Ukraine’s mysterious exit from the arms trade

Having spent six years preparing for a lucrative deal supplying arms to Iraq, Ukraine seems to be about to breach the first part of the contract. Anna Babinets suspects external forces may be at play...

Anna Babinets
22 February 2011

Ukraine’s future as a major player in the arms trade is in the balance. Having landed the greatest contract in its history just over a year ago — to supply armoured personnel carriers and airplanes to Iraq — the country now seems strangely reluctant to deliver. An Iraqi delegation is due in Ukraine to collect the first installment of military equipment. Yet the indications are that they will go home empty handed; and there is likely to be a major scandal if the contract is revoked. 

According to both US Congress and the Stockholm International Peace Research Institute (SIPRI)  for the past ten years, Ukraine has ranked among the top ten largest arms exporters in the world.  They inherited the factories, technology and expertise following the demise of the USSR, a country that always tried to take the lead in everything, including the arms trade.

BTR 4 swimming

The BTR-4 armoured personnel carrier (APC) is intended to transport personnel of mechanized infantry units and to provide fire support in combat.

After gaining independence, Ukraine discovered that its military production capability exceeded its own needs, and decided to sell the surplus. One of the largest contracts Ukraine secured was in the 1990s - the sale of 320 tanks to Pakistan, in which the country gained 650 million USD (US dollars). By offering inexpensive and reliable hardware, instead of state-of-the-art technology, Ukraine has become a key arms exporter to many countries in Asia, the Middle East and Africa. 

In 2009, the Iraqi government announced a plan to spend 2.5 billion USD on retrofitting the army. Ukraine was the first country to sign a contract to supply arms to Iraq.  Under the terms of the contract, over the next three to four years, Ukraine was to supply 420 armoured personnel carriers (APCs) and 6 airplanes. The then Ukrainian President Viktor Yushchenko stated: “We have secured a leading position in the world arms and military equipment market.” And indeed, everything pointed to this being the case. Commentators wondered how much money Ukraine could make by servicing the exported equipment. It was speculated how much of the 2.5 billion USD allocated to arms imports by the Iraqi government would go to Ukraine.

By offering inexpensive and reliable hardware, instead of state-of-the-art technology, Ukraine has become a key arms exporter to many countries in Asia, the Middle East and Africa. 

Anna Babinets

Ukraine did well to land the deal. After all, there were other contenders, such as South Korea and Canada. The reasons it did were two-fold; the first and key reason being political. Ukraine's peace mission during the Iraq war was one of the largest. A total of 19 Ukrainian peacekeepers lost their lives in Iraq, and according to some reports, the US helped Ukraine to obtain the 500 million dollar deal out of gratitude. The second reason was Ukraine's comparative advantage - the relatively low cost of Ukraine's military equipment, as well as the country's experience with exports of this kind.

Iraq and USA pinned their hopes on Viktor Yushchenko. But just a few months later Ukraine had a new government. Soon after becoming President, Viktor Yanukovych replaced the head of Ukrspetsexport, the company in charge of selling arms and military equipment abroad.

The chief executive of Ukrspetsexport, Dmitri Salamatin, deserves special comment here. Until recently Salamatin was an MP representing the Party of Regions (President Viktor Yanukovych's party). He has no past connection to the arms trade. What he did have was political connections. Until 1999 he lived in Russia and married the daughter of Oleg Soskovets, who served as deputy prime minister under Boris Yeltsin, and in this capacity was responsible for the Russian arms industry.The two men had probably met many years earlier, since both Salamatin and Soskovets had lived in Kazakhstan before 1991. Mr. Salamatin made his mark in the Ukrainian parliament as a regular participant in the scuffles that are quite common in this country. On one occasion, when he was already head of Ukrspetsexport, he left his office and went to parliament especially to support the MPs of the Party of Regions in just such an incident.

AN 32 plane

The deal between Iraq's Defense Ministry and Ukraine's state-owned arms exporter, UkrSpetsExport, involved 420 BTR-4 armored personnel carriers, six Antonov AN-32B transport aircraft and other equipment.

The first instalment of Ukrainian armoured carriers was due to reach Iraq by 6 January 2011, to be displayed during a military parade in Baghdad, marking the country's Army Day. The parade was also intended as an opportunity to showcase new military equipment bought from Russia. Unfortunately, Ukraine failed to supply the APCs (BTR-4 ) and airplanes (An-32) on time. This is when the information on the breach of contract reached the Ukrainian media.

Ukrspetseksport immediately blamed the breach of contract on the company's previous management, warning the media it would take them to court if they continued to “publish information capable of damaging Ukraine's foreign policy image”.

The former Ukrspetsexport director Sergey Bondarchuk was somewhat taken aback by Mr. Salamatin's accusations. “He should really thank us for having signed such a great contract, and make sure he delivers on it,” Mr. Bondarchuk said.

Mr. Salamatin rarely grants interviews and has commented on the breaking of the Iraqi contract only through his press office. He claimed the reason behind the Ukrainian military equipment not making it to the parade was that the Iraqi side had provided them with incorrect and belated specifications for the APCs and airplanes. He promised that by the time the second delivery to Iraq was due in late February,  both the first and second instalments would be delivered.

Russia's prime goal is to get rid of Ukraine as an arms dealer so that she can increase the price of her own military equipment and keep supplying it to Asia and Africa - without fear of competition from Ukraine.

Anna Babinets

However, my sources tell me there will be no delivery at the end of February. Neither the Kharkiv factory that produces the APCs, nor the Kiev plant where the airplanes are made, have produced the requisite amount of military equipment. And, despite all their assurances, Ukrspetsexport management has done nothing to speed up the process.

My sources also say the technical specifications are not really the problem. The real cause of the conflict is Mr. Salamatin's refusal to pay commission to a middleman in the Ukraine-Iraq deal.  In the contract, the services of the middleman, referred to as a “consultant”, are valued at 70 million USD. According to my information, the US company Jankovic & Associates Inc. is providing the 'middleman' service.

Most major international arms trade deliveries are conducted through middlemen. but Mr. Salamatin has rejected this practice and that is why the contract is stuck. “Even if he is not happy with this particular middleman, nothing is stopping him from looking for another. After all, someone in Iraq has got to deal with day-to-day issues relating to the contract,” says my source. He claims Mr. Salamatin is not looking for a middleman and has allowed the contract to drift.

Like most countries involved in the arms trade, Ukraine has been no stranger to scandal linked to weapons. The most memorable has been the “chain armour” scandal. In 2002, the US accused Ukrainian President Leonid Kuchma of illegally selling the Chain Armour communications surveillance system to Iraq during the war. A year later the government produced evidence disproving the accusation. In a more recent scandal, Russia accused Ukraine of exporting arms to Georgia during the armed conflict with Russia in 2008. This is also an unproven accusation. 

Despite this, never before has Ukraine prevented itself from selling arms. Some arms trade experts now believe that Ukrspetsexport head Mr. Salamatin has been deliberately holding up the delivery, since he is really working for Russia. The facts from his CV mentioned earlier certainly suggest that this might be the case.

Ukraine and Russia – two countries with similar capacities and producing similar products – are competitors in the arms trade, supplying the same market. The arms trade has kept growing with no signs of diminishing. All the players in the market are ready to do anything to get rid of a competitor, and will avail themselves of any opportunity to plant their man in the management of a rival company.

BTR 4 Ukraine

The layout of the BTR-4 represents a dramatic change compared to the older BTR family of vehicles. It carries nine fully equipped soldiers in addition to the two-man crew. Soldiers enter and exit the vehicle either through the rear doors or the roof hatches.

Ukrainian President Viktor Yanukovych is either unwilling or unable to do anything about the current situation. It is difficult to imagine that he is not aware of what is going on. Nevertheless, he has done nothing about it.

“In the context of the 'reset' in the US – Russian relations, it is quite possible that the contract may go to Russia. Ukraine's former achievements may turn out to be less significant than the future needs of Russia's services,” says Ukrainian arms expert Aleksei Mel'nik.

It is unlikely that the 500 million dollar contract is all Russia is after. Russia's prime goal is to get rid of Ukraine as an arms dealer so that she can increase the price of her own military equipment and keep supplying it to Asia and Africa - without fear of competition from Ukraine. A sudden breach of the contract with Iraq would seem to fit this scenario quite well.

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