The Russian military-industrial sector at the time of sanctions. The "three card game"

(To NC)

The restrictions imposed by the International Community with the economic sanctions issued after the invasion of Ukraine, have limited access to military and military products to the companies of the Russian defense and industrial complex. dual-use of foreign manufacture.

The subject of this analysis is the activity of Moscow aimed at trying to involve the member countries of the Eurasian Economic Union (EAEU) and other nations belonging to the former Soviet Union to circumvent sanctions and continue undisturbed in the procurement of military technology deemed necessary to their own weapons systems.

In a series of meetings held between March and April this year on the initiative of the Russian Federation, the UAE Council took decisions aimed at minimizing the negative impact of international sanctions on the Russian Federation's economy. In particular, it exempted from the payment of the duty on the import of products of critical importance for the Russian economy (about 300 items), such as medical equipment, pharmaceutical products, trolleys for rail transport, equipment for conducting geological explorations, goods for the textile industry, packaging for food, seeds, fertilizers, electrical equipment and materials for electronic components.

A particular measure, taken with an eye to the China1, is the one with which the EAEU approved an increase in the limit on the import of duty-free goods to 1.000 euros. The Deputy Head of the Ministry of Economic Development of the Russian Federation, Dmitry Volvach, announced that "This measure will help to ensure a sufficient quantity of essential goods purchased by citizens of the EU Member States". It will therefore be possible to import goods for personal use free of charge up to a value of 1.000 euros from foreign countries to countries adhering to the EAEU. The maximum weight of goods for duty-free import remained the one established at 31 kg. The EAEU Council has established that the measure is in force from 25 April to 30 September 2022. The new rule applies to all EAEU countries, except Armenia.

These initiatives have enabled Russia to create favorable conditions to facilitate the movement of essential goods for Russian industry, through the member states of the EAEU, including those of foreign production.

Excluded from the benefit of the duties described above, nevertheless theArmenia maintains a key role in the "three-card game" that Moscow has undertaken between Russia, member countries of the EAEU and foreign states whose products it has an interest in purchasing. It should be remembered, on February 26, 2021 Yerevan signed with the European Union (EU) the Comprehensive & Enhanced Partnership Agreement between the European Union & Armenia (CEPA). Among the various advantages brought to the parties by the agreement are the reduction of trade barriers in the context of mutual commercial and economic cooperation and the simplification of procedures for the granting of licenses and authorizations. Thanks to this agreement, in 2021 Armenia's external trade with EU countries increased by 25% (compared to 2020), for a total value of 1,6 billion dollars.

In the complex framework of relations between Russia and Armenia and between Armenia and the European Union, the privileged relationship in force between Moscow and Yerevan has led Armenia to continue its cooperation with the Russian Federation in the technical-military field and to help Russia evade sanctions.

In fact, Russia has adopted a series of measures adopted to circumvent the sanctions, which can be summarized as follows:

  • the creation of joint Russian-Armenian enterprises on Armenian territory;
  • the export to third countries of Russian products bearing Armenian trademarks;
  • the purchase by Yerevan of products high-tech of western production, subsequently exported to Russia;
  • the use of Armenia's banking system to carry out financial transactions.

Lo Yerevan Telecommunications Research Institutefor example, it works closely with the leading Russian manufacturer of air defense equipment - the Almaz-Antey Corporation. In addition to supplying its own products, the Armenian institute is also active in re-exporting to Russia a series of electronic components of foreign production.

Other Armenian companies in business with the Russian war industry sector appear to be the same Special Design Bureau (Ashtarak), which supplies the Russian Federation with photoelectric digital angle converters, used, among other things, for the production of the Sukhoi Su-34 fighter-bombers (photo) and the Charentsavan Machine Tool Factory (Charentsavan), which produces a number of components for Russian armored vehicles and rocket artillery systems.

Russia has also established an export / import scheme for products through the territory of Kazakhstan.

In the city of Oral, 20 km from the state border with the Russian Federation, a logistics hub is under construction, designed for the customs clearance, distribution and transshipment of goods arriving and entering Russia.2.

The movement of goods occurs according to the following scheme: foreign products are delivered across the Caspian Sea to the Kazakh ports of Aktau and Kuryk. After customs clearance, the goods are transported to the city of Oral, where they are distributed and transhipped on the vehicles of Russian logistics companies, with subsequent transfer to Russian territory. Russian products are exported to third countries according to a similar scheme, in the reverse order. The advantage that Russia enjoys by exploiting this route is given by the possibility to import and export tax-free goods entering and leaving the territory of Kazakhstan, as it is part of the EAEU.

(Map of the routes used by Russia for trade through Kazakhstan)

The Russian industrial sector linked to Defense also uses Kazakhstan to procure foreign-made equipment and components, of which it has scarcity and production difficulties.

For example, the firm Ulyanovsky Mechanical Plant, the leading manufacturer of anti-aircraft defense equipment in the Russian Federation, involves Kazakhstan to gain access to German-made components. In fact, before the invasion of Ukraine, Russia bought German technological products dual-use for military purposes, necessary for the production and modernization of anti-aircraft type missiles Beech and type 2K22 anti-aircraft systems Tunguska (photo). Following the increase in sanctions against Moscow, the supply of these products has become impossible. The possibility of circumventing the obstacle is offered by the fact that Kazakhstan also has the aforementioned weapons systems for air defense and, therefore, is entitled to purchase the necessary materials from Germany, presumably for repairs. Once in Kazakhstan, these can be easily handed over to the Russian Federation.

Let's look at the case of the Russian state company Rostec that, in order to promptly fulfill the requests to satisfy the production needs connected to the conflict and, at the same time, to respect export contracts, has intensified contacts with private Kazakh companies specialized in the export of defense products, with the aim to use them as intermediaries for the purchase of weapons and components from abroad. On April 10, 2022, therefore, the representatives of the company Rostec delivered to their Kazakh counterpart a list of more than 400 foreign-made defense products of priority interest to the Russian military industry: microcircuits, electrical equipment, spare parts for weapons and military equipment manufactured mainly in Germany, Japan, Switzerland, Estonia, China, Italy, Poland and the United States. Also at the beginning of April this year, the Rostec approached representatives of the defense departments of Kazakhstan and Azerbaijan with a request to receive 300mm rockets for the anti-aircraft missile defense system Smerch. Given the difficult relations between Moscow and Baku - let's not forget the frictions relating to the disputes over Nagorno-Karabak - the request made to Azerbaijan appears more indicative of an urgent need, rather than an attempt to approach the former Soviet republic, today the opponent of Russia. Regarding the above requests, while Kazakhstan's position is unclear, the Azerbaijani Ministry of Defense refused to provide military assistance to the Russian Federation.

We come to the Moldova, which while not joining the EAEU, maintains a close relationship of cooperation with the Russian Federation in the military and technical fields.

Company Topaz, based in Chișinău, is a major supplier of Obedinennaya Dvigatelestroitelnaya Korporatsiya, the main Russian manufacturer of engines for the Russian Air Force aircraft, included in the list of companies subject to sanctions. There Topaz produces machine tools high-tech, such as electronic equipment used in the production of regulators for aircraft engines and complexes for the electrochemical treatment of gas turbine blades. As of August 2022, Russian orders exceeded 80% of production. The company is a member of the international association United Engine Corporation (UEC), whose headquarters are located in Moscow. UEC is a member of Rostec and, in turn, is made up of several Russian and foreign companies (including some Western ones) engaged in the development and production of aircraft engines. Its very structure allows Moscow to buy, through the Topaz, components of western production.

As part of the continuous search for collaborations by the Russian Federation aimed at obtaining the supply of products high-tech foreigners to meet the needs of their military-industrial apparatus by circumventing international sanctions, the role of Israel. Between the end of May and the beginning of June this year, the Kremlin proposed to the Israel Aerospace Industries and Aeronautics Defense Systems, leading Israeli companies for the production of unmanned aerial vehicles (UAVs), to evaluate the organization of the supply to Russia of components for the production of drones. The offers came from influential Israeli businessmen who own businesses and assets in Russia, who stressed the Russian Defense Ministry's critical dependence on these components and ensured representatives of Israeli companies a high level of confidentiality when cooperating with Russian importers.

It should be remembered that in 2010, Russia began buying UAVs Searcher MkII and Bird Eye 400 from Israel, manufactured by Israel Aerospace Industries (IAI). Subsequently, in 2011, the Russian company Oboronprom signed a contract worth about 400 million dollars with the Israeli company IAI to have the license to produce in the Russian Federation the two models of UAVs, respectively called in Russian Forpost e Zastava. The two models are produced at the company Uralsky Zavod Civil Aviation of Ekaterinburg.

Following the Russian aggression on Ukraine, Israel officially refrains from concluding new agreements on the supply of military goods to the Russian Federation, including components for the new unmanned aircraft produced in Russia. In turn, the Russian Defense Ministry has announced the complete replacement of imports of Israeli components with others of its own production and the start of autonomous production of drones. Forpost-R (photo).

In addition, in April of this year, Russian exporters turned to the management of the French company Dassault Aviation for the purchase of components for the repair of the radar warning systems and laser detection systems with which the Ka-combat helicopters are equipped. 52.

The societies Israel Aerospace Industries, Aeronautics Defense Systems e Dassault Aviation have declared that they are not willing to further collaborate with Russian companies in the Defense sector.

Finally, we want to express a particular consideration in relation to the importance that lithium has for Russia, also for its applications in the military field.

We want to start from a particular reading of the reasons for the invasion of Ukraine of the obstinacy with which the Kremlin wants to occupy the Donbass at all costs. In this case, the Russian motivations are not to be found in the problems related to the defense of the Russian-speaking population in the area, but to its mineral resources:

“The area roughly between the Belarusian border and the Donbass, with a south-east trend, to be clear, is the area that geologists define as the Volinja Shield or even the Ukrainian Shield. An area rich in raw materials, especially pegmatites with spodumene, a mineral the latter - also called trifane - which is a source of other metal minerals such as uranium, thorium, cesium, niobium, tantalum and lithium. And it is precisely the latter, lithium, which represents one of the essential elements of the industry of the future. A fundamental element for the energy transition, for the production of batteries for EVs and aluminum alloys for aeronautical use, but also as a flux and fluidifier of slag from melting baths and in welds and for pharmaceutical compounds, lithium represents one of the reasons (certainly not the most important, but with a weight that should not be underestimated) of the Russian military operations in Ukraine. In fact, there are countless deposits around the currently contested area of ​​Mariupol and southern Donbass, but also in that of Žitomir "3.

Following Canada's refusal to supply Russia with raw materials for lithium production, Moscow is urgently looking for alternative sources of supply for this mineral.

On April 12 this year, Deputy Director of the Metallurgy Department of the Ministry of Industry and Trade of the Russian Federation V. Demidov reported about the severe lithium shortage in Russia, as a result of the refusal of Canadian companies - owners of mineral deposits of lithium carbonate in Chile and Argentina - to export raw materials to Russia. The share of the products of these companies in the Russian market is 85%. To cover the deficit, Russia has turned to the only potential supplier of this mineral available, Bolivia, to increase the volume of lithium deliveries: the share of Bolivian ore on the Russian market is 15%. On April 14, Deputy Minister of Foreign Trade B. Blanco expressed his willingness to increase the volume of supplies to Russia.

There is another aspect that represents a problem for Russia, however: the scarcity of industrial production of lithium carbonate, due to the reluctance of the Bolivian government to attract foreign investment. Only at the end of 2021, Bolivia has agreed with eight foreign companies to conduct pilot tests on the extraction of raw materials, on the basis of which a decision will be made regarding the selection of a company and the start of industrial production by it. Russia, of course, will try to ensure the victory of its own company Uranium One Group and it cannot be excluded that it applies unfair competition methods or that it attempts to bribe the officials of La Paz, in order to obtain a monopoly position on the extraction of raw materials in Bolivian territory.

The critical dependence of the Russian economy on trade with EU countries (36% of Russian turnover is represented by the EU and amounts to approximately 284 billion US dollars), does not allow Moscow to give up toto to European products. Despite the sanctions imposed, Russia today buys about 15% of the pre-war volume of necessary products from EU countries.

In this context, the procurement policy of military components and materials implemented by Moscow in the aftermath of the aggression against Ukraine appears aggressive and, at times, poorly considered. It is a fact that the sanctions, at least in part, have proved effective, forcing the Kremlin to make cumbersome choices to circumvent the impossibility of conducting foreign trade relations through normal channels. This is the case of the involvement of the member countries of the EAEU or Moldova as "banks" on which to bounce the traffic of goods and materials directed towards Russia. A certain anxiety transpires, however, from the unlikely negotiations that the representatives of the Russian arms companies have tried and still try to weave with their counterparts in the Western sphere, such as Canada, France and Israel or, at least, adverse to the policy of Moscow, like Azerbaijan. It seems likely, however, that this attitude will continue in a marked way, both for the need to have the components in question, and to demonstrate the firm will to exert its influence on neighboring countries, regardless of whether it is allied or hostile.

Even with interlocutors from countries manifestly contrary to the Russian decision to invade Ukraine, where deemed appropriate or necessary, Moscow will stubbornly pursue the possibility of obtaining what it needs. After all, "asking is lawful, answering is courtesy", even in a negative way.

1Заказывать в Китае можно будет больше. Up to 1000 Euros, the limit is limited to XNUMX euros (You can order more from China. Approved the increase in the limit for the duty-free import of goods to 1.000 euros), ixbt, 15/04/2022.

2On the signed memorandum at the Kazakh-Turkish business forum, Kazakh Invest, 07.03.2022.

3 R. Busetto, Donbass 2022: the lithium war, electronicanews, 21/04/2022.

Photo: Kremlin / web / MoD Russian Federation