Ukraine’s belated decision on March 29 to stop supplying weapons and military equipment to Russia, a month after its troops seized the Crimean peninsula, is likely to lead to the cancellation of numerous international contracts signed by Moscow. The decision is likely to impede Russia’s military-defense industry significantly.
As the second largest exporter of arms with the world’s third military budget of $91 billion, Russia is extremely dependent on Ukrainian supplies, which accounts for 87 percent of its military imports, according to the Stockholm International Research Institute.
The news announced by recently appointed Ukroboronprom head Yuriy Tereshchenko came just two weeks after his predecessor, Valentyna Drozd, on March 13 said that the state-owned multi-enterprise military and defense producer had shipped radar and guidance instruments for Russian tanks and aircraft.
“We won’t produce weapons and then sell it to the country which is invading our territory and uses these armaments to shoot at us,” Prime Minister Arseniy Yatsenyuk said on April 1. The measure extends to all arms and military component producers.
The crisis between the two former Soviet republics escalated on Feb. 27, when Russian soldiers began their seizure of Crimea, an autonomous republic within Ukraine. Severing ties with Ukraine could have a far more dramatic impact on Russia’s defense program than any Western sanctions restricting sales of Western military hardware, experts note.
It was a logical step, said Anton Mikhnenko, an analyst for Kyiv-based Center for Army Conversion and Disarmament Studies. “The Soviet Union was also exporting weaponry to Nazi Germany in the 1930s and 1940s, but stopped… after war broke out between the countries in 1941,” he explains.
Helicopter and aircraft engines and components for missiles are a major part of Ukraine’s supplies to Russia.
Deliveries in 2012-2013 also included 13 An-140 and one An-148 transport aircraft.
Freezing military exports to Russia would not be so critical for the Russian side if it only impacts the country’s domestic market. But the riskiest part of this deal is Moscow’s inability to fulfill multibillion-dollar international contracts without Ukrainian inputs. For instance, the popular Mi-8 helicopter fully depends on engines made by Zaporizhya-based Motor Sich, a privately-owned company. “Russia needs Motor Sich for air,” comments Mikhnenko.
However, Concorde Capital’s head of research Oleksandr Parashchiy predicts that neither Russia nor Motor Sich will halt cooperation involving helicopter engines since they depend on each other too much. The company may simply ignore or skirt the measure via legal loopholes.
Motor Sich’s press secretary Anatoliy Malysh told the Kyiv Post that company has not cancelled any supplies to Russia and is not going to do so. “Our production is not military, it deals with transportation,” he said.
The company sells half of its production to Russia. Moreover, Motor Sich suffers more if it stops supplying engines for the jointly-produced An-148 planes. Ukraine and Russia had plans to produce 150 planes of this type worth $4.5 billion.
Motor Sich’s share price on the Ukrainian Exchange fell by around 18 percent since the beginning of the standoff in Crimea.
Thus, the government’s decision won’t be easy for the nation’s military and defense industry. Around 90 percent of the country’s military production is sold abroad and worth $1.3 billion. Russia is the final destination of around 30 percent of it. Ukraine furthermore needs Russian production too, as Motor Sich uses components imported from Russia for its aircraft engines.
Other exporters to Russia include Mykolayiv-based Zorya-Mashproekt, which sells several types of turbines to Russia, including those installed on military ships. Another is Kharkiv-based Hartron, which supplies the control systems for Russian missiles.
The Yuzhmash plant in Dnipropetrovsk is the only service provider for Satan missiles that Russia uses. Meanwhile, aircraft producer Antonov, headquartered in Kyiv, may continue selling to Russia since its production is classified as non-military, experts said.
It will be difficult to substitute Russia’s demand for Ukrainian military production, says Mykola Sungurovsky, a leading military analyst for the Razumkov Center in Kyiv.
Now, the profitability of Ukroboronprom remains uncertain. Last year Ukroboronprom had $55 million of net profit. It made $1.7 billion in revenue while $300 million came from doing business with Russia.
“We will continue to actively trade, and hope to meet last year’s sales figures in 2014,” said Ukroboronprom’s Tereshchenko, adding that the state-owned concern will focus on supplying and modernizing Ukraine’s military. Experts see him as an effective manager and say his appointment is the right decision so far.
Ukroboronprom covers only 30 percent of the Ukrainian military’s needs, with the remainder covered by imports. Implementing NATO standards in the country’s military production could improve it, said Mikhnenko of the Center for Army Conversion and Disarmament Studies.
Editor’s Note: The story has been updated on Apr. 4 to include the comment from Motor Sich’s press secretary Anatoliy Malysh.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected]. Kyiv Post editor Mark Rachkevych contributed to this
