A Middle East arms race sounds like bad news to most people, but for state-owned defense manufacturer Ukroboronprom it could be good business.
At the state concern’s Ukrainian Defense & Security Forum ’16 on Feb. 18, the country’s military manufacturers gathered to hawk their wares and seek new markets. The country’s previous main export market, Russia, is now closed following the Kremlin’s annexation of Crimea two years ago.
Oleg Batyuk, managing partner at Dentons Kyiv, who spoke at the forum, said Ukraine should instead look to the Mideast for buyers.
“The Ukrainian defense industry has key niches that it could fill in the Middle East,” he said.
The forum came amid a flurry of export-oriented development in Ukraine’s arms industry, as it strives to find export markets to replace that of Russia. And for Ukraine, the Middle East is already becoming increasingly attractive, with a number of key deals already in place.
In December, Antonov announced that it had reached a preliminary agreement to sell 30 military cargo jets to Saudi Arabia. The two countries will also produce airplanes in Saudi Arabia itself through a joint partnership agreed on Feb. 23.
Turkey and Ukraine recently announced a joint defense modernization project that will see the two countries cooperate on updating their tank forces. Meanwhile, the Ukrainian and Iranian governments signed a memorandum of understanding on March 7 detailing, among other things, the relaunch of aircraft production at an Antonov-operated factory in the Islamic republic.
Ukraine’s export potential to the Middle East will be discussed in-depth at the Kyiv Post’s Capturing New Markets Conference on March 29 at the Hilton Kyiv Hotel.
Going post-Soviet
Since Russia attacked Ukraine after the EuroMaidan Revolution, the country’s once-burgeoning defense industry has lost its main export market. Roughly 70 percent of Ukroboronprom’s exports were going to Russia at the time of the annexation of Crimea in March 2014, when they were banned.
With Russia’s aggression, Ukraine also lost a component of its military-industrial complex, which was still entwined in Soviet-era manufacturing infrastructure.
“The Soviet-style technology that exists in Ukraine’s arsenal was made so that Russian parts were used to the maximum,” said Ukroboronprom General Director Roman Romanov in a February 2016 interview with Deutsche Welle. “It was difficult at the beginning, but we’re gradually resolving this.”
Vadim Bodaev, director of investment firm SigmaBleyzer, told the Kyiv Post in an interview at his office that if Ukraine does not successfully make the change, it risks losing “key markets.”
Bodaev added that while Ukraine is a top exporter internationally, it only holds roughly 3 percent of global defense exports.
“But we have to save our 3 percent,” Bodaev added.
Natural destinations include the Soviet Union’s former allies, whose armies had been largely supplied with weapons systems built in the then-Ukrainian Soviet Socialist Republic. Now, 25 years since the collapse of the communist regime, many Mideast militaries are in need of modernization, while others seek weapons systems that fit with Soviet-based models.
Furthermore, the region’s often-rough conditions mean that equipment based on Soviet designs, which were made to operate in environments ranging from those of Kamchatka to Turkmenistan, will not suffer weather-related faults.
Antonov ‘breakthrough’
Experts say that the Saudi deal represents a big step for Antonov, which is widely seen as being among the most prosperous and effective of Ukroboronprom’s myriad manufacturers. The Saudi military is expected to buy 30 An-178 military transport planes.
The value of the deal has not yet been announced, and Antonov declined to specify how much it would be worth. In the past, an individual An-178 has been priced at up to $70 million.
According to additional terms of the deal, Ukraine will export technology, parts, and expertise to Saudi Arabia, where An-132, An-148, and An-178 airplanes will be manufactured.
“This is a real breakthrough for Antonov,” Mikhail Samus, Deputy Director for International Affairs at the Center for Army, Conversion, and Disarmament Studies, told the Kyiv Post.
Samus, a former officer in the Ukrainian Army, said that Antonov’s main competitor in the sale of military cargo planes was the Brazilian plane manufacturer Embraer.
“They were literally neck-and-neck with us in the development of planes,” said Samus. “But once the crisis began in Brazil in 2015, they began to slow, and Antonov began to go through its testing faster.”
But, Samus added, Embraer retains a crucial advantage over Antonov: the company is supported by the relatively robust Brazilian state, and it collaborates with foreign governments and corporations, including the Czech Republic and Boeing.
For Antonov, Samus said, Saudi investment could make Antonov’s newest plane, the An-178, competitive for export around the world.
“Here, Saudi Arabia is really important. If it continues to support the project, it will be a breakthrough,” Samus said. “For this plane the main thing now really is investment, which would launch it into full production.”
An unnamed Iraqi company has also ordered three An-178s, company director Mikhail Gvozdev said in a July press conference.
Persian prospects?
Experts told the Kyiv Post that Saudi Arabia is arming amid geopolitical tensions with its main regional rival, Iran. The kingdom made a 275 percent increase in purchases over 2011-2015 compared to 2006-2010.
For Ukraine, however, Saudi Arabia’s geopolitical rival also presents further opportunities for military export. Antonov ran a factory in Iran until 2009, until one of the planes crashed and Iran halted production.
“This could start again,” said Bodaev. “It’s effectively a new market… a lucrative market.”
On March 7, Iran and Ukraine signed a memorandum of understanding that brought the countries a step closer to restarting production at the factory, which was originally built by a U.S. company in the early 1970s to produce Bell helicopters.
“We agreed to widen cooperation in the aviation sector,” said Minister of Regional Development and Construction Gennadiy Zubko in a government press release dated March 7. Zubko added that the two countries will look at further production of the An-140, as well as potentially delivering the An-178, the plane Saudi Arabia also intends to buy.
