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Billion-Dollar Deal With Russian Firm Sets Off Contracting Alarm

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Day by day, Bashar al-Assad's brutal Syrian regime continues to crack down on its own civilian population. So when Secretary of State Hillary Clinton accused Russia last week of providing attack helicopters to the Syrian government, most Americans were rightly outraged. But how would Americans feel if they knew nearly a billion taxpayer dollars were supporting the Russian arms broker at the center of the controversy? Unfortunately, that may very well be the case.

A major Russian state-owned arms broker, Rosoboronexport, responsible for roughly 80 to 90 percent of the country's foreign arms sales, is coming under attack from a group of senators after winning a nearly $1 billion, sole-source contract from the Department of Defense (DoD) in 2011 to provide Afghanistan with non-attack Mi-17 helicopters. Rosoboronexport previously was sanctioned by the U.S. government from August 2006 through May 2010 for aiding Iran's nuclear program. Since sanctions were lifted, Rosoboronexport has also provided billions of dollars of lethal aircraft and other weapons to the Syrian government, which may have deployed them in killing thousands of civilians.

While advocacy groups have urged Congress to end DoD's deal because of the company's ties to Syria, POGO believes that Rosoboronexport's arrangement with the Pentagon also raises other concerns. Specifically, is the deal to buy 21 dual-use Mi-17 helicopters for $375 million (with a $500 million option to buy 12 more) in the best interest of the military and the U.S. taxpayer?

There are indications that the U.S. is being overcharged for Mi-17's, especially given the non-competitive nature of Rosoboronexport's award. Further, POGO is concerned that Rosoboronexport is not a responsible contractor with adequate standards of integrity and business ethics.

Non-Competitive Contracts

One concern is the uncompetitive nature of Rosoboronexport's sole-source contract. POGO stresses the importance of competition in obtaining the best prices and quality for goods and services; in most circumstances, sole source transactions should be avoided. Awarding contracts to companies such as Rosoboronexport without obtaining competing bids enables contractors to charge more and hinders the government's flexibility. As POGO wrote in a 2006 letter to Congress, "noncompetitive... contracts are sometimes linked to, and often are a breeding ground for, wasteful government programs and projects."

In fact, a Congressional official with knowledge of the matter told POGO that the U.S. government was likely overcharged for the helicopters. Rosoboronexport has charged the U.S. approximately $16.4 million for each Mi-17 helicopter, while Mi-17s from a previous Navy deal with a Huntsville, Alabama company called Defense Technology, Inc. cost only $10.8 million.

In a March 2012 bipartisan letter to Secretary of Defense Leon Panetta, Senators John Cornyn (R-Texas), Richard Durbin (D-Ill.), Kirsten Gillibrand (D-N.Y.), and Kelly Ayotte (R-N.H.) expressed their "grave concern" at the single-bid nature of the contract. The senators wrote that "[o]ther options are very likely available" and asked DoD to review all other options. Under Secretary of Defense James Miller responded to the bipartisan letter by stating that "the President's continuing efforts to build improved relations with Russia... in no way excuses Rosoboronexport of its activities with Syria," but concluded that the "acquisition of these Mi-17 helicopters is a key part of [the Defense Department's] on-going strategy to hand over the security of Afghanistan to the Afghan people." Miller admitted that secondary options for Mi-17 helicopters do exist, but argued that only the Russian Mi-17s are suitable for Afghanistan.

The U.S. Army claims the Russian helicopters are less expensive than comparable American models. When Sen. Cornyn asked Chairman of the Joint Chiefs of Staff General Martin Dempsey about the Rosoboronexport deal, Dempsey responded that if Rosoboronexport "enter[ed] the competition, it could very well be that they ended up being the lowest bidder." Such speculation does not justify the use of sole source deals. It is irresponsible for the DoD to award billion dollar contracts without seriously evaluating competing bids.

According to Sen. Cornyn, viable alternatives exist for the Army. However, the DoD claims that the Mi-17 helicopters are ideally suited for rough Afghanistan terrain. The Russian Mi-17 is rugged, practical, and, according to Army Secretary John McHugh, "absolutely essential to maintain[ing] the viability of a still-emergent Afghan force."

Ethical Concerns

Further, Rosoboronexport's dealings with Iran and Syria may violate a Federal Acquisition Regulation (FAR) provision regarding contractor responsibility. FAR Subpart 9.1 states that contracts "shall be awarded to... responsible prospective contractors only." In order to obtain government money, a contractor must have "a satisfactory record of integrity and business ethics." In addition, a recent amendment to FAR 25.703-2 requires official certification that U.S. contractors do not engage in activities that would warrant sanctions under the Iran Sanctions Act of 1996.

POGO is unable to determine whether Rosoboronexport violates the responsibility provision of the FAR; however, does the contractor's past business with Iran and current funding of a brutal Syrian regime at the very least call into question its responsibility? POGO thinks so. In 2006, the Bush Administration sanctioned the company based on credible information tying it to Iran's weapons of mass destruction program. Rosoboronexport continued to do major business with Iran, selling them S-300 missiles intended to defend against air strikes. Despite Rosoboronexport's business with Iran continuing into 2010, President Obama lifted the sanctions in May of that year.

POGO is unable to confirm that Rosoboronexport has continued its business with Iran since sanctions were lifted, but Rosoboronexport is currently selling weapons to the regime of Bashar al-Assad, which is in the midst of a brutal crackdown on pro-democracy forces. Furthermore, according to Under Secretary Miller, "there is evidence that some of [Rosoboronexport's] arms are being used by Syrian forces against Syria's civilian population," most likely violating international human rights law.

And Rosoboronexport itself seems to have no problem with that. In fact, a spokesman admitted that until the U.N. Security Council imposes sanctions, the company's "cooperation" with Syria "remains quite active and dynamic." While there is no definitive authority on whether a contractor enabling a brutal regime to kill thousands of its citizens constitutes "a satisfactory record of integrity and business ethics," it should at least be a matter of concern to contracting officials at DoD.

Moving Forward

Recently, the House of Representatives debated the National Defense Authorization Act (NDAA) of 2013 and passed an amendment prohibiting the DoD from entering into "future contracts with any company arming the Syrian regime." In turn, the Senate Armed Services Committee included in its NDAA markup an amendment requiring a Government Accountability Office investigation into the Rosoboronexport contract. While these amendments are a step in the right direction, they will probably not apply retroactively to stop the Defense Department's current deal with Rosoboronexport.

The executive branch has also sent mixed messages on Rosoboronexport's contract. On the very same day Clinton expressed concern that Russian helicopters could further deepen the Syrian conflict, the Pentagon staunchly defended its business with Rosoboronexport, highlighting a startling and worrisome disconnect between the two departments. POGO hopes that both departments can get on the same page and seriously re-examine the Rosoboronexport contract.

Though this is an egregious example, POGO doubts that this is the only case of bad business. Congress should hold the DoD accountable in enforcing contracting law that requires contractors to be responsible. Considering the contract's non-competitive nature paired with Rosoboronexport's questionable business dealings, the government should send a clear message reaffirming its commitment to contracting accountability.

By Andrew Wyner and Melanie Kaufman

Andrew Wyner is a POGO research associate and Melanie Kaufman was a POGO intern

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