Russia's delay of stealth frigates mirror problems with Gorshkov deal
Yantar's so-called financial problem and exchange rate loss seems an attempt to wrest a higher price from the Indian government just as in the case of Admiral Gorshkov, as exchange rate fluctuations are always factored in international contracts between two countries or overseas companies, says Ravi Kunder
After having delayed the delivery of the Indian aircraft carrier INS Vikramaditya (formerly Admiral Gorshkov) by four years and doubled its price, Russia may delay the delivery of three stealth frigates to the Indian Navy as it says that it has lost RUR500 million due to exchange rate fluctuations. It is now seeking a $60-million loan to complete the construction of the frigates.
Yantar, based in the port city of Kaliningrad on the Baltic Sea also is negotiating a $60-million loan with the Russian national development bank Vnesheconombank (VEB), to complete the construction of three stealth frigates for the Indian Navy. (See: Russian shipyard building Indian frigates runs out of funds)
The state-owned Yantar shipbuilding factory's director general Igor Orlov said this week that when the contract was signed in 2006 to build three Project 1135.6 Krivak IV-class guided missile frigates for the Indian Navy, the exchange rate for the rouble was 28.2 roubles for a $1, but since then, it has fallen to 23.5 roubles resulting in the shipyard losing approximately RUR500 million. Today, however the exchange rate is 31 roubles for $1.
The $60-million loan is over and above the $100 million it had taken recently from the VEB to tide over financial constraints, Russian newswire RIA Novosti said quoting Yantar's director general Igor Orlov.
Yantar's claims of financial problems are somewhat hard to digest since in the first quarter of 2009, it posted a net profit RUR106.390 million (Rs161 million), up from the RUR119.322-million loss in the same period in 2008, according to the company's first quarter result.
In the first quarter of 2009, Yantar's turnover was RUR8.1 billion compared to RUR2.9 billion in the first quarter of 2008, and earnings increased almost 4.4 times to RUR33.996 million.
The company also revealed that its order books were full until 2012.
At a time when most companies have retrenched employees to cut costs during the global financial crisis, Yantar has actually hired more workers since the beginning of this year - in January ithired 100 people and added 62 in the first week of February, with plans to hire another 500.
On 5 August 2009, Orlov announced that the shipyard would be upgraded at a cost of $580 million and the upgrade project would be done in collaboration with Germany's IMG-group.
The Yantar shipbuilding factory is Russia's largest shipyard and since its inception in 1945, it has built 153 military ships and about 500 civillian ones .
The shipyard, escaped bankruptcy on two occasions, once in 2004 and again in 2006.
In 2006, based on the impending $1.6-billion order for the three Indian stealth frigates, Yantar was able to renegotiate its $1.5-million debt with Interregional Investment Bank and Vneshtorgbank, thus avoiding bankruptcy.
It well may be that this so-called financial problem and exchange rate loss, is an attempt to wrest a higher price for from the Indian government just as in the case of Admiral Gorshkov.
This is especially so since exchange rate fluctuations are always factored in in international contracts between two countries or overseas companies.
The Financial Express had reported on 12 December 2007, ''The defence establishment is getting worried at reports emanating from Russia about problems dogging its Rs5,514-crore (around $1.4-billion) project for construction of three more Talwar-class 'stealth' frigates at Yantar shipyard in Kaliningrad. There is a fear that Russia may demand more money for the construction of the three frigates, apart from pushing back their delivery dates.''
It added, ''Although Russia is yet to officially communicate any demand for more money in the frigates' project, Russian officials are publicly holding that it will take ''a minimum of $100 million more'' to construct the three Indian warships at Yantar shipyard.''
So far, Russia has not asked for more money, but saying that it has lost $500 million on the order due to currency fluctuations is a sure sign of what can be expected in the coming months.
Although St. Petersburg-based Severnaya Verf yard was in the race to build the stealth frigates for the Indian Navy, the order was bagged by Yantar shipyard. The order was a follow-up order to the three Krivak Class, Project 1135.6 stealth frigates delivered to India in 2004 built by the Baltisky shipyard. These frigates were delivered two years behind schedule.
In October, alarmed at the news of infrastructure and financial problems at Yantar, India deputed a team of observers headed by deputy chief of the naval staff, Vice Adm. Raman P Suthan to oversee the project's progress.
As late as last month, Orlov had said on the sidelines of the 4th International Maritime Defence Show in St. Petersburg that Russia would deliver three stealth frigates worth $1.6 billion to the Indian Navy in line with the "contract deadline" of 2012. (See: New batch of IN stealth frigates to be delivered on-time: Russia)
"The contract's deadline is 2012. We are not expecting any delays at this point," said Orlov, "Russia will fulfill its obligations on schedule to supply three Project 1135.6 frigates to India by 2012,'' he said.
"The first ship will be floated out this year, the second, probably, in spring 2010, and the third - a bit later," Orlov said.
A RIA Novosti report also quoted him as saying that the Indian government had provided 'sufficient and timely' project financing.
According to a recent analysis titled 'BMF RF ''Naval Military Fleet of the Russian Federation] on Foreign Warship'', published by the authoritative Moscow-based weekly - the Independent Military Review says that the Russian Navy is currently on the verge of 'irreversible collapse.'
It said that the main cause for the 'collapse' is the state of the Russian shipbuilding industry, which is "incapable of producing warships in either the quantity or at the level of quality that their navy customer requires" for the future.