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The navy cancels a controversial warship deal and gets a refund, ending years of beating around the bush
A ‘windfall’ from Russia via Singapore

by our Defence Correspondent
On February 2, 1999, an unprecedented event took place in the history of the Sri Lankan armed forces .

That day, the Sri Lanka Navy snatched nearly two billion rupees from the jaws of an unscrupulous arms dealer, and returned it to the Central Bank.

The action also saved the country a further 67 million rupees in interest which would have had to be paid to various banks, if the wrangling over the irregular arms deal had continued.

Top navy officials, including navy chief Vice Admiral Cecil Tissera, who pushed through the cancellation and demanded the refund in the teeth of opposition from many unscrupulous quarters, should be applauded for their act, as should the country’s Attorney-General Sarath Silva who gave the necessary legal advice on the matter.

Our readers are familiar with the story, since we have brought you the details as it unfolded from September l995. We even termed it, rather mirthlessly, ‘’from Russia with love."

Briefly, the shady deal began on September 5, 1995, when the navy signed an agreement with M/s Global Omarus Technologies of Singapore, to buy two frigate-type warships from Russia. Global Omarus represented M/s Voentech of Russia.

The 2.1 billion rupee 30 million dollar deal was signed despite the reputation that Global Omarus already had for supplying unusable weaponry and vehicles to the Sri Lanka Army in 1994, a 74 million dollar deal which the then Prime Minister Chandrika Kumaratunga cancelled as soon as she took office.

The frigates to be supplied were two ‘’Grisha V" class warships.

Under the agreement, the navy had to advance a sum of 1.5 million dollars, which it did, to Global Omarus.

It also had to establish a letter of credit for 27 million dollars, valid up to January 2, 2001, with an international bank. The bank chosen for this purpose was Commerz Bank of Singapore.

But Commerz Bank was wary of giving such a large letter of credit, and required the navy to actually deposit 27 million dollars with it, as collateral for the letter of credit.

The navy asked the Bank of Ceylon, which was acting as intermediary, to deposit the sum.

But the Bank of Ceylon didn’t have that kind of money just lying around, and had to ask the Central Bank of Sri Lanka for a loan of 27 million dollars, which was approved.

Interest on the loan from the Central Bank plus charges of the Bank of Ceylon came to a phenomenal 94 million rupees for the period up to Jan. 2, 2001, and would have to be paid by the navy.

Commerz Bank’s charges for keeping the letter of credit open, came to 280 dollars a day (Rs. 20,000), which would amount to Rs. 44 million for the entire period. This too would have to be paid by the navy.

But bungling by Global Omarus and Voentech over the next three and a half years saw to it that the navy received no warships.

Firstly, Voentech couldn’t supply the ships since it already had to supply warships to other countries before Sri Lanka.

Teams of Sri Lanka Navy officers who visited Russia to see the ships, were kept cooling their heels, or rather, freezing them in the Russian winter.

One team which went to watch the frigates doing speed trials, was actually shown a ship. But it was in the middle of winter, and the sea was frozen, so the ship couldn’t even put to sea, let alone do speed trials.

Other teams were shown ships and then told that they were already sold to other countries.

Finally, after two years, Voentech admitted that it couldn’t supply from Russia, and Global Omarus offered two other ships, also Grisha V class, from a Ukrainian shipyard.

But a navy team that visited found that the yard was on the verge of bankruptcy, and couldn’t even afford to have a proper electricity supply to the yard. The navy rejected this offer as well, thankfully.

Meanwhile, the interest and bank charges on the loan and letter of credit, kept mounting.

Next, Global Omarus offered two different warships, of Antharis and Grif class. But the builder wouldn’t commit himself to a proper date of delivery, which meant that this yard too was having problems of production.

Next, the navy had discovered that Antharis and Grif class weren’t suitable for its purposes, and rejected the dubious offer.

At this point, mid last year, Vice Admiral Tissera, who had been trying desperately to undo other people’s previous wrongs by somehow acquiring two frigates for Sri Lanka, and thereby ensuring that the project wasn’t a total waste of taxpayers’ money, decided to scrap the deal.

The navy demanded that Global Omarus repay the 1.5 million dollar advance. It also asked for the letter of credit to be closed, and the 27 million dollars refunded.

But Commerz Bank insisted that Global Omarus’ consent was necessary to close the letter of credit. The navy consulted the Attorney-General, whose advice was to push forward since the whole deal was now void. Tissera was firm: Commerz Bank must return the money.

Finally, on Feb. 2, Commerz Bank refunded the 27 million dollars, and the Bank of Ceylon returned it to the Central Bank.

By closing the letter of credit, the navy saved the interest it would have to pay to the Central Bank, amounting to Rs. 20 million, as well as the charges of Commerz Bank, which came to Rs. 47 million. This, of course, is in addition to freeing itself and the taxpayers from having to repay the loan of 27 million dollars, which is nearly two billion rupees.

Of course, charges paid by the navy so far are considerable, amounting to 22.3 million rupees to Commerz Bank, and 24.1 million to the Central Bank and Bank of Ceylon, all of which is money down the drain. But these are almost negligible when compared to the entire loan.

In any case, it is laudable that the deal was cancelled and the money got back, even at this late stage, saving the taxpayer Rs. 2 billion.

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