Opinion: Russian defence consolidation offers global opportunities

Russia's re-organisation of its defence industrial base through the creation of Russian Technology (Rossiiskiye Tekhnologii) in December 2007 could potentially transform Russia's position in the global market and provide opportunities for outside investors.

Fashioned by a law passed by the Duma and signed by President Vladimir Putin, this move consolidated many of Russia's largest industrial, technological and financial companies into one giant state-owned conglomerate and at the centre sits Rosoboronexport.

This development is significant to Western defence companies in two primary ways. First, the Russian arms industry is set to transform into a new competitor on the world market and second, the Russian government may allow foreign companies to acquire a stake in Russian Technology and the previously inaccessible Rosoboronexport.

Rosoboronexport once maintained its global market share by relying on its competitive prices. However, this strategy has lost value as the technology gap between Russian and Western competitors' weapon systems has widened while the price advantage has diminished.

Meanwhile, Rosoboronexport has suffered from a lack of investment and insignificant devotion to research and development (R&D). President Putin seeks to revamp Russia's defence industry by signing the law that produces Russian Technology. For the first time in post-Soviet Russia, Russian Technology unites all aspects of the Russian Federation's arms industry from R&D to international distribution. This conglomerate will include some of the largest Russian financial and industrial companies.

A primary reason for the widening technology gap was that Rosoboronexport operations had been restricted by the company's status as an industrial holding company. It was ineligible to launch an initial public offering (IPO), issue Eurobonds, acquire or sell assets freely, or seek loans from major Western banks. This status deprived Rosoboronexport from capital and investment for R&D and therefore the technology gap between Russian and Western weapons systems has widened.

Russian Technology, headed by former Rosoboronexport head Sergei Chemezov, is seeking to gain a monopoly over domestic arms sales to supplement the company's already-existing monopoly over the export of Russian weapons. Russia's procurement and R&D budget for 2008 is projected to be USD15 billion and Chemezov hopes to obtain a majority of this capital. Chemezov promoted the creation of Russian Technology as a necessary step to propel the Russian arms industry back into the role of global leader, and he will exploit this theme to acquire capital and key assets from the Russian government. Through foreign investments and governmental support, Russian Technology has the potential to reposition itself as a leading international arms supplier in the coming decade.

The change in the legal status of the Russian arms industry may present Western companies with a unique investment opportunity.

Jane's reported in August 2007 Chemezov's announcement that companies belonging to the state enterprise may hold IPOs by 2012.

While Russian Technology officials will approach the sale of Rosoboronexport independently, Russian Technology has already demonstrated its desire to sell its daughter companies' stock to foreign buyers. Within two weeks of the formation of Russian Technology, the company moved to attain foreign investment in its automobile producer AvtoVaz, selling a 25 per cent blocking stake to French manufacturer Renault. 557 of 1,830 words