VZCZCXRO8527
RR RUEHDBU
DE RUEHMO #3345/01 0901040
ZNY CCCCC ZZH
R 311040Z MAR 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 3327
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEHAS/AMEMBASSY ALGIERS 0087
RUEHBJ/AMEMBASSY BEIJING 3988
RUEHNE/AMEMBASSY NEW DELHI 1031
RUEHRB/AMEMBASSY RABAT 0111
RUEHTU/AMEMBASSY TUNIS 0164
RUEKJCS/SECDEF WASHDC
RUEKJCS/JOINT STAFF WASHDC

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. 
 
------------- 
DEBT FOR ARMS 
------------- 
 
¶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. 
 
---------------------------- 
SAVING DEFENSE INDUSTRY JOBS 
---------------------------- 
 
¶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." 
 
MOSCOW 00003345  002 OF 003 
 
 
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." 
 
------------------------- 
ALGERIA'S MILITARY REARMS 
------------------------- 
 
¶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. 
 
--------------------------------------------- ----------- 
ALGERIA IN THIRD PLACE; IMPLICATIONS FOR CHINA AND INDIA 
--------------------------------------------- ----------- 
 
¶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." 
 
----------------------- 
MiG EMERGES AS A WINNER 
----------------------- 
 
¶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). 
 
------- 
COMMENT 
------- 
 
¶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