Murphy's Law: The Billion Dollar Death Match


August 19, 2009: India has paid Russia another $122 million for work being done on the old, damaged, aircraft carrier (the Admiral Gorshkov), which is being refurbished for Indian use as the INS Vikramaditya. India paid $600 million when the refurbishment contract was signed in 2004. But since then, Russia has demanded that the total payment be increased from $974 million to nearly $3 billion. Moreover, the project, which was to have been completed last year, has now been pushed back to 2012. The Indian government is not happy with this, and the Russians are eager to work out a deal that will placate the Indians, and not cost Russia over a billion dollars in cost overruns. These negotiations are expected to go on for a while, producing no end of drama for all concerned. For example, last year, Russia threatened to give the Gorshkov back to the Russian Navy, if the Indians don't come up with more money.

All this was a sad tale of bungling, corruption, greed and lost blueprints. The Russians admitted that this project suffered from inept planning, shoddy workmanship, and poor management, but they wanted India to pay for most of those mistakes. The Indians were not amused, and played hard ball, making much of the fact that India was now the biggest customer for Russian military exports. Everyone was also aware that India was increasingly turning to more expensive (and more capable) Western arms suppliers.

But building a Gorshkov type carrier today would cost at least $4 billion, and take eight years. And you would have to add several years of paper shuffling by the notoriously inept Indian defense bureaucracy. So even at nearly $3 billion in additional costs, the deal still makes sense for India. The Russians know that, but the Indians are furious because of the duplicity, and are making real moves to shift more, if not most, of their offshore defense procurement from Russia to the West. This has the Russians worried.

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 scandal loomed as a Russian error of gigantic proportions. But the Russians were willing to admit to mistakes and put things right, for a price. For example, the boss of Sevmash naval shipyard, when the Gorshkov deal was negotiated, was fired and under criminal investigation, on suspicion of financial mismanagement. Since then, there has been a team of Indian naval officers and shipbuilding experts wandering the Russian shipyard, keeping an eye on the work (which has never stopped) and taking notes.

Naturally, the Indians were not happy, and at first insisted that the Russian government (which owns many of the entities involved) make good on the original deal. India sent its own team of technical experts to Russia, and their report apparently confirmed what the Russians reported, about shipyard officials low-balling the cost of the work needed. This is a common tactic for firms building weapons for their own country. It gets more complicated when you try to pull that sort of thing on a foreign customer. The Russian government initially offered to cover some of the overrun cost. But then they insisted that India cover most the additional costs, or lose the ship entirely. Nothing was said about whether or not the Indians would get any of their money refunded. As Indian anger rose, the Russians began to realize that they would have to eat most of the additional mistakes, or risk losing billions in future sales.

The 44,000 ton Admiral Gorshkov entered service in 1987, but was inactivated in 1996 because it was too expensive to operate on a post Cold War budget. This attracted the attention of India, which was looking for a way to expand their carrier aviation capabilities. India is currently building another carrier, from scratch, but that 40,000 ton vessel won't be ready until 2015. India's sole current aircraft carrier, the 29,000 ton INS Viraat, is currently undergoing 16 months of shipyard getting maintenance and upgrades, leaving India with no carrier capability. This was to have been avoided by the timely arrival (last year) of the refurbished Russian carrier. If that had happened, the INS Viraat would have been retired in 2012, after 53 years service (for Britain and India). But now the INS Viraat will get its engine and hull refurbished, and its electronics upgraded, and possibly serve for another decade.

Under the terms of the new deal, the INS Vikramaditya will be ready for sea trials by the end of 2012. Thus by 2015, India will have two large carriers in operation, and some bitter memories of their experience with the Russians over the Gorshkov.


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