The Crumple of Russian Fingers Exports – Competitors, Ukraine & The Future of Russian Exports

From the early stage of the Cold War, the Soviet Union and later the Russian Federation have long been major arms exporters. About 2 years ago now I made a video suggesting that as a result of the war in Ukraine, that might be about to change and now in 2024 we have the data to prove it. Recently, after SIPRI published their latest arms transfer data for 2023, organisations like Politico published reports that Russia had lost its second place in the global arms export market, and even worse, had lost it to France. But while those headlines won attention, things probably weren't as bad for Russia as they first suggested, in reality they were arguably much, much worse.

Russia lost its second place position when you counted the 5 years from 2019 to 2023. But if you just look at 2023, the first full year after the Russian full-scale invasion, Russia didn't drop to third, it fell to position six. With an order book that was more and more reliant on just a few close allies to act as buyers. And once you start digging a little bit deeper into the data, you find there's a lot more to this story. And so in this episode we're going to dig into some arms trade data for 2022 and 2023 to understand what's changing with Russia's defence industry and exports. What is driving the change, what impact is it likely to have? And which nations are out there seizing market share while Russia falls away.

To address those questions, I'm going to work through a couple of points in sequence. First, we'll look at some figures around the decline in Russian arms exports in 2023. What was transferred, who was it transferred to, and who is still placing additional orders? Then we'll look at some of the factors that might be driving those changes in the arms market. And of course, who is taking Russia's market share. Finally, we'll ask two important questions. Firstly, does the decline in exports actually matter to Russia in any sort of strategic sense? And secondly, what the future might be for Russia's place in the global arms market? Given the subject matter, this video is going to be pretty heavy on some of everyone's favourite things,.

Think data, graphs and economic statistics. Which brings me to some caveats around a major source for this video. Unless otherwise noted, all the arms transfer data I use this episode is coming from the Stockholm International Peace Research Institute. They track and publish information on the transfer of major weapon systems. So this data isn't going to be counting AKs, RPGs and artillery shells, it's going to be counting tanks, fighter jets and cruise missiles. Obviously it's also only going to include transfers that SIPRI can identify. Which is another reason not to try and count every AK that crosses a border.

Also note that almost all measurements are in TIV, Trend Indicator Value. Basically this is a value that SIPRI calculates and assigns to individual weapon systems to remove the importance of factors like inflation or currency valuation changes. So its main use is going to be in making comparisons and identifying trends over time. It's a massive data set with tremendous value, so while this will be the first video I do using it in 2024, it will not be the last one. I'll link the methodology in the description, let's get into it. Starting with one of the big questions up front: what happened to Russian arms exports in 2023? And my key warning here is remember that you are dealing with a lagging indicator.

And one which is really telling you more about the past than helping you predict the future. In the regular economy, an example of this sort of indicator might be housing foreclosures. If people encounter hard times, say for example they lose their jobs, they'll often do everything they can to hold onto at least their homes. And even if they just can't any more, it takes time to get behind on payments and for the foreclosure process to play out. So if foreclosures spike it might be telling you less that the economy is terrible now, and more that it was having problems 12 months ago. Arms transfers are lagging in a similar way.

A lot of time can separate arms being ordered from arms being delivered. So if an event or series of events comes along and nukes your sales pipeline, you may not see the results for a while. That might help explain part of what we saw from the Russian data in 2022. At that point transfers were very roughly down by about half from 2019 levels and about two thirds from pre-Crimea levels. But there had also been a slight recovery from a low point in 2021. And so the question was: what would the data look like in 2023 once the effects of the Ukraine War had more time to show themselves?.

The answer, as it turns out, wasn't pretty. In 2022 SIPRI recorded 2,600 trend indicator value of Russian arms transfers to other states. In 2023, the figure fell from that already historic low point by more than 50% to 1,269. That meant that, according to the SIPRI data, Russian arms exports had now fallen a casual approximately 84% from 2013, the last year before the annexation of Crimea. And there are a couple of factors I think which demonstrate that things are probably even worse than just that raw number would suggest. For one, it's not like Russian arms exports are down just because no one's buying weapons at the moment. Perhaps unsurprisingly given a couple of minor geopolitical developments,.

Like a conventional land war in Europe, 2022 and 2023 were actually quite busy years on the arms market. So it's not the market that's collapsing, it's Russia's share of it. In 2012 Russia accounted for about 30% of the export value that SIPRI tracked. In 2018 that figure was 25%, in 2020 15%, and in 2023 4.4%. If you want to compare that to the smartphone market, in 2018 Russia was Samsung, and in 2023 they were a fractional share of Vivo. Problem two is that Russia hasn't just been selling less stuff, it's been selling it to fewer and fewer countries.

Generally speaking, as an arms exporter you benefit from having as many potential buyers as possible. It helps de-risk you against major economic or political changes in the countries that you sell to, which might impact their demand for your systems. Venezuela might stand out as a potential example there of a country that used to buy a large number of Russian arms under Hugo Chávez, but now not so much, probably in significant part because the country is pretty much broke. The number of distinct buyers is also important because it might impact the relative bargaining power between the buyer and the seller. This is just basic supply and demand in action.

If someone wants to buy 5% of your stuff and you have a dozen other people lining up to buy it, you can probably tell them to make a good offer or take a hike. But if you are selling to a single or small number of buyers who know that you are probably desperate, you might have to get ready to be taken to the cleaners. Between 2012 and 2019, SIPRI recorded between 24 and 31 recipients for Russian arms transfers each year. From 2019 however the breadth of the Russian market narrows considerably. From 31 nations in 2019, to 15 in 2022, down to 12 in 2023. OK, so clearly there's a group of countries that are no longer.

Taking deliveries of Russian weapons systems. And in other cases countries might still be on the list of buyers, but at much, much lower quantities. Vietnam for example brought in 83 trend indicator value of Russian weapons in 2022 and 2023 combined, meaning that technically congratulations, they make the list. But that's less than 8% of what came in in 2012 to 2013. So with all these countries dropping off the list or scaling down, who is still taking deliveries? And here I want to start with historically the most significant importer of Russian weapons systems, India. India has long been the world's largest weapons importer.

And the most significant destination for Russian arms. In 2012 India accounted for roughly 46% of tracked Russian arms deliveries by TIV. And from there the numbers roller coasted around a little bit. But if we're sticking to our historical milestone years, in 2013 pre-Crimea it was 48%, in 2021 53%, and in 2023 32%. I've already done a video on India's defence strategy and their efforts to increase self-reliance and also to diversify the countries from whom they are buying their military equipment. So if you are interested in some of that background, I'll link it in the description. But I will add two specific notes here for this point.

Firstly, this isn't the first time in recent history that India's share of Russia's exports has dropped. For the years 2014 through 2020, the number was actually lower in percentage terms than it was in 2023. But that percentage change was nowhere near enough to compensate for the massive decrease in overall quantities. So even though India accounted for a lower share of Russian exports in 2018 than in 2023, the actual value was only about a third of what it had been a couple of years earlier. Basically, as you can see on the right there, India has been slowly cutting down its imports of Russian weapons for years now,.

It's just the rest of the world has been doing it faster. By contrast, if you look at a couple of examples of countries that are taking a greater share of Russian arms exports, these are the People's Republic of China, Belarus, Myanmar and Kazakhstan. You can see the changing scale of deliveries to those four countries on screen now. But at a big picture level, in 2012 those countries accounted for 11% of Russian arms exports, by 2020 it was 25%, and in 2023 more than half. China's share of Russian exports narrowed to within roughly 3 percentage points of India's. In essence there been something of a shift in the centre of gravity for Russian arms deliveries. But here's the thing, even though that might look like a pretty clear story when it's all graphed up,.

I don't think it comes anywhere near close to telling us the full story. Because if you're trying to project forward, it's very important to understand the distinction between deliveries and orders. Most of the time when a nation state buys major weapon systems on the international market, they can't just pay an extra 20 bucks at checkout for next-day delivery. Generally speaking, outside of some very special situations like the war in Ukraine or the resupply of Israel during the Yom Kippur War, you are going to be looking at a wait time of at least months and more often years before you get a major delivery. And the reflection of that is that industry in the selling country.

Is probably going to be making investments and engaging with suppliers on the basis of that order book and assumptions about future orders. So basically when you look at deliveries today, you're not really getting a perfect window into demand today, instead what you are seeing is a mish-mash, a long tail of demand that might stretch back years. What you're looking at on the right there is a chart of Russia's defence export deliveries in 2023 charted against the year that those systems were originally ordered. Instantly, there are a couple of things that stand out. Less than 12% of deliveries were ordered in 2022 or 2023.

A majority had order dates of 2018 or earlier. And there were more deliveries relating to orders that were on average at least 20 years old, that is, from 2004 back to 1998, than there were from 2022 or 2023 after the Ukraine factor started to impact order patterns. Now of course, because as you know there is nothing I enjoy more than diving just that bit deeper into the data, I want to show you that once you start unpacking the order dimension of this a little bit more, there's a bit of a twist on the reported narrative. For example, India's ongoing defence imports from Russia in 2023.

Got a lot of reporting attention when this data came out. But there are twists here relating to both the “what” and the “when”. So far as the “when” goes: of all of Russia's arms deliveries to India in 2023 that SIPRI tracked, none had listed order dates after the invasion of Ukraine. And a strict majority actually related to a deal for the S-400 system signed back in 2018. In total, India received about 406 TIV worth of stuff in 2023, with 130 of that being S-400 launchers and 77 being the 48N6 missiles for those systems. Some of the receipts date back to orders from 1998 or 2001, a point where NATO countries were still selling weapons to Russia.

And a lot of those more recent imports that SIPRI is counting aren't really imports at all, they are licensed production that's taking place in India for which a fee is being paid back to Russia. That includes licensed production of the Konkurs-M ATGM, which was a deal signed in 2021 I believe, licensed production of the BMP-2 signed 2020, and the 9M119 signed 2018. So a lot of what India is doing here is just honouring old contracts. The situation is even more stark when you look at the deliveries that went to China.

A lot of this was D-30KP-2 turbofan engines which were ordered in 2015, AL-31 turbofan engines relating to a 2011 order, and some MR-90 fire control radars for the Chinese Navy with a SIPRI order date of 2004. The newest order on that list was from 2015. Meaning that even though the data shows China stepping up as a recipient of Russian defence exports, all we really saw in 2023 were deliveries against a very, very old Chinese order pipeline. And as for the two Sukhoi 30s received by Myanmar, order date 2018. And in something of a strange reversal, there has been some reporting (I'll link some of it in the description) suggesting that Russia may actually have been trying.

To buy back from Myanmar some of the equipment that it had sold it in previous years. Although given the heavy fighting in that country, there's probably a question mark over how much Russia might expect to get back. I could go on, but by now you probably get the point, if you want to predict Russian arms deliveries in the future you need to look at orders today. And that's where things get a bit ugly, with the caveat of course that it's always possible that arms are being ordered without organisations like SIPRI being aware of it. What I've done on screen here is (using the SIPRI data) calculate the average number of new orders for Russian weapon systems per annum.

Over four distinct time periods: immediately pre-Crimea, so 2012-14, immediately post-Crimea, so 2015-17, pre-Ukraine invasion, so 2018-21, and post-invasion, 2022 and 2023. And suffice to say you probably don't need a stats degree to identify the trend there. Compared to that 2012-14 base period, in 2015-17 orders fell by just under 20%. By 2018-21 they had more than halved. And in 2022-23 they were just over a quarter of what they had been less than a decade earlier. So it's not just Russian arms deliveries that are slowing down, it's orders for future deliveries. And if you're wondering which of the dozens of countries which used to regularly.

Buy Russian weapons systems are still buying post-Ukraine invasion, in 2023 it wasn't 30 or 20 or 10 countries that placed orders for new Russian weapons, it was three: Kyrgyzstan, India and Iran. With Tehran by itself accounting for more than 65% of new orders placed. Plus, some of these orders should probably come with an asterisk. The Indian figure isn't in relation to the purchase of aircraft from Russia, but rather the expansion of India's licence-built Sukhoi 30 program. Which has certainly been talked about a lot, but according to SIPRI wasn't firmly contracted as of the end of 2023.

And then the Iranian order is again for fighter aircraft (this time actually from Russia) but in relation to a deal which has been on and off again more than your average high school drama romance. But even if we take the numbers here as given, it highlights the tremendous change in Russia's order book, from being a favoured supplier to dozens of nations around the world to one which is reliant on a single buyer, Tehran, for a majority of its new orders. OK, so at this point we've probably pretty comfortably covered the “what”. Russia's arms exports have already fallen off a proverbial cliff, while their recent order book is overwhelmingly dominated by a single buyer,.

Which is itself under heavy international sanctions, facing double-digit inflation, and has a proven record of shaking the Russians down pretty effectively on previous arms deliveries. None of that is probably ideal from a Russian perspective. The next question however, is why is this happening? And while we can only make educated guesses here, it does seem like a couple of factors are coming together. So what I'm going to do is explore four of those factors in turn, reputation and demonstration effects, diplomacy, diversion and risk. Each of which can probably be re-expressed as a problem facing Russian arms exports.

Problem one is do people actually want to buy your products, what is their reputation? And yes, I do think reputation is a valid word to use here. And one which distinguishes the soft factors, the feelies of the way a weapon is perceived, as opposed to harder measures like its actual combat performance. If you want a more technically accurate term than the “feelies” or reputation, you might go with “demonstration effects”. We might want to imagine that when governments or militaries are deciding they want to procure a particular weapon system, they are doing so based on a very cold evaluation.

Of how good and how effective it is versus what it costs etc. And while those hard data-driven factors are obviously very important, military purchases are also vulnerable to fads, phases and perceptions around quality and effectiveness, to an extent just like any other product might be. And this phenomenon can go both ways, both in terms of seeing a weapon system capture attention, and as a result sudden market interest. Think for example of what I've heard described as the “TB2 effect” where systems like the TB2 drone or HIMARS suddenly became household names. And with that came a surge in market interest for those systems.

And for those systems specifically, because even if you could (and many nations did) look at other multiple rocket launchers to provide a HIMARS-like capability, HIMARS is the one on all the news reports, the one the politicians recognise, and the one you can probably get budget for. And one of the only reasons we didn't see more HIMARS sales in 2022 or 2023 is probably because it feels like Lockheed Martin has pre-sold every vehicle to come off the line from now until the heat death of the universe. And in that respect, in terms of public and international perception, Russian weapons have not had a very good war.

In terms of the popular media coverage think turret-popping tanks, a failure to achieve air superiority, and successful Ukrainian strikes against targets protected by Russia's air defence systems. To quote from a CSIS piece, “Contrary to Syria, the war in Ukraine undermined the reputation of many Russian weapon systems, often demonstrating their ineffectiveness or obsolescence. While such military struggles may have often had more to do with poor personnel training or deficiencies with command and control, they nevertheless create the perception of a deficient Russian military system and provide more reason for prospective buyers to look elsewhere.” Now yes, you can potentially raise objections to any of those points.

You can say that it is possible for Western tanks to pop their turrets as well, and that some Western MBTs have been lost in Ukraine. You can explain away some air defence failures, and a lot of the other losses as just saying this is the attritional style of fighting that Russia has chosen to adopt. In the case of many buyers this might be proof that not all publicity is good publicity. And there may actually be one additional nuance to this problem, and it has to do with the gap between what systems Russia relies on in Ukraine, and those that it depends on for arms sales. If you think about examples of Russian weapon systems that the Ukrainians complain the most about.

And which have made the greatest impact on the war in Ukraine, you are probably thinking of things like the Russian artillery force. The Russian army is in many ways an artillery army. One which operates best when it can concentrate a lot of tube and rocket artillery, establish fire superiority, and then leverage fire superiority into tactical advances. But while Russia has always possessed a lot of artillery, no one bloody buys it. A vast majority of the current and reserve Russian inventory is made up of old legacy systems. Many major buyers, including countries like India and China, are increasingly preferring 155mm rounds to the old Soviet 152.

And Russia's ability to cost-effectively produce new artillery systems has long been undercut by the fact that they can always just pull on the thousands and thousands of barrels and systems that they have in storage. So the big money for Russia has never been in artillery or things like it, it's been in aircraft: jets, helicopters, aviation engines, and to an extent missile systems as well. Which might be pretty inconvenient from a marketing perspective, because you could argue the VKS has had a much worse war than the Russian ground forces. The Russian Air Force failed to obtain air superiority, failed to neutralise the much smaller and older Ukrainian Air Force,.

Demonstrated a concerning inability to hit dynamic targets behind the lines, particularly early in the war, and has suffered some very high-profile losses, some of them to friendly fire. Obviously there are a lot of downward pressures on Russian aircraft sales beyond just issues of reputation, perhaps most importantly Russia probably wants to divert all of the aviation output it can in order to replace VKS losses. But as you can see on screen there, different armament types have fallen off in terms of exports far faster than others, with aircraft leading the charge. Russia actually shipped more air defence systems in 2022 and 2023 than it did in 2020 or 2021. But the aircraft category headed for the deck so quickly.

It probably broke the sound barrier on the way down. In 2019 the aircraft category made up about half of all Russian arms exports, in 2023 that number was down to 16%. And to get a sense of just how much that matters, the aircraft category in 2020 was larger than the sum of all Russian exports in 2023. You still obviously had buyers like Iran out there trying to get their hands on Russian aircraft. But for those buyers out there with a combination of actual choices and money, I think it's an open question how many will ultimately choose Russian designs over competitors from the US, Europe, China, or even domestic products going forward.

Question two is even if a buyer would like to buy a product like the one you manufacture, do they want to buy it from you? Arms sales aren't just about military necessity, they are also about politics and diplomacy. Sales are often a sign of a strong relationship between two countries. And since the invasion of Ukraine, the number of countries who might not want to buy Russian weapons for diplomatic or political reasons has probably grown significantly. As a very rough measure, in the UN General Assembly in March 2022, when there was a vote on condemning the Russian invasion, 141 countries voted in favour, 5 against with 35 abstentions.

Among those yes votes are a number of countries that have previously purchased Russian weapon systems. This obviously doesn't mean that countries that voted yes who have previously purchased Russian weapons couldn't choose to do so again in the future. But there might be a little bit of a diplomatic and communications challenge involved in explaining why you are choosing to purchase weapon systems from a country you are saying is engaged in active aggression. It'd be kind of like trying to tell your public that, yes, the Empire is evil, yes, they blew up Alderon and yes, they are led by a Sith Lord.

But on the other hand, how cool would it be if we could buy some Star Destroyers? The data seems to suggest that some buyers are not making that jump. Serbia for example, according to SIPRI, had ordered Russian weapons in 2018, 2019 and 2021, but they haven't placed any further orders in 2022 or 2023. And even if a country decides that it still wants to buy Russian weapons, the question is: does Russia have any weapons to sell? If you've been following this channel for a while, you probably know that Russia has lost just a couple of pieces of military equipment in Ukraine. Replacement equipment has to come from somewhere,.

So you might have a clash of priorities between the Russian MoD and the export market. And given that Russia's defence producers are often essentially state controlled, one suspects that a buyer or two might be told that their delivery window has changed from months or years, to some unspecified point in the future when Ukraine stops blowing up our stuff. In 2023 a representative of the Indian Air Force told an Indian parliamentary committee that there were concerns over planned Russian arms deliveries. And we have seen Russian T-90S tanks, which is the model that was originally developed for India, fighting and being lost in Ukraine.

Now for me, one potential explanation for that is that these were vehicles produced surplus to the order, or which India rejected for some technical reason. But on the other hand you have to imagine stuff like this might make buyers just a bit nervous: you might get your order on time, but there's also a chance it gets delayed or diverted. Kind of like ordering a new car from a dealership, but not being sure they wouldn't take it bush bashing or drag racing before delivering it. And all of that helps tornado together into a vortex of the one thing that markets abhor almost above all else: risk.

As a nation, your arms supply and national defence are probably not going to be areas where you tolerate a great degree of uncertainty. You want to know that supplies will be consistent. You want to know that systems will work. And you want to know that you can rely on your supplier so your readiness and ability to deter, to project power, or protect your national security is not going to be undermined. And at the moment Russia is just a walking red flag when it comes to risk rating. You can't be sure you'll get your delivery on time. Maybe it's diverted to the Russian MoD, maybe the factory suffers a smoking accident,.

Maybe there's a temporary component shortage due to sanctions, it's really hard to know. And it's a really interesting contrast to many European and American defence suppliers who have partly struggled to send as much equipment to Ukraine as they might have, because they've continued to honour and prioritise existing contracts. Then there are layers and layers of other risks. What happens if the sanction regime changes? What happens if you can no longer effectively make payment between your country and Russia? What if the war escalates and deliveries become even more problematic? The list goes on. If you are a country like Iran, already under heavy sanctions yourself, with not that many alternate suppliers available to you, maybe you are happy to take that risk.

But if you're a country like India, that risk might matter. And for you, diversification and increased self-reliance are both available options. So for these and other reasons, Russia is probably less attractive to a lot of countries as an arms supplier in 2024 than it was in 2019 or 2013. The war might have been good for the Russian arms business, but it's been pretty abysmal for the arms export business. But the kicker here is that things didn't start to go bad in February 2022. Even before Putin sent the tanks towards Kyiv, Russian exports were already on a downward trend. Deliveries in 2021 were less than half of what they'd been in 2019.

And new orders were seemly slowly but inevitably trending towards levels that hadn't been seen since the 1990s, an era when just walking onto a former Soviet base and stealing shit might have been a viable alternative to purchases in some cases. Bottom line, demand was historically weak. Some of it came down to former large buyers diversifying their sources, or becoming more self-reliant. India and China both come to mind here. And as an extension of that, the market was arguably just becoming more competitive and Russian systems less advantaged.

There was a period of decades where Russia could sell countries like China systems that were much more advanced than what they were manufacturing domestically. But cut forward to 2023, and Russia might struggle to sell its most recent Flanker derivative to a country that now has its own indigenously-produced version and has moved on to 5th generation fighters. In various technological fields others were just catching up or racing ahead. And over time it was always going to get harder and harder for Russia to sell upgrade package 737 to some old Soviet design. Especially when countries like China were always going to be able to throw far more money.

Not just at developing next generation products, but also establishing production at scale. Now hypothetically if Russia had fought a quick and victorious 3-day war against Ukraine in which all of its equipment performed admirably, and gave us a Russian tank parade through Kyiv, rather than a parade of Russian tanks in Kyiv, maybe you might have seen enough of a surge in demand and interest to push the numbers back up for a while. But eventually the product offering itself was always likely to become a sales bottleneck. In order to win back market share in the late 2020s or 2030s the Russian arms industry was always going to have to innovate.

It was going to need a next generation of export-ready products, like a 5th generation fighter or new armoured vehicles that were cost and/or capability competitive with their various opponents. But as we'll come back to in a bit, the more Russian exports collapse the less likely I think it is that they'll be able to develop next-generation export-ready products. Now I've heard it said that in business chaos and disruption can beget opportunity, and when the second largest supplier in a particular market just suddenly decides to set their business on fire, that probably counts as a disruptive event. For various reasons, Russia's arms exports have been falling.

At exactly the same time as many nations around the world are seeking to rearm. In a fit of irony, by invading Ukraine Russia might have driven up global demand for some of its best exports, weapons, at precisely the same moment that it can't really meet that demand. And so while we will look at this topic more in the future, what I want to quickly introduce now is which nations are stepping up to fill the market void. Clearly no individual country can claim the credit, because Russia has been bumped down to sixth on the list in 2023 behind the US, Germany, China, France, Italy, and only just ahead of the United Kingdom. And as you can see on the chart here showing changing delivery volumes by year,.

There's plenty of movement but the market probably hasn't crystallised yet. But each of those lines does have an emerging story. At first glance, the People's Republic of China might seem like a decent substitute supplier for countries which were previously buying arms from Russia. Like Russian systems, Chinese weapons are often going to be cost competitive. And in many cases has Soviet DNA, so if your force is used to Soviet or post-Soviet equipment it might be easier to transition over to Chinese equipment. But for various political, economic and strategic reasons that we might go into in the future, we haven't really seen China move in and take over all the former Russian markets.

But they have expanded their sales and locked down particular markets, like Pakistan, very tightly. Chinese deliveries in TIV terms increased from 1,310 in 2021 to 2,432 in 2023. That took Chinese export volumes from being very roughly half of Russia's in 2021 to roughly double in 2023, not bad at all you'd have to say for only 2 years. And it's results enough to make the 2022/23 period the best 2-year period for Chinese weapon exports in the 21st century. But in terms of raw numbers, Paris has been pushing far more product than Beijing. France took the number three position for the 2019-23 period not off the back of a sudden surge in exports, but rather solid performance over the last 5 years.

France actually shipped less in either 2022 or '23 than did in 2021, 3,892 TIV in 2021 and only 2,012 in 2023. However according to the SIPRI data, orders for French systems have been trending in the other direction, with the 2022/23 period being stronger than either 2021 or '18/19. Anecdotally, one of the main constraints on exports for certain French systems might not actually be the shortage of willing buyers, but rather the ability of industry to ramp up production and deliver those orders in a timely manner. And so when you see leaders in Paris talking about the need to swap over to more of a war economy, that problem might be one of the things they are trying to address.

There was some recent data released by the missile giant MBDA that gives us some clue as to what that transition might look like. According to an article I'll link, in 2023 MBDA made 4.9 billion US dollars worth of deliveries, but it booked an additional $10.8 billion worth of orders. The firm is now reportedly planning to invest billions of dollars in the coming 5 years expanding production in the UK, Italy and France. And part of the expected return on investments like that is not just an increase in overall output, but an increase in responsiveness. If in 2022 it took about 42 months from when you ordered an Aster surface-to-air missile.

To when you actually got it delivered, the firm is now indicating that by 2026 they want that number down to 10 months. And if you're a nation facing a suddenly escalated security challenge, or even an all-out war, 42 months might be an impractically long time to wait while 10 months just might be serviceable. It also might be critical for some of these firms to increase output if they are going to clear some of their order backlog. So it will be very interesting to watch French output and delivery numbers through 2024. But while France got a lot of the attention, in 2023 the European king on deliveries was actually Germany.

In TIV terms, deliveries rose from 857 in 2021 to 1,481 in 2022, to 3,287 in 2023. And across that time period there was also a lot of new orders coming in. But before some of my other European listeners get 5-10% more nervous hearing about a significant increase in German weapon sales, I want to stress that (at least in statistical terms) this isn't particularly remarkable and has very little to do with Ukraine. Almost 60% of those German 2023 exports relate to naval products, and frankly we probably would have noticed if one of Germany's.

Famously pudgy frigates had turned up in Odesa. The largest single entry on the list for example was a pair of Type 218 U-boats that went to Singapore in relation to an order that I believe dates back as far as 2013. With some of the other major items being A-200 frigates for Egypt. So yes, interest in and orders for German weapon systems seem to be very much on the rise, but it might need a little more time before we start seeing evidence of that flow through into delivery figures. But Germany, France, China, they are all still talking rookie numbers, what about the number one? Before the Russian invasion of Ukraine, the United States.

Was the world's number one arms exporter. After the Russian invasion of Ukraine it is still the world's number one arms exporter, but with a Max Verstappen-style lead. Exports in 2021 were 11,074 trend indicator value worth of equipment, jumping 40% to 15,592 in 2022, before settling down again slightly to 11,287 in 2023. And if you think that that massive jump in 2022 and then drop off in 2023 is a result of weapons deliveries to Ukraine, I'm sorry but no. According to the SIPRI set, in 2022 Ukraine took 6% of US exports, and in 2023 15%.

Meaning that 2022 bump might have been less to do with the US trying to arm Ukraine and more to do with other countries hearing gunshots in the proverbial neighbourhood and rushing to Uncle Sam's Munition Mart to get strapped as quickly as possible. This is one of the reasons I'll often raise a bit of an eyebrow when I read that the US doesn't have enough weapons to continue supplying Ukraine. Because it sure does seem like they have enough weapons to supply just about everyone else. Yes, there are specific bottlenecks when it comes to particular munitions like artillery shells, but to give an example there, in 2022 to '23 the US exported more than 2,500 TIV worth of armoured vehicles, Bradleys, Abrams, you name it.

Only about 18% of that went to Ukraine. And indeed, looking at the SIPRI data more broadly, over the 2022 to 2023 period Ukraine only accounted for about 11% of the tracked imports. Still obviously a major consumer, especially of stuff like artillery shells that isn't tracked in the SIPRI set, but it's still a fairly small slice of the arms market and America's customer base. Much was made of the American decision to supply Ukraine with around 30 Abrams tanks, but within that same time period SIPRI tracked, among other things, the delivery or upgrade of 162 Abrams for Morocco, 153 for Kuwait, and 218 for Saudi Arabia.

All of those notably relate to deals that have been in play for a while. But it should bring home that while the US has supplied Ukraine with a significant amount of equipment, the vast majority of its exports are still going to other recipients. So we have a situation where the US's main competitor for the number one arms export spot is dropping away like a stone, and America's position at the top looks fairly secure. And while that's probably true I also think it might be under-selling it. Because while US deliveries increased moderately after the Russian invasion, the US order book went nuts. Again as nations around the world detected a subtle shift in the global security environment,.

And rushed to get in their HIMARS and F-35 pre-orders. For the data hungry out there, there is probably enough material in those Chinese, French, German and US arms sales, plus the rise, and further rise, of new suppliers like the Republic of Korea, to merit its own episode. But there's only so many graphs one YouTube video can handle, and this video is meant to be about Russia. And from that perspective, the main point is probably that Russia has undermined its current position in the market, and their various competitors appear to have been moving quite quickly to take advantage of that opportunity.

OK, so Russia has fallen a couple of spots down the league tables, the next question is: does that actually matter? And I think it's a valid question because, as we noted earlier, the primary purpose of the Russian defence industrial base right now is to supply weapons and equipment for the Russian invasion of Ukraine. Does it really matter that Russian industry is shifting from meeting international demand to domestic demand? The TL;DR is probably that shifting productive resources to meet the Russian MoD's requirements probably makes sense, but it isn't a decision that can be made without cost.

Because there are a number of ways in which Russian defence exports have long been central to Russian policy and the viability of its defence industrial base. Firstly, because it's been argued that Russian exports have long been a means to prop up the profitability of the defence sector and effectively cross-subsidise the state defence order. In order to operate a productive enterprise, ultimately money has to come from somewhere. And before the full-scale invasion of Ukraine, the Russian defence sector was in many ways struggling just to get by. In 2019 Yury Borisov, the Deputy Prime Minister and the one who was overseeing the defence industry, said it was pretty much living hand to mouth.

And in 2020 Putin had to agree to write off a portion of the industry's collective debt. And one driver for those difficulties was that in a number of cases that we have Russian sources attesting to, companies were signing contracts that just weren't profitable. For most Western defence firms the path to profit is to sell weapon systems and services at a profit. And indeed going back decades now, in the procurement frameworks for a lot of Western countries there will usually be a guide as to how much profit margin a supplier should be able to charge for a particular contract. Another, allegedly more Russian approach, would be to sell very marked up systems to other countries while selling cheaply or even below cost to the Russian MoD.

Essentially you could hypothetically have Rostec shake down India, so Russia could shake down Rostec. However, what that means is that if you stop selling exports (which are profitable), in order to sell more to the Russian government (which is not profitable), then there might be a lot of red ink incoming, and some pressure to change your business model. As shocking as it might be to hear, selling yourself stuff at a loss is not in fact an infinite money glitch. But from a point of view of Russia's status as a great power and its influence around the world, the loss of the influence that comes with arm sales might be more important than the need to prop up the domestic industry with some additional wartime payments. Russia, like most nations, has a certain number of arrows in its international relations quiver.

It doesn't have the same sort of influence and cultural reach that the US does, nor can it deploy the same sort of financial resources overseas that the Chinese do. But what it can offer are things like hydrocarbons, or enough weapon systems to make Michael Bay call time out. Some of the reasons weapon systems can work so well as tools of international influence is because when you buy them you are sort of signing up to a long-term relationship. You are probably going to need a tail of ammunition and spare parts that might last decades, your military will have to learn from their military, probably exercise together. Your Defence Department will probably be talking to.

Their contractors to make sure knowledge transfer happens. But that can also be a vehicle for familiarity, further negotiation, and possibly future sales pitches. And because it can be so hard to convert from one set of systems over to another, once you are in this arms supply relationship, it can take a lot of effort to get out of it. At least if your nation has any imperative to make sure it's capable of defending itself fully at any given time. Breakup decisions can be difficult enough without them resulting in things like your air force being grounded. And so we have repeatedly, and I'd argue often effectively, seen Russia.

Deploy its arms exports as a tool of its influence. Arms sales were arguably a key part of the country's relationship with nations like India or Vietnam. They could be deployed to openly but non-violently challenge American influence in countries like Iraq, Saudi Arabia or Egypt. And with the sale of S-400 air defence systems to Türkiye, Moscow created a significant diplomatic incident both within NATO and the F-35 program. So it might be that as the footprint of Russian arms sales shrinks, so too does its resulting influence. It also might hamstring one of the tools Russia has had to influence conflicts abroad.

And I very deliberately used an image of aid going to Ukraine here because I think it illustrates the underlying point. By now I think a lot of nations have figured out that if you want to influence the way a war or crisis evolves. preferably to your advantage but without committing your own troops, one thing you can do instead is just find the side that you want to win and supply them with a shit ton of weapons. US arms supplies had a major impact on the Yom Kippur War and the Soviet defeat in Afghanistan. The US has been on the receiving end of the strategy a few times at this point. And recently the Russian government made extensive use of resupply.

As one of its tools of intervention in Syria. Yes, Russia would also intervene in Syria directly, but its materiel contributions were also massive. Among other things Russia reportedly delivered more than 1,100 tons of spare parts for armoured vehicles and helped establish a number of repair facilities. Those facilities in turn reportedly helped repair nearly 5,000 armoured vehicles between 2015 and 2018. Assistance at that sort of scale quite possibly had a material effect on the way the fighting played out. But in future Russia might be more constrained in its ability to ship spare parts by the kiloton given the potential scale of the demand back at home.

Moving on then from geopolitics to economics. A lot of Russian arms programs rely to at least some extent on foreign sales to generate both scale and to share risk. Basically even though Russia is a major military power, it just doesn't buy enough stuff to merit the sort of factories and programs that it wants to have. To an extent you can compensate for low demand levels by changing how you produce something. You don't invest super heavily in mega factories full of capital equipment and instead you take a labour intensive, often almost handmade, approach. Russia already has a pretty artisanal and labour intensive.

Approach to a lot of its defence manufacturing. And that might have something to do with the generally low levels of labour productivity that were observed about the industry before it ramped up for Ukraine. But now the scale problem doesn't really apply to existing conventional munitions because they are in very high demand. The place where it might apply more is to Russia's development projects. A good example of this might be Russia's other 5th generation fighter project, Sukhoi 75, the Checkmate. This thing has been in development for a very long time, and Russia has marketed it as sort of their equivalent, their counter, to the F-35.

Think single-engined 5th generation fighter with a lower operating cost and price point than something like Sukhoi 57. And sometimes what will happen is a model of this thing will turn up at various trade shows with about as much hype and dramatic lighting as your average Super Bowl. While the Russians pitch to potential development partners like India to pretty please give them the money and assistance they need to turn the model into a real aircraft. Because Sukhoi 75, even though it is according to Russian state media intended to be a primarily export product, isn't actually an export product yet – it's a program to create one. And by bringing in development and investment partners,.

What Russian industry would normally be able to do is bring in capital to share R&D costs and also share the risk in case the product goes wrong. And personally what I'm taking from that is that we should all feel bloody cheated that we never got an episode of Shark Tank where the Russians turned up and asked for millions of dollars in exchange for a share of their 5th generation fighter program. Of course with products like this, it's always hypothetically possible that Russia would just front up all the R&D money at the start, build a finished production-ready airframe and then start selling it around the world. But going it alone on something like this isn't exactly a low-risk manoeuvre.

Maybe you take all the risk yourself and end up with a world beater, a design that vindicates some of the resources you sunk into it. And which, since you didn't have any development partners, you can hoard all to yourself if you want. And other times you find out that you put millions or billions of dollars into a program and you ended up with a dud. That's just part of the risk you take when you try and develop a new system, especially when you try and develop it solo. And with the Russian budget and Russian industry straining to provide the Russian troops in Ukraine with what they need right now,.

I think it's an open question how much room there is for Russia to continue to invest in next generation products that may or may not work, and which almost certainly won't arrive quickly enough and in the quantity necessary to make any sort of difference in Ukraine. So from an industrial perspective, in Russia the biggest casualties of the collapse in international exports probably aren't going to be the basic systems. Every time a Ukrainian drone flies overhead, the order book of the plants making S-300 or Buk interceptors gets just that little bit more secure. And if you're a plant cranking out artillery ammunition or restoring old armoured vehicles,.

The export market was always secondary to you anyway. Instead I think the greatest threats are to Russia's next generation rock star systems, for lack of a better term. The issue with that though, is that eventually next generation is what the market is going to want. Russia has done very well for a long time with its upgrades and iterations of old Soviet designs. Sukhoi 35 is night and day a better aircraft than its Sukhoi 27 ancestor. But we now live in a world where more and more countries have actual flying 5th generation fighters of indigenous design. The technology is so mature that the United States is getting ready.

To start retiring some of its first 5th generation fighters. And some of the major defence industrial powers in Asia, North America and Europe have 6th generation programs in the pipeline. My concern, if I was a Russian defence industry analyst looking forward, would be that if I can't get enough sales I'm not going to be able to develop next generation products. And if I don't develop next generation products, I may struggle eventually to make enough sales. OK, so at the risk of getting into the dangerous world of projecting the future here, what might be next for the Russian arms sector given the recent movements we've seen? Will it reclaim its spot alongside the United States as a major market leader?.

Or is it doomed to fall further down the rankings? And at an even bigger picture level, I want to ask what sort of threat does the current situation pose to Russia's defence industrial base in the short versus medium and long term? And in the short term at least, I think the answer is – not much. In fact if anything, Russia's defence industry is probably still on a strong growth trend. And that's basically because, even though Russia's United Shipbuilding Corporation somehow found a way, it's kind of hard to go bankrupt as a monopoly weapon supplier during a war. Arms exports were a key element in the sustainability of Russia's peacetime defence sector. But a lot of the factors that make exports important during peacetime just don't apply during a war.

Profitability probably matters a lot less because the government is going to want the lines running almost no matter the cost. If your business is slowly going bust because your contract to restore armoured vehicles doesn't cover all of your cost, well, you are going to ask for bailout. And somehow I doubt Putin is going to announce that he's giving up on the whole Ukraine thing because Uralvagonzavod is having some P&L issues. Similarly, you are not going to have issues finding economies of scale or using excess capacity, because again the Russian government is going to buy basically whatever you can manufacture. And finally, when it comes to the need to have international partners to share development risk with,.

For the moment that issue might be partly mitigated by the reversion to legacy systems. Chemezov, the head of Rostec, recently told us for example that Russia is going to focus on T-90, not T-14. Because the T-14 is too expensive as an answer to the requirements in Ukraine. So there you go, if you never sit down and try and develop and deploy anything new you are not going to face development risk, and if you don't face development risk, you don't need dance partners to share it with. Going back to the big picture however, in the medium to long term there are three broad reasons that the recent expansion in defence output in Russia might not be all good news for the defence industry over the medium to long term.

Firstly, there are arguably a few economic landmines on both the supply and demand side of the current model. Demand side, because Russian industry is currently configuring itself with quantity of production as the absolute driving objective. But it's an open question what will happen to all that extra productive capacity that's being built up when the demand level from the Russian MoD is no longer just “yes” with a blank check attached. There's a bit of a distinction here between the build-up in parts of the Western defence industrial base, which seems configured to meet what is expected to be an enduring increase in demand for military products,.

And this sort of demand for wartime emergency output in Russia. Meanwhile on the supply side, the threat is probably the uncertainty over the availability of future inputs. For example, what do you do with a defence industrial base which is configured around rapidly restoring old vehicles when you run out of old vehicles? More than 80% of Russia's armoured vehicle output and a significant part of its ammunition output is based on the refurbishment of old stock. In the past that might have seemed like a sustainable model, because who could possibly stuff up a war badly enough that you could actually.

Burn through most of the Soviet inheritance? But if Russia ever starts to exhaust that availability of old materiel, their competitiveness in parts of the export market might take a hit. That point feeds into two others, firstly that for the most part Russia's expansion in output to support the war hasn't been driven by building new facilities from scratch which are then staffed with experienced skilled labour and advanced capital equipment in order to produce equipment as cost efficiently as possible. Instead a lot (although by no means all of it,.

There have been some new repair facilities established for example) is being driven by the activation of slack capacity. You take factories that are running 8 hours a day, 5 days a week, hire an additional 500,000 people, increase the duration of everyone's average shift, and start running it 24 hours a day, 6 days a week. And while that might deliver some economy of scale because you're now producing stuff at greater scale, there's also some pressures in the other direction. As a very general rule, inexperienced labour is going to be less productive than experienced labour. And they can also drag down the productivity of your experienced staff.

If they require a bunch of supervision. Russian state media says that one major defence plant increased its headcount over the course of 2023 from 4,800 to 19,500. Meaning that on average each of those experienced workers that might be able to repair a vehicle using nothing more than duct tape, sheet metal and a broken bottle, is now responsible for supervising (on average) four new recruits. And as anyone who has supervised a bunch of new recruits will tell you, they can either be the best possible thing in the world for additional productivity, or they can result in experienced workers spending half their time.

Trying to make sure the newbies don't accidentally burn down the factory. There is also just a general productivity problem when you start extending people's shifts out to 12 hours. Much to the chagrin of production planners everywhere, human beings are often endowed with a tremendous sense of entitlement and often claim that they benefit from time to do things other than producing tanks. Like needing to eat, sleep, use the bathroom or touch grass occasionally. And so there is a lot of research out there that suggests that you don't always get a 1:1 increase in output every time you increase someone's working hours.

You might get more overall output, but past a certain break-even point it might be less efficient output. And problem three frankly, is that a lot of this additional output is shit the market is just not going to want. Recruiting tens, or hundreds of thousands of people, giving them a crash course in welding 101, and then setting them to restore vehicles that are older than they are might give you output. But while some of the products that Russia is now producing in large numbers might be in demand on the export market, think Lancet loitering munitions for example, a lot of the stuff being produced is by market standards, complete and utter trash. It's still dangerous trash and can be useful in Ukraine.

But you have to ask the question: other than the Russian Ministry of Defence after several years of attritional struggle, who exactly is going to be interested in buying a restored 60 year-old armoured vehicle that was put back together by people with 3 weeks training on a 12-hour shift, with weld quality so bad it is difficult to distinguish from fire damage? I mean some of this stuff you'd struggle to even write a contract for because it's not going to have an official designation. It's also unlikely that Franken-MT-LB here ever went through official acceptance trials or comes with a full manual.

Basically Russia is trying to win this war by ramping up production of a Soviet army. But when this is all over, there may not be anyone else out there looking to buy one. So if you're looking for some possible futures for the Russian arms industry if and when the war in Ukraine ends, there is absolutely no way I can give you any sort of certainty. But what I can do is illustrate a couple of broad ways it could go. Option one is an extended war economy, where the Russian government avoids any sort of demand shock to the defence industry by just continuing to buy all of its output. Under this scenario maybe Russia decides to embark on a multi-year rebuilding process for the military replacing a lot of what was lost in Ukraine, at least in so far as it's possible.

Even just to get back to where they were at the start in terms of stockpile levels would take years of full speed ammunition and missile production, and the restoration of thousands of additional armoured vehicles. And in that scenario, maybe the expanded Russian defence industrial base can survive just fine without exports, because it's selling its product to the Russian government. Taking that option however, would come with at least two problems. In order to maintain wartime level of demand, the Russian government would need to find a way to fund a wartime level procurement budget for multiple years. And even if that financial strain was acceptable,.

The question is what sort of army are you building at that point? Because unless you invest in retooling and re-purposing of a lot of the facilities and capacity that's been built up, what they are producing as we said, is old generation stuff. Meaning that, to take an extreme example, if you just take the approach of continuing to buy what is currently being produced in order to avoid disruption, you might see the Russian military finishing a re-equipment process in the 2030s where tank units are still receiving restored T-80s and T-72s, artillery units are being issued towed guns from the Cold War era,.

While Russia's competitors have re-equipped one or more generations ahead. Scenario 2 would be one where the war ends eventually, but in a way that results in sanctions being dropped on Russia and Russian arms firms being able to push back into the market. Those first caveats are important, because to be maximally competitive Russia needs to not be subject to the risks and uncertainties that come from potential supply disruptions or sanctions. In this world I think there's potential for a really mixed story for the Russian defence sector. There will probably be a lot of demand out there for systems.

That have performed relatively well in Ukraine, Lancet, Iskander, many Russian drone systems. Plus you'd have to imagine there'd be enduring demand in the air defence and aerospace sectors. With sanctions dropping, cost coming down and scale already established, the Russians could probably score some significant export wins in certain markets. But other parts of the defence industrial base are probably going to have to be converted or mothballed. You just can't sustainably justify paying people premium salaries to restore old equipment forever. The museum market only has so much demand. Finally, a sort of worst case scenario for the industry would be one where Russia remains under sanctions, remains locked out from significant parts of the international market,.

But at the same time where the Russian government looks for significant cuts in military spending. That, depending on how it's handled, could be a very disruptive experience. Think expanded or new facilities needing to have their values written down, thousands of employees laid off, wages being cut or not paid on time, benefits and hours being reduced, and all the painful experiences that any industry really can go through when the line suddenly goes down. And significant downward pressure on a lot of prices as Russian producers try to dump product onto the international market that the Russian MoD is no longer picking up the tab for. All while Russia slips further and further away from its hope.

Of reclaiming its once privileged position at the top of the export ladder. How exactly this all resolves, and what the future of the Russian arms industry is remains to be seen. But what I think is clear is that thanks to the war in Ukraine, the Russian defence industry is going through its greatest transformation since the end of the Soviet Union. And while it would probably be fairly short-sighted to write off an industry of that size and experience, it's clear that plenty of other producers are racing forward to seize the opportunity and fill the void in a way that's fundamentally transforming the global arms market as we know it. But that's probably a much broader issue and a story for another time.

Meaning it's time for a quick channel update to close out. And for me this episode was a bit of a back to basics exercise, analysing industry data. I still think there is plenty more to be pulled out of this data set, and the real fun begins when you start integrating with other sources to generate additional insights. But even noting the limitations of the data and the limited wedge of the issue we looked at today, I genuinely hope you enjoyed it. Looking forward to future releases, I have to say I was very relieved when I found out that April 1st does not fall on a Sunday, and as such a release day. So there might be an option for me to dodge the insanity of April fool's day,.

But I might put the topic to my patrons for further discussion. There should also be some polling going up there on future release topics more generally, probably in the first half of this coming week. But one thing that probably won't be on that list is future gaming releases at least for the next couple of days, ah, the gaming PC is in fact pretty kaput at this point. I can rip the drives, all the data is fine and I've ordered a replacement unit, but after many, many years of noble service, instability has finally become non-functionality there. So Perun Gaming people, you are great, please just wait a little bit longer. And for the rest of you, I hope you enjoyed this week's dose.

Of PowerPoint and spreadsheets. I'll see you all again next week.

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