In early January 2007, the United States announced that it had imposed trade sanctions against 24 entities from several countries under Section 3 of the Iran and Syria Nonproliferation Act. The list of sanctioned entities included three Russian companies – RosOboronExport, the Kolomna Design Bureau of Machine-Building, and Tula Design Bureau of Instrument Building – as well as one Russian individual, Alexey Safonov. [1] The sanctions, which will be applied for a period of two years, ban U.S. government procurements from the companies and individuals identified, bar U.S. aid and military sales to them, and prohibit the granting of U.S. export licenses for transfers to them of armaments-related or dual-use strategic commodities. This is the second time in six months that Washington has imposed sanctions against Russian entities. In August 2006, the United States took a similar step against RosOboronExport and Sukhoi Holding over arms sales to Iran. (See “Russia Reacts Angrily to U.S. Sanctions on Two Russian Arms Companies,” in the October 2006 issue of WMD Insights.) After an additional review, the sanctions against Sukhoi Holding were lifted in October 2006, but those imposed against RosOboronExport remained in place.

Russian Weapons Sale to Syria
The January 2007 sanctions were reportedly related to the sale of weapons systems to Syria that ended up in the hands of Hezbollah, a Shi’ite militia group based in southern Lebanon. [2] The Kolomna Design Bureau is known for producing, among other weapons, the Igla shoulder-launched anti-aircraft missile; Syria has purchased Strelets mobile anti-aircraft systems, which are equipped with Igla. The Tula Design Bureau manufactures advanced anti-tank missiles that U.S. officials were quoted as saying had found their way to Hezbollah during its July-August 2006 conflict with Israel. The affiliation of Mr. Safonov and the reasons for sanctions against him were not disclosed. [3]

As in the August 2006 case, these new U.S. sanctions elicited strong protests from Russia. Minister of Defense Sergey Ivanov was quick to assert that the United States was “unhappy that sales of Russian arms and military equipment are growing, as is acquisition for our own Armed Forces.” As in August, Russian commentators claimed that the true reason for sanctions was Washington’s displeasure with Russian arms sales to Venezuela. [4]

Russian commentators claimed that these sanctions, like those imposed previously, would not hurt the Russian companies in question. Ruslan Pukhov, Director of the Center for Analysis of Strategies and Technologies (CAST), called them “symbolic.” [5] None of the three companies have any business relations with U.S. government or U.S. business entities. The only exception is AVISMA, recently acquired by RosOboronExport, which is one of the largest producers of titanium and titanium products in the world and has a multi-billion dollar contract with Boeing. This relationship, however, was not affected by previous sanctions, and Russian experts anticipate that the situation will remain unchanged under the new sanctions. [6] AVISMA’s legal affairs director Artem Kislichenko said that the August 2006 sanctions “did not create any discomfort except moral.” Recently, AVISMA and Boeing signed a 30-year agreement under which the latter is expected to spend $18 billion on purchases of titanium parts and $5 billion on design and engineering services for its Boeing-787 aircraft from AVISMA. [7]

Russian experts note, however, that because the RosOboronExport uses the Bank of New York for money transfers, it is possible that its accounts there could be blocked by the U.S. government as part of the sanctions. To reduce this vulnerability, the Director General of RosOboronExport, Sergey Chemezov, stated that the company’s deals are gradually being transferred to currencies other than the dollar, such as the euro, which could help RosOboronExport by-pass the U.S. banking system. [8]

RosOboronExport’s potential vulnerability to future sanctions could be further reduced by a widely anticipated restructuring of the company. The organization is said to have become so diversified and unwieldy -- for example, it includes not only a titanium-producer AVISMA, but also the largest auto manufacturer in Russia, AutoVAZ -- that it will probably be restructured as a “state corporation.” Arms sales would be concentrated within one subsidiary of the new entity. The new corporate structure might limit any future U.S. sanctions for controversial arms sales to that subsidiary, without affecting other elements of the new state corporation. At the moment, it is unclear when this reform might take place, because a change in Russian law would be required to authorize the new entity. Some Russian analysts are hopeful that the new law might be adopted during 2007. [9]

Russian Arms Trade with Iran
Russia is currently readying itself for yet another round of American sanctions, this time caused by the transfer of Tor-M1 anti-aircraft systems to Iran. [10] The transfer of 29 systems, under a contract whose worth is estimated at $1.4 billion, began in November 2006 and was completed in January 2007, about two weeks after the announcement of the most recent sanctions. [11] Defense Minister Ivanov declared that this deal was not in violation of international law: “We sell only a limited range of defensive weapons,” he said. “The Tor-M1 system, for example, will not affect the balance of forces in the region because its effective range is only up to 40 kilometers.” [12] Nonetheless, Russian experts believe that U.S. domestic legislation makes new sanctions all but inevitable.

According to some observers, these future sanctions will likely be introduced against the producer of the Tor-M1, an entity called Kupol (“Dome”), that is based in Izhevsk. According to the editor-in-chief of the journal Eksport Vooruzhenii [Weapons Exports], Dmitri Vasiliev, sanctions should have little or no impact on the enterprise, because Kupol does not do business with American companies. As a result, new sanctions could again become primarily a political gesture. [13]

Russian officials, independent experts, and commentators are virtually unanimous in their support for arms trade with Iran, Venezuela, and other countries, and in condemning the United States for opposing them. A rare dissenting view was expressed by Aleksandr Lukin, Director of East Asia and Shanghai Cooperation Organization Research Center at Moscow State University for International Relations. Although he characterized the U.S. sanctions as an act of “unfair competition” by the United States, he also questioned the wisdom of Russia’s arms export policy. Arming Iran, he argued, is a “short-sighted and ultimately suicidal policy” because Iran is in “direct competition” with Russia for influence in Central Asia. The radical Islamic regime in Iran is likely to ignite a major conflict in the Middle East, he continued. Although arms trade with Syria is less controversial, he noted, such deals are likely to undermine Russian economic interests in Israel, which are considerably more important than any profits yielded from arms sales to Syria. [14]

Such views are unlikely to affect official Russian policy in the near term, however. Arms producers still derive the bulk of their profits from arms exports and view Iran, Syria, and similar countries as particularly lucrative customers. Paradoxically, U.S. opposition to such sales may strengthen domestic political support for them, because the U.S. action is seen in many circles as an attempt to weaken Russia’s underlying arms production capabilities.

Nikolai Sokov – Monterey Institute Center for Nonproliferation Studies