Kasyanov Overturns Yet Another Klebanov Deal

The government has done a back flip over a $1.2 billion contract to sell China 40 Su-30MKK fighter jets, with Prime Minister Mikhail Kasyanov transferring the contract from the Komsomolsk-on-Amur Aviation Production Association, or KnAAPO, to Aviation Military Production Complex Sukhoi.

KnAAPO remains involved in the deal but has been demoted to subcontractor, defense industry sources said.

It is the second time a contractor for a large arms deal has had the rug pulled out from under it since Ilya Klebanov was demoted from deputy prime minister. He remains industry, science and technology minister in February.

The Chinese contract for the fighter jets was signed last summer as a battle broke out between Sukhoi -- which formally unites the designers and producers of Sukhoi planes, but in reality only controls the Sukhoi Design Bureau -- and KnAAPO.

Until now, KnAAPO has been the leading supplier of Su-30MKKs. But Sukhoi general director Mikhail Pogosyan had fought to change the situation in the hope that the money for the contract would be directed through the concern so that most of the profits would be concentrated in Sukhoi. He had planned to use the funds to launch a program to develop a fifth-generation fighter.

Although Pogosyan did not win the battle at the time, he did get some concessions, namely that in a later contract Sukhoi's share in the arms deal would be raised from 12 percent to 16 percent of the profits. Sukhoi also earned presidential approval to create an aviation holding that would be called AKhK Sukhoi that would bring the rebellious KnAAPO -- which uses its status as a unitary enterprise to ignore Sukhoi's decisions -- under control next year.

Now Pogosyan has total victory.

In the past three months, arms trade in Russia has gone through some major changes. Since Kasyanov took over the sector from Klebanov, he has already reviewed one of his predecessor's decisions and handed another Chinese contract, in this case to build two destroyers, to Severnaya Verf, even though it had earlier been promised to another St. Petersburg competitor, Baltiisky Zavod.

Sukhoi refused to officially comment on any changes in the contract, but a highly placed official in the company, on conditions of anonymity, confirmed the changes. KnAAPO could not be reached for comment.

Some experts consider Kasyanov's actions to be harmful to the industry. Marat Kenzhetayev, a specialist at the Moscow Physics and Technical Institute's Center for Arms Control, said "an arms client first and foremost values stability and predictability, and fluctuation can only do harm." Although the Chinese will not drop the contract, their demands will be stricter for any new contracts in the future, he said.

But the revision is not yet over. In April, the government is to sign a decree that envisions the creation of an air defense concern uniting Russia's state-owned medium- and long-range anti-aircraft missile producers into a single entity.

China already signed a contract at the end of last year to purchase $500 million worth of S-300 anti-aircraft systems from the Almaz company, which will now be dissolved into the conglomerate.