Murphy's Law: Message Sent Damage Done

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March 14, 2015:   The growing Russian use of armed (and diplomatic) aggression against its neighbors is hurting the Russian economy in unexpected ways. For example long time customers for Russian military equipment (weapons, spare parts and services) are becoming more reluctant to buy Russian. The reason is simple, Russia is now seen as unpredictable and unreliable when it comes to supplying support and spare parts for their weapons and equipment. This became obvious when Russia was hit with economic sanctions in 2014 for its aggression against Ukraine. Russia then threatened to halt shipments and support for weapons to any country that supported the sanctions. Soon Russia got the message and tried to back down, but it was too late. The message was sent and the damage was done.

The best example of this was the lucrative sale to the United States of expensive rocket RD-180 engines for satellite launchers. In May 2013 Russia announced it was going to halt RD-180 shipments. The U.S. did two things. First it protested to Russia, without much effect, that halting the RD-180 shipments was breach of contract and that breaching this particular contract would do enormous damage to Russian exports in the future because now many countries and firms realize that a contract with a Russian firm can be cancelled by the Russian government for any reason. This was always seen as a risk when doing business with Russia and many Western firms declined to do so or have pulled out of Russia in the last decade because of the growing unreliability of Russia as a business partner. The RD-180 affair got a lot of publicity, all of it bad with regard to future Russian exports of manufactured goods. Europe, which gets about a third of its natural gas from Russia, is already looking for alternate sources and investors are fleeing Russia (and taking their money with them).

Russia tried to recover from their RD-180 disaster. In July 2014 Russia announced that it was going to continue shipping the RD-180s because it needed the money. These 5.5 ton rocket engines cost $10 million each. It was no secret that the large profits from the RD-180 sales was keeping several Russian firms (rocket engine design firms and the engine manufacturer) in business. Unofficially Russian trade officials had warned their bosses about the problems resulting from the loss of future export business and this was apparently listened to in the case of the RD-180s. That aspect of the situation could not be mentioned officially but Russians working with American on the RD-180 business were bitter and often quite open in their criticism of the Russian leadership, and much else that goes wrong in 21st century Russia. The corruption in Russia and the problems foreign firms are having with that, and the eternally difficult Russian bureaucracy are all known problems inside Russia but have proved impossible to fix so far. Russia needs the exports, even though the official line is that the sanctions are not hurting.

The second problem was that the U.S. announced they were going to speed up the process of developing a rocket engine to replace the RD-180. After Russia said it was going to continue shipments the U.S. did not order the replacement rocket motor program slowed down. The U.S. has decided to eventually, and as soon as possible, eliminate the need to purchase RD-180s.

The RD-180 situation was not the only one. Many East European nations are still using Russian military equipment and even when they buy Western models now, they still use a lot of Russian vehicles and aircraft (especially helicopters) because this stuff is cheap and reliable. But the threat of Russia cutting off tech support and spare parts now has East European nations phasing out all Russian vehicles and shopping around for replacements from Western suppliers.  

Another casualty of the Russian bad behavior is a general reluctance of the rest of the world to buy anything from Russia. This Russian efforts to get a share of the civil aviation market with its new airliners and transports is now crippled.

 


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