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Hollande Threat to Cancel Russia Mistral Warship May Be Empty

July 22 (Bloomberg) -- Bloomberg’s Peter Cook reports on the detection of a missile launch from a rebel area in the eastern part of Ukraine that most likely shot down the MH17 airplane. He speaks with Pimm Fox on “Taking Stock.” (Source: Bloomberg)

French President Francois Hollande said he’s prepared to cancel the sale of the second Mistral warship to Russia. It may be too late for that, a person with knowledge of the contract said.

The construction of the helicopter carrier is nearly complete and it has been mostly paid for, said the person, declining to be identified because details of the contract aren’t public.

Hollande on July 21 held out the threat of a possible cancellation of the warship’s sale if the European Union decides to expand its sanctions against Moscow in light of evidence that Russia-backed separatists in eastern Ukraine shot down a Malaysian airliner last week, killing all 298 people on board. The warship is the second of the two vessels France agreed in 2011 to sell to Russia for about 1.2 billion euros ($1.6 billion). The first ship is due for delivery in October, the second in 2016.

“Can the rest of the contract be honored?” Hollande said. “That will depend on Russia’s attitude.”

Hollande argued that the sale of the first helicopter carrier needs to go through because it has been built and Russia has already paid for it.

And yet, the story is not that different for the second vessel. The 653-feet long assault ship named “Sevastopol,” after the harbor in Crimea, is at least 75 percent built, the person said. The hull, the structure and the landing platforms for helicopters are finished. Workers now are installing cables, beds, elevators and other equipment, the person said.

Photographer: Alain Jocard/AFP via Getty Images

French President Francois Hollande delivers a speech to French soldiers at the Kossei airforce base, in N'Djamena, Chad, on July 19, 2014. Close

French President Francois Hollande delivers a speech to French soldiers at the Kossei... Read More

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Photographer: Alain Jocard/AFP via Getty Images

French President Francois Hollande delivers a speech to French soldiers at the Kossei airforce base, in N'Djamena, Chad, on July 19, 2014.

Intensified Pressure

Hollande’s position was one of principle, an official in the president’s office said. France cannot anticipate the sanctions process and can’t say how it would deal with the breach of the contract, the official said, declining to be named as per government rules.

France came under intensified pressure from European and U.S. partners on the military contract as further sanctions against Russia are considered. President Vladimir Putin, already facing sanctions over Russia’s annexation of Crimea and its role in backing the rebels in Ukraine, is confronting worldwide scorn over the crash as evidence mounts that Russia provided the missile used to down the Malaysian Air jetliner on July 17.

European Union foreign ministers yesterday said they will consider restricting Russia’s access to capital markets and sensitive technologies unless Putin expedites the investigation of the downing of flight MH17.

French Foreign Minister Laurent Fabius said in an interview on TF1 television last night that delivery of the second Mistral ship “will depend on the attitude of the Russians,” adding, however, that “signed contracts must be honored.”

Contract Breach

The penalty for breaking the contract is not public and the French government has declined to give details in recent months on the contract.

Russia has paid almost 1 billion euros to DCNS, the state-owned builder of the ships, for the contract, the person said.

The first ship, called “Vladivostok,” will be delivered in October after Russian sailors finish training. About 400 sailors are currently in the port city of Saint-Nazaire, the site of the construction, for training.

Russia had also signed with France for a potential option on two additional Mistrals, built mainly domestically. In December 2012 it said it was postponing the plan.

The ship is capable of carrying as many as 700 combat troops, 16 helicopters and 60 armored vehicles. Russia bought the two Mistrals with French equipment, including combat navigation devices, and will arm them with its own weaponry. The Mistral weighs 22,000 tons and is 105 feet broad. A U.S. aircraft carrier weighs on average 66,000 tons.

‘Pragmatic French’

While DCNS is running the deal, subcontractors include shipbuilder STX France, engines builder Rolls-Royce Holdings Plc (RR/) and French military electronic equipment companies Thales SA (HO) and Sagem. DCNS is building the two ships in cooperation with OAO United Shipbuilding Corp. of Russia.

Russian Deputy Prime Minister Dmitry Rogozin was quoted July 21 by the Russia’s Itar-Tass news agency as saying that he doubted France would break the Mistral contract.

“Billions of euros are involved,” he said, according to the state-owned news agency. “The French are very pragmatic.”

To contact the reporter on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Vidya Root

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