Russia is building a supertank -- if the nation can afford it.
Last month, we introduced you to Russia's new Armata main battle tank. Weighing in at 55 tons, and featuring multilayered armor, an independent crew capsule, and a fully automated 125 mm main gun firing both cannon rounds and laser-guided missiles, Armata is designed to be Russia's answer to General Dynamics' (NYSE:GD) M1 main battle tank built for the U.S. Army and Marine Corps. We also described how Russia is using Armata ("Армата") as a core chassis upon which it will build an entire family of armored personnel carriers, anti-aircraft missile launchers, armored self-propelled artillery, flame throwers, bridge-layers, and minesweepers -- some operated as robots.
But as high-tech and powerful as all this sounds, the Armata contains one potentially fatal flaw: its cost.
Trouble in Putin's paradise
Late last year, a controversy broke out between Russia's Ministry of Defense (MinOboron) and UralVagonZavod (UVZ), the military contractor responsible for building Armata. As described on Russian-language website gazeta.ru, MinOboron blasted UVZ for offering a tank that it describes as overpriced and incomplete.
To date, Russia has invested 15 billion rubles ($239 million) in developing the Armata tank, and budgeted 39 billion ($622 million) more. But MinOboron is demanding UVZ both complete its design and lower its price. Unless UVZ complies, "MinOboron will not extend the contract for delivery of Armata to the [armed] forces, and will refuse serial purchase. ... We'd rather buy the latest version of the T-90 while they finish up the Armata," said the Defense Ministry.
To date, the Russian army has taken delivery of only 12 prototype Armata tanks, bought in 2013. A contract is in place for production through 2017. But at last report, no long-term contract had been signed.
That's just the problem. According to UVZ, mass production is key to reducing the unit price of the Armata. The tank is expected to be complete and ready for mass production this year. (Indeed, it is scheduled to make its debut at the May 9 Victory Day Parade on Red Square.)
But according to gazeta.ru: "MinOboron must buy no fewer than 40 Armata tanks in 2016, 70 in 2017, and 120 annually beginning in 2018" in order to maintain stable, affordable production of the tank. Even then, it would take more than 20 years to produce Russia's desired force of 2,300 Armatas -- pushing the deadline for completion into 2035, while the target date had been 2020.
How much does Armata cost?
Nonetheless, it appears UVZ and MinOboron are getting closer to reaching terms. According to Russian-language website lenta.ru, the sides agreed to a price last month, which will permit UVZ to build the tank in sufficient numbers, and at sufficient speed, to satisfy both parties.
Neither UVZ nor MinOboron are publicly revealing what that price is, however. To the contrary, lenta.ru quoted Russian army reserves Col. Victor Murakhovsky as saying "the tank currently doesn't have a price," but only "a cost of the work, including such things as development cost and the cost of building prototypes."
In Murakhovsky's view, "the first few machines will be 'gold-plated'" due to these costs. UVZ, however, insists that with mass production, it can produce a tank like no other for roughly half the cost of a Western tank. Lenta interpreted this as meaning Armata will cost "roughly 4-5 million dollars" each, or "a little bit more expensive than a T-90 tank."
What it means to investors
Naturally, all this fascinates Kremlin watchers. But what does it mean to investors? On the one hand, the fact that Russia is spending upward of $9.2 billion to build 2,300 high-tech main battle tanks doesn't quite fit the definition of "good news." We'd much rather Russia spend that money on unicorns and rainbows.
But as investors, we have to live in the real world -- and Russia's arms buildup in general, and its Armata tank program in particular, have real-world implications. Specifically, if Russia is building an army of 21st century robotic supertanks, then chances are the Pentagon will want to upgrade its own tank force -- budget constraints or no.
Budget constraints, of course, are what torpedoed the Pentagon's last transformative effort to remake its armored forces -- the Future Combat Systems project. FCS would have invested $160 billion (or more) into creating a whole new family of weapons systems -- tanks, armored personnel carriers, and more, not unlike what Russia is now attempting to do with the Armata system. Fears that this budget could morph into a $300 billion megaprogram forced the Pentagon to shutter the FCS project in 2009. But Russia's resurgent military spending could bring it back to life.
After all, currently, the Army's tank force centers on an M1 Abrams tank first designed in 1972, to match it. Subsequent iterations of the M1, all the way through the latest "M1A2 SEPv2" design, have added better optics, communications gear, and armor to the basic package. General Dynamics is also working up an M1A3 variant expected to go operational in 2018 or 2019. But by then, Russia's new Armatas should already be in the field, and even the M1A3 might then look a bit stodgy (and at a list price of $9 million
or more, expensive).
Result: If UVZ delivers the Kremlin's new supertank on time and on budget, it could spark a new arms race in tank technology. And with General Dynamics now being America's only major tank producer (at 15% operating profit, according to S&P Capital IQ data; armored vehicles are also its second-most-profitable product), the U.S. company would likely be the top beneficiary domestically of such an arms race.