THE RUSSIAN ARMS DEAL WITH ALGERIA: A MODEL FOR

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003345

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/24/2016
TAGS: PREL PINR MARR MOPS RS AG
SUBJECT: THE RUSSIAN ARMS DEAL WITH ALGERIA: A MODEL FOR
EXPANDING THE MARKET?

REF: A. ALGIERS 451

B. USDAO ALGIERS 181643Z MAR 06

C. USDAO MOSCOW 231358Z MAR 06

D. MOSCOW 3034

Classified By: Minister-Counselor for Political Affairs Kirk Augustine
for reasons 1.4 (a/b/d)


1. (C) SUMMARY. President Putin's March 10 visit to Algeria
demonstrated that Russia is actively working to expand into
new arms markets to sustain the Russian military-industrial
complex. Russia reportedly will sell Algeria 70 combat and
trainer jet aircraft, 300 T-90S tanks, air defense systems,
and various other arms for a total of $7.5 billion. The
deal, made possible through Russia's agreement to write off
$4.7 billion of Soviet-era debt, catapults Algeria into the
number three position behind India and China as a purchaser
of Russian arms. END SUMMARY.

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DEBT FOR ARMS
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2. (U) High on Putin's agenda for his March 10 visit to
Algeria (Ref. D) was finalizing arms contracts worth a
reported $7.5 billion. We discussed the Algeria deal and
Russia's arms export strategy with Konstantin Makiyenko,
Deputy Director of the Center for Strategic Analysis and
Technologies (CAST). Makiyenko said that the sale to Algeria
meant that Russian arms exports had "moved out of the India
and China ghetto." He was referring to the fact that India
and China currently buy 70 percent of Russia's arms exports.
Makiyenko speculated that the deal might cause other North
African countries to step up purchases of modern arms as well
to keep pace with Algeria. In a press interview, Sergey
Chemezov, General Director of Rosoboronexport (Russian
Defense Exports) noted that 90 percent of the present
arrangement involved the sale of new equipment and only 10
percent would buy upgrades or repair of materials from
previous sales.


3. (C) Makiyenko told us that if Russia had insisted on
Algeria paying off its debt of $4.7 billion, the contracts
just agreed would not have been signed. He said Algeria
wanted the same 100 percent debt relief that Syria had
received when Russia wrote off its larger debt. Makienkyo
said that the Russian military-industrial complex would be a
big winner, and could potentially obtain contracts for twice
the amount of the original debt of $4.7 billion. Makiyenko
said that the deal would benefit most sectors of the Russian
arms industry. Half of the contracts would go to the
aviation industry, and about $1 billion each to the
manufacturers of air defense systems and tanks. In addition,
he told us, shipbuilders may earn several hundred million
dollars.

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SAVING DEFENSE INDUSTRY JOBS
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4. (C) Aleksandr Golts, Deputy Editor-in-Chief of
Yezhenedelniy Zhurnal, told us he agreed that debt relief was
central to the deal. Golts doubted that Algeria would have
paid off the debt anyway. He said the deal turned out to be
a "win-win" situation for both sides. The Algerians can wipe
off their old debt and the Russians profit by keeping the
production lines in defense factories moving. Golts observed
that saving defense sector jobs would pay handsome political
dividends for the Putin camp in the run up to the 2008
Presidential elections.


5. (C) Aleksey Arbatov, former Duma Defense Committee Vice
Chairman, also agreed that Russia's military-industrial
complex would benefit from these Algerian arms contracts.
Arbatov noted Algeria is a good market for Russia since it
does not provoke the same political sensitivity as do Russian
sales to Iran, Syria, or Venezuela. Russia has no vital
interests in North Africa, he remarked, and its approach is
"all commercial."


6. (C) Aleksandr Belkin, Deputy Executive Director of the
Council on Foreign and Defense Policy (CFDP),told us that
Putin's trip to Algeria "killed two birds with one stone."

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First, Russia re-established strategic relations with Algeria
that had been adrift for over a decade. Second, Russia
diversified its arms clients by expanding out of its heavy
reliance on India and China. However, Belkin underlined that
the arms industry alone is not a suitable base for Russian
industry. Only serious investment and development of
civilian industries will improve the overall health of the
Russian economy, he said. Belkin pointed out that the fall
of the Soviet Union was due in part to over-spending on
defense industry and insufficient attention to the civilian
sector.


7. (C) Belkin noted that Russia has been relying on
Soviet-era stockpiles and Soviet-designed weapons since the
end of the Cold War. The current lack of strategic depth,
not only in material but in trained personnel and ideas, will
challenge Russia's ability to stay competitive in arms
markets. While the Soviet Union's defense industry received
the best engineers, technicians, and students, Russia's
defense industry today is not getting "the best and the
brightest."

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ALGERIA'S MILITARY REARMS
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8. (U) The announced $7.5 billion deal is reported to include
contracts for 36 MiG-29 SMT fighters, 28 Su-30 MKI fighters,
and 14 Yak-130 jet trainers (aircraft contracts alone worth
$3.5 billion). Additionally, 36 earlier-model MiG-29
fighters would be returned to Russia and resold to other
countries. Algeria will buy 300 T-90S tanks over four to
five years (worth $1 billion),eight divisions of S-300 PMU
air defense systems ($1 billion),and 30 Tunguska air defense
systems (nearly $500 million). Russia will also upgrade 250
T-72 tanks (over $200 million),supply Metis and Kornet
anti-tank missiles, and repair vessels for the Algerian Navy.


9. (C) According to Makiyenko, however, of the $7.5 billion,
only $5.5 billion of the sale can be accounted for (the
aircraft, new T-90S tanks, and the S-300 PMU air defense
systems). There was no transparency regarding the rest of
the $2 billion, he noted. Additionally, Belkin doubted the
Russian defense industry could support making 300 new tanks,
even over several years as reported. Belkin predicted that
Algeria might instead receive refurbished older tanks.


10. (U) Marat Kenzhetayev, an analyst from the Disarmament
Studies Center in Moscow, told the press that Algerian
contracts would represent a virtual rearming of the Algerian
military. Between 1962 and 1991, Algeria bought $10 billion
worth of arms from the Soviet Union. However, Kenzhetayev
noted, during the 1990s its orders didn't exceed $500 million
and since 2000 have been less than $100 million.


11. (C) Makiyenko predicted to us that Libya would not want
to fall behind militarily, though there was more a "pride
race" between Algeria and Libya than an arms race.
General-Colonel Sergey Mayev, First Deputy Director of the
Russian Federal Defense Order Service, took the same public
line, telling media representatives that the Algerian
contract opens prospects for promoting Russian armored
vehicles to Libya, Syria, and Iran.


12. (C) Neither Makiyenko nor Belkin saw a military necessity
for Algeria to purchase that quantity of arms. Makiyenko
speculated that the Algerian President authorized the
purchase to obtain "toys for his military boys" to keep them
off of his back. He understood that there was some discord
between the Algerian President and his top military brass,
and the deal might be part of an attempt to buy them off.

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ALGERIA IN THIRD PLACE; IMPLICATIONS FOR CHINA AND INDIA
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13. (C) The deal would make Algeria the number three
purchaser of Russian arms, after China and India. Makiyenko
predicted that Algeria might become the number one client of
Russian arms over the next several years, as the Indian and
Chinese markets for Russian arms level off or decline. The
Chinese, he said, are tired of receiving "stripped-down"
versions of Russian arms and are looking to other suppliers,

MOSCOW 00003345 003 OF 003


especially from Europe. If the European Union (EU) decided
to lift its arms embargo against China, he speculated, China
could use a threat to buy modern weapons from Europe to
extract a deal for fully-equipped arms from Russia. The
Chinese had made it clear they wanted "the good stuff."

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MiG EMERGES AS A WINNER
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14. (C) Makiyenko told us the Algerian contract essentially
guarantees the future of MiG Aviation, which had been
suffering in its competition with the more powerful Sukhoy.
An on-again, off-again MiG deal to India could be revived
thanks to the Algerian contract, he said, and predicted the
Algerian deal could revive MiG's chances to re-enter the
contest for designing a fifth-generation fighter (won by
Sukhoy in 2001).

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COMMENT
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15. (C) While there is still a lack of clarity regarding the
actual value of the deal, it will give a much needed boost to
the Russian military-industrial complex. Enterprises
employing thousands, often located in remote and depressed
regions, can expect steadier employment for the next several
years as a result of the deal with Algeria. Saving jobs in
the defense industry sector should pay important political
dividends to Putin and his allies as the 2007-2008 election
cycle approaches. The Algeria deal makes clear that the GOR
is pushing to expand the market for Russian arms beyond its
current focus on China and India. We can expect to see more
use of innovating financing, such as debt write-offs, as an
incentive to move deals forward and keep the Russian defense
industry's production lines moving.
BURNS