France could lose billions in canceled Mistral warship deal with Russia

France could lose billions in canceled Mistral warship deal with Russia
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After initial negotiations, France and Russia failed to agree on the amount Paris has to compensate for refusing to deliver two Mistral vessels amid the Ukrainian crisis. France needs to find a viable solution to preserve its reputation as a reliable business partner.

In late May, it became evident that initial negotiations failed to settle the diplomatic spat between Moscow and Paris over the delivery suspension of two Mistral-class helicopter carriers.

The €1.12 billion contract was sealed in 2011 and represented the first major arms sale deal between a NATO member state and Russia since the collapse of the Soviet Union. It was then interpreted as a political gesture, symbolising a rapprochement between Moscow and the West as well as a willingness to cooperate in the defence sector.

However, following Russia’s incorporation of Crimea and emergence of the crisis in Eastern Ukraine, sanctions were imposed on Moscow as relations with the United States and the European Union deteriorated. Concerned with possible repercussions on the Mistral deal, France initially assured Russia that the EU arms embargo would only affect new contracts.

However, French President Francois Hollande later submitted to American and German pressure and decided to suspend the delivery of the warships.

France is currently offering to terminate the contract and reimburse Russia €785 million, provided that the Kremlin permits the sale of the vessels to any third party without reservation. Additionally, Paris is proposing to share expenses associated with the dismantling of Russian equipment that has already been integrated into the ships.

On the other hand, the Russian Ministry of Defence is insisting on a hefty compensation of  €1.163 billion. This sum covers Moscow’s disbursement and the additional cost incurred for training of personnel, redesigning the naval bases to accommodate the vessels, as well as building of Ka-52K attack helicopters. Russian officials therefore described the suggestion put forward by the French negotiators as “totally impracticable”.

Russia’s strategic considerations

The two Mistral-class vessels, the Vladivostok and the Sevastopol, would give the Russian army a considerable force projection capacity. If based in the Crimean port of Sevastopol,  the ships would allow Russia “to land or airlift troops and armored vehicles anywhere around the Black Sea while providing soldiers with close air cover”, explains Marc Pierini, a visiting scholar at Carnegie Europe.

Pierini warns that the security of Ukraine, Moldova, Georgia, Bulgaria and Romania would therefore be at risk. However, the South Ossetia war in 2008 and the events in Crimea in 2014 demonstrated that Russia’s military strategy heavily relies on its land forces.

Nonetheless, when the purchase of two Mistral-class vessels was agreed, a Russian Admiral Vladimir Vysotsky argued that having such warships in 2008 would have allowed Russian forces to win its war against Georgia in “40 minutes instead of 26 hours”. His words are often quoted as an illustration of why France should not deliver the ships to Russia.

However, Russia’s geostrategic situation has changed, as it now controls the Roki Tunnel, which could allow for swift military action against Georgia. Similarly, Russia shares land borders with most countries where it has strong national interests, for instance in Eastern Europe and Central Asia.

Additionally, Russia is a continental power with a limited warm water sea access and its defence strategy revolves primarily around land and air operations. Therefore, analysts maintain that Mistral-class helicopter carriers do not address the strategic needs of the Russian Navy. Indeed, Russia is not a power projection nation as, for instance, the United States or France.

In the end, scenarios in which the country would use its naval forces to deploy troop and would require Mistral-class helicopter carriers are very limited.

Stakes are high

Oleg Bochkarev, the deputy chairman of the Russian Military-Industrial Commission, was quoted in numerous media sources as saying: “Russia won’t be taking them, that’s a fact”. However, Deputy Prime Minister of Russia Dmitry Rogozin hurriedly reprimanded Bochkarev, suggesting that the decision is after French leadership and that Russia would be satisfied with either the ships or a monetary compensation.

However, as Alexander Golts fairly observed, Russia is only trying to avoid undermining its negotiating position. Considering that the country is currently short of cash and that the purchase of Mistral ships was initially motivated by political rather than strategic considerations, Moscow is now simply playing its game to receive a lavish compensation.

France is the fifth largest arms exporter in the world and it is important for the country to save its reputation as a reliable business partner. At the same time, as an EU member state, France has a responsibility to act in solidarity and unity with other members of the EU.

A possible compromise for Paris could be to satisfy Moscow’s legitimate demands and voluntarily repay the sum stipulated by the contract. Thus, France’s key concern now is how to settle the dispute at the minimal cost. In fact, the final bill for France could go as high as €3 billion.

The Mistral deal is an excellent illustration of the fact that business dealings between sovereign states do not come without political predicaments. All things considered, the Mistral vessels do not bear strategic significance for the Russian fleet.

On the other hand, the ships became a very sensitive issue for France, which faces a Cornelian dilemma in choosing between fully supporting its allies or its economic interest by backing a crucial national industry. As a result, France now finds itself having to suffer significant financial losses if it wants to respect both its political commitments and commercial obligations.

 

Categories: Europe, Politics

About Author

Alina Yablokova

Alina is a political risk analyst covering Russia and Eastern Europe. A Russian-born Londoner, she holds an MA (SOAS) and a BA (Warwick) in Politics, International Relations and Diplomacy. Alina has experience in working in international and government institutions. She speaks English, Russian, French and Spanish.