labels: aerospace
Russia looks to rework cost escalation clause for all defence contractsnews
21 May 2007
Moscow: A falling dollar and strengthening rouble may spell trouble for Indo-Russian defence contracts, with Russia now seeking a review of the cost escalation clause for all existing contracts, including big ticket ones such as the Su-30MKI and the INS Vikramaditya (ex-Adm Gorshkov). If India accedes to Russian requests for a revision, it could probably mean doling out extra cash to Russian defence contractors to the tune of at least half a billion dollars.

According to reports, quoting diplomatic sources, the issue was discussed extensively by defence secretary, Shekhar Dutt, during his three-day visit here earlier last week, in particular with Russia's state arms export monopoly Rosoboronexport.

It would appear that Moscow is prepared to stick to earlier terms of the contract for the delivery of the first 100 Su-30 MKI aircraft, of which it has already supplied 60. It has indicated that it may not be able to supply kits for the remaining 138, for local assembly at the Hindustan Aeronautics Limited (HAL), at currently contracted prices.

The $8.5 billion Sukhoi deal, is one of the largest single defence contracts ever in the global market involving deep transfer of technology. Irkutsk Corporation, the main contractor, has said that it is not able to stick to contract terms of delivering the aircraft at a cost escalation rate of 2.55 per cent per annum. It is seeking a revision of the rate to 5 per cent, and according to reports, may eventually settle for a 4.5 per cent escalation clause.

The same logic would appear to hold good for the INS Vikramaditya (ex-Adm Gorshkov), where contractors appear to have seriously underestimated the amount the cabling required for the ship and now find costs shooting up prohibitively for the supply of the same.

It may be kept in mind that cost escalation factors are part and parcel of the game and the story is the same around the world. American defence majors, for instance, keep petitioning the US Congress for cost revisions of existing contracts on a regular basis.

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Russia looks to rework cost escalation clause for all defence contracts