Reuters Investigation Sheds New Light on Russian Engine Deal

Michal Gass, Former President and CEO of United Launch Alliance

Following up on questions posed in a letter by U.S. Senator John McCain to the US Air Force chief of acquisitions, Reuters has been looking closer into the United Launch Alliance RD-180 issue, and the mysterious five person company RD-Amross, which serves as the Russian rocket engine’s US importer. It is a long and somewhat complicated piece to follow, but here are a few of the highlights.

From the Reuters Special Report:

“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.”

What is equally troubling about the pass through charges is that no-one can say where they went, although the story leaves the strong impression that the ultimate beneficiaries are some of the same people being sanctioned by the US government over Russia’s invasion of the Crimea.

One, as outlined in the SpaceX lawsuit against the ULA block buy is Russian space minister Dmitry Rogozin. While a federal judge lifted a temporary restraining order against further RD-180 imports on the basis that the Obama Administration had made no positive determination of Rogozin deriving a direct benefit from such sales, a second person who was sanctioned is closely connected as well.

Again, from the story:

“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 (half owner of RD-Amross) 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.”

But was there corruption involved? Decide for yourself.

Again:

“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.”

Why does all of this matter?

As it stands today, orbital access for many NewSpace plans, is to borrow a phrase from the industry, operating on a single string failure mode.  That string is SpaceX. Not due to the OSC Antares failure as some might suggest, but because SpaceX is the only currently operating launch company which is seeking to lower prices and actively pursuing re-usability.

Reliable and truly affordable access to space will only be fully secured when there are at least two companies operating RLV’s and robust competition ensures there is no going back to the bad old days of expendable rockets. ULA may eventually become one of those companies, and the recently announced partnership with Blue Origin offers some hope, but thus far it has spent more of its energy in efforts to undercut SpaceX politically than to meet it in the open marketplace.

Military and space historians are gong to one day look back at the era of the Atlas V and wonder how was that the United States placed dependence on a foreign, and possibly hostile power squarely in the launch path of its most expensive payloads to the detriment of its own industrial base. While the launch record for the Atlas V has been exemplary, a fact ULA never neglects to mention, it has been just as good for the Delta IV.

Beginning in 2011 as the company came under growing criticism for its ever increasing prices, executives began to resort to the assertion that “you get what you pay for.”  As the Reuters piece details, we were apparently paying for quite a bit more than we got.  Unless of course, ULA would like to explain how each RD-180 engine is at least 15% more reliable because we paid for “unallowable excessive pass-through charges.”