The Russian Defense Industry: Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017

This report is the result of SDI/ICD Research’s extensive market and company research covering the Russian defense industry. It provides detailed analysis of both historic and forecast defense industry values including key growth stimulators, analysis of the leading companies in the industry, and key news..

Why was the report written?

The Russian Defense Industry Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017 offers the reader insights into the market opportunities and entry strategies adopted by foreign original equipment manufacturers (OEMs) to gain market share in the Russian defense industry.

What is the current market landscape and what is changing?

Russia is the world’s third largest defense spender and is forecast to spend US$556.4 billion on defense over the forecast period. Over the forecast period, the Russian government is forecast to continue investing in the modernization of its armed forces, including the replacement of Soviet era equipment.

What are the key drivers behind recent market changes?

Russian defense expenditure was primarily driven by factors such as the level of global demand for its defense systems, its focus on homeland security and its ongoing military reform program. Russia is expected to spend US$277 billion on the acquisition of weapons systems during the forecast period. Ongoing modernization of armed forces is forecast to affect growth of its defense market over the forecast period.

What makes this report unique and essential to read?

The Russian Defense Industry Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017 provides detailed analysis of the current industry size and growth expectations from 2013 to 2017, including highlights of key growth stimulators. It also benchmarks the industry against key global markets and provides a detailed understanding of emerging opportunities in specific areas.

The report provides detailed analysis of the current industry size and growth expectations from 2013 to 2017, including highlights of key growth stimulators. It also benchmarks the industry against key global markets and provides detailed understanding of emerging opportunities in specific areas.

The report includes trend analysis of imports and exports, together with its implications and impact on the Russian defense industry.

The report covers five forces analysis to identify various power centers in the industry and how these are forecast to develop in the future.

The report allows readers to identify possible ways to enter the market, together with detailed descriptions of how existing companies have entered the market, including key contracts, alliances and strategic initiatives.

The report helps the reader to understand the competitive landscape of the defense industry in Russia. It provides an overview of key defense companies together with insights such as key alliances, strategic initiatives and a brief financial analysis.

In 2008, the Russian government passed the Strategic Sectors Law (SSL), requiring any foreign firms wishing to purchase a controlling interest in a domestic defense firm to be pre-approved by the government. If approved, the foreign firm can only operate as a minority shareholder in the venture and cannot make decisions which would affect the manufacture or sale of the defense systems produced. This restrictive market entry policy has severely limited opportunities for prospective foreign OEMs to enter the Russian defense industry.

From the Soviet era onwards, Russia has traditionally developed its own defense technology in competition with Western nations. Following the disbanding of the Soviet Union, Russia’s investment in the modernization of its defense systems reduced drastically, as funds were diverted towards the reconstruction of the country. Since this disbanding, Russia has been reluctant to allow foreign companies into its defense industry, an attitude that has proved to be a strong entry barrier for foreign OEMs.

The Russian defense sector is saturated with domestic firms, which cater to the majority of the Russian armed forces’ defense needs. Therefore, entry for foreign defense companies is severely restricted, with governmental approval required. Also, foreign firms are not allowed to establish ventures in order to manufacture defense goods in Russia, with foreign companies only permitted to hold a minority share in Russian defense firms and not having the right to make decisions pertaining to the manufacture or sale of defense systems.

Russian defense expenditure registered a CAGR of 10.19% over the review period and is estimated at US$77.9 billion in 2013. It is forecast to grow at a CAGR of 18.00% over the forecast period to reach an estimated US$151 billion in 2017. In total, the country is forecast to spend an estimated US$556.4 billion on its armed forces over the forecast period, of which approximately US$277 billion will be allocated for capital expenditure.

Russia’s homeland security is forecast to grow at a CAGR of 5.90% over the forecast period to reach an estimated US$83.3 billion in 2017. This spending will primarily focus on equipping personnel with surveillance and early warning systems and on providing satellite images of critical infrastructure for disaster recovery planning.

Over the review period, Russia was the world’s second largest arms exporter behind the US. The low cost arms produced by the country and large amount of credit offered to countries such as Venezuela increased arms sales over the review period, with India and China accounting for the highest share of Russia’s defense exports. Over the forecast period, Russia is forecast to continue to account for a significant share of global arms exports.

1 Introduction 

1.1 What is this Report About? 

1.2 Definitions 

1.3 Summary Methodology 

1.4 SDI Terrorism Index 

1.5 About Strategic Defence Intelligence (www.strategicdefenceintelligence.com) 

2 Executive Summary 

3 Market Attractiveness and Emerging Opportunities 

3.1 Defense Market Size Historical and Forecast 

3.1.1 Russia’s annual defense expenditure is forecast to reach US$XX billion by 2017 

3.1.2 Defense exports, homeland security and military reform to factor defense expenditure 

3.1.3 Defense expenditure as a percentage of GDP forecast to rise to XX% by 2017 

3.2 Analysis of Defense Budget Allocation 

3.2.1 Capital expenditure forecast to be allocated an average of XX% of the total defense budget over the forecast period 

3.2.2 Expenditure on weapons acquisition forecast to reach US$XX billion by 2017 

3.2.3 Russia is forecast to spend US$XX billion on revenue expenses over the forecast period 

3.3 Homeland Security Market Size and Forecast 

3.3.1 Russian homeland security spending forecast to reach US$XX billion by 2017 

3.3.2 Protection for key infrastructure and civilians to factor growth in the homeland security market 

3.3.3 Strategic Defense Initiative (SDI) Terrorism Index considers Russia a “highly affected” region 

3.3.4 Russia faces a significant threat from terrorists 

3.4 Benchmarking with Key Global Markets 

3.4.1 Russian defense budget growth to be higher than majority of large spenders over the forecast period 

3.4.2 Russia projected to become world’s third largest defense spender by the end of the forecast period 

3.4.3 Russia allocated XX% of its GDP to defense in 2011 

3.4.4 Russia is “highly affected” from acts of terrorism 

3.5 Market Opportunities: Key Trends and Growth Stimulators 

3.5.1 Russia to invest in submarines 

3.5.2 Russia to invest in naval surface combatants to counter the threat arising from the growing naval power of South-East Asian countries 

3.5.3 Russia to invest in the procurement of armored vehicles 

3.5.4 Russia to invest in the procurement of helicopters and fighter aircraft 

3.5.5 Russia forecast to invest in the procurement of surface-to-air missiles 

3.5.6 Russia to invest on cyber weapons 

4 Defense Procurement Market Dynamics 

4.1 Import Market Dynamics 

4.1.1 Limited domestic defense capabilities factors the country’s defense imports 

4.2 Export Market Dynamics 

4.2.1 Over the review period, Russia was the world’s second largest arms exporter 

4.2.2 The US, Germany and France are Russia’s main defense export competitors 

4.2.3 Aircraft account for the majority of Russia’s defense exports 

5 Industry Dynamics 

5.1 Five Forces Analysis 

5.1.1 Bargaining power of supplier: low to high 

5.1.2 Bargaining power of buyer: high 

5.1.3 Barrier to entry: high 

5.1.4 Intensity of rivalry: high 

5.1.5 Threat of substitution: high 

6 Market Entry Strategy 

6.1 Market Regulation 

6.1.1 Entry into defense sector is highly regulated 

6.2 Market Entry Route 

6.3 Key Challenges 

6.3.1 Aversion of Russian government to Western defense technology 

7 Competitive Landscape and Strategic Insights 

7.1 Competitive Landscape Overview 

7.1.1 Domestic industry in the process of consolidation for better focus and fund allocation 

7.1.2 Defense sector is dominated by domestic firms, with no foreign presence 

7.2 Key Domestic Companies 

7.2.1 Sukhoi: overview 

7.2.2 Sukhoi: products 

7.2.3 Sukhoi: recent announcements and strategic initiatives 

7.2.4 Sukhoi: alliances 

7.2.5 Sukhoi: recent contract awards 

7.2.6 Splav – overview 

7.2.7 Splav – major products and services 

7.2.8 Tactical Missiles Corporation: overview 

7.2.9 Tactical Missiles Corporation – major products and services 

7.2.10 Tactical Missiles Corporation – recent announcements and strategic initiatives 

7.2.11 Tactical Missiles Corporation – recent contract wins 

7.2.12 Almaz-Antey – overview 

7.2.13 Almaz-Antey – Major Products and Services 

7.2.14 Almaz-Antey – recent announcements and strategic initiatives 

7.2.15 Almaz-Antey – alliances 

7.2.16 Almaz-Antey – recent contract wins 

7.2.17 United Aircraft Corporation – overview 

7.2.18 United Aircraft Corporation – major products and services 

7.2.19 United Aircraft Corporation – recent announcements and strategic initiatives 

7.2.20 United Aircraft Corporation – alliances 

7.2.21 United Aircraft Corporation – financial analysis 

7.2.22 KBP Instrument Design Bureau – overview 

7.2.23 KBP Instrument Design Bureau – major products and services 

7.2.24 KBP Instrument Design Bureau – recent announcements and strategic initiatives 

7.2.25 KBP Instrument Design Bureau – recent contract wins 

7.2.26 V.A.Degtyarev Plant – overview 

7.2.27 V.A.Degtyarev Plant – major products and services 

7.2.28 Kurganmashzavod – overview 

7.2.29 Kurganmashzavod – major products and services 

7.2.30 Kurganmashzavod – recent announcements and strategic initiatives 

7.2.31 Kurganmashzavod – alliances 

7.2.32 Kurganmashzavod – recent contract wins 

7.2.33 Uralvagonzavod – overview 

7.2.34 Uralvagonzavod – major products and services 

7.2.35 Uralvagonzavod – recent announcements and strategic initiatives 

7.2.36 Uralvagonzavod – alliances 

7.2.37 Uralvagonzavod – recent contract wins 

7.2.38 Izhevsk Mechanical Works – overview 

7.2.39 Izhevsk Mechanical Works – major products and services 

7.2.40 Izhevsk Mechanical Works – recent announcements and strategic initiatives 

7.2.41 Irkut Corporation – overview 

7.2.42 Irkut Corporation – major products and services 

7.2.43 Irkut Corporation – recent announcements and strategic initiatives 

7.2.44 Irkut Corporation – alliances 

7.2.45 Irkut Corporation – recent contract wins 

7.2.46 Irkut Corporation – financial analysis 

7.2.47 Oboronprom Corporation – overview 

7.2.48 Oboronprom Corporation – major products and services 

7.2.49 Oboronprom Corporation – recent announcements and strategic initiatives 

7.2.50 Oboronprom Corporation – alliances 

7.2.51 Oboronprom Corporation – recent contract wins 

8 Business Environment and Country Risk 

8.1 Economic Performance 

8.1.1 Construction Output, Current Prices, Local Currency 

8.1.2 Construction Output, Current Prices, US Dollars 

8.1.3 Current Account Balance as Percentage of GDP 

8.1.4 Deposit Interest Rate 

8.1.5 Exports of goods and services, current prices 

8.1.6 Fiscal Balance as a percentage of GDP 

8.1.7 Foreign Direct Investment 

8.1.8 GDP at Purchasing Power Parity 

8.1.9 GDP, Constant Prices (Local Currency) 

8.1.10 GDP, Constant Prices (US$) 

8.1.11 GDP, Current Prices (Local Currency) 

8.1.12 GDP, Current Prices (US$) 

8.1.13 General Government Final Consumption Expenditure 

8.1.14 Gross Fixed Capital Formation, Current Prices 

8.1.15 Imports of goods and services 

8.1.16 Inflation, average consumer prices 

8.1.17 Interest Rate (Lending) 

8.1.18 Manufacturing Output, Current Prices (Local Currency Bn) 

8.1.19 Manufacturing Output, Current Prices (US$ Billions) 

8.1.20 US$- Exchange Rate (Annual Average) 

8.2 Energy and Utilities 

8.2.1 Crude Oil Distillation Capacity 

8.2.2 Electricity Exports 

8.2.3 Electricity Imports 

8.2.4 Electricity Installed Capacity 

8.2.5 Fossil Fuels Proved natural gas reserves 

8.2.6 Fossil Fuels- Proved oil reserves 

8.2.7 Hydroelectricity Installed Capacity 

8.2.8 Natural Gas Consumption 

8.2.9 Natural Gas Imports 

8.2.10 Natural Gas Production 

8.2.11 Net Conventional Thermal Electricity Generation 

8.2.12 Net Geothermal, Solar, Wind, and Wood Electric Power Generation 

8.2.13 Net Hydroelectric Power Generation 

8.2.14 Nuclear Electricity Net Generation 

8.2.15 Petroleum, Consumption 

8.2.16 Petroleum, Production 

8.3 Minerals 

8.3.1 Coal Consumption 

8.3.2 Coal Production 

8.4 Social & Political Risk 

8.4.1 Political Stability Index 

8.4.2 Transparency Index 

9 Appendix 

9.1 Contact Us 

9.2 About SDI 

9.3 Disclaimer 

Table 1: Russian Defense Expenditure, 2008–2012 

Table 2: Russian Defense Expenditure, 2013–2017 

Table 3: Russian GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2008–2012 

Table 4: Russian GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2013–2017 

Table 5: Russian Defense Budget Split Between Capital and Revenue Expenditure (%), 2008–2012 

Table 6: Russian Defense Budget Split Between Capital and Revenue Expenditure (%), 2013–2017 

Table 7: Russian Capital Budget Allocation (US$ billion), 2008–2012 

Table 8: Russian Capital Budget Allocation (US$ billion), 2013–2017 

Table 9: Russian Revenue Budget Allocation (US$ billion), 2008–2012 

Table 10: Russian Revenue Budget Allocation (US$ billion), 2013–2017 

Table 11: Russian Homeland Security Budget (US$ billion), 2013–2017 

Table 12: Benchmarking with Key Markets – 2007–2011 vs. 2012–2016 

Table 13: SDI Terrorism Index 

Table 14: Sukhoi – Major Products & Services 

Table 15: Sukhoi – Alliances 

Table 16: Sukhoi – Recent Contract Wins 

Table 17: Splav – Major Products & Services 

Table 18: Tactical Missiles Corporation – Major Products & Services 

Table 19: Tactical Missiles Corporation – Recent Contract Wins 

Table 20: Almaz-Antey – Major Products & Services 

Table 21: Almaz-Antey – Alliances 

Table 22: Almaz-Antey – Recent Contract Wins 

Table 23: United Aircraft Corporation – Major Products & Services 

Table 24: United Aircraft Corporation – Alliances 

Table 25: KBP Instrument Design Bureau – Major Products & Services 

Table 26: KBP Instrument Design Bureau – recent contract wins 

Table 27: V.A.Degtyarev Plant – Major Products & Services 

Table 28: Kurganmashzavod – Major Products and Services 

Table 29: Kurganmashzavod – Alliances 

Table 30: Kurganmashzavod – Recent Contract Wins 

Table 31: Uralvagonzavod – Major Products & Services 

Table 32: Uralvagonzavod – Alliances 

Table 33: Uralvagonzavod – Recent Contract Wins 

Table 34: Izhevsk Mechanical Works – Major Products & Services 

Table 35: Irkut Corporation – Major Products & Services 

Table 36: Irkut Corporation – Alliances 

Table 37: Irkut Corporation – Recent Contract Wins 

Table 38: Oboronprom Corporation – Major Products & Services 

Table 39: Oboronprom Corporation – Alliances 

Table 40: Oboronprom Corporation – Recent Contract Wins 

Figure 1: Russian Defense Expenditure, 2008–2012 

Figure 2: Russian Defense Expenditure, 2013–2017 

Figure 3: Russian GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2008–2012 

Figure 4: Russian GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2013–2017 

Figure 5: Russian Defense Budget Split Between Capital and Revenue Expenditure (%), 2008–2012 

Figure 6: Russian Defense Budget Split Between Capital and Revenue Expenditure (%), 2013–2017 

Figure 7: Russian Capital Budget Allocation (US$ billion), 2008–2012 

Figure 8: Russian Capital Budget Allocation (US$ billion), 2013–2017 

Figure 9: Russian Revenue Budget Allocation (US$ billion), 2008–2012 

Figure 10: Russian Revenue Budget Allocation (US$ billion), 2013–2017 

Figure 11: Russian Homeland Security Budget (US$ billion), 2013–2017 

Figure 12: SDI Terrorism Heat Map, 2011 

Figure 13: SDI Terrorism Index, 2011 

Figure 14: Benchmarking with Key Markets – 2007–2011 vs. 2012–2016 

Figure 15: Defense Expenditure of the World’s Largest Military Spenders (US$ Billion), 2011 and 2016 

Figure 16: Defense Expenditure as a Percentage of GDP of Largest Military Spenders (%), 2011 

Figure 17: Russian Defense Export Trend, 2007–2011 (TIV values) 

Figure 18: Russian Defense Exports by Country (%), 2007–2011 

Figure 19: Russian Defense Exports by Category (%), 2007–2011 

Figure 20: Industry Dynamics Porter’s Five Forces Analysis 

Figure 21: United Aircraft Corporation – Revenue Trend Analysis (RUB Billion), 2008–2010 

Figure 22: United Aircraft Corporation – Operating Profit (RUB Million), 2008–2010 

Figure 23: United Aircraft Corporation – Net Profit Trend Analysis (RUB Million), 2008–2010 

Figure 24: Irkut Corporation – Revenue Trend Analysis (US$ Million), 2006–2009 

Figure 25: Irkut Corporation – Operating Profit (US$ Million), 2006–2009 

Figure 26: Irkut Corporation – Net Profit Trend Analysis (US$ Million), 2006–2009 

Figure 27: Russian Construction Output, Current Prices, Local Currency (In Billions), 2001–2010 

Figure 28: Russian Construction Output, Current Prices, US Dollars (In Billions), 2001–2010 

Figure 29: Russian Current Account Balance as Percentage of GDP, 2008–2017 

Figure 30: Russian Deposit Interest Rate, 2001–2010 

Figure 31: Russian Exports of goods and services, current prices (US$ Billion), 2001– 2010 

Figure 32: Russian Fiscal Balance as a percentage of GDP, 2002–2010 

Figure 33: Russian Foreign Direct Investment (US$ Billion), 2001–2010 

Figure 34: Russian GDP at Purchasing Power Parity (US$ Billion), 2006–2015 

Figure 35: Russian GDP at Constant Prices (Local Currency Billion), 2006–2015 

Figure 36: Russian GDP at Constant Prices (US$ Billion), 2006–2015 

Figure 37: Russian GDP at Current Prices (Local Currency Billion), 2006–2015 

Figure 38: Russian GDP at Current Prices (US$ Billion), 2006–2015 

Figure 39: Russian General Government Final Consumption Expenditure (US$ Billion), 2001–2010 

Figure 40: Russian Gross Fixed Capital Formation, Current Prices (US$ Billion), 2001–2010 

Figure 41: Russian Imports of goods and services (current US$ Billion), 2001–2010 

Figure 42: Russian Inflation, average consumer prices, 2008–2017 

Figure 43: Russian Lending Interest rate, 2001–2010 

Figure 44: Russian Manufacturing Output, Current Prices (Local Currency Billion), 2001–2010 

Figure 45: Russian Manufacturing Output, Current Prices (US$ Billion), 2001–2010 

Figure 46: Russian US$- Exchange Rate (Annual Average), 2002–2011 

Figure 47: Russian Crude Oil Distillation Capacity (Thousand Barrels Per Cal Day), 2000–2009 

Figure 48: Russian Electricity Exports (Billion Kilowatt hours), 2001–2010 

Figure 49: Russian Electricity Imports (Billion Kilowatt hours), 2001–2010 

Figure 50: Russian Electricity Installed Capacity (Million Kilowatts), 2000–2009 

Figure 51: Russian Fossil Fuels Proved natural gas reserves (Trillion Cubic Feet), 2002–2011 

Figure 52: Russian Fossil Fuels- Proved oil reserves (Billion Barrels), 2002–2011 

Figure 53: Russian Hydroelectricity Installed Capacity (Million Kilowatts), 2000–2009 

Figure 54: Russian Natural Gas Consumption (Billion Cubic Feet), 2001–2010 

Figure 55: Russian Natural Gas Imports (Billion Cubic Feet), 2001–2010 

Figure 56: Russian Natural Gas Production (Billion Cubic Feet), 2001–2010 

Figure 57: Russian Net Conventional Thermal Electricity Generation (Billion Kilowatt hours), 2001–2010 

Figure 58: Russian Net Geothermal, Solar, Wind, and Wood Electric Power Generation (Billion Kilowatt hours), 2001–2010 

Figure 59: Russian Net Hydroelectric Power Generation (Billion Kilowatt hours), 2001–2010 

Figure 60: Russian Nuclear Electricity Net Generation (Billion Kilowatt hours), 2001–2010 

Figure 61: Russian Petroleum Consumption (Thousand Barrels Per Day), 2002–2011 

Figure 62: Russian Petroleum Production (Thousand Barrels Per Day), 2002–2011 

Figure 63: Russian Coal Consumption (Million Short Tons), 2001–2010 

Figure 64: Russian Coal Production (Million Short Tons), 2001–2010 

Figure 65: Russian Political Stability Index, 2002–2010 

Figure 66: Russian Transparency Index, 2002–2011