Big profits in Florida

ATLANTA/MOSCOW – For months, a powerful U.S. senator has been pushing for details of a murky deal under which a Russian manufacturer supplies the rocket engines used to launch America’s spy satellites into space.

At issue: how much the U.S. Air Force pays for the engines, how much the Russians receive, and whether members of the elite in President Vladimir Putin’s Russia are secretly profiting by inflating the price.

Now, documents uncovered by Reuters provide some answers. A tiny Florida-based company, acting as a middleman in the deal, is marking up the price by millions of dollars per engine.

That five-person company, RD Amross, is a joint venture of Russian engine maker NPO Energomash and a U.S. partner, aerospace giant United Technologies. 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.

A spokesman for RD Amross told Reuters that the company resolved the dispute by reducing its charges under the first contract. Neither Amross nor the Pentagon would disclose the dollar amount of the price cut.

But the documents indicate that Amross later managed to make up for the concessions. In the current deal, Amross is charging the same average total price per engine - $23.4 million – that was proposed in the initial contract rejected by the Pentagon auditors.

The disclosure of the middleman’s profits and the 2011 contract dispute is likely to increase scrutiny of the deal - and the Russians behind it.  

Sen. John McCain, R-Arizona, is seeking to end funding for future purchases of the Russian engines in the coming year’s Defense Department budget. In June, he wrote to the Pentagon’s chief of procurement seeking details about the price of the engines and the role of Florida-based Amross as a middleman. In his letter, McCain said he suspected that the Air Force was being overcharged. The Pentagon hasn’t divulged the information he sought.

Told of the Reuters findings, McCain said he has been expressing deep concern to the Obama administration that U.S. taxpayers “are paying millions of dollars to companies that may have done no work but merely served as a ‘pass-through’ to enrich corrupt Russian businessmen connected with Vladimir Putin.” The administration’s response, he said in a written statement, signals “it is either ignorant of these allegations or unwilling to investigate them. This is unacceptable.”

The Russian engine is a critical component in Atlas rockets, the workhorse of the U.S. military’s satellite program. The latest Atlas model is made by United Launch Alliance, a joint venture of Boeing and Lockheed Martin. ULA has a long-term contract with the Air Force to put America’s military and reconnaissance satellites into space. Many of the country’s most sensitive missions could be grounded if the supply of RD-180s were cut off.

At a projected cost of $70 billion through 2030, the launch program is one of the biggest acquisition deals in Pentagon history. And because the program leaves Washington dependent on engines made in Russia, it is a potential flashpoint at a time of renewed Cold War tensions.

“It is outrageous that the United States today remains dependent on Putin’s Russia, particularly for a national security space launch program,” McCain said.

In a series of stories, Reuters is investigating how Putin has transformed Russian capitalism by letting people close to him benefit from major state programs or lucrative public contracts, often using intermediary companies. In the RD-180 deal, the United States risks getting caught up in that system.

ALLIES OF PUTIN

The Russian government owns 86 percent of Energomash, maker of the RD-180 engine. The company falls under the supervision of Dmitry Rogozin, the deputy prime minister responsible for the defense and space industries. Rogozin was among a number of Russians sanctioned by the Obama administration in March in retaliation for what the West says are Moscow’s efforts to destabilize Ukraine.

The sanctions against Rogozin nearly derailed the engine program. A U.S. rival to ULA, Space Exploration Technologies, won a federal court order freezing the Energomash deal in April on the grounds that the Pentagon shouldn’t deal with a company overseen by a sanctioned foreign official.

The Obama administration, faced with losing the only ready supplier of the engine, opposed the move. The administration argued that it wasn’t required to cut off business with Energomash because it had made no determination that Rogozin controlled the company. In response, the judge lifted the freeze.

But Rogozin isn’t the only associate of Putin involved in Energomash. A closer intimate of the president has played an important role in the company, corporate ownership documents show.

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 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. (See related story on Kovalchuk and Rogozin).