Jane's Defence Weekly Mixed fates [Content preview Subscribe to IHS Jane s Defence Weekly for full article] The post-cold War destinies of the Russian, Ukrainian, Polish and Belarusian defence industries have ultimately seen them tread very different paths. Nick de Larrinaga reports Ever since the post-cold War stagnation suffered by the defence industries of Russia, Ukraine, Poland and Belarus - along with those in the rest of the former Warsaw Pact nations - their paths have diverged considerably: a situation now exacerbated by the recent crisis over Russia's interventions in Crimea and eastern Ukraine. In Russia itself the policies of President Vladimir Putin have pumped large sums of money into defence. Russia's defence spending growth initially also had a knock-on effect, boosting the defence industries of Ukraine and, to a lesser extent, Belarus, where defence concerns still maintained close ties with those in Russia. At the same time a busy upgrade and export trade in relation to former Soviet equipment was also fruitful for states well used to operating such systems. Poland, meanwhile, turned openly to the West, with NATO and EU membership creating both a desire to create new, Western military technologies and heralding a period of sustained economic growth needed to support a buoyant defence industry. In all four countries a period of sustained defence industry consolidation has occurred and, indeed, is still ongoing. Levels of defence technology and industrial production capabilities vary significantly across these four nations, while each has adopted different approaches to defence industrial development based on their own specific circumstances. Equally varied has been each nation's successes on the export market. Poland Poland's accession to NATO membership in 1999 spurred a gradual modernisation programme aimed at aligning the country's old Soviet military equipment to NATO standards. The country also gained membership of the European Union in 2004, with EU and NATO membership serving as the two pillars of the country's economic and military security and outlook. The drive towards NATO interoperability and the purchase of Western defence equipment prompted a widespread procurement push. This has seen the country buy military equipment from a range of Western sources and become one of the leading arms importers over the past decade. Although the bulk of the cash behind this procurement drive left the country, Poland's defence industry has also benefited from involvement, via offsets, in the purchase of Western military equipment. Page 1 of 9
One major example of this industry development can be seen in Poland's Aviation Valley Association, centred around the city of Rzeszow in the south of the country. While the area has long had ties to the aviation industry, the association itself was formed in April 2003, in part to organise Polish industry involvement in the country's purchase of 48 Lockheed Martin F-16C/D Block 52M+ Fighting Falcon fighter aircraft from the United States. The biggest chunk of this participation was centred around the creation by Pratt & Whitney of an F100 turbofan engine production plant, but also involved participation by Polish firms in a host of other activities. From 18 members in 2003, the Aviation Valley Association's membership has now grown to more than 110 members. Since 2001 Poland's defence spending has been set at a guaranteed level of at least 1.95% of gross domestic product (GDP). While this falls just short of the NATO stipulation to spend 2% of GDP on defence, it has placed Poland as one of the few nations to come close to meeting this target (only 4 of the current 28 NATO members achieves this). Combined with a growing economy, boosted by unfettered access to European markets via the country's EU membership, this has created a strong backdrop of steady defence budget growth over the last decade, bolstering the local defence industry. Poland defence budget. (IHS) 1533596 Page 2 of 9
Poland's defence spending in 2014 is set to be PZL22.2 billion (USD10.5 billion), according to data from IHS Jane's Defence Budgets, representing 1.98% of GDP. Despite the 1.95% budget stipulation, Poland passed a temporary suspension to this rule in order to run a defence budget at 1.76% of GDP in 2013 necessitated by wider economic issues. Despite this hiccup in 2013, in constant 2014 dollars defence spending is set to rise to USD12.3 billion in 2018. Manpower and personnel expenses account for the largest proportion of Poland's defence budget, but spending on procurement is set to rise over the coming years. Poland set a spending target of 24.7% of its defence budget on procurement in 2013: almost double the percentage procurement accounted for in the years following independence, when reforming the country's military structures was the priority. Including spending on research, testing, development, and evaluation (RTD&E), Poland is now projecting that procurement will account for 27% of the country's defence budget by 2017. In absolute terms the country spent USD2.23 billion on defence procurement in 2013, with this set to rise to USD3.23 billion by 2018. Poland's EU membership has thrown up issues for the country's defence industry, however. The European directive on defence and security procurement (2009/81/EC), in particular, has presented problems due to its effective prohibition of offsets in defence procurement. Instead, Poland has embarked on a policy of 'Polonisation', using Article 346 of the EU Treaty to broadly restrict purchases to bidders with a local footprint in Poland. One result of the 'Polonisation' policy is to create a wave of foreign direct investment (FDI) in Poland's defence industry, with a host of Western defence suppliers buying outright or partial ownership of Polish defence firms. FDI by defence firms into the Polish market has also been driven by efforts from aerospace and defence companies to benefit from Poland's low labour costs. Examples of this include PZL Mielec, now owned by Sikorsky; EADS PZL 'Warszawa-Okecie', majority owned by Airbus; and PZL Swidnik, now an AgustaWestland subsidiary. Page 3 of 9
Poland defence budget. (IHS) 1533596 Russia Despite broadly stagnating since the end of the Cold War Russia's defence industry has been boosted by the massive resurgence in Russian defence spending since 2008. Prior to this Russia's defence industry, although still capable of designing and producing high-end military equipment, lacked reliable procurement orders of meaningful size. As a result industry too often was restricted to creating military equipment that either never progressed beyond the prototype stage or saw only limited production runs. Examples of this include the MiG 1.44 and Sukhoi Su-47 fighters, as well as the T-95 main battle tank (MBT). Consequently, industry suffered from poor economies of scale, general supply chain inefficiencies, meaning that research and development (R&D) capabilities suffered. The needs of the Russian state armaments programme (Gosudarstvennyi Programme Vooruzheniya - GBV), first launched in 2007 and then updated in 2011, have prompted a massive rise in Russian Page 4 of 9
defence spending since 2008. In total the latest GPV is expected to see between USD600-760 billion spent on defence by 2020. As of 2014 Russia's annual defence spending stands at USD78.14 billion and by 2018 this is set to rise by 54% to USD103.16 billion, according to IHS Jane's Defence Budget figures. This hefty increase in spending has been ongoing over the last half decade, with Russia's military expenditures having risen by 92.4% since 2010 in nominal terms. Russia spends a significant 3.44% of its GDP on defence and this is forecast to rise closer to 4% by 2018. While the country's economy has grown fairly consistently under Putin, it is now faced with international sectoral sanctions as a result of the Ukraine crisis that could impede further growth in GDP. One result of this could be a slowdown in defence spending, although this would appear unlikely at this time. Firstly, Russian military spending has continued to grow as a proportion of the overall federal budget in recent years, maintaining fast growth despite any fluctuations in overall GDP. Currently, Russia's defence budget accounts for 20.1% of all federal spending (up from 12.6% in 2010), with this trend likely to continue - especially if GDP is affected by the sanctions imposed by the EU and United States. Additionally, that the cause of the sanctions is essentially military in nature would tend to undermine any downward pressures that defence spending may feel; indeed, the current crisis could prompt further rises in Russian defence spending. Russia's defence industry has already prospered from this rise in defence spending, with procurement totalling USD13.79 billion in 2014 and set to rise to USD21.3 billion by 2018. The country's procurement spending is implemented under the annual state defence order (Gosudarstvennyi Oboronnyi Zakaz - GOZ), and although topline defence spending has increased, Russia - and its defence industry - have struggled to actually implement and absorb this funding. For example, in 2011 issues with implementing the GOZ led to the dismissal of several senior Russian defence industry and military personnel. These issues now appear to have been resolved. Page 5 of 9
Russia's defence budget. (IHS) 1526079 Off the back of the resurgence in Russian defence spending, the country's defence industry has prospered. Defence companies and military programmes that had stalled, or only progressed very slowly, since the Cold War have now started delivering. Given the general paucity of defence deliveries in the decade after the end of the Cold War, every single service branch found itself in need of significant, if not complete, recapitalisation. Indeed, the GPV envisages the replacement of 70% of the country's defence equipment inventory with modern systems by 2020. As a result, every single sector of the country's defence industry is now engaged in major defence acquisition and development projects. Russia's defence industrial capabilities cover the full spectrum of military products, from the design and construction of nuclear-powered submarines, major surface combatants, advanced combat aircraft, large transport aircraft, armoured vehicles, air-defence systems, to advanced radars and command and control systems. The only area where Russia today is lacking in terms of industrial capability is in the indigenous design and production of large unmanned aerial vehicles. Page 6 of 9
Even by the end of the Cold War Russia's capabilities at the higher-spectrum of defence technology had slipped behind that seen in the West and under the decade-long period of post-soviet underinvestment in defence that gap has widened. However, backed by a massive rise in military spending, Russia is beginning to pick up the pace of defence R&D again and is beginning to narrow this gap. The Soviet Union was entirely self-sufficient for its defence needs and the Russian military to this day remains almost exclusively provided for by the same firms that equipped it in Soviet times. The break-up of the Soviet Union has, however, left many of these enterprises outside the Russian Federation - particularly in Poland, Ukraine and Belarus. Additionally, the lack of R&D development within Russia's defence industry has forced the country to look abroad for the first time for military equipment. In some cases the need to purchase defence equipment from abroad has also been driven by the inability of Russian industry to match the production quality, delivery schedules and price of foreign suppliers. Notable examples of foreign purchases from Western suppliers include the purchase of Italian Light Multirole Vehicles (LMVs), German soldier training systems, French electrooptical systems and, most notably of all, French Mistral-class helicopter carriers. The Russian Helicopters production line at Rostov-on-Don. It remains to be seen what impact the embargo of exports by Ukraine to Russia will have on Russia's helicopter output. Most Russian helicopters are powered by Motor-Sich helicopter engines built in Ukraine. (A Drwiega) 1448686 Page 7 of 9
Ukraine Ukraine's defence industry has suffered since the country's independence from a paucity of domestic orders and is now facing the loss of its principal customer: Russia. Despite this, Ukraine's defence industry remains large, with the country having inherited some of the flagship industrial organisations of the Soviet Union, including Antonov, Motor-Sich, Zorya-Mashproekt and the Kharkiv Morozov Machine Building Design Bureau (KDB). With domestic spending on defence historically low and inefficiently distributed, Ukraine's defence firms have largely sustained themselves on exports. Besides exports of subsystems and other components - both major and minor - to Russia, the country's defence industry had found a solid trade in the upgrade and modernisation of Soviet-era military equipment. Many of Ukraine's key defence industrial concerns (over 160) have been consolidated within the government-owned Ukroboronprom holding company, created in 2010. Ever since the loss of Crimea in March, Ukraine has increasingly ramped up the repair and modernisation of its military inventories to cope with the needs of its armed forces. As such, the loss of Russia as a major export customer may not be felt by many Ukrainian defence firms in the short term. In particular, the Ukrainian military has focused on improving its armoured vehicles, aircraft, air-defence systems and anti-tank missile capabilities. Additionally, the country has also embarked on purchasing new military equipment, notably two contracts for a total of 370 utility vehicles from JSC AutoKrAZ for UAH361 million and contracts with KDB for BTR-4 8x8 and Dozor-B 4x4 armoured vehicles. Belarus Belarus inherited a large number of former Soviet defence firms following its independence. However, compared with Ukraine it received companies with a much narrower focus and arguably firms of lesser importance to the Soviet/Russian supply chain. The country's defence industry has struggled since independence, seeing itself overshadowed by Ukraine as a supplier to Russia while lacking sufficient resource and direction to improve its indigenous capability. Development and control of Belarus' defence industry is overseen by the State Military-Industrial Committee of the Republic of Belarus (Goskomvoenprom - VPK). The VPK was founded in 2003 in order to provide a sense of direction to Belarus' defence industry efforts while also being the principal conduit for attempts to strengthen the country's defence industrial relations with foreign nations. Belarus's fairly meagre defence budget, USD791 billion in 2014, provides little for the country's defence industry once personnel and operational expenditures are accounted for. However, the state of affairs today is a marked improvement on that found over a decade ago when spending was even lower, little priority was given to defence, and there was little direction to the country's defence industry development or military modernisation. Page 8 of 9
Following the creation of the VPK in 2003, Belarus established a State Armament Programme (SAP) covering the period 2006-2015. Although this focused broadly on the modernisation of existing Belarussian inventories, it provided the first solid framework for the development of the country's armed forces - including timelines and spending plans - for industry to work with. This was followed in 2010 with the expansion of the VPK's role to cover all aspects of defence industrial policy. The VPK launched a defence industry development plan in 2011, lasting until 2015 and focusing on the development of unmanned technologies, military geoinformation systems, fire control systems, countermeasures and special forces equipment. The VPK is currently working on the creation of a new industry development plan covering the period 2015-2025. In 2012 Belarus announced plans to consolidate its defence firms into a single holding company, to be called Beloboronprom, on similar lines to the holding companies seen in Russia, Ukraine and Poland. However, little progress has thus far been made, with the VPK noting in 2014 that it was continuing to work towards the establishment of the holding company. Copyright IHS Global Limited, 2014 For the full version and more content: IHS Jane's Defence Industry and Markets Intelligence Centre This analysis is taken from IHS Jane s Defence Industry & Markets Intelligence Centre, which provides world-leading analysis of commercial, industrial and technological defence developments, budget and programme forecasts, and insight into new and emerging defence markets around the world. IHS defence industry and markets news and analysis is also available within IHS Jane s Defence Weekly. To learn more and to subscribe to IHS Jane s Defence Weekly online, offline or print visit http://magazines.ihs.com/. For advertising solutions contact the IHS Jane s Advertising team Page 9 of 9