#7
Far Eastern Economic Review
December 12, 2002
In Guns We Trust
The presidents of China and Russia aren't keen to have it aired in public.
But Russian sales of weapons to China are booming just as Taiwan feels the cost of U.S. ships and submarines
By David Lague and Susan V. Lawrence

Russian president Vladimir Putin's talks with Chinese President Jiang Zemin and his successor as Communist Party chief, Hu Jintao, in Beijing on December 2 were designed to present an overwhelmingly reassuring picture to an unsettled world.

In their 13-page joint communiqué as reported by the official media, Jiang and Putin appealed for peaceful diplomatic solutions to brewing crises over Iraq and North Korea. They signed a series of economic and law-enforcement agreements to draw the two giant neighbours with communist pasts closer. They called for peace and development to remain "the theme of the times" and even voiced hopes for stronger cooperation in ecological and environmental protection. And they never directly mentioned the burgeoning arms trade that underlies their extremely "strategic partnership."

Russian media reports suggested both sides had in advance of the visit agreed to keep all future arms deals secret--apparently for both public-relations and defence reasons. And officials from both sides declined in Beijing to talk about what deals might be on, or under, the table. But despite the official silence, senior Western defence officials say that it was highly likely the talks behind closed doors would include China's desire to buy nuclear submarines, and more advanced surface ships and to speed technology transfers to the People's Liberation Army as part of its arms race with United States-armed Taiwan. Because it is Russia's sales of weapons and military technology that are gradually bringing the PLA within sight of its goal of transforming into a modern, hi-tech force. And, in turn, it is largely China's weapons purchases that are keeping the Russian defence industry and its ever-important research and development alive until the Russian economy recovers enough for Moscow to rehabilitate its own military.

The big loser is of course the island of Taiwan. As mainland China's surging economy allows it to more easily afford advanced Russian hardware, Taiwan is in greater danger of being outgunned in an accelerating arms race because the government can't keep up with the amounts being spent. "Taiwan is increasingly unable to pay for the new weapons that it requires to counter what Russia is selling the PLA," says Richard Fisher at the Jamestown Foundation in Washington, who is a staunch critic of China's attempts to militarily intimidate Taiwan. The influential Stockholm International Peace Research Institute, Sipri, estimates that China imported arms worth a total of $10.78 billion in 1990 dollars in the decade up to 2001 and more than 90% of these weapons were from Russia. The value of imports from Russia sharply accelerates from 1999, Sipri's figures show. By 2000, China had risen to become the world's biggest arms importer. It retained that position last year ahead of India, Turkey, Taiwan and Saudi Arabia.

Not surprisingly, Beijing, which regards Taiwan as a Chinese province and refuses to rule out the use of force if Taipei continues to delay talks on reunification, strongly defends its trade with Russia. "We buy their weapons because we need them," says Xia Yishan, a veteran former diplomat and one of China's top Russia experts. "We're a major power. In defence, we want our military to be modern. So we need some military technologies and military equipment. Whatever place will sell to us, we'll buy."

China is definitely living up to Xia's words. A Western military embargo since the 1989 Tiananmen Massacre means that the PLA has little choice but to place its orders with the sprawling network of military factories that Russia inherited from the former Soviet Union. Because of the secrecy surrounding China's military build-up, it is difficult to assess exactly how many advanced Russian weapons systems are already in service with the PLA. But reports in the Russian and Western media show that Beijing has paid at least $5.8 billion for deliveries or local production of Sukhoi Su-27 and Su-30 strike aircraft, $1 billion for two Sovremenny-class destroyers armed with supersonic anti-shipping missiles, $1.5 billion for anti-aircraft defence systems and about $800 million for four advanced Kilo-class conventional submarines. "The PLA is now the primary consumer of Russian large combat ships and conventional submarines and the PLA is very likely the major consumer of very advanced Russian military technologies," says Fisher.

Some defence analysts believe the actual value of Russian military transfers to China is much higher than the published estimates if extensive deliveries of modern tanks, artillery, radar and communications equipment, missiles and helicopters are also taken into account. In big-ticket items alone, China has this year ordered two more Sovremenny destroyers priced at a total of $1.4 billion and eight more Kilo-class submarines for $1.5 billion. Reports in the Russian defence media indicate that Beijing is also negotiating to buy a further 40 Su-30 fighter-bombers from Russia. Based on earlier orders, this contract could be worth up to $1.8 billion. These weapons along with a growing array of missiles aimed at Taiwan mean that the balance of power in the Taiwan Strait is now shifting toward Beijing.

For Russia, the arms trade with China is also vital. "There are almost no significant orders for our domestic consumption for this stuff," says Sergey Goncharov, minister-counsellor at Russia's embassy in Beijing. "These exports are quite important to this overall industry." Other top Russian officials put it more bluntly than that. They know that the very survival of Russia's military factories and shipyards depends on Beijing's, and to a lesser extent India's, orders. For Moscow, keeping these industries alive and producing state-of-the-art hardware is crucial to its dreams of maintaining and even rebuilding its power. "Russia's defence industry complex can be preserved only by supplying military equipment and arms to China, "Russian Defence Minister Sergei Ivanov told lawmakers in the country's far east on November 5, according to the leading business daily Kommersant.

Competition between the two nations for influence and control over the sparsely populated regions that are Russia's far east goes back centuries and could resurface. So the major potential downside for Moscow is that it may in fact be arming a potential rival or, probably more realistically, supplying a potential competitor in the world arms trade.

Xia, now a researcher with the Foreign Ministry's think-tank in Beijing, interprets the arms trade quite differently. He sees it as evidence of a strong and trusting relationship and notes that some of the hardware now in service with the PLA has yet to be introduced to Moscow's armed forces. "We all know that their arms are relatively advanced, and China's are relatively backward," he says. "If they were suspicious of China, or didn't trust China, they wouldn't sell to China. The arms trade shows the level of trust between our two countries."

Other experts are not so sure. They believe Russia simply can't afford to supply its own forces with the latest equipment and remains suspicious of China's growing power. As evidence, they point out that Moscow is willing to sell India more advanced weaponry than it has so far delivered to China.

For sure, Taiwan has hardly been standing still as China's build-up gathers momentum. In the early 1990s Taipei launched a military expansion aimed at maintaining its technological edge over the PLA. With the exception of contracts with a combined value of $5.4 billion to buy 60 Mirage fighter-bombers and six navy frigates from France, 70% of Taiwan's imported weapons have come from U.S. suppliers. These orders include 150 F-16 fighters, hundreds of tanks, dozens of helicopters, artillery guns, missiles, radars, airborne early warning and control aircraft and surface warships. In fact, Sipri estimates show that Taiwan's spending over the decade to 2001 reached $15.5 billion measured in 1990 dollars, about 50% more than China's outlays for the same period.

Just as Russia is profiting from a captive Chinese market, U.S. defence contractors have cashed in on orders from Taiwan, a market that other Western military suppliers are increasingly reluctant to enter. The reason: Beijing insists that arms sales to Taiwan are a violation of Chinese sovereignty and is quick to apply sanctions against governments that approve arms exports to Taipei.

As Beijing's trade muscle grows, most defence analysts believe that the sales of French Mirages and frigates in the early 1990s will probably be the last major non-U.S. arms for Taiwan. This is far from ideal for Taipei. Although its close relationship with the U.S. gives the island access to top military technology and hardware, it finds itself unable to call for competitive bids that would allow it to drive a harder bargain.

Taiwan's spending dwindles

This is an extra challenge for Taiwan as it struggles to keep pace with China's rocketing defence budget. In March this year, Beijing announced that it was boosting military outlays by 17.6% to about $20 billion this year, the latest in a sequence of big increases as the Chinese economy continued to expand at breakneck speed.

However, the published defence-spending figure is widely acknowledged to understate real outlays. In its annual report on China's military power released on July 12, the Pentagon estimated that actual annual spending had reached $65 billion. If so, this would mean that China has the second-biggest defence budget in the world--though Beijing is still dwarfed by U.S. outlays this year of $350 billion. The Pentagon report forecast that based on expected economic growth real defence outlays could jump threefold or fourfold by 2020.

Taiwan's spending on the other hand has shrunk as a proportion of government outlays as the island's economy struggles to recover from a prolonged downturn. Taiwan's defence budget for this year is about $8 billion, the lowest since 1996. "We certainly can't engage in an across the board arms race with China," says government lawmaker Parris Chang. "We are certainly worried and so is the U.S."

U.S. President George W. Bush last year promised to do "whatever it took" to defend Taiwan against unprovoked attack but Washington certainly doesn't want Taiwan to become overreliant on this promised protection. The Bush administration wants Taipei to boost its spending on U.S. arms to deter any Chinese aggression and is lobbying hard for increased outlays. And it seems that Taipei will have little choice but to come up with more money if it intends to go through with the major hardware orders that are now in the pipeline.

In the meantime, the effect of this disparity is that China has been able to afford sharply increased arms imports in recent years. In its report, the Pentagon said that Russian defence sales to China averaged $1 billion a year from the beginning of the 1990s but jumped to about $2 billion a year from 1999. Not suprisingly, this translates into more military muscle. "Russian arms sales and technical assistance to China accelerate Beijing's force modernization and likely will have a significant impact on its ability to use military force," said the Pentagon report.

Publicly, Beijing plays down the importance of China's arms imports from Russia, noting that they are decreasing as a proportion of total trade. Two-way trade last year reached $10.7 billion, according to Russian figures, and should jump by about 20% this year. "Arms are really a very small part of overall trade," says Xia.

But for Taiwan, any amount is too much when it is finding it hard to keep up with the prospering mainland. Lawmaker Chang foresees that an end to the arms race could yield a valuable peace dividend. "Both sides could really save some money," he says. Dream on.

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