Russia's state-run arms exporter, Rosoboronexport, will lose $4 billion in prospective contracts for fighter jets and tanks because of the United Nations' actions, said Sergei Chemezov, head of the state industrial holding Russian Technologies.
Those deals stemmed mainly from a military spending spree that Gadhafi launched when international sanctions against his regime were lifted in 2004 after he abandoned a clandestine nuclear arms program.
The U.N. Security Council imposed an arms embargo on Libya Feb. 26, with Russia endorsing that with some reluctance.
The European Union imposed its own sanctions, including an arms embargo, Monday. France, Spain and Italy are major importers of Libyan oil and natural gas.
The Arab world has been a major export market for Russia's army industry in recent years, topped only by China and India.
Other Arab regimes are in trouble amid the current wave of unrest that has toppled the presidents of Egypt and Tunisia in the last few weeks and may well bring down others. That could hit the Russian arms industry as well.
Earlier this week, defense industry sources estimated that Russia stands to lose $10 billion in arms sales to Libya and other North African states hit by the political turbulence.
Moscow faced a similar loss in June 2010, after the United Nations imposed stringent new sanctions on Iran over its contentious nuclear program.
Moscow, under stiff U.S. pressure, shelved a $700 million deal to supply Tehran with long-range, high-altitude S-300PMU air-defense missile systems the Iranians needed to protect their nuclear facilities from possible pre-emptive Israeli strikes.
There is still a possibility that Moscow could salvage that contract since it hasn't formally canceled it.
But Russia's defense links to Gadhafi's increasingly beleaguered regime seem certain to sink. What happens to the Russia connection if Gadhafi is defeated by Libya's insurgents isn't clear.
Russia's current arms sales to Tripoli began when Gadhafi sought, after 2004, to modernize his 75,000-strong armed forces.
They were equipped at that time with aging, if not obsolete, Soviet-era weaponry provided by Moscow, Libya's main arms supplier during the Cold War.
Following the Fourth Arab-African Aviation Exhibition, known as LAVEX, in 2009 he focused on advanced Russian weapons systems.
Russian officials said Libyan efforts focused on five main export contracts that included T-90 main battle tanks and upgrading 200 1970s-era T-72 tanks, which in 2004 were the most modern in Libya's armory.
Libya was seeking new aircraft to replace its aging Vietnam-era MiG-21s, 23s and 35s and French-built Dassault Mirage F1s.
After Russian wrote off Libya's $4.5 billion Soviet-era debt in 2008, Tripoli was signed up for six Yakovlev Yak-130 fighter-trainer aircraft along with 12-15 Sukhoi Su-35 Flanker-E strike aircraft under an $800 million contract announced by Rosoboronexport in July 2010.
Had the deal gone through, Libya would have been the first export customer for the Su-35.
Other prospective deals discussed with Libya concerned the S-300PMU air-defense system, the Tor-M2E and Buk-M1 short-range air-defense systems, Sukhoi Su-30MK2 and MiG-29SMT fighters jets, several dozen combat helicopters, a diesel-powered submarine as well as T-90 tanks and rocket launchers.
In recent years, Moscow has been driving to boost arms sales to its old Cold War clients such as Libya, Syria, Algeria and Yemen.
This was intended to bolster the industry, a key foreign currency earner, at a time when Russia was cutting back its military, and as a means to restore Moscow's influence in the Middle East.
The Russian government's recent decision to undertake its biggest rearmament effort since the 1990s Soviet era is likely to mean big-ticket orders for Russian arms manufacturers that should offset the loss of defense sales to Libya and possibly other Middle Eastern states as well.
Russian Deputy Defense Minister Vladimir Popovkin announced the massive re-equip of Russia's conventional forces in late January.
The $650 billion program involves the procurement of 1,000 new helicopters, 100 warships, eight nuclear-powered ballistic missile submarines and 600 combat aircraft.
These presumably include a much-hyped fifth-generation fighter to match Lockheed Martin F-35 stealth jet, over the next decade.