How a U.S.-Russian Space Rocket Deal Funds Putin's Cronies

MICHAEL WEISS, PIERRE VAUX

The close working relationship between NASA and the Russian space agency centered around the International Space Station (ISS) since the 1990s is now looking precarious as the United States faces a dilemma over whether to continue to business with a public sector controlled by Russia's military-industrial complex.

At issue is whether the sale of Russian-made rocket engines for NASA launch vehicles undermines the reason that U.S. sanctions were imposed on two Russian officials for their role in Moscow’s invasion and annexation of Crimea in 2014: Dmitry Rogozin, a deputy prime minister in charge of Russia’s defense industry known as the country’s “space czar,” and Sergei Chemezov, the head of Rostec, a vast state-owned defense and technology holding company.

Billions of U.S. taxpayer dollars are set to be spent by the United States for these rocket engines.

Rogozin has explicitly referred to it as “free money” that will flow directly into Russia’s military-industrial complex—this, at a time when Russian-made weaponry and materiel are being used in an ongoing dirty war in Ukraine, and Russian warplanes continue to bomb CIA-backed rebels in Syria.

“It’s pretty fucked up,” says Charles Davidson, executive director of the Kleptocracy Initiative, a new graft-monitoring project based at the conservative Hudson Institute in Washington, D.C. “It should be a scandal, not just a controversy.”

Russia’s state-controlled NPO Energomash has contracts worth over $2 billion dollars to supply two major U.S. aerospace companies, United Launch Alliance (ULA) and Orbital ATK, with rocket engines.

The deal with ULA, a joint venture between Lockheed Martin and Boeing, dates back to the late 1990s, providing RD-180 engines for the U.S. firm’s Atlas V launchers. The Orbital ATK agreement for eight RD-181 engines for Antares rockets was concluded in March this year.

These engines are essential components of the rockets: the first stages that get the craft off the ground. After this stage has burnt up all of its fuel and is discarded, both the Atlas V and Antares rockets continue the ascent powered by U.S.-made engines.

The problem is that after last year’s restructuring of the Russian space industry, Rogozin, Chemezov and Rostec, are all directly involved in this transaction. The U.S. Treasury Department insists that the deal in no way violates existing sanctions because entities arguably controlled by sanctioned individuals are not automatically subject to sanctions themselves.

Even still, the optics of the deal, and the foreign policy implications it raises, are awkward since, if Rogozin is to be believed, American public money is now pouring into the very Kremlin war machine that precipitated U.S. sanctions on Russia in the first place.

Prior to the restructuring, Roscosmos, the Federal Space Agency, had overseen a relatively loose conglomeration of manufacturers, some private and some partially owned by the state—the descendants of the old Soviet-era design bureaus. But following several high profile failures, notably the July 2013 explosion of a Proton rocket, the Russian state moved to put tighter reins on the space industry, with Rogozin accusing space firms of operating too much in their own interests.

A new state corporation under the Roscosmos banner was formed by presidential order in July 2015, with the older RSA Roscomos dissolved on December 8.

Under President Vladimir Putin’s decree control of all assets belonging to the firms that had made up the old Russian space agency, including NPO Energomash, were now to be transferred to the state corporation.

Rogozin, who was one of the first seven individuals placed on the U.S. sanctions list in March 2014, became Roscosmos’ chairman. When the restructuring was proposed in 2013, he noted that the move would “effectively combine civilian and defense capabilities.”

When it comes to U.S. sanctions, Rogozin has alternated between issuing acidic threats and professing himself unbothered. “After analyzing the sanctions against our space industry, I suggest the U.S. delivers its astronauts to the ISS [International Space Station] with a trampoline,” he said in April 2014, after the U.S. Treasury made its first designation.

A few months later, he told the Russian state-owned TASS news agency that a new cold war with America needn’t necessarily impinge on Russia’s defense modernization plans. “We need the most modern engines that produce more thrust. In order to design them, we need free money. This is why we are prepared to sell them … taking the sanctions very pragmatically.”

As for Sergei Chemezov, he has been a friend of Putin’s since their days together in East Germany, where he was said to be Putin’s mentor in the KGB. He formerly served in the Russian Presidential Administration and was put on the board of directors of Roscosmos when the new state company was formed.

According to a U.S. official speaking on background, Chemezov is “the most influential member of Roscosmos’ supervisory board.” Rostec, the company he heads, controls two-thirds of Russia’s defense sector, employing 900,000 people, of 1.2 percent of the total Russian workforce. It was added to the Treasury’s sanctions list in September 2014.

Chemezov has also been a beneficiary of the Russian corporate practice known as“raiding.” As Ron Wahid explained at DefenseOne, last year the Russian government handed control of FundServisBank, a major bank, to Novikombank, one of Rostec’s subsidiaries. “The twist is that FundServisBank insists it never had any financial problems,” Wahid wrote. “The end result is that the bank now serves as the personal stash for Putin and friends’ space loot.”

Thus U.S. dealings with Roscosmos should also fall under the axe of sanctions. Or so one would think.

Principal Deputy Under Secretary of Defense Brian McKeon raised the question with John Smith, acting director of the U.S. Office of Foreign Assets Control (OFAC), the body that administers and enforces U.S. Treasury Department sanctions. In a letter dated March 1, Smith responded that OFAC sanctions only come into automatic effect if sanctioned individuals own a 50 percent or greater interest in the given entity. While Smith did say that Rogozin and Chemezov’s control over Roscosmos “could be a potential basis” for such a designation, the OFAC has yet to make “an affirmative determination to designate those entities.”

Sen. John McCain has been an outspoken critic of buying engines from Roscosmos-controlled entities. “Our reliance on Russian rocket engines manufactured by a company controlled by Putin cronies continues to subsidize the corrupt Russian military-industrial base,” McCain told The Daily Beast. “This is unacceptable at a time when Russia continues to occupy Crimea, destabilize Ukraine, menace our NATO allies, send weapons to Iran, violate the 1987 Intermediate Range Nuclear Forces Treaty, and bomb U.S.-backed forces in Syria fighting the murderous Assad regime.”

As a solution, McCain has proposed offsetting 50 percent of the budget allocated for building a new U.S. launch system to be used to end America’s dependency on Russian engines. (McCain included this as a provision in his National Defense Authorization Act for Fiscal Year 2017.)  For the time being, the senator says, SpaceX Falcon 9 and ULA Delta IV, both of which have American-made engines but which are currently more expensive than Russia’s RD-180 and RD-181, can be used for national security space launches until the industry grows more competitive.

In April 2014, SpaceX actually filed suit against the U.S. government, claiming that, even before the Roscomos restructure, the U.S. Air Force had entered into an “unlawful” contract with ULA because the space and defense industries were known to be led by the sanctioned Rogozin and the contract deferred “meaningful free competition for years to come, costing taxpayer billions of dollars.”  (SpaceX and the government reached a compromise in January 2015 and the suit was dropped.) 

Further underpinning the contradictions of international relations is the fact that the Orbital ATK Antares rockets not only require Russian RD-181 engines, but their first stage cores are designed and built by Yuzhnoye SDO — in Dnipropetrovsk, Ukraine.

Reluctance to tackle this issue head-on may be due to the greater political significance of another deal between Roscosmos and Western partners.

NASA has depended entirely upon Russia’s Soyuz spacecraft to transport astronauts to and from the ISS since the retirement of the U.S. space shuttle fleet in 2011, costing nearly $80 million for every seat on the Russian flights.

Last August, NASA Administrator Charles Bolden informed members of Congress (PDF) that, “due to their continued reductions in the president’s funding requests for the agency’s Commercial Crew Program over the past several years,” NASA had been “forced” to extend the contract with Roscosmos through 2019, providing the state corporation with around $490 million.

But on May 24, in a sign that this financial pressure may be easing, both the U.S. and Russian space agencies announced that there are no plans to renew NASA’s Soyuz contract after 2018.

TASS cited William Gerstenmaier, NASA’s associate administrator for human exploration and operations, saying that his agency will not extend the contract as two U.S. firms—Boeing and SpaceX—are due to begin test launches of their own manned spacecraft next year.

Sergei Saveliev, deputy chief of the Russia’s state-run Roscosmos corporation, confirmed to TASS that his agency had no plans to renew the contracts.

At the same time, Gerstenmaier added that American astronauts would continue to fly aboard Soyuz spaceships as their Russian counterparts would, in return, be able to travel on NASA flights to the ISS, free of charge.

But while Gerstenmaier’s comments held the door open for further cooperation on the ISS, he has said as recently as December 2015 that NASA was redirecting its priorities towards longer-range ventures.

The added political pressure of sanctions may well spell the end for the post-Soviet era of collaboration in space between Russia and the United States.

Ukraine-related sanctions on Russia don’t just affect the U.S. space industry, but NASA’s European counterpart ESA, which began a €340 million joint venture with Roscosmos in 2005, under which the Russians supply Soyuz rocket parts which are then assembled and launched from the ESA center in French Guyana.

Both Rogozin and Chemezov are on the EU sanctions list, too.

This article has been updated since publication.

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