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Roscosmos seeks to obscure bidding process to evade US sanctions

Enlarge / Russian President Vladimir Putin (L) and Roscosmos Space Corporation Chief Yuri Borisov peruse an exhibit while visiting the Korolev Rocket and Space Corporation Energia last October.Contributor/Getty Images

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Russia's Duma, the lower house of the nation's federal legislature, passed a new law earlier this month that directs the Roscosmos State Corporation to make purchases through a closed bidding process.

According to the Interfax news agency, the legislation expands the list of corporations, including Roscosmos subsidiaries and other "legal entities," that must participate in the government contract procurement processes via a closed bidding process.

Passage of the amendment by the Duma, which is dominated by President Vladimir Putin's "United Russia" political party, signals that it will almost certainly become the law of the land. Based on the Russian news report, translated for Ars by Rob Mitchell, the idea for the law came from Roscosmos, the sprawling corporation that operates the majority of the country's civil and military space programs.

Roscosmos itself initiated the idea for the law in 2019.

"The legislation was developed with the goal of preventing third parties from getting information about purchases by organizations of the space industry, and aimed at increasing information security in the space business and measures to ameliorate the effects of sanctioning actions by foreign nations which have organizations that have ties with the space and rocket industry in Russia," Roscosmos stated at the time.

Why is this passing now?

It was not passed in 2019 by the Duma but easily cleared the legislative body this time around.

So what is really going on here? It appears to be more than simply good—or rather, bad—governance. Transparency in the bidding process for large government contracts is seen as essential by participants in such a competition. In the United States, for example, NASA publishes its contract opportunities. Afterwards, it provides a list of those companies that bid and a "source selection statement" outlining the strengths and weaknesses of each of the bidders. This gives US companies confidence in a fair process and provides public accountability. Advertisement

An open bidding process is seen as an essential element of eliminating corruption and cronyism from government contracting. However, the motivations of Roscosmos and the Russian Duma do not appear to simply be obfuscation of the bidding process.

Since the onset of Russia's war against Ukraine in early 2022, the United States and its allies have strengthened sanctions and export control measures against Russia. This has impacted myriad areas of the Russian economy, including technical components and other materials used by the space program. The new law appears to be part of an effort by Roscosmos to work around those sanctions.

Paving the way for shell companies

They kind of came right out and said it.

"Due to fears of falling under sanctions a number of contractors, primarily foreign ones, refuse to supply goods to organizations of the defense industry and also the space and rocket industry," said Roscosmos Deputy Director Nikita Nikiforov in the Interfax report. "This leads to violations of cooperative supply chains and creates risks of late execution of tasks standing before the space and rocket industry."

By shifting to a closed bidding process in the country's "Unified Information System," the information about who is providing what to Roscosmos, will now be tightly restricted.

There is another clue about the nature of the law in that it states the new rules apply to "a company or legal entity" that receives federal funding. Precisely what this means is unclear, but the term "legal entity" likely applies to shell companies within Russia.

Essentially, there are shell companies in neighboring countries with historical ties to Russia, such as Kazakhstan or Azerbaijan. These companies purchase Western goods, such as circuit boards, from a country such as Taiwan or Vietnam. Then, for a fee, they transfer them to a state-owned company in Russia. The new law, passed this month by the Duma, would obscure this process and help Roscosmos evade sanctions.