barer-B AT assault weapon, in competition with the Russian Attack-B.

Ukrainians even ventured into the “holy of holies” of Russian military export markets – China, which is very interested in the Ukrainian defense industry in terms of acquiring new technology. In 1994, Ukraine supplied China with 56 guided air-to-air missiles, and in 2013, it sold China two giant amphibious Zubr hovercraft together with the technical documentation.

The sale caused an outcry in Russia, given that Russia was already negotiating with China on the eve of the contract. However, Russia’s conditions were more stringent. First, a series of 10-15 ships would be built in Russia, and only after their completion and delivery would Russia transfer the technical documentation.

Ukraine has even found success in the markets of Thailand and Brazil, where neighbors were openly promoting Russia. In Thailand, in the summer of 2011, a contract was signed for $140 million for the supply of 121 BTR-3-E1 with support machines and 49 T-84U Oplot tanks to the tune of $231 million. The Ukrainians beat out the Russian T-90.

In Brazil, where the military deals are not made in haste, the Ukrainian representation has been involved in negotiations for the supply of Dozor-B armored personnel carrier (APCs), and it intends to promote the establishment of a joint venture specializing in the manufacture of armored vehicles.

However, the greatest success Ukraine has seen is from its space program. Surpassing the interests of Russia’s Roscosmos, in 2011, Ukrainians were able to negotiate with the local authorities on the joint construction of a spaceport and the launch of the Ukrainian Tsiklon-4 rocket carrier.

As recently resigned Prime Minister Mykola Azarov said, the Ukrainian side will be directly involved in all stages of the design and construction of the spaceport. The launch of the first satellite was already scheduled in 2010.

However Russia intervened in the affair, and Ukraine's partnership for the production of the rocket carrier and the project’s implementation was moved to 2014.

Another major market for Ukraine was Iraq, which, still before the impending withdrawal of U.S. occupation forces, began to increase its armed forces in the face of many more years of battling fundamentalists, while also realizing its vulnerable position in the Persian Gulf, surrounded by not-so-friendly neighbors. However, this experience turned out not to be a success for Ukrainian weapons manufacturers.

In 2009, Baghdad signed a contract worth $460 million for the supply of a total of 420 BTR-4E, and Iraqis were to receive all APCs by the middle of 2012. Russian manufacturers, as the press reported, did not have access to this tender, and its fate was decided in Washington rather than in Baghdad.

However, the fate of the contract was not as fortunate as the previous contracts to sell, on the whole, very high-quality Ukrainian armored vehicles. Until early 2013, under this contract Iraq received only 88 armored personnel carriers in two shipments (26 were shipped in April 2011 and 62 in October 2012).

In 2012, the carriers had already given rise to criticism by the Iraqi military, and the delivery of 42 carriers, sent to Iraq in the spring of 2013, was rejected by the client. They delivery was even refused to be unloaded at the port. The host side allegedly found a crack in the hull of one of the carriers. In September, Iraq finally canceled the contract.

As a result, the Ukrainian side has suffered huge financial losses for its SE PACIFICA freight vessel, which long stood in the bay, due to delay in shipping metal to India. Only in December 2013 did the vessel return to Odessa.

Russia is also a player in the Iraqi arms market, but Russian-Ukrainian interests do not clash there. In 2012, a number of Russian and world media rumors emerged about the cancelation of the largest weapons contracts over the past ten years between Russia and Iraq to the tune of $4.2 billion.

Russian and international media accused representatives of Ukraine, who allegedly wanted to get a part of the contract, of spreading misinformation. However, the contents of the contract, including air defense systems and helicopters, are not manufactured in Ukraine.

A Ukrainian soldier stands on top of an armoured personnel carrier at an army checkpoint during a referendum on self-rule in the southeastern port city of Mariupol. Photo: Reuters

Can Russia shake off its dependence on Ukraine?

Although they compete on the arms markets with finished products at the production stage, Russia and Ukraine continue to cooperate closely. More than 70 percent of the suppliers of systems and components for the Ukrainian defense plants are located in Russia. Without the participation of Russia, Ukraine can only manufacture outdated tanks and APCs. However, Russia is strongly dependent on the Ukrainian defense industry, as its share on the Russian market is close to 60 percent.

However, the change of power resulting from the change in government in Kiev makes further cooperation improbable at best. Recently Ukroboronprom halted the delivery of weapons and military equipment to the Russian Federation. Until the moment the conflict is de-escalated, relations in this sphere between Ukraine and Russia will remain frozen.

In recent years, Russia has taken several measures to shake off its dependence on the Ukrainian military-industrial complex. In particular, the supply of engines for helicopters from Ukraine began to be replaced by Russia’s own production. The complete replacement, according to Russian Ministry of Industry, will take about 2-2.5 years.

In Russia, the production of engines for the Yak-130 training aircraft has begun, which were previously made ​​in Ukraine. Russia is designing and manufacturing the Topol-M, Yars, and Bulava modern ballistic missiles without CB Yuzhnoe.

During the creation of the new Ka-60, Russia abandoned the production of Motor-Sich helicopter engines. Unlike the AA S-300 missile system, the S-400 Triumph no longer uses Ukrainian components. Russia has also acquired the rights to the Ukrainian military transport version of the An-140, which is assembled by the Aviacor plant in Samara.

Taking into perspective the current climate of confrontation, threats to cut off military-technical cooperation can be a useful tool for applying pressure. However, the final split of the two military-industrial complexes from each other can badly damage Russian industry, and a large number of Ukrainian companies will face significant consequences as well.