Russian client unilaterally scratches off big order to Samsung Ηeavy Ιndustries

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Samsung Heavy Industries has been hit by sanctions against Russia following the Russia-Ukraine war. The company’s order worth 4.85 trillion won (approximately $3.7 billion) from a Russian client before the war broke out was blocked by sanctions and the Russian client abruptly called off the contract.

The Russian client unilaterally claimed that the contract was not fulfilled during a negotiation process,” Samsung Heavy Industries said in a public disclosure on June 12 with respect to 10 liquefied natural gas (LNG) carriers and seven shuttle tankers for the North Sea ordered from Russia’s Zvezda Shipyard in 2020 and 2021. “The Russian client notified Samsung Heavy Industries of the termination of the contract and demanded that Samsung Heavy Industries return its down payment of US$800 million and its delayed interest to the Russian client.”

“We are currently unable to conduct any financial transactions with the Russian client (Zvezda) that has been designated as a specially designated national (SDN),” Samsung Heavy Industries added. “We believe that the termination notice is illegal and plan to file a claim in the Singapore Arbitration Court to prove the illegality of the termination and the scope of the refund, while continuing negotiations.”

The dispute between the two companies dates back to 2019, before the outbreak of the Russian-Ukrainian war. In 2019, Samsung Heavy Industries signed a series of contracts to build 22 ships — 15 icebreakers and seven icebreaking shuttle tankers — with Zvezda. It was a huge order with a total contract value of US$5.7 billion. Five of the ships were successfully built and delivered to the Russian client.

The bone of contention was the remaining 17 ships. In November 2020, Zvezda awarded Samsung Heavy Industries a contract for the supply of blocks and equipment for 10 icebreaking LNG carriers. In October 2021, the two companies signed a contract on the supply of blocks and equipment for seven icebreaking shuttle tankers. The total contract value stood at 4,852.5 billion won. Zvezda gave Samsung Heavy Industries an advance payment of $800 million.

However, around the time Samsung Heavy Industries began to design the vessels, Russia’s invasion of Ukraine triggered sanctions on Russia. The U.S. Treasury Department designated Zvezda as an SDN, cutting off any money flow into Zvezda. Samsung Heavy Industries was only able to design some of the ships, eventually halting their production in August and negotiating with Zvezda about keeping the contract alive.

However, Zvezda suddenly told Samsung Heavy Industries on June 11 that it was terminating the contract for the 17 ships, claiming that Samsung Heavy Industries had defaulted on the contract, according to Samsung Heavy Industries. “Due to the US government’s designation of the Russian client as an SDN, transactions with the Russian client were blocked, so Samsung Heavy Industries notified the Russian client of force majeure and conducted negotiations with the Russian client,” the company said.

Samsung Heavy Industries will take legal action against Zvezda by filing a complaint with the Singapore Arbitration Court.

Source: Business Korea