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12 May, 2011  ▪  Serhiy Zghurets

Examining Weapons

Research supervisor, Center for Army, Conversion and Disarmament Studies; Chief Editor, Arms Export and Defense Complex of Ukraine magazine

According to the Stockholm International Peace Research Institute (SIPRI) figures, Ukraine dropped out of the top ten exporters of arms in 2010, landing 13th in the global ratings of weapon suppliers. Officially, special domestic exporters and industry players only sold US $201mn worth of weapons, whereas Ukrainian Week’s sources claim that Ukraine earned over US $1bn on weapons.

Counting weapons

SIPRI does not use official data from exporting countries in its annual reports. Instead, it collects its own information from publications and through contact with exporters and government authorities. What’s more, SIPRI only looks at data using five “key armament” categories, leaving out the delivery of parts and additional supplies. This means that the top ten rating of suppliers does not match official data; and official numbers on exports of weapons, if disclosed at all, cannot be considered comprehensive.

In 2010, the state-owned Ukrspetsexport[1] and its subsidiaries exported arms and special services worth US $956.7mn, up 19.66% from 2009. These are Ukrspetsexport’s own figures, and the company was the key supplier of weapons in Ukraine until Ukroboronprom, (The Ukrainian Defense Authority), was set up last year. Yet, this number only takes into account transactions carried out directly through Ukrspetsexport. However, last year Ukraine had nearly a dozen companies and entities authorized to independently export military products and services.

In contrast to the above stated figures a joint analysis of signed and executed contracts by the analytical publication ‘Arms Export and Defense Complex of Ukraine’ and the Center for Army, Conversion and Disarmament Research, estimated that profits from selling arms hit US $1.2bn in 2010, even allowing for a margin of error. This analysiscovered dual-use products and services, including launches of carrier rockets (and the participation in their production), involvement of military aircraft in carrying weapons, (for instance, under the 2009 SALIS  program AN-124 ‘Ruslan’ planes spent over 11.500 hours in the air), vehicles and military units, as well as parts sold by Ukrainian companies to the Russian Federation directly.

The contracts reported by representatives of Ukraine over 2008-2010, which were either carried out or are being prepared, is optimistically estimated at a total of US $5.7mn, and their deadlines range from three to five years. This means that these contracts alone will not let the benchmark of annual exports of Ukrainian weapons fall under US $1bn over this period.

Unfortunately this is where the potential of the Ukrainian defense industry ends. The world arms market is expanding every year. Countries are continually increasing their defense budgets against the backdrop of growing prices for military products and a devaluating dollar. The global arms market was worth US $20bn in 2000, US $40bn in 2005, and US $70bn in 2010. Ukraine accounts for US $1bn of this (the margin of error included), that means a range of 0.12% to 0.8% of the global market, depending on which period. Is that a little, or a lot? It’s important to distinguish revenues from profits. In the 90s, Ukraine intensely traded what was left of its soviet military past. To sell an APC (Armored Personnel Carrier) for US $100,000, one would only need to give it a fresh lick of paint. The whole price, less the paint, was the profit. Today, this kind of business is not so profitable – the leftovers are just not good enough. Ukraine now sells a set of new APC-4 to Iraq, basically making them from scratch. The vehicle costs over US $1mn, the big risk being that the producers will get less than 10% profit from the deal even in a best case scenario. This is typical of the whole defense industry in Ukraine: new arms produced here bring little profit as a result of the huge initial costs of setting up mass production.

Productivity is even lower. Nearly 120,000 people are employed within the barely alive defense enterprises in Ukraine. Therefore, based on a US $1.2bn profit estimate from arms export in 2010, each employee’s output was worth US $10,000. By comparison, Israel has two major exporters of weapons – the privately-owned Elbit Systems and the state-owned IAI with 27,000 employees in total. In 2009, the income of these two companies from military export orders reached US $5.6bn, which means over US $200,000 worth of output from each employee and the big producers of military vehicles in Europe boast similar numbers.

Challenges of tomorrow

Weapons, or their parts and supplies, are the only high technology currently exported by Ukraine. But the presence of these Ukrainian products on foreign markets, and signed contracts to supply arms to foreign armies, largely results from the research and industrial heritage of the past which somehow continues to be used to its maximum extent. Surely this inertia will end someday. Ukraine’s defense industry, as it stands today, simply does not have the sufficient reserves to design and produce the weapons of the future.

The country needs hi-tech equipment. Currently, the strongest equipment builders and industrial engineers include the US, Germany, France, the UK, Italy, Sweden, Japan, Switzerland, and Belgium. These countries are the leaders of arms exports in both general and specialized segments. This is clear because the production of hi-tech weapons requires hi-tech equipment. Even the Americans admit that many things labeled “made in USA,” from air-to-air missiles to Abrams tanks, could never be assembled without the necessary equipment from Japan. Meanwhile, another squadron of countries whose machine building development is synchronized with their weapons progress, both on domestic and external markets, is building muscle. They include Korea, China, Taiwan, Singapore and Malaysia. Microelectronics, optoelectronics, and various sensors are the competitive advantages of products made by these countries of “the second wave.” Re-equipping production facilities is what Ukraine should be spending some of its weapon export revenues on!

Finally, knowledge is arguably the only inexhaustible resource Ukraine has to offer. It is not subject to trade deficit and can also be sold many times over. Therefore, cultivating intellectual resources in the defense industry, developing academic schools and creating interest in high technology and the country’s defense are the most important conditions for development in this sphere. Without this, Ukraine will lose all its future battles concerning weapons.

LEADING GLOBAL WEAPONS EXPORTERS IN 2007-2009

Below is the average data on arms exports from the world’s leading suppliers of weapons and equipment. This rate differs from SIPRI data since it reflects exports in real numbers. Discrepancies in each national estimation system, restricted access to data, and different evaluation methods used by government and non-government international analytical organizations make it impossible to draw an unambiguous hierarchy of the leading weapons exporters. For this chart, the author preferred to use information published by the official authorities of certain countries. In 2010, only the US, Russia and South Korea disclosed this kind of information.

US; UK; Ukraine; Germany; Canada, Sweden; France; China; Turkey; Spain; Italy; Russia; South Korea; Israel

GROWTH OF THE GLOBAL WEAPONS MARKET

The market for weapons is growing, in dollar terms, largely due to increasing world defense budgets, higher prices for new weapons and equipment, and the devaluation of the dollar

Global weapons market growth based on various analyzed and averaged data

Average export indicators of Ukraine’s weapons, military vehicles and services to the global market

Global market and weapons exports from Ukraine, according to the Arms Export and Defense Industry of Ukraine

Ukraine’s curve shows the average exports of weapons, military equipment and services from Ukraine to the global market

CALLOUTS:

The military authority of Thailand is going to buy 200 Oplot tanks from Ukraine at an estimated value of nearly US $231.1mn

In April of this year Iraq is expecting 400 Ukrainian produced APCs for its troops. The contract was signed in 2009 and is estimated at US $550mn.



[1]Ukrspecexport is an authorized state-owned intermediary company engaged in exports and imports of military and special-purpose products and services.


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