Friday, November 4, 2016

Baltic Defence Budgets Surge as Russia’s Neighbors Respond to Perceived Threat, IHS Markit Says

October 20, 2016 - Since the Ukraine crisis began, orders for new defence equipment in the Baltics has doubled and will double again in the next two years, according to analysis released today by IHS Markit, a world leader in critical information, analytics and solutions.
Latvia, Lithuania and Estonia increased spending on new defence equipment from $210 million in 2014 to $390 million in 2016. Together by 2018, those three countries are expected to spend around $670 million a year on new equipment.
“The profile of defence spending in the Baltics has changed dramatically in the past two years,” said Craig Caffrey, principal analyst at IHS Jane’s. “Their defence budgets will all be over 2 percent of GDP by 2018, and each country will have doubled or tripled their budgets from 10 years ago. In 2005, the region’s total defence budget was $930 million. By 2020, the region’s defence budget will be $2.1 billion. This growth is faster than any other region globally.”
Latvia and Lithuania have been the two fastest growing defence budgets in the world since 2014, according to IHS Jane’s analysis. The high rates of growth will be sustained until 2018.
New Cold War
“The increase in defence spending in the Baltics is largely linked to the growing confrontation between Russia and the West, often described as the ‘new Cold War,’” said Alex Kokcharov, principal analyst at IHS Country Risk. “We have seen political confrontation between Russia and the West in the past two and a half years escalate to military assertiveness and we don’t see this ending anytime soon.”
“Military exercises carried out by Russia and NATO have increased in frequency, as have various aviation and marine incidents in the Baltic and Black Seas,” Kokcharov said. “Russia very much views these areas as its immediate frontier.”
“While we do not expect Russia to become involved in a conventional interstate war with the West, including NATO member states, it is likely that the confrontation will continue for a number of years,” Kokcharov said. “This confrontation will likely include elements of military intimidation, making immediate Russian neighbors concerned.”
Russia at zenith of defence expenditure
The 28.6 percent increase in the defence budget for 2015 (the largest since 2002) is expected to represent the zenith of Russian defence expenditure for the foreseeable future, according to the IHS Jane’s report.
The 2016 budget included the first reduction in Russian defence expenditure seen since the late 1990s. With further growth required to fund the full extent of the RUB21 trillion investment planned for the 2011-2020 State Armament Program, it seems likely that some of the modernization goals will need to be deferred into the new 2016-2025 program, expected to be formalized this year.
On the defence trade side, Russia has been steadily losing market share,” said Ben Moores, senior analyst at IHS Jane’s. “Russia, once previously dominant in the world’s second largest import market, has been steadily losing market share in India to Israel and USA over the past five years.” Russia has a large backlog with China over the next decade, which is primarily related to SU-35 deliveries. However, this belies the trend of exports from Russia to China in coming years. Russian exports to China, once a huge market for Russia, are in steady decline as China has developed parallel industrial capabilities.

“Russia is well positioned in high growth markets such as Vietnam, Indonesia and India,” Moores said. “However, it faces increasingly competition in all three from North American and European companies and will have to adopt new strategies to retain market share.”

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