Perils and Proposals: Military Contracting with Volatile Regimes

by Andreas Kuersten

France has a Russia problem—one that is vexing its policymakers. By contracting to deliver Mistral-class helicopter carriers to Russia amidst Russian aggression towards Ukraine, France has assumed the untenable position of selling military hardware to a country whose military actions it decries. France’s current solution of suspending the contract, although effective in avoiding domestic political consequences of cancellation, is only temporary. Inevitably, France will be forced to either arm a hostile state with warships or harm its defense industry and pay Russia damages for breach of contract—a challenging predicament. Thus, France’s Mistral dilemma should serve as a cautionary tale for Western arms suppliers trading with unpredictable actors and encourage modification of similar contracts in the future. Such modifications would be straightforward, protect against revenue and domestic employment losses, and help advance foreign policy that aligns with Western values.

The status of the Mistral contract has steadily evolved since its 2011 formation. In response to Russia’s actions against Ukraine, the West levied sanctions that France initially asserted were inapplicable to the carriers. However, when Allied pressure caused France to temporarily suspend the deal, Russia responded by setting a deadline for delivery and threatening legal proceedings. France was unfazed and eventually suspended delivery indefinitely.

However, indefinite suspension is not cancellation—nor has France genuinely threatened the latter. Cancellation would compel repayment of the roughly $1.6 billion contract and create liability for punitive damages for contract breach. It would also result in the loss of hundreds of French jobs in the defense industry, an area of robust growth in a largely stagnating economy. Overall, cancelling the carrier contract would cause substantial harm to this sector and, thereby, political support for French leadership.

Yet these domestic repercussions must be weighed against international responsibilities. France, a leading voice against Russian aggression, has also long maintained constant advocacy for human rights and the rule of law. Additionally, France’s allies have been outspoken in their opposition to the contract.

In a skillful but precarious balancing act, France has worked in the interests of all parties without fully appeasing any. Suspension of the carrier contract prevents military materials from heading for Russia, thus placating both international allies and France’s own security interests. Meanwhile, with the contract technically intact, Russia has delayed legal action and the French economy remains unharmed.

However, no suspension is infinite—inevitably, Russia will demand something for its money. France must then choose between delivering warships to an expansionist power or paying a hefty price for its values.

France’s predicament is not unique. In 2014, Germany suspended and then cancelled a $120 million defense contract with Russia. It now faces, and will likely lose, a Russian suit for reimbursement and damages. Because the German contract was substantially completed and much smaller than France’s, Germany had less to lose. Yet both situations highlight the possible costs for Western defense companies and leaders when dealing with potentially belligerent regimes.

Currently, most international defense agreements are protected from the implementation of sanctions by force majeure—an unforeseeable impediment beyond a party’s control. But simple withdrawal of contract approval by a private firm’s host state is not considered force majeure, and therefore leaves corporations in the lurch and comes at great political cost for politicians eager to avoid economically harmful policies.

While an immediate solution to France’s Mistral dilemma looks unlikely, there are policy prescriptions that can address similar predicaments in the future. Generally, three issues must be considered: lost revenue, lost jobs, and penalties.

First, lost revenue is unavoidable in the short term: a choice must be made between supply and payment, or cancellation and refund; simultaneously denying belligerents products and the money they paid would discourage potential buyers and degrade Western moral and legal standing.

Second, employment could be protected in future contracts through government insurance or compensation programs covering cancellations that are political in nature. These programs would allow projects to continue while seeking out alternative buyers to at least partially repay government reimbursement. Public expenditure could also be offset through private sector insurance payments. These programs would diminish domestic and political consequences for cancellation and allow leadership to better conduct effective foreign policy.

Finally, penalty liability could be contracted out of defense agreements by crafting certain politically motivated withdrawals of state contract approval as excusing conditions akin to sanctions. Although a marginal amount of military sales will likely be lost to non-Western arms exporters—like Russia and China—due to buyers wary of contracts with additional revocation provisions, Western firms still make the most advanced defense systems in the world and negative industry impacts would probably be slight. Furthermore, specifically defining “political reasons” as aggressive international conflict, genocide, or similarly extreme conduct could mitigate potential business losses. Such language must also be consistently implemented among Western states to prevent undercutting.

Ultimately, France’s Mistral dilemma is a cautionary example for Western governments and defense industries. These actors must institute changes in international contracting to responsibly continue business and possibly reengage with Russia should it alter its behavior. Otherwise, they may find themselves where France is: stuck between a warship and an expensive court case.

The views expressed in this article are solely those of the author, and do not reflect the views of NOAA or the U.S. Government.  

About the Author


Andreas Kuersten is a legal fellow with the National Oceanic and Atmospheric Administration, Office of General Counsel, International Section. He has previously held positions with both the U.S. Navy and Air Force JAG Corps.

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