Last month at the Golden Idea Awards , an annual ceremony for the Russian defense industry, Deputy Premier and ex-KGB hard-liner Sergey Ivanov told the prize winners that he was supremely proud of them. “Even in the midst of the world financial crisis,” he said, “there has been no drop-off in the demand for our products.”
It is probably the only Russian industry that can claim such an honor. November’s dismal economic data showed  that the Russian economy had gone off a cliff; the double-digit declines in industrial output, commodities prices, and consumer spending were the biggest since the country’s outright collapse in 1998. Yet Russia’s weapons exporters are still doing brisk business. Their expected earnings for 2008 , a disastrous year for everyone else in Russia, were $8 billion, with a crop of future contracts worth some $33 billion.
The industry starts with a considerable advantage—proximity to the Kremlin. The weapons export monopoly, Russian Technologies , is run by Sergey Chemezov, Putin’s buddy from their Dresden days in the KGB. “There’s been a significant increase in Russian arms exports under Putin,” says Paul Holtom of the Stockholm International Peace Research Institute . Russia is now second only to the United States in weapons exports.
And now, the industry is set to get another gift from the nation’s rulers. World demand for most Russian products—oil, nickel, gas—has collapsed, and Russia’s currency reserves are leaking like a sieve. So the Kremlin has started notching the ruble downward to ease those pressures. Its phased devaluation —about 1 percent to 2 percent a week for the last two months—has left the ruble some 18 percent lower than its August peak. What’s more, economists predict that the Kremlin will deflate the ruble another 20 percent this year in order to protect the country’s reserves and revive its exports. (Even after years of promising diversification, commodity exports are still Russia’s lifeblood.)
As the ruble drops by more than one-third of its value, Russian guns, planes, and tanks, already the bargain alternative to pricey American models, will become still cheaper. This is important for two reasons: As the revenue streams of Kremlin-connected oligarchs dwindle, this one could hold steady since a cheaper product can catch dropping world demand. This could also help because some of Russia’s weapons customers are oil producers hurt by tumbling oil prices. Venezuela, for example, has signed a series of lucrative arms contracts with Russia but is already negotiating a loan  to pay for all those goodies. Cheaper arms, however, should alleviate these pressures—and keep pinched customers from reneging on those defense contracts.
That’s good news for Russian weapons exporters but bad news for some of the world’s peacekeepers. Once the world’s arms warehouse, the Russian defense industry since the collapse of the Soviet Union has been hobbled by inefficiency, an aging work force, and inferior products. (In an unprecedented incident last year , Algeria, an old Soviet customer, sent back 15 MiG fighter jets, claiming they were lemons. “It was the first time a foreign customer returned a military hardware purchase—ever,” says Stephanie Neuman, a weapons trade expert at SIPA. “It was unheard of.”) But what Russia lost in market share, it made up for in zeal, aggressively peddling its weaponry all over the world. Desperate to attract new customers and win back old Cold War allies, Moscow attached few strings to its weapons deals. Such terms of trade were very attractive to the countries that America refused to do business with, and soon Syria, Iran, North Korea, Libya, Venezuela, Somalia, Eritrea, Burma, Yemen, and Sudan all became Russian customers.
Of course, the United States has armed its fair share of unsavory actors, but on the whole, say weapons experts, its export controls are much tighter than Russia’s. “The U.S. sells widely, but places where it draws the line, Russia jumps in,” says William Hartung of the New America Foundation . And Russia, recognizing that the West looks askance at sales to these rogue actors, has made some gestures of appeasement, like promising to do surprise inspections after a sale is completed to someone in what it calls the “awkward” market. It is unclear whether any such inspections have taken place.
The other discrepancy between the two superpowers is what they sell. America makes the bulk of its money selling very expensive, high-end technology—big-ticket items like fifth-generation fighter planes. Russia also sells mostly tanks and planes, but it also churns out a huge number of small arms and light weapons, the industry term for things like AK-47s, shoulder-fired anti-aircraft missiles, and RPGs. The figures are murky, but last year Russia sold as much as $400 million worth of these. And once these cheap and highly portable weapons are sold to “awkward” states, they very quickly turn up somewhere else entirely.
While the big stuff like planes and helicopters has been found in some nefarious corners of the world (Darfur, for example), it is the light, cheap stuff that presents the biggest problem. “Soviet-bloc weaponry constitutes the bulk of illicit circulation,” says Matt Schroeder of the Federation of American Scientists. And circulate it does. Russian guns sold to Eritrea recently surfaced in the hands of Somali insurgents ; the computer of a captured FARC leader revealed that Hugo Chávez was planning on arming them with Russian shoulder-fired surface-to-air missiles; Russian rifles sold to Algeria were found being used by death squads; and, in the summer of 2006, Russian anti-tank missiles, or RPGs, sold to Syria were found under the auspices of Hezbollah in southern Lebanon. (RPGs are cheap, but they cost the Israeli army nearly three dozen tanks.) And those Hamas missiles we’ve been hearing about of late? According to military sources, those are Russian Grad missiles, funneled to Gaza through Syrian and Iranian intermediaries.
It remains to be seen, of course, if a devalued ruble exacerbates the situation by making small arms and light weapons even cheaper. For one thing, the Kremlin seems unwilling to take the ruble down 20 percent in one fell swoop, which would really give the weapons exporters a boost. The Russian weapons industry is not in good shape: In recent years, there has been very little spent on R&D and even less on the Russian army (the industry is almost completely dependent on exports), and it is fast losing market share in its two largest markets: India and China. And, given that the entire world is hurting, there may be a bunch of canceled arms contracts around the corner.
On the other hand, countries might cut back on the big, less portable weaponry but keep the light and cheap guns flowing. The collapse of other Russian industries may make selling arms that much more urgent for the cash-strapped Kremlin, which has already stepped up its salesmanship, sending President Dmitry Medvedev on a sales trip to Venezuela in November . And, with a cheaper ruble at its back, Russia might find some eager customers in the increasingly awkward and dangerous corners of the globe.