US Ban on Russian Defense Firms Raises the StakesAug 11, 2006 12:05 UTC by Defense Industry Daily staff
DID has covered a number of stories lately dealing with defense export restrictions, especially with respect to Venezuela. We’ve also covered stories before involving sanctions against firms who have dealt prohibited materials to Iran, and other stories involving Immigration & Customs Enforcement of trafficking in military items. Our January 3, 2006 report focused on the December 2005 sanctions list for Iranian dealings, which added a number of Chinese firms including Norinco. The latest list, published in the US Federal Register on August 4, 2006, names a pair of significant Russian companies as well: Russia’s central arms export hub Rosoboronexport, and jet fighter manufacturer Sukhoi.
While other companies in North Korea, Cuba and India were also named, the fallout has extended into overall US – Russian relations. DID will explain what’s going on and what the resulting sanctions mean, while offering our readers additional sources for their perusal.
While there have been accusations from sources including the Russian TASS news agency that the decision against Sukhoi was taken as a result of its sales to Venezuela, the State Department’s Public Notice 5483 in the Federal Register notes that decision was issued July 25th – just slightly before news reports of the Venezuelan sale. Instead, the reason cited was very explicit: the Iran Nonproliferation Act (Public Law 106-178), which applies to companies that have sold certain materials to Iran. The exact citation is as follows:
“…for the transfer to Iran since January 1, 1999, of equipment and technology controlled under multilateral export control lists (Missile Technology Control Regime, Australia Group, Chemical Weapons Convention, Nuclear Suppliers Group, Wassenaar Arrangement) or otherwise having the potential to make a material contribution to the development of weapons of mass destruction (WMD) or cruise or ballistic missile systems.”
While Sukhoi claims it has not sold weapons to Iran since the 1990s, Kommersant and others note that the catalyst was likely a deal that Rosoboronexport and the Defense Ministry of Iran made in late July for the repair and upgrade of 30 Su-24 ‘Fencer’ long-range strike aircraft. The SU-24 strongly resembles the earlier American F-111, whose FB-111 variant was used for many years as a nuclear strike platform by Strategic Air Command.
Pursuant to Sections 2 and 3 of the Iran Nonproliferation Act of 2000 (Public Law. 106-178), the U.S. Government determined on July 25, 2006 that the measures authorized in Section 3 of the Act shall apply to the following foreign entities and any successor, sub-unit, or subsidiary thereof:
- Korean Mining and Industrial Development Corporation (KOMID) (North Korea)
- Korea Pugang Trading Corporation (North Korea)
- Center for Genetic Engineering and Biotechnology (Cuba)
- Balaji Amines (India – chemical firm)
- Prachi Poly Products (India – chemical firm)
- Rosoboronexport (Russia) and
- Sukhoy (Russia)
The exact sanctions imposed read as follows:
“Accordingly, pursuant to the provisions of the Act, the following measures are imposed on these entities:
1. No department or agency of the United States Government may procure, or enter into any contract for the procurement of, any goods, technology, or services from these foreign persons;
2. No department or agency of the United States Government may provide any assistance to the foreign persons, and these persons shall not be eligible to participate in any assistance program of the United States Government;
3. No United States Government sales to the foreign persons of any item on the United States Munitions List (as in effect on August 8, 1995) are permitted, and all sales to these persons of any defense articles, defense services, or design and construction services under the Arms Export Control Act are terminated; and
4. No new individual licenses shall be granted for the transfer to these foreign persons of items the export of which is controlled under the Export Administration Act of 1979 or the Export Administration Regulations, and any existing such licenses are suspended.
These measures shall be implemented by the responsible departments and agencies of the United States Government and will remain in place for two years from the effective date, except to the extent that the Secretary of State may subsequently determine otherwise. A new determination will be made in the event that circumstances change in such a manner as to warrant a change in the duration of sanctions.”
A US official reportedly made the ambit of these sanctions clearer by noting to Reuters that “the sanctions apply to the specific entities and their successors, sub-units or subsidiaries and not to their respective countries or governments.” That limited wording is important given developments like EADS’ recent investment in Irkut, but Rosoboronexport’s ambitions and the tangled structure of the Russian defense industry could widen the sanctions’ impact within Russia itself.
The broader question will be the sanctions’ impact on US-Russian business and diplomatic relations more broadly. Izvestia huffed about declarations of economic war, and Kommersant ran an article titled “The End of Partnership.”
Given Russia’s direct work exporting nuclear reactor technology etc. to Iran, one may be forgiven for wondering what partnership they are referring to. Rosoboronexport Chairman Sergei Chemezov, an ex-KGB officer and friend of Valdimir Putin’s, probably didn’t help matters when he made this veiled threat, as reported by the Washington Post on August 7th:
” ‘The introduction of these sanctions could have a negative impact on the Russian-U.S. partnership in countering illegal supplies of counterfeit Russian-designed military gear to Iraq and Afghanistan,’ Chemezov said in an apparent reference to Soviet weapons produced without license in many countries across the globe.”
When an ex-KGB member makes references like this, even one filled with disclaimers inserted to provide plausible deniability, they do not pass unnoticed. Much will depend on the dynamics inside Putin’s inner circle, which is now heavily stacked with acquaintances from the Russian leader’s past career in the KGB spy agency.
“This is going to be very serious because this threatens President Putin and some of his very closest people,” Pavel Felgenhauer, a Moscow-based defense analyst, told Reuters. “The official reaction from the Kremlin, especially when it sinks in about how serious this is, will be severe. I think there will be countermeasures.”
These countermeasures could include a $20 billion project by an American firm to develop Arctic gas deposits, and a planned $3 billion purchase of Boeing 787 jets by Aeroflot.
We’re likely to know very soon. There are reports that Boeing may be about to unveil a 50/50 Russian joint venture with VSMPO-Avisma to create titanium parts for its 787 Dreamliner passenger jet. The Financial Times reports that Boeing plans to buy $4 billion in parts from the joint venture over the next 10 years; by 2030, says the article, Boeing plans to spend up to $18 billion on Russian titanium products and $5 billion on Russian engineering services.
That’s a large chunk of money. Would Putin jeopardize that in order to make a point?
And if VSMPO-Avisma, the globe’s #1 titanium firm, becomes a Rosoboronexport subsidiary as Chemezov intends, would its American deals be in jeopardy?
A close look at the exact wording in the State Department notice argues that no, they would not.
First of all, read the sanctions above – imports to the USA are not prohibited. Beyond that, Boeing is not a US government agency, and titanium parts for a civil aircraft with no military variants almost certainly do not fall under the ambit of restricted items or arms sales or services. Nor are they presently controlled items.
The concerns expressed by VSMPO-Avisma about further action against it in the US market are unlikely… at this point, anyway. Firms who wish to import Russian titanium via Rosoboronexport, it seems, need only ensure that they avoid breaching the 1973 US Berry Amendment, which prohibits this practice for military items.
One might also examine Boeing’s partnership with Sukhoi on the SuperJet 100 Russian Regional Jet (RRJ) project. Boeing’s role began in 2001, but has since dwindled to more of an advisory role for various reasons. It also seems to be well outside the ambit of these sanctions.
Since most of the likely American commerce with Rosoboronexport is unaffected by the sanctions regime, the Russian reaction is the only major variable left. We’ll have the first indications within a couple of days… when Boeing’s big deal either does or does not go through.
Meanwhile, the USA retains a number or other tools that it hasn’t used yet, including possible action against VSMPO-Avisma in the US market if Russia begins to make life difficult for US firms.
Life could get very interesting very shortly, in the defense industry and beyond.
- DID (Aug 13/06) – Titanium: Boeing Signs Deal with VSMPO-Avisma. It’s official. In June 2007, both a 787 deal with Aeroflot and a deal for some assistance with Sukhoi’s regional jet followed.
- DID (Aug 13/06) – Titanium: Sanctioned Rosobornexport Buys #1 Producer VSMPO-Avisma. Acquisition of over 51% confirmed, amount not revealed, observers not surprised.
- CDI, Johnson’s Russia List (Aug 9/06) – Russia could lose $1 bln a year if U.S. withdraws trade benefits. Add one more entangled issue and potential lever to the mix. “On Tuesday, the Office of the U.S. Trade Representatives asked for public comments on whether duty-free trade benefits should be limited or withdrawn for countries whose shipments to the U.S. exceeded $100 million in 2005 and met one of two criteria. The two criteria were that a country’s 2005 World Bank classification as an upper-middle-income economy or a country’s total exports in 2005 totaling 0.25% or more of all global exports.” The Generalized System of Preferences was designed to benefit less-developed countries.