The true meaning of the Moscow-Algiers arms deal

13.03.06

Moscow, March 13. (RIA Novosti defense commentator Viktor Litovkin).

A landmark event in Russian aircraft-making – promotion of MiG CEO Alexei Fedorov to Director General of the United Aircraft Corporation (UAC), the new national champion, came shortly before a huge defense (mainly aviation) deal with Algeria.

The high-level Russian delegation in Algeria signed $7.5 billion’s worth of arms trade contracts under which Russia will supply a fleet of multirole fighters -- 36 light MiG-29SMT Fulcrums and 28 heavy Su-30MKA Flankers -- and 16 Yak-130 Mitten combat trainers, all worth around $3.5 billion. Additional programs include upgrade of 36 older Fulcrums, supplies of missiles and ground-based radars, and pilot and technician training. This series of contracts is going to be a tough test for the UAC, its new CEO and companies bound to become its units -- Sukhoi, MiG, and Irkut Corporation.

Interestingly, Fedorov, who had come to MiG from Irkut and, accordingly, at different times had pushed for Flankers (Irkut) and Fulcrums (MiG) in talks with the Algerians, this time was not restricted by in-house rivalry and got, in his new capacity, a brilliant chance to show his real management skills and national champion’s efficiency as both Sukhois and MiGs are currently on the table.

There is little doubt that the Russians are ready for the Algerian deal technologically: both multirole fighters have been in operation for some time, for both there is backup production capacity: the Su-30s is produced by Irkut (Irkutsk) and KNAAPO (Komsomolsk-on-Amur), and the MiG-29SMTs by RSK MiG (Lukhovitsy, Moscow Region) and Sokol (Nizhny Novgorod). The Mitten is still being tested, and commercial production will surely take additional time and effort, but this is highly unlikely to affect the four-year contract.

At first, questions arose on whether the Algerians were ready for the contract financially. The deals were signed only after Russia agreed to write off $4 billion in Algeria’s bilateral debt. But if there was no money to pay the debt, the natural question arose, how Algiers was going to pay for the aircraft which, according to Sergei Chemezov, CEO of Russian state arms exporter Rosoboronexport, would be delivered only upon bank transfer?

Where there is a will there is a way, though. Apparently unable to raise cash, Algeria offered a payment scheme which, though complicated, seems perfectly acceptable. Vagit Alekperov, CEO of Russia’s leading oil producer LUKoil, gas giant Gazprom chief Alexei Miller, and head of independent gas producer Itera Igor Makarov’s role among Russian negotiators turned out to be much more important than it had seemed, as the North African nation pledged to give Russians shares in upstream as well as downstream operations with its oil and gas, including intercontinental energy deliveries.

In the context of the arms deal, the scheme is likely to be as follows: Algeria gives a Russian company access to an oil- and gas-rich region, with the proceeds split between the producer and the Algerian government who is bound to immediately transfer the revenues to the UAC as payments for the aircraft which Russians make totally on their own.

Of course the proposed scheme is far from straightforward, and is going to include many mediators like banks and other credit organizations, but it could also be seen as evidence to the solid financial condition the Russian corporation is in.

A company that can afford such a scheme demonstrates its ability to engage in long-term, rather than expediency-driven, relationship. Even more importantly, though, involvement in such extensive and long-term contracts – which admittedly imply some one-off compromises - means stable additional profits in the future because the producer who reaches out in such a manner gains tremendous advantages in MRO and other after-sales programs for a fighter fleet that is going to last way beyond a decade.

The future profits that the UAC leaders were probably having in mind when supporting the debt write-off will enable the corporation to invest more in R&D to create more products and do more good to Algeria, Russia, and its aircraft industry. –0-