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The Strongest Leverage Putin Might Have to Retaliate Against U.S. Sanctions


"Crony capitalism in the United States helping gangster capitalism in Russia.”

"Russian President Vladimir Putin listens during a meeting in Samara, Russia, July 21, 2014. Putin has lambasted those who use the downing of a passenger jet in eastern Ukraine for “mercenary objectives,” the Kremlin said Monday. (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service)\n

A dose of crony capitalism in the form of a no-bid Pentagon contract is causing anxiety that Russian President Vladimir Putin's government could have the needed leverage to retaliate against U.S. sanctions.

Russian President Vladimir Putin listens during a meeting in Samara, Russia, July 21, 2014. (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service)

These concerns stretch across the typical Washington boundaries.

The White House says it wants to reduce reliance on Russian rocket engines. Sen. Ted Cruz (R-Texas) wants to know what happens if Russia retaliates by halting the exports. Sen. John McCain (R-Ariz.) wants an investigation.

Meanwhile, Gen. William Shelton, commander of the U.S. Air Force, said it could be “dire” if Russia cuts off the rocket engine supply, as one Russian official threatened, and poses “serious national security implications.”

In the middle of this, a federal lawsuit against the Pentagon objects to the sole-source contract in part because the plaintiffs claim it sends “hundreds of millions of U.S. taxpayer dollars to Russia's military-industrial base.”

The U.S. government will spend $70 billion on the entire Evolved Expendable Launch Vehicle program by 2030, according to the Government Accountability Office. The EELVs are manufactured by the United Launch Alliance, or ULA — a joint venture between Lockheed Martin and Boeing, two of the largest defense contractors in the country.

ULA has received a single-bid contract to build the military and intelligence satellites since 2006. The company in turn contracts with Russian defense firm NPO Energomash, the lone supplier of the RD-180 engines for the Atlas V rockets that carry U.S. satellites. For its part, ULA calls the lawsuit from a smaller firm “frivolous” and “self-serving.”

NPO Energomash benefits from a Pentagon contract. But the firm's owner, Dmitry Rogozin, the deputy prime minister of Russia, was targeted under the early round of U.S. sanctions against Russian businessmen over the situation in Ukraine. In May, Rogozin threatened to ban exports of RD-180 rockets to the United States.

“We are sanctioning the individual and funding his company,” Michael Waller, an international policy analyst who has worked for both the White House and on Capitol Hill told TheBlaze. “The contradiction is pretty absurd.”

Waller said the typical Washington instinct to give contracts to well-connected companies – like Boeing and Lockheed Martin — in this case is putting the country at risk.

“This is pork barrel politics and crony capitalism in the United States helping gangster capitalism in Russia,” Waller said. “Russia will not want to continue to provide the engines to launch satellites that will spy on them.”

The White House has also objected to a defense appropriations bill in the House that proposed spending $220 million for the new Russian-made rocket engines.

“This approach prematurely commits significant resources and would not reduce our reliance on Russian engines for at least a decade,” the Office of Management and Budget said in June. “With a goal of promptly reducing our reliance on Russian technology, the administration is evaluating several cost-effective options including public-private partnerships with multiple awards that will drive innovation, stimulate the industrial base, and reduce costs through competition.”

The Lawsuit

Space Exploration Technologies Corp., also known as SpaceX, is suing the Defense Department, claiming it was locked out of a bid against the giant combination of Lockheed Martin and Boeing even though the company claims it could produce the product at only one quarter of of what the two giant firms are charging taxpayers.

“The Air Force will spend an estimated $400 million for each launch purchased from ULA, while SpaceX anticipates a price of roughly $100 million for the exact same services,” the SpaceX complaint, filed in April, states.

ULA will be building 35 rockets for the government over the next five fiscal years, according to the Government Accountability Office.

In addition, the SpaceX complaint states that the Air Force pays another $1 billion to ULA for an annual “launch capability” subsidy to cover the company's business overhead.

“This complex and exclusive deal, which was concluded outside of public scrutiny, funnels hundreds of millions of U.S. taxpayer dollars to Russia's military-industrial base, including monies that may flow to individuals on the U.S. sanctions list,” the lawsuit says.

“It is hard to imagine any way in which entrenching reliance on Russian rocket engines while funding the Russian military industrial complex with U.S. tax dollars serves national security interests, especially at a time when the administration has sanctioned individuals associated with the same military industrial complex over the Ukraine annexation,” the suit continues. “Yet, that is what the Air Force's arrangement with ULA effectively does, despite the fact that there are domestic alternatives available.”

A ULA spokesperson did not respond to repeated inquiries from TheBlaze. However, the company has issued several statements on the matter on their website. In an April 28 response to the SpaceX lawsuit, the company said it saves the government $4 billion.

“ULA has purchased a first stage engine built in Russia for the past 20 years for the Atlas rocket and has always maintained contingency capabilities if the supply was interrupted to ensure our customers mission needs are met,” ULA said in its statement. “ULA maintains a two-year inventory of engines in the U.S., and would be able to transition other mission commitments to our Delta rockets if an emergent need develops.”

The U.S. Federal Court of Claims lifted a preliminary injunction on May 8 to allow ULA to continue purchasing the RD-18 rockets in the midst of sanctions, after letters from the U.S. departments of State, Treasury and Commerce affirming the transactions don't affect sanctions involving Ukraine.

“Sadly, SpaceX’s frivolous lawsuit caused unnecessary distraction of the executive and judicial branch and increased tensions with Russia during a sensitive national security crisis,” ULA said in May. “SpaceX’s actions are self-serving, irresponsible and have threatened the U.S.’s involvement with the International Space Station and other companies and projects working with Russian State entities.”

'Serious National Security Implications'

On May 13, Rogozin, the Russian official who owns the company selling rocket engines to ULA, tweeted: “Russia is ready to continue deliveries of RD-180 engines to the US only under the guarantee that they won’t be used in the interests of the Pentagon.”

An Air Force spokesman referred TheBlaze to a joint Senate subcommittee hearing on July 16, in which Shelton talked about the matter.

During that hearing, Cruz inquired about the Pentagon's dependence on Russia.

“Assume that conditions with and relations with Russia deteriorate substantially, I hope that they don’t but assume that they do, assume that Putin adopts a position of maximum belligerence and picks up the phone and instructs all engine exports end tomorrow,” the Texas senator said. “What would the implications be for U.S. national security if that decision were made?”

Shelton said it would force the United States to have fewer launches of military and intelligence satellites, potentially delaying launches between one year to four years.

“As we look at that as one of the number of scenarios we’ve considered, we think at a minimum that would be about a $1.5 billion we think that that would stretch out launches,” Shelton said. “So that puts constellations at risk and the ones that we’re talking about, the heaviest ones are our most significant constellations so it is dire. If that should happen, there is no question that inside this manifest, that we’re considering right now, there would be serious national security implications.”

Cruz followed up: “To what extent could our existing stockpile of engines reasonably be stretched to cover the needs, how long could we expect it to cover our needs?”

Shelton responded there are 15 engines remaining now.

“We don’t know the exact impact until we get together and decide how we would allocate those 15 engines,” Shelton said.

However, Shelton also told the senators that he presently did not believe there was cause for alarm at this point.

“We have seen no indication of an interruption threat other than what Mr. Rogozin said,” Shelton said. “We have seen no indication from the commercial side. We have talked to ULA extensively. They have talked to their counterparts in Russia extensively, and there has been no indication that that is a serious threat at this time.”

Shelton added, “Certainly the potential is still there, but what we are seeing right now is business as usual.”

'Apparent Deviation'

When the EELV program began in 1995, Boeing and Lockheed Martin were competitors. The non-competitive bidding began in 2006 under the Bush administration as an urgent response during the war on terrorism, Waller said.

The sole-source contract expired in 2013, according to the GAO, and the Defense Department signed a contract modification to buy another 35 launch vehicle booster cores over five years. Separately, the Defense Department has set aside up to 14 launches for competition among all certified launch vehicle providers.

In an April 25 letter to Defense Department Inspector General Jon T. Rymer, McCain asked for an investigation into reasons for the single-bid contract. The Arizona senator asserted that from 2006 through 2014 – when the joint venture between Boeing and Lockheed Martin began – the “program's costs increased by 166 percent.”

“Calculations based on budget allocations and launches per year suggest that ULA's per-launch cost could be as high as $460 million,” McCain's letter said. “By some estimates, competition in EELV could save taxpayers up to $1 billion annually and help ensure that this program can be counted on for delivering needed military space capability at the most reasonable cost. With that in mind, the Air Force's apparent deviation from the Office of the Secretary of Defenses direction that competition in this program be 'aggressively' pursued and from internal DOD policies and instructions on competition is profoundly troubling.”

Meanwhile, a 2011 Government Accountability Office was skeptical about the contract.

“According to Defense Contract Audit Agency (DCAA) reports, ULA proposals contain inadequate cost or pricing data that make it difficult for DOD to assess the adequacy and fairness of launch prices and the cost-effectiveness of launch operations. DCAA has stated DOD should obtain additional data before negotiating launch contracts to ensure ULA proposals are an acceptable basis for contract negotiation,” the GAO report said.

Follow Fred Lucas (@FredVLucas3) on Twitter

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