Procurement: A Nasty Situation


December 5, 2007: A nasty situation is developing between India and Russia, over a $1.5 billion deal that sold the unfinished Russian aircraft carrier Admiral Gorshkov to India, and included a Russian shipyard performing $700 million worth of repairs, modifications and upgrades. Another $800 is to be spent on aircraft, weapons and equipment. Russia now wants a lot more money, while India insists on getting what the original contract called for. While the carrier is in Russia, India, which has already paid the Russians half a billion dollars, insist that India now owns the ship.

The Admiral Gorshkov entered service in 1987, but was inactivated in 1996 (too expensive to operate on a post Cold War budget). The Indian deal was made in 2004, and the carrier was to be ready by 2008. But a year ago reports began coming out of Russia that the shipyard doing the work, Sevmash, had seriously miscalculated the cost of the project. The revised costs were now more like $1.1 billion for the $700 million refurb. The situation has since gotten worse, with Sevmash now saying that it will cost over $2 billion to refurbish the carrier. The Indians are not happy, and expects the Russian government (which owns many of the entities involved in this deal) to make good on the original deal.

Given that India currently has $10 billion worth of Russian military items on order, and has been Russia's biggest, and most profitable customer for military equipment for decades, the Gorshkov is looking to be an error of gigantic proportions. The boss of Sevmash, when the Gorshkov deal was negotiated, has been fired and is under criminal investigation, on suspicion of financial mismanagement. To make matters worse, the additional work required on the Gorshkov has caused Sevmash to turn down lucrative commercial projects (like offshore oil platforms.)

Just to add to the pressure, India is getting more interested in Western military equipment, including big ticket items like warplanes and ships. The Indians have grown tired of the poor performance of Russian equipment, and the poor service they often receive when it comes to spare parts, or fixing design errors. For decades, this was tolerated because Russian gear cost less than half what comparable Western stuff went for. Since India's major foe was Pakistan, which was equipped with equally shabby Chinese weapons, it all seemed to work out. But now many Indian generals and admirals, noting the high performance of American troops in the war on terror, are seriously considering the higher cost Western way of war.

The Indian government has told the Indian Navy that no more money will be forthcoming, and that Russia must comply with the original contract. The Russians, however, complain that the Indians demanded, after the contract was signed, for substantial changes that were not in the contract. These changes greatly increased the cost of the work. The Indians accuse the Russians of not planning the refurb to do what needed to be done. The Gorshkov situation is doing a lot of damage to the India-Russia military equipment relationship, and Western firms are taking note.




Help Keep Us From Drying Up

We need your help! Our subscription base has slowly been dwindling.

Each month we count on your contributions. You can support us in the following ways:

  1. Make sure you spread the word about us. Two ways to do that are to like us on Facebook and follow us on Twitter.
  2. Subscribe to our daily newsletter. We’ll send the news to your email box, and you don’t have to come to the site unless you want to read columns or see photos.
  3. You can contribute to the health of StrategyPage.
Subscribe   Contribute   Close