|
 At issue: how much the U.S. Air Force pays for the engines, how much
the Russians receive, and whether members of the elite in President
Vladimir Putin’s Russia are secretly profiting by inflating the
price.
Now, documents uncovered by Reuters provide some answers. A tiny
Florida-based company, acting as a middleman in the deal, is marking
up the price by millions of dollars per engine.
That five-person company, RD Amross, is a joint venture of Russian
engine maker NPO Energomash and a U.S. partner, aerospace giant
United Technologies. According to internal company documents that
lay out the contract, Amross stands to collect $93 million in cost
mark-ups under its current multi-year deal to supply the RD-180
rocket engine.
Those charges are being added to the program despite a 2011 Pentagon
audit that contested a similar, earlier contract with Amross. That
deal would have allowed Amross to receive about $80 million in
“profit” mark-ups and overhead expenses on RD-180 engines,
government documents show.
The confidential report of the 2011 audit described the mark-ups and
additional charges as improper under U.S. contracting law. Amross,
the auditors concluded, was a middleman that did “no or negligible”
work. The audit characterized the $80 million in added costs as
“unallowable excessive pass-through charges.”
A spokesman for RD Amross told Reuters that the company resolved the
dispute by reducing its charges under the first contract. Neither
Amross nor the Pentagon would disclose the dollar amount of the
price cut.
But the documents indicate that Amross later managed to make up for
the concessions. In the current deal, Amross is charging the same
average total price per engine - $23.4 million – that was proposed
in the initial contract rejected by the Pentagon auditors.
The disclosure of the middleman’s profits and the 2011 contract
dispute is likely to increase scrutiny of the deal - and the
Russians behind it.
MCCAIN LETTER
Sen. John McCain, R-Arizona, is seeking to end funding for future
purchases of the Russian engines in the coming year’s Defense
Department budget. In June, he wrote to the Pentagon’s chief of
procurement seeking details about the price of the engines and the
role of Florida-based Amross as a middleman. In his letter, McCain
said he suspected that the Air Force was being overcharged. The
Pentagon hasn’t divulged the information he sought.
Told of the Reuters findings, McCain said he has been expressing
deep concern to the Obama administration that U.S. taxpayers “are
paying millions of dollars to companies that may have done no work
but merely served as a ‘pass-through’ to enrich corrupt Russian
businessmen connected with Vladimir Putin.” The administration’s
response, he said in a written statement, signals “it is either
ignorant of these allegations or unwilling to investigate them. This
is unacceptable.”
The Russian engine is a critical component in Atlas rockets, the
workhorse of the U.S. military’s satellite program. The latest Atlas
model is made by United Launch Alliance, a joint venture of Boeing
and Lockheed Martin. ULA has a long-term contract with the Air Force
to put America’s military and reconnaissance satellites into space.
Many of the country’s most sensitive missions could be grounded if
the supply of RD-180s were cut off.
At a projected cost of $70 billion through 2030, the launch program
is one of the biggest acquisition deals in Pentagon history. And
because the program leaves Washington dependent on engines made in
Russia, it is a potential flashpoint at a time of renewed Cold War
tensions.
“It is outrageous that the United States today remains dependent on
Putin’s Russia, particularly for a national security space launch
program,” McCain said.
In a series of stories, Reuters is investigating how Putin has
transformed Russian capitalism by letting people close to him
benefit from major state programs or lucrative public contracts,
often using intermediary companies. In the RD-180 deal, the United
States risks getting caught up in that system.
ALLIES OF PUTIN
The Russian government owns 86 percent of Energomash, maker of the
RD-180 engine. The company falls under the supervision of Dmitry
Rogozin, the deputy prime minister responsible for the defense and
space industries. Rogozin was among a number of Russians sanctioned
by the Obama administration in March in retaliation for what the
West says are Moscow’s efforts to destabilize Ukraine.
The sanctions against Rogozin nearly derailed the engine program. A
U.S. rival to ULA, Space Exploration Technologies, won a federal
court order freezing the Energomash deal in April on the grounds
that the Pentagon shouldn’t deal with a company overseen by a
sanctioned foreign official.
The Obama administration, faced with losing the only ready supplier
of the engine, opposed the move. The administration argued that it
wasn’t required to cut off business with Energomash because it had
made no determination that Rogozin controlled the company. In
response, the judge lifted the freeze.
But Rogozin isn’t the only associate of Putin involved in Energomash.
A closer intimate of the president has played an important role in
the company, corporate ownership documents show.
That man, billionaire businessman Yuri Kovalchuk, is one of Putin’s
oldest friends. In March, he too was sanctioned over Ukraine. The
U.S. Treasury cited his close ties to Putin, describing Kovalchuk as
the Russian president’s “personal banker.”
In October 2010, Kovalchuk took partial control over Energomash when
Putin ordered that the business be placed under the oversight of
another state-owned space company, RSC Energia. Through an asset
management firm that he controlled until this spring, Kovalchuk had
control of a minority stake in Energia.
With the support of the Russian space agency, Kovalchuk thus became
a key player in both Energia and Energomash, according to a senior
manager at Energia. The billionaire’s brother served as chairman of
Energia from 2011 to 2013. Kovalchuk’s role at Energomash hasn’t
been previously reported.
A person close to Kovalchuk declined to address Reuters’ questions
about the corporate registration documents tying him to Energomash.
This person said: "Assumptions regarding management functions and
any control of Y.V. Kovalchuk in the companies RKK Energia and NPO
Energomash are false." Kovalchuk’s brother, Mikhail, declined to
comment.
In March, shortly before the United States announced sanctions
against Kovalchuk and others, Kovalchuk’s interests in Energia and
Energomash were transferred to another member of Putin’s circle.
MISSING MILLIONS
Much remains unclear about the RD-180 program, including the price
the Air Force ultimately pays for the engines and what becomes of
all the profit earned by Amross.
Washington isn’t the only capital where the deal has raised
questions. Russian government auditors informed the Kremlin in 2010
that Energomash was making large losses on the RD-180 deal, in part
because proceeds were being captured by unnamed offshore
intermediary companies.
According to unpublished records of Russia’s federal Audit Board,
Energomash made a $50 million loss from the engine sales to the
United States from 2008 through 2010. The shortfalls were the result
of mismanagement by unnamed former executives who sold the engines
to Amross for less than their production cost, the auditors
estimated.
“In reality, money was made, but it didn’t come to the country,”
Vitaly Davidov, then deputy director of the Russian Federal Space
Agency, told a 2011 meeting of the Audit Board, according to minutes
of the gathering.
U.S. reliance on the RD-180 is a byproduct of post-Cold War warming.
In the 1950s and 1960s, Soviet engineers developed rocket engines
that used liquid oxygen and kerosene to generate great thrust,
putting heavier rockets and payloads into space. The United States
had its own engines, but by the 1990s it had stopped making ones
powerful enough for the biggest jobs. With the Cold War over,
Washington turned to Russia, and in 1996 the RD-180 was selected to
power Atlas rockets.
[to top of second column] |
But Energomash has never sold the engines directly to the rocket
program. Instead, it has sold them to a joint venture it set up with
a unit of United Technologies. The engines are then resold to the
Pentagon’s main contractor, which since 2006 has been ULA.
The joint venture – the middleman in the engine deal - is
Florida-based RD Amross. The firm’s role is an uncommon one. The
Pentagon has rules limiting the use of middlemen in contracts, a
safeguard against fraud and wasteful spending. But in this case, the
arrangement was seen as temporary.
The partners originally planned to co-produce the engine in America
for U.S. government space missions, according to a review in May by
the Defense Department. That hasn’t happened. The engines proved to
be cheaper to make in Russia, and Energomash had a ready supply of
them.
The Pentagon finds itself highly dependent on the Russian engines as
a result, according to the Defense Department review. Through 2020,
the U.S. government will rely on RD-180-powered Atlas V rockets for
more than 56 percent of its space launches, the report said.
Amross and its five full-time employees occupy a small suite in a
beige stucco building just off the white sands of Cocoa Beach,
Florida. The building is home to doctors, a dentist and a hearing
aid seller.
Since 2011, the company has been run by U.S. space industry veteran
William Parsons. A former Marine, Parsons worked at NASA for years,
serving as director of the John F. Kennedy Space Center in nearby
Cape Canaveral. Before joining RD Amross, he was vice president of
strategic space initiatives at Lockheed Martin, co-owner of United
Launch Alliance. Parsons declined to comment.
TOUGH QUESTIONS
Amross’s engine sales have been questioned over the years in
Washington. Most recently, in a June 20 letter to Defense Department
acquisitions chief Frank Kendall, McCain wrote that he had
unspecified information indicating that “ULA — and ultimately the
Air Force — buys the RD-180 for a price significantly above what RD
Amross pays NPO Energomash.” As a result, “the U.S. taxpayer (is)
essentially giving a Russian company a profit by perhaps more than
200 percent. Is this allegation accurate?”
McCain sought specifics. "For how much does NPO Energomash sell the
RD-180 to RD Amross?” he wrote. “For how much does RD Amross
subsequently sell the RD-180 to ULA? For how much does ULA sell the
RD-180 to the Air Force?”
Despite the Pentagon’s silence, the documents examined by Reuters
answer his first two questions.
RD Amross buys the engines from Energomash for $20.2 million each on
average, according to Amross’s current contract with Energomash,
dated June 5, 2014.
Amross adds $3.2 million to each engine, a 15 percent markup. It
then sells them to ULA for $23.4 million, according to an amendment
to Amross’s contract with ULA, dated Oct. 2, 2014.
In all, Amross will reap $93 million in mark-ups over the course of
the deal. The $680 million contract calls for 29 engines to be
delivered from this year through 2017.
The current arrangement follows an earlier, $303 million contract
proposal that called for Amross to deliver 12 engines to ULA from
2011 to 2013.
In an August 2011 report, the Pentagon’s Defense Contract Audit
Agency detailed the deal. It said that middleman Amross would pay
$17.9 million per engine on average. Amross then planned to add on
average $5.5 million in “profit” to the price of each engine – an
extra 31 percent - before reselling them to ULA. The profit mark-ups
totalled more than $66 million.
In a 67-page report, Pentagon auditors called the proposal “not
acceptable for the negotiation of a fair and reasonable price.” They
contested the $66 million profit “in its entirety, as unallowable
excessive pass-through charges” under federal contracting law. The
services Amross cited to justify the profit “constituted ‘no or
negligible value,’” they concluded. The auditors also contested
$14.4 million in overhead expenses.
The findings were extraordinarily blunt, said Charles Tiefer, a
military contracting specialist and professor at the University of
Baltimore School of Law, who reviewed the document for Reuters.
“The bottom line is that the joint venture between the Russians and
Americans is taking us to the cleaners,” Tiefer said. He said he had
reviewed Pentagon audits critical of Iraq War contracts, but those
“didn't come anywhere near to how strongly negative” the Amross
audit was.
ULA and RD Amross said they resolved the dispute to the Air Force’s
satisfaction. The price was reduced, they said, but they wouldn’t
put a dollar figure on the discount. The Air Force said the audit
was taken into account in working out the contract. It wouldn’t
discuss the price it paid ULA for engines under that deal or the
current arrangement.
“ULA and the Government ultimately determined that the RD AMROSS
contract price was fair and reasonable and there were no
‘unallowable excessive pass-through charges,’” ULA spokeswoman
Jessica Rye said in a written statement.
In a letter to McCain last month, Defense Department acquisitions
chief Kendall said Amross’s value in the deal included providing
technical advice, logistics and “anomaly resolution.”
Reuters described its findings about Kovalchuk’s ties to Energomash
to Amross, ULA and the Air Force. The Air Force didn’t address the
Kovalchuk connection. ULA said it is “not aware” of any involvement
at Energomash by the Russian billionaire.
Amross referred questions to the joint venture’s American co-owner,
the Pratt & Whitney Military Engines unit of United Technologies. A
spokesman there, Matthew Bates, said Amross’s lawyers had looked
into the Kovalchuk connection.
“We disagree with your assertion that ‘Kovalchuk has had a
significant role in Energomash,’” Bates said in an email. The
indirect stake uncovered by Reuters, Bates said by e-mail, was not a
majority holding. What’s more, “these alleged connections were
severed prior to the imposition of U.S. sanctions against Yuri
Kovalchuk.” He didn’t address the role played by Kovalchuk’s brother
as chairman of Energia, the company that runs Energomash.
Washington had warned it was considering sanctions on Russian
officials. About two weeks before the sanctions were announced,
Kovalchuk’s investment appeared to diminish. But it stayed in
friendly hands.
Control of his indirect holding in Energia shifted to a pension fund
run by a businessman named Yuri Shamalov. He is the son of longtime
Putin associate Nikolai Shamalov, a co-owner of a powerful bank run
by Kovalchuk. The Shamalovs had no comment.
In June, Energomash and Amross finished up a new agreement to supply
RD-180 engines to the Air Force program.ULA is paying $23.4 million
per engine – the same price originally called for in the prior
contract that caused all the wrangling.
(Additional reporting by Maria Tsvetkova and Jason Bush in Moscow.
Edited by Richard Woods and Michael Williams.)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
