THE WAR AS BUSINESS

The Russian-Ukrainian war has seriously changed the situation in one of the most dynamic markets on the planet: the global arms market.

For arms manufacturers, large-scale conflicts is nothing but a tempting business opportunity. It is no coincidence that leading arms manufacturers have significantly increased sales of their products in recent months.

Growing global industry

In just a few months, HIMARS and Javelin missiles have gone from being little-known military equipment to being widely recognised symbols of modern warfare.

This publicity campaign is already paying back major dividends. Some time ago, the US State Department approved a potential $10 billion deal with Poland for a new batch of HIMARS multiple-launch rocket systems and related equipment. Last year Warsaw placed an order for nearly $4b worth of US Abrams tanks to replace more than 200 Soviet T-72 tanks sent to Kiev. Other Eastern European countries, including Estonia, Finland and Lithuania, have done the same, handing over most of their Soviet-era weapons to Ukraine and seeking to replace them with advanced Western weapons.

As a result, orders from leading Western arms manufacturers have risen seriously, leading to an unprecedented surge in sales. But these sales are only one aspect of a broader boom in the global arms trade. It is about restructuring the arms market as a whole.

Currently, it is difficult to predict who will benefit most from this boom. So far, the biggest beneficiaries have been the Western arms dealers, but the long-term effect could be the creation of a multipolar arms trade system.

Overall, the global arms market decreased by 5.1% between 2018 and 2022 compared to 2013-2017 due to lower military imports in Africa and the Americas. At the same time, arms imports increased sharply in Europe and some states in the Middle East and South-East Asia, where new zones of instability and potential conflict are forming.

The observed trend also indicates a diversification of supply from one or two major suppliers, as was the case during the Cold War, to a range of manufacturers offering different modifications of the same product at different prices and with different margins of safety.

According to experts, one of the key reasons for this shift is the relative stagnation of the Russian defence industry.

Although exact figures are almost impossible to find, some sources point to a rather steep decline in arms sales by Moscow in recent years, allowing the US to dominate as the world's leading arms exporter.

One of the reasons for the US statistical leap is said to be Russia's reluctance to disclose the volume and nature of its sales in order to avoid Western sanctions. Even the indicators for the official Russian arms export have stagnated at around $15 billion a year in recent years, while other countries have seen a tangible surge.

Russia-France: battle for the second place

Contrary to many predictions, Russia has so far managed to fulfil the large contracts it signed before the war. This can be explained by the resilience of the Russian arms market, which is highly diversified. Russian defence industry produces a wide range of products for domestic and foreign markets. Arms plants across the country have expanded dramatically since the outbreak of the war. A number of production lines are now operating around the clock to meet the dramatically increased demand.

Despite Moscow's best efforts, some countries have become more cautious about the reliability of Russian arms supplies as demand in Russia itself grows steadily and the ability to supply foreign markets decreases. India, considered the world's leading importer of Russian arms, is particularly concerned.

While Russia accounted for 22% of global arms sales in 2013-2017, this figure fell to 16% in 2018-2022. According to the Stockholm International Peace Research Institute (SIPRI), arms exports from the country fell by 31% over the same period.

France, which has recently become the second after the US on the global arms market, is trying to take Russia's place. The French-Russian competition is particularly noticeable in the Indian market.

While India's arms imports from Russia have fallen by 47% in recent years, France has increased its arms exports to the country by 30%. Even so, Russia remains India's main arms supplier.

Playing big in local markets

Meanwhile, Indian defence industry, which is an important sector of the economy, is also growing rapidly. This comes at the expense of India's growing concerns over national security. To upgrade its armed forces and to reduce dependence on external factors, the government has taken several initiatives to promote the 'Made in India' policy.

China is also expanding its own arms production line. If successful, these initiatives would allow them to reduce dependence on Moscow and perhaps even compete for defence contracts in an increasingly multipolar arms industry.

As Russia struggles to hold onto its shrinking market share, US companies are struggling to keep up with the surge in demand for weapons.

But increased shipments to Ukraine and Europe are opening new horizons in regional markets that local players with relatively smaller MICs are trying to fill. For example, Türkiye, which firmly established itself as the leading drone manufacturer after the 44-day war in the South Caucasus and cemented its success with deliveries to Ukraine.

In general, Türkiye has made intensive efforts in the last decade to achieve autonomy in the defence industry. As a result, the country could reduce its dependence on military imports from 70 to 30 percent. Today, Türkiye is reported to have more than 760 autonomous defence industry projects with a total value of over $70 billion.

In these circumstances, Türkiye's defence industrial complex (DIC) exports are breaking records every year. In 2022 alone, the country's military exports increased by 36.9% to $4.395b, setting another high record, and with drones leading the sales. Unmanned aircraft exports account for 24.5% of the total sales of military products in Türkiye and are worth $1b.

From South Korea to Azerbaijan

Perhaps the biggest success story is South Korea. Its fast-growing defence industry is backed by a government. According to the head of the government, South Korea's goal is to become the world's fourth-largest arms exporter by 2027 (according to SIPRI, South Korea was the eighth leading exporter in 2021).

After the start of the Russian-Ukrainian war, South Korea concluded a deal with Poland for nearly $6b for tanks, howitzers and ammunition, some of which have already been shipped. Norway and Estonia have also expressed interest in importing Korean weapons.

That said, Seoul has a number of unique advantages as an arms producer. Given that the country is still technically at war with North Korea, its defence industry is able to expand rapidly to meet demand in times of crisis at relatively cheap cost. And its weapons are largely compatible with NATO systems because of the long period of adaptation during frequent military exercises with the US. But unlike their American counterparts, Korean contractors are more willing to transfer technology for use by other countries.

However, there is one big exception. The fact is that South Korea is unlikely to renege on its promise not to sell weapons directly to Ukraine because of the country's delicate relations with Russia and North Korea and its general policy against sending weapons to active war zones.

But Seoul was able to find some creative solutions. In November 2022, it was reported that South Korea had agreed to sell 100,000 artillery shells to the US, which Seoul insisted to be the end users of its weapons. But US officials claimed that the shells would actually be sent to Ukraine after being handed over to the United States.

As the war drags on, demand for weapons in Europe is likely to continue to rise as Ukraine's supporters rebuild their stockpiles and upgrade their armed forces. And this buildup of weapons is not likely to cease with the end of the conflict, as manufacturers also compete for customers in regions far from Eastern Europe.

The Azerbaijani defence industry has become actively involved in this process. After the 44-day war, the local defence industry began to receive new orders for Azerbaijani weapons. It is known that Azerbaijan produces more than 1000 items of arms, ammunition and other military products. In 2021, the industry exported more than 60 percent of its total production volume. The military products were exported from Azerbaijan to more than 30 countries. Azerbaijan exports locally produced ammunition, modern small arms, drones and armoured vehicles, including those produced under licence by leading manufacturers.

In recent years there has been an emphasis on cooperation with a number of regional arms manufacturers in order to retain and increase their share of neighbouring arms markets.