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13 July 2016

Germany – a partner of the Russian military?

How European business contributes towards the strengthening of the Russian army 

Russia poses a military threat to Europe – one would be forgiven for arriving at such a conclusion given the tone of recent publications in the European media. However, while politicians and journalists speak of confrontation and imminent danger, European business continues to supply Russia’s military industry.

Sensing danger coming from the East

Former Polish Minister of Defense Bogdan Klich spoke of the danger coming from the East in his interview for the radio station RMF FM. Witold Waszczykowski highlighted Russia’s bellicose policy in his interview for Dziennik Gazeta Prawna (Legal Newspaper Daily). In his interview for Fronda.pl, former Polish Deputy Minister of Defense Romuald Szeremietiew pointed to the fact that Russia has recently shown that it is capable of using force under convenient circumstances in disregard for international agreements.

Latvian, Austrian, German and French media express their concerns over Russia’s bellicosity and it seems that Europe would be wise to fear the strengthening of its Eastern neighbor given the current circumstances. However, the words of politicians and journalists are at odds with business trends. Businesses refuse to suffer lost profits even at a cost of supplying Russia’s military industry, which consequently contributes towards the strengthening of the Russian army.

German businesses serve the Russian defense industry

Although supplying the Russian defense industry directly is not allowed, no complex schemes are required to overcome this obstacle and the engagement of one intermediary will suffice - for example, the engagement of a company in Russia with a statutory capital of 50 rubles (approximately 70 Euro cents). Not millions, not thousands, but merely a few dozen rubles. Under Russian law, this modest sum of money constitutes the scope of a company’s liability to its counter-parties. Nevertheless, the Limited Liability Company “Industriya-Service” has been successful in securing multi-million tenders for supplying equipment to Russia’s defense industry for many consecutive years.

This surprisingly placed trust by large defense plants and corporations in a microscopic organization can be understood by considering the words of its director: “We’re lucky. We cooperate with global leaders in the area of non-destructive testing… Special thanks go to YXLON International (PHILIPS Industrial X-Ray GmbH) – they were the first to trust a young unknown company to represent their interests in Russia and in CIS countries”.

YXLON International is a direct successor of Philips and the leading supplier of industrial X-ray inspection systems. The company’s customers include Daimler AG, BMW, General Motors, VW, Ford, Boeing, EADS, Honsel, Superior, Alcoa, Thyssen Krupp, Goodyear and Bridgestone.

Thus, large, high-tech German business is behind fifty rubles of statutory capital. The director of “Industriya-Service” mentioned other German partners, too, in 2012 such as KOWOTEST, JUTEC and SCHWARZE-ROBITEC. The head of “Industriya-Service” also cited a list of Russian buyers of German technology in the same interview, namely: the Irkutsk Aviation Plant which produces combat aircraft, “Krasmash” which manufactures ballistic missiles for submarines and another company with a telling name: the “Tactical Missiles” Corporation.

Sanctions are not an obstacle

But perhaps, following the imposition of sanctions against Russia, Germany has stopped supplying equipment to the Russian defense industry? No. Sanctions have not become an obstacle to trade.

German firms sold equipment to the Gas Turbine Engineering Research and Production Center “Salut” which produces engines for the Su-27SM, Su-33, and Su-34 in 2015, and to the Central Research and Development Institute of Chemistry and Mechanics in May 2015. The latter is “the leading organization in the country in the field of scientific and technological breakthrough solutions for advanced weaponry”. German companies sold their solutions to the Academician Pilyugin Scientific and Production Center of Automatics and Instrument-Making which develops missile technology in June 2015.

Germany has continued to supply the Russian defense industry in 2016. The Science and Technology Center “Atlas” acquires German products. The center operates “in the field of information security for the benefit of federal agencies of the governmental authorities of the Russian Federation, law enforcement agencies as well as other customers”. German goods are also procured by the “Raduga” State Engineering Design Bureau, a global leader in the field of high-precision missiles.

From a single deal involving German solutions, the defense conglomerate the “Technodinamika” Group is set to make 159 million rubles (approximately 2.5 million euros).

Can industrial X-ray machines be classified as dual-purpose equipment, the supply of which to Russia is currently banned? It depends solely on criteria formulated in documents that regulate the sanctions. These criteria should be reasonable though; clearly, even gasoline can be used for refuelling both ambulances and military machinery; a lathe can be used to produce both civilian and military products; the same goes for X-ray equipment. It cannot be regarded as military equipment although it can be used in the process of manufacturing weapons in practice.

Germany, the FSB (the Federal Security Service) and the Russian defense industry

Perhaps it will come as a surprise to European lay people, but Germany sells its goods to Russia’s FSB. For example, it sells products to the 43753 military unit which used to be part of the eights main KGB administration of the USSR and is now in control of the means of cryptographic protection of information as well as the 34435 military unit – The Institute of Criminology of the 11th Center of the FSB of the Russian Federation at the moment – which “reconstructs the psychological profile of a suspect based on their handwriting, identifies their appearance, and partial biography from their voice, and can carry out identification based on a speck of dandruff”.

The latter military unit concluded a contract with LLC “Industriya-Service” not for the supply of equipment, but solely for repairs and maintenance. However, purchase documentation leaves no room for ambiguity: “Only the producer’s original, compatible consumables can be used in the process of maintenance”.

The “Geophysics” Central Design Bureau which is part of the Corporation “Strategic Control Points” announced the purchase of tools by the German company PFERD on July 5, 2016. The “Luch” Research and Development Institute-Scientific and Production Facility which “has been involved in development and supply of fuel elements to the nuclear and defense industry” purchased German “Spectromat” equipment worth 38 million rubles. The Vavilov State Optical Institute – the leading research and development establishment in optics in the field of industrial and defense-industrial sectors – purchased technology made by Trioptics GmbH in July. The Russian Nationwide Research and Development Institute of Aircraft Materials which develops materials and technologies for combat aircraft buys tooling made by Walter.

The Ulyanovsk Mechanical Plant – the main producer of air defense systems - which manufactures “Buks”, “Tunguskas”, “Shilkas” and “Pantsirs” – purchases measuring equipment made by ROHDE and SCHWARTZ. The “Strela” Scientific and Production Facility which produces military radars buys German machines made by OPTIMUM.

Germany also cooperates with Crimea. For example, the “Fiolent” plant headed by the Hero of Ukraine Alexander Batalin today, purchased German solutions in 2015 and plans to purchase more in 2016.

“Sanctions? Don’t make my ‘Iskanders’ laugh” – a slogan which became popular in Russia after the imposition of European sanctions against Russia. It acquires a new meaning when you learn that a manufacturer of “Iskander” missiles buys German tooling, German lubricants and German components.

But do not imagine that Germany is the only country which supports the Russian military. France supplies produce to “Aviakompozit” which produces nose cowlings for military aircraft. Italy sells goods to the “Iskra” defense plant as well as the “Salut” enterprise. The latter is part of the “Tactical Missiles” corporation. The Netherlands also supplies goods to “Tactical missiles”.

This list is non-exhaustive which serves as confirmation that sanctions have not become a significant obstacle to German and European businesses. Furthermore, neither statements by politicians regarding the Russian threat nor alarming publications in the media are enough to dissuade entrepreneurs from contributing towards the strengthening of the Russian defense industry. 

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