Dangers ahead in Air Force procurement: Aircraft contracts could reward Russia, French espionage and bribery, and other bad behavior

KC-X program. EADS and Boeing are facing off to build the KC-X tanker – a next-generation plane to replace the half-century-old KC-135. Protectionism is not the question here, either. The Air Force clearly gave the specifications of the type of plane it wanted as the KC-X, and only Boeing submitted a design, a modified 767, that met those needs. EADS, meanwhile, is trying to get the Pentagon to subsidize its troubled Airbus division, marketing a recycled A330 passenger jet to become the KC-X. EADS responded by lobbying to compel the Air Force to scrap its standards and buy its off-the-shelf jet that is already on the assembly lines. In other words, EADS is more interested in creating political pressure to get the U.S. taxpayer to bail out its floundering factories than it is in offering to build what the U.S. military says it needs.  The KCX contract, according to Business Week, could be worth more than $100 billion – the largest defense contract in a generation.¹²

Business Week reports that the Air Force doesn’t need the Airbus tanker, which is larger than the Boeing 767: “The issue for the Air Force isn’t how much fuel it can carry but how many planes it can buy to cover the world.” The A330 can’t land easily on short airstrips around the world where our forces need fuel, while the 767 can, and the Air Force needs large numbers of smaller tankers, not small numbers of large ones. But we’ll let the military state their own cases based on their own technical and operational requirements. Bigger strategic issues are at stake.

The first issue is whether or not the U.S. wants to put the fates of its JCA and airborne tanker modernization in the hands of the Russian government.

Kremlin sees self pulling off “serious coup” within EADS

Flush with petrodollars, the Putin regime is trying to take a big enough stake in EADS to give it the ability to block or otherwise influence management decisions. EADS stock value has tumbled after corruption scandals, bad management decisions, failure to deliver on multibilliondollar contracts, and structural changes imposed by the incompatibility between the odd political setup of the company European labor policies. Moscow also exploited the EADS stock value dive as the British dumped their large stake. The Kremlin secretly bought up more than five percent of EADS last year through the state-controlled Vneshtorgbank.

Putin has hatched what his state-controlled Novosti information service calls a “serious coup” within EADS.³ Vneshtorgbank did not let EADS know of its secret acquisition until last October. The Russian leader told German officials in October, “I personally believe that Russia could in time increase its stake up to 10 percent, maybe more.”⁴ Kremlin officials told reporters that the Russian government intends to buy up to 20 percent of EADS on the international market.⁵

Russia wants EADS board seat and management power

Putin told the Germans that he insists “on Russia’s capability to have a hand in EADS’s corporate matters.”⁶ EADS says it is standing firm against Putin’s demand, and rejected an attempt to buy onto the board last fall.⁷ But Putin appears intent on getting his way, while maintaining that his approach was “not a sign of aggression.”⁸ The next month he told the Russian press, “We have no plans for a hostile takeover.^”9

Putin told French: Let us in peaceably or we’ll take you by force

The Russian leader continues to deny his ill intent (even as his critics die premature deaths).  “This purchase is not a hostile takeover,” Putin told the French defense minister in February, 2007. “We are ready for constructive interaction and we would like the companies to reach an agreement.” But his Novosti agency said the Kremlin would buy more of the EADS float regardless of what Paris and Berlin say. Novosti reported that that Putin told the French “that if such an agreement was not attained, financial institutions would work with the shares on the stock market.”¹⁰