Ukraine earned over 1bn dollars exporting military goods, services

Analysis & Commentary: by Serhiy Zhurets
Defense-Express website, Kiev, in Russian 12 Jan 09
BBC Monitoring Service, UK, in English, January 12, 2009

Ukraine has earned at least 1-1.2 bn dollars from the export of special goods and services in 2008, expert Serhiy Zhurets writes. Despite a certain rise in sales year on year, the profitability of Ukrainian arms exports has been decreasing, due particularly to higher prices for ferrous metals and workforce and the hryvynya's depreciation, he noted.

Analyzing exports by sectors and providing statistics, Zhurets concluded by saying that aircraft engines and other equipment together accounted for 27 per cent of all military-purpose exports. The following is the text of the report by Zhurets entitled "Sorting out armaments", posted on the Ukrainian military Defense-Express website; subheadings are as published:

The Centre for Army, Conversion and Disarmament Studies has carried out a large-scale evaluation of national armaments activity against the background of four recent years jointly with the Defense Express information and consulting group, taking into account statements made by Ukrainian and foreign arms producers, industrialists and politicians, using international and its own factual and statistical databases and methodologies.

According to the centre's preliminary information, the country earned at least 1bn-1.2bn dollars last year from special exports and services. At first sight, this index is not bad from the statistical point of view. But at what expense has this goal been attained and what does this Ukrainian arms range contain?

Despite certain dynamics in growth, the profitability of arms exports for Ukrainian plants and special exporters has been falling, including in 2008, due to a rise in price for metals, components, labour and the fall in the dollar exchange rate, even in comparison with 2000.

Besides this, domestic growth did not keep pace with the growth of the world arms market itself, as it expanded quite dynamically. It was estimated as being worth over 20bn dollars in 2000, 25bn dollars in 2003, 36bn dollars in 2006 and over 55bn dollars in 2007.

The volumes of world arms purchases practically followed the rise in oil prices, and the momentum of this trend will be even more noticeable in the results for 2008. Meanwhile, while Ukraine's arms share on the world market equalled was about three per cent in 2000, the billion dollars won by Ukraine is less than two per cent.

The right to export goods and services of a military and dual designation is enjoyed in Ukraine by the state company Ukrspetseksport and its affiliated entities: Ukroboronservis, Progress, Ukrinmash and Spetstekheksport. There are around 14 additional entities in Ukraine entitled to operate on the foreign arms market upon the approval of their price policies and strategies by Ukrspetseksport as the state monopolist.

As a rule, they are subordinated to the Industrial Policy Ministry and manufacture finished types of production. Ukraine's total arms exports is an aggregate index of revenues from the work of both authorized special exporters as intermediaries and manufacturers themselves selling their products on their own.

According to the Centre for Army, Conversion and Disarmament studies (Kiev-based non-government analytical entity established in 1998), the peak of Ukraine's revenues from exporting military equipment is around 1.2 bn dollars (see Arms Exports table).

The data has been obtained on the basis of processing open information sources, statements made by officials and industrialists, information from international reports on conventional weapons, including the UN Register.  Calculation errors may range from 10 per cent to 15 per cent.

The table presents both initially announced and refined data for certain years. It took into account the fulfilment of foreign trade contracts by both special exporters as well as enterprises of the Industrial Policy Ministry: those possessing individual licences for foreign economic activity and those operating on the basis of bilateral intergovernmental agreements with the Russian Federation, just like the Defence Ministry's enterprises, which are actively involved in making exports supplies of armaments and military equipment. The results for 2008 are forecasts.

Arms exports*: 1998 - 300m dollars; 1999 - 446m dollars; 2000 - 600m dollars; 2001 - 575m dollars; 2002 - 550m dollars; 2003 - 714m dollars; 2004 - 780m dollars; 2005 - 800m dollars; 2006 - 1bn dollars; 2007 - 1bn-1.2bn dollars; 2008 - 1bn-1.2bn* dollars

Ukraine supplied goods of a military and dual designation to 80 countries in all regions: to CIS, 23 Asian and 15 African countries and some countries on the American continent.  

The 10 biggest importers of Ukrainian armaments and component units are Russia, India, China, Azerbaijan, Georgia, Kazakhstan, France, Algeria and others. The Ukrspetseksport company managed to broaden sales markets of its produce in 2007 due to the conclusion of contracts with Kenya, Chad and Thailand.

The head of the State Exports Control Service, Yuriy Petrochenko, has announced that Ukrainian companies trading in products and services of a military and special designation stepped up their activity in 2008. "They have become more aggressive in the good sense: the number of their applications to us for permits to conduct negotiations and conclude contracts has risen.

This concerns companies like Ukrspetseksport, Ukrinmash, Spetstekhnoeksport and others," he said. According to Mr Petrochenko, the trend in increasing modern armament systems supplies and fall in hardware sales from the Defence Ministry's warehouses goes on. Ukrainian companies are beginning to place their production abroad. A substantial share of cooperation supplies with the Russian Federation remains.

Meanwhile, the share held by Russia among CIS countries in Ukraine's arms exports equalled 20.9 per cent in the first half of 2008, with Azerbaijan in second place with 6.7 per cent, followed by Georgia (6 pe! r cent) and Kazakhstan (5.5 per cent).

Meanwhile, the geography of Ukraine's arms supplies in 2007 looked like this: 28 per cent - South-East Asian countries; 22 per cent - Russia; 14 per cent - CIS countries, not including Russia; 18 per cent - Middle East and North Africa; 12 per cent - Africa, not including North Africa; 6 per cent - USA, Western and Eastern Europe countries, Latin America (* based on data from the Ukrspetseksport state company)

The major components of the country's military exports are products and technologies of defence enterprises, surpluses of armaments and military hardware items from Defence Ministry's stocks, services in military hardware renovation and modernization, joint research and design projects. In the meantime, the most capacious positions in the structure of Ukraine's arms range belong to activities and produce related to the aerospace sector.

Ukrainian special exports in 2005-2008 were based in the main on sales of "second-hand" aviation hardware. More than 150 planes, over 60 of them being training and battle L-39 ones in different modifications, were sold. The average price equivalent for this period was over 450m dollars, while the average annual - around 100m-120m. dollars. The most brilliant transaction was the finalization of the contract to supply 14 modernized MiG-29 planes, along with spare parts for them, to Azerbaijan.

Within the framework of this contract, Ukrainian parties aspired to resolve the tasks of importance within the framework of the future large-scale programme of modernizing the MiG-29 fleet, but this time for the Ukrainian Air Force, without involving the Russian party.

In particular, it was related to the rise in target detection and pursuit range by an on-board radar system, along with adding the possibility of using "air-to-land" missiles. But as a result, the task was ! only partially resolved. Ukraine has a redundant fleet of MiG-29 fighters manufactured between 1986 and 1991. The maximum export price of these machines in battle worthy condition is around 25m dollars, though the most likely price is 15m dollars.

The average price equivalent of supplies in 2005-2008 is 400m dollars. Specialists from the Dnipropetrovsk-based Pivdenne design bureau [also known as Yuzhnoye] and Pivdenmash [also known as Yuzhmash], with mediation and coordination of the Ukroboronservis state enterprise, fulfil works in warranty and author's supervision over the condition of 80 R-20 Voyevoda strategic missile systems (code 15A18I, SS-18 Satan according to NATO classification) with which the missile task force of the Russian Federation is equipped. Voyevodas will be battle ready in the missile task force till 2016.

In late April 2008 the Ukroboronservis company signed a contract on manufacturing and supplying 24 Zenit-2SB missile carriers from Ukraine with the International Space Services company from Russia, which is the integrator of the Land Launch project. The total value of the contracts is over 1bn dollars.

The programme has been scheduled until 2014. The cost of delivering! cargo into orbit using the Zenit is one third less than with the European Ariane-type rocket, with the cost of a launch from it coming to 80m dollars. The total cost of annual services and supplies in the space sector, both military and civilian, for the next five years can be estimated as worth over 110m dollars.

The lion's share of Ukraine's exports of high-precision missile armaments belongs to "air-to-air" R-27-type medium-range guided aviation missiles in different modifications. The average price equivalent of supplies in 2005-2008 is 350m dollars. Upon receipt of components and orders from Russia, missiles are assembled at the Kiev-based Artem state joint-stock holding company.

The export volumes of aviation missiles depend on the destinations and the amounts of sales of Russian fighters. In the period of 2005 to 2008, Ukraine exported 1,089 R-27 missiles (963 units to China, other buyers being Algeria, Azerbaijan and Kazakhstan). According to Forecast International, the average cost of a medium-range missile of the "air-to-air" class is around 400,000 dollars.

The average cost of Slavic items with twice a long a range can be taken as 300,000 dollars. Then the highest possible profitability for Ukraine of aircraft missile supplies in this segme! nt is more than 300m dollars in the period of 2005-2008.

Despite substantial potentialities of Ukrainian ship building sector and its capacity to produce and repair ships of almost all classes, Ukrainian shipyards did not receive military orders in 2005-2008. Meanwhile, naval exports during this period can be estimated as worth 300m dollars thanks to the Mykolayiv-based Zorya-Mashproekt state enterprise, a gas turbine building research production complex.

Technical maintenance and repair of operable gas turbine units supplied earlier for the naval forces of China, Singapore, USA, Romania and Greece are fulfilled on a permanent basis. Presently, the major naval partners of producers from Mykolayiv in supplying gas turbines for newly built ships are India, Russia and China.

The enterprise signed a contract on participation in the development of gas turbine engines for prospective ships with the world's largest ship building company DCNS (France) in 2008. At the same time, Zorya-Mashproekt will supply turbines to a number of modern naval ships which will be exported to foreign customers by the French company DCNS.

Ukraine's exports of anti-aircraft missile systems are fulfilled only from the Defence Ministry's stocks. The average price equivalent of supplies in 2006-2008 is 80m dollars. Supply of Buk-M1 anti-aircraft systems to Georgia in 2007 has a special place, but not only due to political tensions. It was the first Buk division whose fighting capacity had been renewed thanks exclusively to the means of domestic defence enterprises.

This methodology can be applied for repairing Ukrainian divisions of Buk-M1 anti-aircraft systems, as all of them have already worked out all determined pre-repair terms, but it was impossible to make arrangements for their repair in Russia in the last 10 years.

The parties did not reach agreement on price. According to the ad hoc investigatory commission of the Supreme Council [Ukrainian parliament] for clarifying the circumstances of the supply of Ukrainian military hardware to Georgia, a division of Buk-M1 anti-aircraft systems (control vehicle, target detection and designation station, six automotive launchers, three launching and charging units and 48 missiles) were sold to Georgia for 28m dollars, and this price was described as inadmissibly low.

In its turn, the resolution of the Cabinet of Ministers dated 14 July 2005, which approved the list of the Defence Ministry's surplus assets, determines the cost of the elements of Buk-M1 anti-aircraft missile system (in the fourth category condition preceding writing off, as the "Georgian" Buk had been prior to the beginning of its restoration and repair in Ukraine).

The approved sale prices are as follows: 9N470 control centre costs 3m hryvnyas (600,000 dollars [exchange rate being around five hryvnyas per dollar at that time]), 9A39 launching and charging unit - 1.4m hryvnyas (280,000 dollars), 9S310 automotive firing unit - 2.7m hryvnyas (540,000 dollars), 9S18 Kupol target detection and designation unit - 3.57m hryvnyas (715,000 dollars). The total cost of this metal within the scale of one Buk-M1 anti-aircraft system is 5.935m dollars. The rest is the cost of the repairs, missiles and profit.

In the course of the last three years, Ukrainian defence enterprises and special exporters should have earned at least 120m dollars from supplies of new types of radar equipment and modernization of the systems that had been supplied earlier. The state-owned enterprise Iskra Research Production Complex (SE Iskra RPC) planned to carry out export supplies in the amount worth 20m dollars, including supplies of civilian radar systems.

Last year's confirmed contracts consist of supply of a 36D6-M radar station to a NATO member state (presumably to the USA) and modernization of 36D6 stations supplied earlier to European partners. Two 36D6 stations were also supplied to Georgia in 2006.

There is still certain export demand for the Kolchuga-M passive radio reconnaissance station manufactured by the Donetsk-based state joint-stock holding company Topaz. According to different estimates, 57 units of the Kolchuga in its old and new versions were beyond Ukraine and 19 units within Ukraine as of 2007. Kolchuga-M stations were supplied, in particular, to Ethiopia (3 units), China (4 units) and Turkmenistan (3 units) before 2006. One Kolchuga-M system consisting of four machines was sold to Georgia in 2006.

The enterprise was due to fulfil at least three contracts on supplying nine Kolchuga-M stations in 2008, two of them for export. In the meantime, the prices of the Kolchuga have remained quite stable since 2002 - since the time of the "Kolchuga scandal" [related to allegations of sales of Kolchugas to Iraq] which stood this item in good stead. Topaz director Yuriy Ryabkin said that the cost of one Kolchuga was within the range of 5m dollars.

Having fulfilled the contract to supply 320 T-80UD tanks to Pakistan in 1999, Ukrainian tank builders took part in tenders to sell and manufacture new tanks for Turkey, Malaysia and Greece, but unsuccessfully. During the period from 2006 till 2008, new Ukrainian tanks (T-84, Oplot, T-80ud, Bulat armoured vehicle) were not supplied for export.

Nevertheless, special exporters successfully sold heavy armoured machinery during this period from army stocks, passing pre-sale preparations at the Defence Ministry's specialized repair works. Over 300 tanks of different types were sold. Another consignment of 33 T-72 tanks manufactured in 1979-1983 was dispatched for supply to Kenya in mid-2008. These tanks, along with other weapons, were on board the Faina ship captured by pirates.

According to regulations in force in Ukraine determined by the 2005 resolution of the Cabinet of Ministers on surplus assets of the Defence Ministry, the average cost of a T-72 tank (second category! ) was determined as 250,000 hryvnyas (50,000 dollars), and the average of a T-72 tank (fourth category) as 170,000 hryvnyas (34 thousand dollars).

In these conditions, 74 T-72 tanks were sold to Georgia for 250,000 dollars per unit, and this price level is not at all bad. The average price equivalent of supplies in 2005-2008 is 250m dollars, taking into account contracts with Pakistan on supplying motor transmission units for Al Khalid tanks.

During the period from 2005 till 2008, Ukraine exported over 320 machines, including [armoured vehicles] BTR, BMP-1 and 2 and BRDM, with their total estimated cost coming to around 80m dollars. The number of new or substantially upgraded machines from this fleet of armoured vehicles is 49, or 15 per cent: BTR-3 in different versions, along with BMP-1 with Shkval fighting modules (10 units for Georgia in 2008).

For the moment, the contract signed by Ukraine in 2007 on supplying 96 new BTR-ZE3 domestically developed and manufactured armoured personnel carriers to Thailand worth 118m dollars can be regarded as the biggest in this segment. In this case, the cost of one machine is 1.2m dollars.

The price is quite European, as the BTR is equipped with expensive remote-controlled empty fighting module Saturm with a heavy set of armaments. True, however, that there is one problem: due to political reshuffles and the replacement of some military officials in! Thailand, this contract is not yet being fulfilled.

The success of Ukrainian defence exports still depends to a great extent on exporting hardware from the Defence Ministry's stocks. If the tasks of technical re-equipment of Ukrainian plants, development of new types of armaments on a new elementary basis and the purchase of these types by the Ukrainian army are ignored, any further increase in arms exports volumes is quite doubtful.

Meanwhile, the national defence budget for 2009 envisages the allocation of a sum equivalent to just 23.5m dollars for research works in development of new armaments and purchases of hardware.

The sum allocated for these purposes in 2008 was almost seven times higher: 160m dollars. That is why export orders are likely to be the only salvation for almost all defence enterprises. Buyers can hopefully be found for any goods: the only issue is in the price.