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Saturday, December 29, 2007

How Russia Screws Itself in the Arms Trade

Strategy Page reports:

India and China are both playing rough with their largest arms supplier; Russia. China and India both have price disputes with Russia, and India is also upset that Russia is supplying China with RD93 jet engines for Chinese made fighters that are being sold to Pakistan. Both China and Russia are threatening to halt purchases if Russia does not back off on attempts to raise prices on contracts that have already been agreed to. China is playing a weak position here, because of a Western embargo on arms sales to China (because of China being a sometimes brutal police state and behaving badly by selling weapons to all manner of nasty people). India is in a stronger position, and is buying more and more weapons from Western suppliers. Currently, India is in the market for 126 top-line fighters. India has told Russia that if those RD93 equipped Chinese fighters keep going to Pakistan, Russia can forget about its chances of winning the competition (worth over $6 billion) for the 126 fighters.

How did it get to this?

In November, 2007, after changing its mind several times over the last few years, Russia finally agreed to allow the use of Russian made engines, in Chinese made JF-17 (also known as FC-1) jet fighters that are exported (to Pakistan, Algeria, Egypt, Nigeria, Bangladesh and Saudi Arabia.) Lebanon, Burma, Iran and Sri Lanka have also shown interest in this low cost fighter that is similar to early model F-16s.)

Earlier in 2007, Russia announced that none of the 500 Russian RD-93 jet engines China is buying could be exported to a foreign country. This was a problem, as China needs those engines for the 150 JF17 fighters it is building for Pakistan. What makes this particularly nasty is that Pakistan has invested $150 million in the development of the JF17. Pakistan thought Russia would give China permission to export the RD93 equipped aircraft. After all, China was such a large customer for RD93 engines (originally designed for the MiG-29), and those 500 RD93 engines are worth $1.25 billion.

But apparently India played hardball, and demanded that the Russians forbid the export of the RD93s from China to Pakistan. India is a major customer for Russian weapons, including cooperative development deals. China is a big customer for Russian weapons as well, but India buys more stuff, and is seen as less of a future threat to Russia than China. Pressure from many other nations interested in the JF-17 apparently caused the Russians to finally relent.

But it gets more interesting. China has been developing a similar (apparently identical) engine to the RD93, the WS-13. Actually, this effort is being aided by Russia, which is selling China technology needed for the manufacture of key engine components. Russia isn't happy about this, because they don't want competition in the low cost jet engine market. Then again, China has a history of stealing technology it cannot buy, so the Russians are making the best of a bad situation. China says the WS-13 is nearly ready for service. Maybe, maybe not. Building high performance military jet engines is difficult, and China has had problems mastering this kind of stuff. Not that they will not eventually acquire the skills, but until they do, they need the Russian made RD93s.

China shipped two RD93 equipped JF-17s to Pakistan in March 2007, and informed the Russians that, according to the their interpretation of the 1992 RD-93 contract, China could re-export the RD-93 engines. The situation sat, unresolved, until the Summer of 2007, when the Russians said that they believed that the 1992 contract was quite clear about China needing Russian permission, and China didn't have it. The Russians were playing hardball, at the behest of the Indians. Apparently, India is expected to use this RD-93 veto to get Pakistan to offer up some appropriate in the current peace talks between the two countries.

Russians problems are largely of its own making. In several warship and fighter sales deals, they screwed up and quoted too low a price. Russia admits that, and wants to change to a higher price. Both China and Russia are not cooperating. To further complicate matters, China has been shamelessly stealing Russian military technology, and producing copies, without compensating the Russians for the stolen technology. China denies this, but it's all pretty blatant.

No one knows how this will all turn out. All three nations believe they have strong negotiating positions, but eventually, someone will have to blink, and back off.

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