Russian Military-Industrial Companies Bicker Over Karakurt-Class Corvette Engine Production

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Russian Military-Industrial Companies Bicker Over Karakurt-Class Corvette Engine Production

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On on February 17, the Arbitration Court of St. Petersburg and the Leningrad Region will begin to listen on the merits of the claim of LLC Kingisepp Machine Building Plant (KMZ) against PJSC Zvezda, Russian media reported.

Behind the relatively modest 16.2 million rubles ($220,000) of claims is a broken contract for the construction of a set of 3 diesel engines for the Project 22800 Karakurt small missile ship – corvette.

And a clear demonstration of how the largest manufacturer of ship engines in the region relates to the country’s defense capability.

The Karakurt-class small missile ships are designed to destroy objects on the shore, water, and repel air strikes. The ship can fight against sabotage and terrorist forces, search for and rescue the crews of ships and aircraft in distress, and carry out coast guard missions.

The project was developed by the Almaz Central Design Bureau.

Its displacement is 800 tons, speed – 30 knots, it has an autonomy of 15 days. The power plant includes three M-507D-1 diesel engines and three DGAS-315 diesel generators manufactured by Zvezda PJSC. The main strike weapon of the Karakurt is the Kalibr high-precision long-range cruise missiles.

In the framework of the state defense order, the manufacture of “Karakurt” is carried out by JSC Leningrad Shipyard Pella, JSC Zelenodolsk Plant named after A.M. Gorky and PJSC Amur shipbuilding plant. The exact number of ships was not disclosed.

The advance payment wasn’t paid, according Kingisepp, Zvezda received payment from the Zelenodolsk plant on time. Zvezda did not transfer the design documentation, which forced Kingisepp to terminate the contract for almost 350 million rubles ($4.7 million).

This is the essence of the KMZ claim against Zvezda. Behind the uncomplicated wording – two and a half years of bickering, during which the Russian fleet could have received a new missile ship.

Zvezda concluded the contract for the production of diesel engines with KMZ on December 21, 2018. The decision was made by the Deputy Minister of Defense of the Russian Federation in September 2018.

“Currently, there is a critical situation with the supply of marine diesel engines for ships under construction and in operation, as well as with the repair of these diesel engines and the supply of spare parts for them by PJSC” Zvezda,” this is the reason why the state customer was forced to look for a second manufacturer of diesel engines.

The wording suggests that the military had the impression that Zvezda was not coping with the contract, so the diesel set for one Karakurt was handed over to KMZ. In December 2018, KMZ signed a contract; at the end of 2019, diesel engines from the Kingisepp plant were supposed to be at Zvezda. But all this time, representatives of the enterprises spent in altercations – first among themselves, then in arbitration.

Zvezda initially had claims.

At first, the company demanded that the contract with KMZ be recognized as not concluded. The reason is that KMZ did not send its signed copy on time, which led the leaders of Zvezda to believe that the agreement had not been agreed upon, that is, had not been concluded. It didn’t work.

The judge suggested the following: KMZ agreed in writing with all the terms of the agreement, signed and sent all protocols of disagreements to Zvezda, so there is no reason to consider the agreement not concluded.

The court refused to satisfy the claim of “Zvezda”; in June 2020, this decision entered into force.

Since the agreement cannot be considered unconcluded, it means that it can be terminated – for this, “Zvezda” again applied to the arbitration court.

KMZ did not provide a cost estimate for the products supplied under the contract, which raised doubts about its ability to timely cope with its obligations.

This lawsuit was straightforward:

“Currently, PJSC” Zvezda “manufactures engines independently and does not need additional help …”

Nothing came of it, once again. The judge stipulated that Zvezda did not pay the Kingisepp plant the advance payment stipulated by the contract and did not fully transfer the design documentation, as such there can be no claim.

The second claim was also not satisfied, and this decision also entered into legal force.

In the fall of 2020, KMZ itself terminated the contract with Zvezda and applied to arbitration demanding compensation for lost profits.

It appears that Zvezda simply did not want to part with the contract for 350 million rubles.

Even a possible loss of 16.2 million, which KMZ claims as a lost profit, is much more profitable than the loss of the entire contract.

It looks like only the Russian Navy is losing.

Mikhail Borozdin, Director of the Production and Engineering Department of KMZ had the following to say:

“We will not comment on the decisions on two claims of PJSC” Zvezda “, rejected by the Arbitration Court of St. Petersburg and the Leningrad Region. The fact that they were refused twice speaks for itself. Regarding the filed claim for the recovery of lost profits” by the Kingisepp Machine-Building Plant “We believe our claims are legitimate and subject to satisfaction in full. All the arguments previously stated by PJSC” Zvezda” in defense of its position, the court found unfounded.

But it is for the production of engines for “Karakurt” that the enterprise mastered the production of units and components, more than 30 units of various equipment were purchased. The volume of own investments amounted to 543 million rubles. Since the signing of the contract with Zvezda, the total number of employees has doubled and exceeds one thousand people. A program has been implemented to modernize the foundry and forging sections. We have expanded to three production sites in St. Petersburg and the Leningrad region, their total area is 69,000 square meters. New jobs have appeared in various technical specialties, our own training center has been opened …”

And then, the Zvezda representative had this to say:

“The claim filed by Kingisepp Machine Building Plant LLC, is considered as unlawful by Zvezda.

In accordance with the contract, KMZ was supposed to manufacture and supply three diesel engines. During the term of the contract, the contractor did not confirm his intentions to fulfill it: he did not provide the required calculation and calculation materials, did not put the engines into production, in accordance with the requirements of GOST, did not manufacture and did not test a prototype. At the same time, “Zvezda” handed over to KMZ all the design documentation stipulated by the contract, which is confirmed by the acceptance certificates signed by the parties and military missions. Zvezda’s repeated appeals to KMZ regarding the timing and progress of the contract remained without a proper response, and subsequently Zvezda received a notice of termination of the contract from KMZ. The enterprise will present the substantiation of its position in court.”

As such, it appears that this is a deadlock, and there’s no solution. It all depends on what the court will possibly decide.

This is a form of cannibalizing of public orders, and damaging other companies’ business for rather small-scale projects.

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