Embargo and Aftermath
NOTE: The use of exact dates in this chapter is to allow any reader that can use my document files to follow the story in more detail.
On January 10, 1985, the headlines proclaimed "Reagan gets what he wants in Geneva." In reality the Pentagon and the military industrial complex to which Inductotherm was marginally attached thought they were losing big time. Reagan agreed with the Soviets to study the Star War defense and perhaps in ten years the Soviets could participate in protecting both our nations against missile attack.
Upon return to Scotland on 16 January 1985 I spent the day attempting to hold meetings on the vast amount of work ahead of us. The items to weld and machine were gone. Production of carbon insulation looked like a lost cause.
The large pieces could not be high fired, and this fact, along with major under firing in the first step, assured that every piece would be scrapped. The effort through Christmas and New Year was enormous. Anything that was black and would stick together was used to fill that last container so the packing lists could be made and an invoice could be issued. The buyers would not pay until we proved the furnaces in the field, but at least the expenses in Scotland had slowed way down.
We were going to be making carbon insulation in Russia and spending a lot of money horse trading our way out of the problems. My best estimate was three years and five million dollars, which meant I would have to sell other equipment of the same type to cover our cash flow in order to keep the Scottish company afloat. One thing was for sure: The isopress tests in Scotland would never be carried out due to technical data regulations. An embargo AFTER we made the shipment of most of the contract was the only thing that could save our bonuses.
On the positive side, the company had a challenge that would force it to finish the development of its carbon company. The know-how we would pick up from our Russian customer in the process of solving the problems in the field could be turned into a valuable asset. The three years in Moscow would provide a better lifestyle for Vera than she had in Scotland.
I had a few quite days to reflect on our problems in the production of carbon insulation. This production line required a non stop production line. The manpower and management were accustomed to working eight-hour, five days a week. The quality problems were coming from efforts during the night and on the weekends. The work force of Bellshill was not shift workers, and we were stuck with that.
John Wilson and I were closing in on a vacuum melting furnace order for the Airbus factory in southern Russia, and another order for tool coating in Moscow. Other business activities in European markets were markedly improved.
Dr. Robert Froberg of Pfizer Corp. was on a business trip in the United Kingdom. He and his wife stopped in for a visit. I showed him the Calcarb setup. Bob thought we should not have been permitted to ship this type of facility to the Soviets.
My tax accountant, Peat Marwick and Mitchell had informed the British tax authorities that I was selling my house upon completion of the construction in Scotland. This was a big saving on the tax due. I was tired of Scotland and worried that Roberts was making a mess of our company in Rancocas. The document I had just signed meant we would be producing technology for which an American citizen would need a license and I knew it would not be given.
An appointment with the Ministry of Defense had been set on January 23, 1985 for the stated purpose of discovering what we could do for them. The military critical list had been published by the Defense Department by that time. The policeman, Tarlton, was sitting at the table. My heartbeat and blood pressure rose like a wave through my body. I really wanted the embargo, but this was a scary situation. Wilson had played down our knowledge of the carbon process and its possible uses during our previous meeting. Wilson told them during the November meeting that he had never heard of carbon-carbon. I told them I had read about new lists from the Pentagon and spoken to Dr. Froberg and was very concerned that the Pentagon would like to see this project stopped. I made no attempt to hide the fact that carbon could be used for rocket parts. I told them about our furnaces in Chelyabinsk, which were much more important. They were not interested in the facts because they were there to confirm and record facts to support the decision to change the regulations that had already been ordered.
We had additional discussions with the MOD on isopress retort technology. The retort we had and were designing would and could not work. The MOD was informed that our solutions were not workable and that the technology was schoolboy stuff. Their comment was that it was serious technology. I laughed at this and told them that day that an embargo would be the best thing that could happen to Consarc due to our technical problems. They may have considered this as my attempt to prevent an embargo.
The remaining parts of the contract were being loaded in containers with the exception of spare parts and those items required by the contract listed on amendment #5 that I had recently signed. This British inspection group wanted to know the actual sailing date of the ship. We told them that the ship was in the port of Hull and would depart on February 4, 1985. It was clear to me that they were going to change the export regulations AFTER this shipment was made.
In Moscow the inspectors reported the real situation. They needed to protect their asses for signing off on faulty equipment in Bellshill after their holiday at home. Ivanov needed documentation from Consarc that the equipment was OK before we made the final shipments and asked for payment.
TELEX: January 25, 1985
THANKS YOUR TELEX. WE BELIEVE THAT SEALING OF SUSCEPTOR, FINAL PRODUCING OF HEATING ELEMENTS AND RETORTS FOR PRESS NOW COMPLETELY OK.
Wilson was a deacon of the church and is not a big teller of tall stories. He wanted to be paid so he did what he had to do.
Telex January 25, 1985
THANKS YOUR TELEX OF 25 TH. YOU ARE QUITE CORRECT IN YOUR ASSUMPTION THAT THE TECHNICAL PROBLEMS ASSOCIATED WITH THE EQUIPMENT HAVE BEEN OVERCOME AND THAT ALL EQUIPMENT BEING DELIVERED WITH THE SHIPMENTS GOING OUT IN FEBRUARY AND MARCH ARE IN FIRST CLASS QUALITY AND IN COMPLIANCE WITH THE CONTRACT.
THE REMAINING TEST PROVIDED IN AMENDMENT NUMBER 5, INCLUDING GAS CLEANING, IS IN PROGRESS AND WE WILL REPORT OUR FINDINGS SOONEST AND IF ANY ALTERATIONS TO THE EQUIPMENT SUPPLIED WILL BE REQUIRED.
Vera and I flew to Florida for a holiday at Consarc's expense because I was required to give testimony in a suit with the Marine Midland Bank for three-quarters of a million dollars. The good news for the board meeting was that we should win the suit.
After the Geneva summit Perle cranked up the propaganda machine to fight Dole and the other dove Senators. This was Perle's job and he did it well. He told the Heritage Foundation staffers on January 30, 1985 that the sale of "specialized equipment" had occurred over the last few years and was worth $70 million. The Soviets had acquired from a "friendly allied country" technology to manufacture a composite material that had "greatly increased" the accuracy of Soviet nuclear missiles. Air Force Magazine did not pay great attention to this revelation. This would have been very alarming if they had not heard this story before.
Ivanov became greedy again in his request for a plasma furnace in exchange for extra man-days in construction. In the end we would use their technology and provide them with the equipment because we would have to produce and seal the susceptor at the site using their furnaces.
Telex February 2, 1985
PRINCIPALLY WE ARE READY TO INCREASE NUMBER OF MAN DAYS FOR ERECTION BY 300-350 DAYS THOUGH IT CAUSES US CONSIDERABLE EXTRA COSTS. AT THE SAME TIME WE REQUEST TO INCLUDE AGAIN IN THE SCOPE OF DELIVERY THE EQUIPMENT AGAINST ITEM 2.7 DELETED BY AMENDMENT NO 5 AS COMPENSATION FOR ADDITIONAL CONSTRUCTION WORKS ETC.
Item 2.7 was the equipment needed to produce the carbon parts in the embargoed container. The original item 2.7 was the plasma adaptation.
On 26 January 1985 Vera and I traveled to Miami on our way to Pittsburgh to give a deposition for a suit Consarc had against Marine Midland Bank for non-payment for the Gurtel Steel contract. (This flight was the cheapest route to use.) I though we had a good chance to win after my testimony and was ready to report this to the directors in Rancocas. The sad news I was about to report was profit projections and problems on the Russian job. Roberts knew that we had huge problems but had not yet understood just how expensive it was going to be. He was concerned about profits in the States, and because he had delayed in collecting bills from the Scots while the pound was falling to near the one-to-one exchange rate.
A telephone call gave the embargo news. Roberts told Wilson to call out our inspectors. I did not even have time to raise hell with Roberts for moving Lona and me into a separate Calcarb payroll and bonus pool. There would be no need for me to travel to Washington. There was no reason to tell anyone about my one man conspiracy to force an embargo.
Rowan's book described the events of this time by lifting an account from the New York tabloid newspaper, Newsday, printed in November 1987: It makes a good story for a book but Rowan had the real facts and did not need the made up story from Newsday.
Thatcher instructed her Department of Trade Minister, Norman Talbot, to call his counterpart in Washington to inform them that she had lived up to her promise to Reagan. All the embargo documents were on my desk when I arrived back in Scotland the next day.
The Export of Goods (Control)(Amendment Number 10) Order 1985.
Made 8th February 1985
Coming into operation at 1.40 PM 8th February 1985
"The department recognizes that this order will put your company in some difficulty. I understand that the contract is the subject of ECGD cover, including cover against the imposition of export licensing controls. You will no doubt wish to pursue the matter with ECGD."
This was better than any thing that could have happened. Clause 10 of the contract provided for an embargo and the customer would have the equipment already delivered. We would be paid 95% of the invoice value by the ECGD and this would provide us profits beyond our expectations.
This regulation was issued with the agreement of CoCom and could not be changed without the unanimous agreement of all the members. This regulation under (3) (B) did not specify pressure or temperature. This meant that any pressure device larger than five inches was covered. For example a pot for cooking with a cover larger than five inches sitting on a normal cook stove could have a controlled thermal environment.
This regulation opened the door wide open for any press less than five inches. The technology that the Soviets wanted could be obtained legally. FMI used this opening to ship a small unit to India. They legally shipped a larger unit from Switzerland that could use the control unit for the smaller unit. They were tried and convicted but eight years later the court ruled that the unit was not especially designed for the larger unit. This was a indirect result of the information I provided the lawyers and a direct result of a German Court forcing CoCom to open their records in 2000 for a definition of "especially designed".
This new regulation covered induction equipment using susceptors above 2000 degrees. This brought the British rules in line with American regulations on pyrolitic graphite. THIS WAS NOT A COCOM AGREED ITEM.
All nine furnaces operating in Russia were capable of 2000 degrees in vacuum but not capable of pyrolitic graphite. THIS IS A COMPLEX PART OF THE STORY THAT ONLY I FULLY UNDERSTOOD.
The ship was scheduled to leave the port of Hull on February 4, 1985. The Thatcher government had set the order to come into effect on February 8, 1985. When local customs officials delivered the order they were surprised when our staff informed them that the ship was still in port. Custom officers were duty-bound to enforce the law, so they seized the supposed final shipment a few hours later.
The local MI 6 called to ask if we needed assistance to get our service engineers out of Moscow under cover of darkness. The DTI was calm as they informed us by fax. In essence, they said they were required for national security, and anyway, "You have insurance."
The document that informed us of the embargo was an interesting one. The container was seized. The correct procedure would have been to inform the company that this shipment now required a license to export to the Soviet Union.
The British government had no right to seize the shipment. The law required them to notify us that regulations had been changed and the shipment must be returned to Scotland awaiting a request for license. This event was to be of great help in settling our insurance claim. As it turned out, almost everything in that container could be exported, so their only way to avoid a scandal was to destroy it and its contents.
I asked the sales director of Consarc to let our customer know the facts.
TELEX 10 February 85
We have to advise you that as of Friday 8 February 1985 all the goods and services required in the execution of the above contract are now the subject of an export license.
As a result of the new regulations we are immediately taking the necessary steps to apply for an export license and will of course advise you soonest.
In the meantime we must advise that we have been instructed that the goods as tabulated in Telex number 1121/85 dated 23 January 1985 including late February shipments are now at the Hull dock for shipping but are being held until our application for an export license is processed.
Due to these new requirements for an export license it is required that our engineers return, preferably Monday evening and await our application for export license being processed.
We also advise that as previously arranged Metcalf and Wilson will travel to Moscow on Monday 18th February for the planned discussions.
Finally we apologize for the inconvenience that this will undoubtedly cause to the project but trust you will understand that such matters are totally outside our control and every effort is being made to resolve this as soon as possible.
Gorbachev was selected to handle the burial of Cherneko. This was the first sign that this little known man in the Soviet Union would become the new boss. Thatcher may have gotten an earful when she met Gorbachev a few days later on February 14, 1985. "What did you mean Maggie when you agreed not to stop any more contracts in progress due to pressure from the Pentagon?" Gorbachev might have told her. I am sure that Thatcher told the Soviets directly or through her ministers that the embargo was a timing mistake and that Consarc could finish the contract.
Everybody at Consarc was happy to take ninety-five percent of Invoice and ninety percent of costs of the remaining items not shipped. There would be no more technical or financial problems. We prepared our documents for the trip to London to meet the DTI and to Moscow to meet the customer and sign other contracts with Metallurgimport. Vera and I entertained Kolosov of the Soviet Trade group in London to find out what they knew about the situation. He told me to be calm because high levels of government had settled the problem.
The meeting at the Department of Trade was full of surprises. Cooke took complete and accurate notes.
It was clear to me that Thatcher wanted us to finish the contract. I knew that we would settle for the insurance. I also knew at that moment that a third party would have to finish the job.
Wilson traveled with Vera and me to Russia on February 17, 1985 to explain the situation. Vera squeezed this trip in because she thought it would be the last on my expense account. A rare early morning appointment was arranged with Ivanov. Soviet buying houses usually wait until the other party is in Moscow to set up the meeting. If the end user is outside Moscow the first meeting can be delayed two or three days. Ivanov said, "Calm down, Jimmy, everything can happen in life."
Their stated position was that every situation was covered by their contracts. The highest levels of Soviet government were aware of the embargo, so the matter was no longer in Ivanov's hands. The simple statement was, "A contract is a contract." They said we should put political pressure on the British government so the contract could proceed.
We had business with Metallurgimport that required a couple of days to complete. Roberts was attempting to expand the products for Consarc and was pushing a product line that put hard coatings on tool bits. This process was developed by the Austrian Company, Plansee, which had already sold this process to the Russians. This company was not in the business of building equipment, so it looked like a natural for Consarc. The trouble was that we had no orders and had no idea what the equipment would cost. We signed a contract with the Russians based upon an estimate from Plansee that turned out to be much too low.
Metallurgimport reminded us that while buying houses compete with each other, this did not mean we could remain partners in business if we defaulted on a contract with another buying house.
We visited the embargoed factory to allow Wilson to see what was done. For me the visit was good-bye to a group of good friends. My final entry in their journal was to explain the situation. Wilson composed and delivered a handwritten letter that detailed the events that had taken place. This letter asked for time before Machinoimport took any action. They agreed, so we departed Moscow.
In the business class section of British Airways John Wilson raised his glass in a happy toast. John was not a young man, and surely not a rich one. He had worked all his life for this little firm and was about to make his first real bonus that would elevate his lifestyle considerably as a direct result of this timely embargo. As we were still climbing out of Moscow Airport on a very clear day with the cold snow-covered fields beneath us, his toast was "Jimmy "if I had written the script for this it would not have turned out better." Booze was free so we quickly had our second double of good Scotch whisky. It was my turn to toast. "John, I wrote the script." He knew I had, but did not fully understand how.
When we returned to Scotland it was decision time. The insurance claim was filed and the Roberts wanted his bills and debts paid. He wanted the exchange rate that was in effect at the time of the loans and bills. The staff at Consarc Scotland was in an uproar because common sense and British accounting rules would not allow it. I wanted to hold the pounds for a better exchange rate in the future.
A telegram came from the insurance company. We had no insurance. We were manifestly bankrupt. British law required directors to pay all costs after they are aware they were bankrupt. Telexes were sent to every politician we could think about. A Telex arrived from the DTI stating they were sure that the fact of no insurance would have a severe impact on our company. We even hired a Queen's Council who confirmed that we had no insurance, but he said we had good political argument. I remember Cooke asking me to show this gentleman some respect. The DTI had arranged a meeting for the next day, and that held out a little hope.
The last shipment did not get on board so we could not issue an invoice under the terms of the contract; therefore we could not be paid under the nonpayment part of the insurance. I sent a Telex that the ship's master had received the cargo and at least we should get ninety percent of our costs to date.
Cooke finally found the notes of the meeting we had with the insurance agent before agreeing to pay for the insurance. Cooke's minutes were articulate and he had the telegram from the agent confirming the facts. Not so good for the courts, but maybe good enough for the politicians.
At a very tense meeting at the Department of Trade and Industry (DTI) the insurer (ECGD) argued that we were not insured. With my best hillbilly voice I told the DTI that I had bought insurance and the agent had promised to pay in the situation at hand. Mr. Hall, senior civil servant of the office, asked if we had paperwork to back my claim. Cooke produced the papers and they adjourned for lunch.
Text of statement by ECGD to Consarc at meeting in DTI,
28 February 1985
Having examined the company's note of the meeting they had with ECGD's Glasgow Office on 12 April 1983, as produced for the first time at this morning's discussion, and the Telex from ECGD's Regional Office to the company on the same date following that meeting, ECGD is now prepared in the exceptional circumstances of this particular case to accept that the consequence of that discussion and the related correspondence was such to entitle you to believe that you would be covered for the circumstances that have now arisen and that it effectively amended the Department's guarantee.
Accordingly, the Department is now prepared to admit liability under the guarantee for 95% of the gross invoice value of the goods delivered and 90% for the costs incurred for the design and manufacture of the undelivered goods.
The Department will expect the company to comply fully with its obligations under the guarantee to minimize the loss. In that respect the 1.2 million pounds presently held by the company should not be returned to the buyer but Consarc should immediately contact the buyer to ascertain whether they are going to exercise their rights under clause 10 to cancel the contract and to claim return of the advance payment and to claim liquidated damages. Before they subsequently respond to the buyer Consarc should approach ECGD with a view to establishing what further steps should be taken with respect to an amicable settlement and/or arbitration.
The ECGD collects its premiums from exporting companies, and while it was a government operation the funds were private. They had to operate under certain rules which required us to minimize their loss, including doing what we could to finish the job, sell the spares and collect as much as we could from our Soviet customer.
We informed the staff that we might no be able to make further payrolls before our departure to London. The next morning, March 1 1985 we brought out the whisky for a round of drinks for the future of the company. I was given the task of informing Tom Dick that the time had come for his retirement effective on 30 April 1985.. He was given a reasonable "golden parachute". Dick was retained as a consultant for the company for tasks that would be assigned in the future. Crawford was named as managing director at the next board meeting.
I composed a Telex to Ivanov to tell him that we were still in business.
March 1, 1985
Our insurance claim is now approved and therefore Consarc Engineering can continue trading as a solvent trading partner.
Export control order number 10 has been published and this, along with other orders, will be mailed to you for your further information.
We have again been informed that equipment at the port of Hull cannot be shipped. We never expect this decision to be reversed since it is considered a national security matter.
Based upon the above facts, we ask for your position with regard to clause number 10 of the contract. After your position is known, we will inform you of what further action can be taken in the best interests of all parties.
I wish to inform you that this is my first experience of this type but that I will do my best within the limits of the law to protect my customers' interests.
I also know that my long-standing reputation as a trading partner has been damaged. I ask that you continue to support visas for myself and my wife to arrive in Moscow 17 March 1985, for a two week period to visit you and other trading contacts.
On the understanding that additional commercial discussions may take place, please also provide visa support for Wilson.
Machinoimport started to set up their rights under the contract. We had defective parts at the site and they were making claims.
Please ship equipment and technology - item 2.7, inform date of shipment. Please indicate date of arrival specialists for completing the erection of delivered equipment. We reserve the right to claim you in full accordance with conditions of contract no. 50-0166/34481
ITEM 2.7 WAS THE EQUIPMENT REQUIRED TO MAKE THE CARBON PRODUCTS IN THE SEIZED CONTAINER.
Vera could see the handwriting on the wall. My business with the USSR was coming to an end. She wanted to make one more trip on the expense account to visit her family and friends. Communications from the buyers and our proposed answers had been sent to the ECGD several days earlier. It appeared that the departments were working against each other. In order to understand the rules, under which we were to operate, we attended a meeting with the insurance company on March 8, 1985.
One thing became clear at the start of the meeting. The items in the container at the port of Hull belonged to Consarc because they had not been legally seized. He offered us an advance on the insurance settlement in the amount of 1.5 million pounds and required that we sign over the rights of the property in the container at Hull to the insurance company.
Again Cooke took complete and accurate notes.
The main items in that container was shaped carbon insulating parts that Calcarb produced for the project. Every single part was doomed to failure due to poor quality control and we all understood this. We knew that we would have to replace these parts and plans were made a month before shipment.
We continued our pressure on the government to give us an order to quit the project. One option was to default the contract and ship all the equipment back to Scotland. The contract provided the means to accomplish this, and the same document which extended our insurance coverage addressed this subject. The costs to the government would be about ten million dollars, but in accordance with Perle's calculations NATO would be saving billions. The insurance company realized that this was a serious liability. I also pointed out that if the equipment was the national security problem that caused the embargo in the first place, then surely the insurance company was not acting in the best interests of the country if they insisted that we finish the contract and collect them some money. I continued to demand a concrete plan of action since, the government was in the drivers seat.
From Chapman ECGD Executive group
14 March 1985
1 At the meeting last Friday you asked for advice about your contract with Machinoimport, and in particular ECGD's rights and your obligations to minimize loss under article 4 (B) of the guarantee, in light of the recent refusal of an import license for certain goods which were to have been exported to Machinoimport.
2 It is of course for you to decide what action should be taken by Consarc under its contract. But you will wish to know that so far as ECGD is concerned the position is as follows:
(I) ECGD will not be requiring you to take any specific action in connection with the contract to minimize loss.
(II) Should you not take such steps as might reasonably be expected to minimize loss, ECGD will not regard you as having failed to comply with your obligations under that article and so will not under article 23 (B) demand repayment of the claims payment made.
(III) ECGD reserves their rights under article 24 (A) of the guarantee with regard to recoveries in respect of goods and services supplied under this contract.
This advice, which reflects the views of the DTI and other government departments concerned, supersedes that given in the second paragraph of ECGD's letter to you dated 8 March which accompanied the interim claims payment.
Principal Finance Officer
The government had made their final decision on this matter. They wanted no part of our commercial problems. The risk to the national security was not worth ten million. Human nature would block our completion of the contract. Any money we collected would be turned over to the insurance company under clause 24. The costs of further work would come out of Scottish pockets. It did not matter that they had opened the door for a third party to pick up the spoils. It was a new political time and Thatcher wanted to protect her position with Gorbachev. The bottom line was that they had given us all the rights to the property and even allowed us to return the down payment. It was time for me to go to Moscow with a gift.
The management of Scotland was busy closing their books for their upcoming bonus. They did not believe what they were reading. Roberts did not believe the position the government was taking. Local government and legal people were scratching their heads to try to figure it out.
I was in a unique position to understand. One thing was sure in my mind. New political winds were blowing and the skies were going to clear. Thatcher had been pushed into the embargo situation. Her quick action to set the matter straight with conflicting parts of her government was unprecedented.
Vera and I entertained Soviet trade agents in London on March 15, 1985. They understood that the British position was that we could finish most of the contract. They were also aware just how tough Ivanov would be. Vera was with me in Moscow for the next five days.
Ivanov was confused when I told him that Consarc had rights to the embargoed property. His legal people told him that the ECGD had title since they had paid Consarc. I told Ivanov that I could transfer title to him in return for a quick close to the contract. His cost would then be the 1.2 million pound advance.
At first Ivanov was interested in my plan to transfer title and sell them the spare parts so that money could be returned to the insurance company. Their total costs would be the 1.2 million down payment. A new contract would then be made with a third party to buy the materials and services they required. Their legal people would not agree that the insurance company did not own the property in Russia and would demand payment in the international courts. At that point in time I was sure of my position but did not have the documents to prove it.
Cooke and Wilson refused to read the governments position they way I read it. The cash from the insurance company was not yet in their pocket. They contacted Roberts for advice. His opinion was that I was moving the wrong way and should slow down.
On the 19 March 1984 Consarc applied for a license to ship the spare parts in our stores that were subject to insurance cover of 90% of the costs. I attempted by telephone and Telex to have a clear statement from Consarc and the British government as to the rights to the property. Wilson and Cooke would have nothing to do with my solution. Wilson and Cooke recorded our long telephone conversation during the evening of 19 March 1985. This was very unfair since I had drunk a considerable amount of vodka. Wilson thought he understood how to push the government into a no answer by the threat of what Consarc would do.
The following Telex was sent to get the answers that would have allowed me to settle the old contract.
The situation has improved, but I expect our trading partners to remain angry until we can provide answers to their questions.
1. Do we have the rights of the contract?
2. Can we transfer rights - can we prove it?
3. Do we have a legal obligation to pay 10 percent of the contract? Will we pay it?
4. Do we have a legal obligation to pay 10 percent of unshipped items? Will we pay it?
5. If they demand rights under #3 above can we and will we request Stockholm?
- As to future trade contracts
1. Will we be allowed to work with equipment and documents already here?
2. Will we be allowed to ship standard spare parts?
3. Will we really be allowed to ship equipment for Calcarb and technology to produce shapes which are not those on the export control lists.
Try to reach me between 2 and 4 my time. I will try in reverse.
No is also an answer but will forever kill our trade position.
Wilson and Cooke were confused as to what could be done with the contract, the insurance, and the British position on this matter. The rules were very clear to me.
From: Wilson, Consarc Engineering Limited
Date: 20 March 1985
We confirm our telephone conversation of this morning and the position that we find ourselves having to take to try and maintain our reputation in the USSR and to stop the possibility of being blacklisted and the whole situation being turned into a political one.
The steps that will be taken by Consarc by noon today unless we are advised otherwise are, as far as we can see, well within the laws of our country and still leave the equipment and the Buyer a very long way from putting the equipment into production.
1. Consarc send out engineers to supervise the final installation and carry out cold tests and start-up of the nine Induction Vacuum Furnaces.
2. Consarc send out engineers to supervise the final installation and carry out cold tests and start-up of the two isostatic presses.
3. Consarc provide the spare parts as listed.
4. Consarc provide the equipment and technology known as "Calcarb " (Item 2.7 of the existing contract) and for the manufacture of carbon fiber furnace insulation materials.
5. That the existing contract will either be canceled or amended to ensure that final commissioning and hand over will be with cold tests only. That is that no graphite susceptor for the nine induction furnaces will be fitted and that no metallic heaters, heat shields, retorts or gas control valves for the pressure differential system will be fitted to the isostatic presses.
6. That the spares tabulated and supplied by Consarc are readily available in the open market and that such spare parts will be, or be unable to make those items now held at Hull Dock and requiring an export license.
The British had put the monkey on our back and continued to tell the lads in Scotland. They could not believe the written words.
TO: CONSARC ENGINEERING LIMITED
From: DEPARTMENT OF TRADE AND INDUSTRY
March 21, 1985
1. THANK YOU FOR YOUR TELEFAX LETTER OF 20 MARCH
2. It is helpful to have this information. But I can only confirm what I told you on the telephone yesterday. As we have previously made clear in correspondence at meetings here, there is nothing in British law as it stands at present to prevent you shipping the equipment under item 2.7 of the contract, or sending engineers abroad.
3. The supply of the spare parts is also permissible to the extent that none of these is subject to export licensing control. We have not yet been able to confirm that this is in fact the case.
4. Your attention is also drawn to the export controls on technological documents: see the export of goods (control) (amendment no 3) order 1983 as amended by the export of goods (control) (amendment no 7) order 1984.
In simple English the government told the Russians and Consarc that they could send men and materials to complete the contract. They allowed equipment that could produce the carbon insulation to replace the seized materials. But not the technology to do it. The Russians had observed the process in Scotland and could do a better job. The Scots would have agreed with me except Roberts was not in the loop and in disagreement.
For the attention of Mr. W H Cooke
From ECGD Claims Division One J G M Cochrane
Your Telex 1544/85 today and my subsequent telephone conversation to which you refer.
The only reply I can give is to clarify points (i) and (ii) of Mr. Chapman's Telex of 14 March.
Since ECGD will not, in this particular transaction, be exercising its rights to require you to take any specific action to minimize loss, it must follow that the department cannot advise you on whatever action you might consider prudent, in conjunction with any such advice you might receive from your own legal advisers, to protect your commercial position under the contract including any amendments to the contract acceptable to yourselves and the buyer. On title, all I can say is that, other than for the goods at Hull (which are the subject of the legal embargo and will remain so until agreement between departments has been reached on their disposal) the department has no intention to exercise its rights under article 23a of the guarantee.
I hope the above will enable you to make an appropriate reply to Mr. Metcalf and that, notwithstanding my inability to advise you, you will keep me closely informed of developments.
I continued to find an argument that would convince the staff in Scotland that we could transfer title and finish the contract.
21 March 1985:
Machinoimport can and will show major losses with respect to equipment and services already delivered. You should not force them to audit under their commercial law. An audited document has far reaching problems for you. They are not happy but have understood that clause ten is the cause and clause four is the remedy. They have heard our argument on damages limited to unshipped items. They argue that the intent was on the complete installation. This matter can only be settled on the legal facts of the contract itself. No other path will work if we force an audit of value through their chamber of commerce.
Your partners are being fair and practical. They will demand the same strict procedures of value as always, demand you finish your task, demand that will remain against you until they can audit value for funds expended. New contracts as allowed by law is the single path to protect your trade position.
For reasons which will be very clear to you I resign my duties with you and my directorships effective 31 March 85
The above threat was a bluff for all the parties. Ideas to go it alone were building in my mind.
March 21, 1985
Please telephone Metcalf at Machinoimport. He should be with Ivanov and tell him that this Telex has arrived and that a copy has also been sent to him at his hotel
We can now advise that in principle and subject to final agreement by all parties Consarc Engineering undertake the following:
1. Consarc send out engineers to supervise the final installation and carry out cold tests and start-up of the nine induction vacuum furnaces.
2. Consarc send out engineers to supervise the final installation and carry out cold tests and start-up of the two isostatic presses.
3. Consarc provide the spare parts as listed.
4. Consarc provide the equipment and technology known as 'Calcarb (item 2.7 of the existing contract) and for the manufacture of carbon fiber furnace insulation materials.
It must be understood that in order for Consarc engineering to undertake the above the existing contract will either have to be canceled or amended to ensure that final commissioning and hand over will be with cold tests only. That is that no graphite susceptor for the nine induction furnaces will be fitted and that no metallic heaters, heat shields, retorts or gas control valves for the pressure differential system will be fitted to the isostatic presses. Such items have been refused an export license.
That the spares tabulated and to be supplied by Consarc are readily available in the open market and that such spare parts will not be, or be able to make those items now held at Hull dock and requiring an export license.
That the buyers recognize that the sellers are not able to complete the contract due to the actions of governments and that such actions are beyond the seller's control.
That the buyers and sellers agree that clause 10 provides the clause for cancellation of the contract.
That upon full agreement, points l to 4 above will be carried out by the sellers, a monetary value will be put on the equipment and documents already in Moscow, and a method of transferring such monies will be agreed upon.
That the full agreement as to the monetary value and methods of payment for items l to 4 be agreed upon by the buyers and the sellers.
That upon arriving at both the above agreed upon monetary values, the sellers will transfer all rights and titles to documents and equipment already in Moscow under this contract to the buyers. That the buyers release the sellers of all further obligations and risks with respect to such documentation and equipment.
Ivanov read the above Telex as the official position of the British Government. He refused to listen to my crazy statement that we could pass title of the equipment already delivered if he would sign an amendment to terminate the contract.
Please pass the following Telex to Metcalf who is staying at the International Hotel (Sovin Center)
Jimmy, we find it very hard to agree to say anything at this time. For example. Cancellation under clause 10 and clause 4 without speaking to the insurers. As you know, the buyer just needs to state that this is what is going to happen and it will happen. That is his right under the contract and there is nothing we can do about it.
For us to state that we agree may totally upset our insurers and put us in a position that by the end of the month, we are again in the shi...
All our contracts at such departments are not available at this time and will not be until well after your meeting at 11.00 hours.
I think you should take our earlier Telex tomorrow and say that we are again going to reply ASAP since we again must check out that we can legally say what they want us to say about clauses 10 and 4.
I am sorry for having to take this approach at this time, but you will know that there must be a good reason for this.
Best of luck and regards,
Ivanov sent Crawford a telex on 25 March 1985 asking for the return of the down payment of 1.2 million pounds with interest.
Vera and I departed Moscow on March 28, 1985 for a short stay in Germany before returning to Scotland. Things were moving too fast to allow me a rest, so I went back to Scotland. Vera remained in Munich to spend some time with her friend who also had emigrated from Moscow.
The embargo brought out the full guns from the Pentagon propaganda machine to fight the battle they just lost in Geneva. The press was fed the story of carbon-carbon and the fact that it made Soviet missiles more accurate by taking the wobble out.
Henry Rowan broke rule #1. Never give the press an interview until you know the facts.
Royce picked up this story from Air Force Magazine. Richard Perle leaked information that the US had stopped an export of equipment to make carbon nose cones to Russia three weeks before the embargo. Royce wrote "The Bombshell is a Dud" and it was published in Perle's home town in upstate NY as a put down. Royce used an old story about FMI sales in this article. No one at Consarc saw this print until late 1987.
The front page news of the Daily Telegraph was already on my desk when I arrived in Scotland. I went to my apartment Saturday night with a large bottle of Russian vodka to study my new set of problems. I had two things to study; one was the press and the other was a memorandum from Rowan about my pay. That night I coined two one-liners. "An oven can cook anything." "You are not a French chef just because you have a frying pan." Royce and the Congress used the first one-liner almost three years later as a statement that meant our furnaces were for cooking rocket parts.
I did not understand where some of the information published in the British press was originating. I was sure that Rowan did not say that we had sold furnaces critical to the manufacture of carbon-carbon. It is a newspaper trick to print a quote without quotation marks. Rowan had unwittingly given the press an admission that other press copied from the printed word. There remains to this day a mystery as to how the Telegraph obtained the information to support the Rowan denials because Rowan did not grant another interview. Perhaps Royce worked with the Telegraph.
SECURITY BAN ON DEAL WITH RUSSIA
CUSTOMS INTERVENE TO STOP CARGO
March 30, 1985.
By JOHN PETTY, Commercial Correspondent, and
DAVID SHEARS in Washington
Britain has succeeded in blocking, at the last moment, the shipment to Russia of sophisticated equipment used in making material for missile nose-cones, a senior American official disclosed yesterday. He said a Soviet ship was actually entering a British port to pick up the shipment when the Government intervened.
The US government knew very little about the details because their chief inspector from Project Exodus was at our Rancocas offices on March 29, 1985 asking a long list of questions which proved he was on a hunting mission.
The Scottish management arranged a press conference for Sunday morning. I had larger problems than the press. I needed the local management to approve one thousand dollars per day to be paid to the parent company for my services to complete the remaining and difficult task of closing the frustrated contract. It was certainly not the right time for the press to find out that I had a Russian wife and I had been doing business in the USSR for fourteen years supplying, much more important equipment than the press were fussing about now.
The Scots wanted no part of paying me to stay in Scotland because they did not agree with the way I was handling the situation. I was able to blackmail them and obtain their approval by threatening to meet with the press that day and tell the story of my Russian wife. They also approved a trip for me and Vera to visit some customers in the Swiss Alps until the press went away. This was my first meeting with the German carbon company named Segri. They were very interested in our plans to increase the density of Calcarb using CVD. This would lead to a request to make brake pads for the German Maglev train.
The Scots recorded and transcribed a long telephone conversation with Roberts on 1 April 1985. I did not read this until 1987 but saw where my efforts were being hindered.
The frustrated contract was out of the hands of the buyers and it appeared that it would become a major political scandal. The British government paid our insurance claim and then gave us the equipment. The Soviets would not believe that we had been paid by insurance and had rights to the property in Moscow to do with as we wished. The Americans had not passed laws to restrict this type of equipment. Thatcher was saying we could finish the contract.
The press went away after two days. I offered an interview to the Herald Tribune in Geneva, but they said the story was hype by the Pentagon and it was old.
I visited the USSR trade group in London on April 8,1985. The purpose was to
try to have them convince Ivanov to close the old contract so we could proceed with other contracts that would be approved by the government.
U.S. Customs delivered new regulations to Consarc's door on April 5, just after the press broke the stories. These regulations included any type of induction furnace operating above 2,000 degrees, not just the vacuum types in the British regulations. The new regulations opened the door wide open for me, because they took away my worry about pyrolytic graphite. The process I wanted to sell was at 1,200 degrees, and well within the limits of the new regulations. I informed Commerce and the DTI, and they told me pyrolytic was now OK and they were concerned about graphitization.
The Russians had the furnaces up and running for graphitizing and these were installed before the rules were changed.
Not a soul at Consarc wanted to know the facts because they wanted the insurance money.
I was still angry with the Scots and Roberts for not backing me up while it was possible to conclude the contract before the Russians hardened their position. When I found they had recorded my telephone conversations, I was even more angry with Roberts. He wanted me to rush home for a special board meeting, but I was not ready. My neighbor was a medical doctor. He saw that I was uptight, prescribed some whisky and confined me to quarters for two weeks.
The local management was beginning to read the governments position correctly. They had given us the property including the spare parts to do with as we saw fit. The Soviets could sue us under their law since we were truly in default. They could have long arms that would confiscate the money owed to Consarc USA by Metallurgimport. They also could refuse to pay the invoices when we shipped the two pending contracts. Cooke wanted legal opinion on this matter. At the end of the meeting council told Cooke that I knew more about Soviet commercial law than he did.
My rest did not require two full weeks. Six scrapbooks, which included the press and the key documents of the whole affair, were prepared. An accountant in Glasgow was asked to set up a company with BEPA as its name. The insurance money was in house and Roberts wanted it converted to dollars so the debt to the USA could be paid. I wanted to hold pounds, which were trading at 1 to 1.15 at the time. Rowan was holding pounds in his English operation. I suggested by Telex that our cash mountain be put on the agenda for discussion. I also decided to sell most of my stock before a dividend was paid.
The new managing director of Consarc Bellshill went with me on 14 April 1985 to attend a board meeting. I explained to the board that the Soviets were in the mood to settle without additional costs to Consarc but that time was of the essence. Everyone read the scrapbook with interest, but Mortimer said the whole thing was over his head because he was only an engineer.
The board recorded the following facts:
"It was agreed that the present status of this contract constitutes a loss situation for all the parties concerned. Consarc loses its reputation, the buying house in the USSR loses money, the ultimate customer has equipment he cannot use, and if the situation is allowed to deteriorate further Consarc, and Metcalf in particular, has lost a sales territory."
The Consarc Board approved the following resolution on April 15, 1985.
RESOLVED, that this Board will support closing of this contract in a manner that does not involve sending additional parts, technology or people to the USSR, and that protects the financial position of Consarc Engineering, and their direct Inductotherm Industries affiliates. Agreements associated with this closing require signature of the Corporate Secretary of Consarc Engineering.
Roberts had clipped my wings before giving me permission to fly. He refused to listen to any of my arguments because he had already decided that clause ten of the contract was the way out.
Special agents from the Customs office wanted to interview me. The managing director from Scotland sat in on the meeting. They repeated the questions they had already asked Roberts a few days earlier. The questions led me to believe that our government knew nothing about the details of the project. I cut the questioning short by offering them a visit to Scotland to see the actual equipment or to furnish them a complete copy of all the documents and drawings at our cost. They had no funds to expend and I told them we also did not want to waste money our government's money.
Before returning to Scotland I asked Joe Lona to use the lab furnace in a CVD mode using methane to increase the density of Calcarb. He was able to do this and provide me a sample before I returned to Scotland. I also asked him to send a sample to Dr. Froberg. I gave Froberg the information on the Maglev train brake pads.
We could not find a single department in the United Kingdom that would order us to stop the contract. Also we could not obtain a letter that told us it would be nice if we stopped. I still had the contract to with the right to sue and withhold funds from other contracts. I was sure that the US government would at least advise American citizens to stop the contract.
On 29 April I traveled to Washington to hire a top rated law firm. Lloyd Cutler was the first man I met. This firm had a good reputation in export law and was very expensive. The Consarc case was hot news in Commerce, so we were able to meet with staffers the next day. The firm assigned me a young lawyer named Andrew Vollmer. The group we met was a strange mix. Two of the three people appeared to be recent immigrants. Seevaratnam, the black Indian, was sure that technical data law covered everything that I was asking to do in Russia. Any technical data which was not published required a license. My example of teaching the Russians how to make Mamma's corn bread was included in his definition of restricted data if it was not published. The method of transfer did not matter it could by telling, showing or in written form.
When I said that seemed to violate my right of free speech. He replied that people were now in prison waiting for the Supreme Court to rule on the question of free speech. Nick Mandage thought I could finish the contract under a grandfather clause, but in this case he was not sure. They were very interested in the British newspaper accounts of the embargo because it was job-related news. My lawyer wrote several letters clearly stating that if allowed to proceed that I would put the embargoed equipment into operation.
Rowan visited Bellshill on May 9, 1985. He was with John Mortimer on other business in the United Kingdom. They were pleased with the operation. I told him we could sell the land for more than two million but was against selling land. Vera and Rowan got along well when the Scottish group took us to dinner in Glasgow. In his letter of 19 May 1985 he wrote: "I enjoyed meeting Vera. She was charming and it was nice to hear her views on the many subjects we discussed during dinner." The main thing they agreed on was Vera's view that real freedom was for those with money to afford it.
On 9 May 1985 we received an inquiry to quote the carbon parts for the embargoed Russian project.
I traveled to the USA on 13 May 1985 to talk Hensley into staying with Calcarb. He was fed up with the Calcarb situation and set up his own company in Knoxville to make furnaces for high strength fibers. His main customers were in Japan, where most of this production was taking place. The Calcarb files were loaded into a rental car on June 1, 1985 and moved to Rancocas. We maintained the local telephone number for some time so as not to lose customers. When the FBI was called on to look into this matter in 1986, they found only a post office box number.
I returned to Moscow on May 17, 1985 for one more attempt to close the contract, with the understanding that Washington was not going to permit American or American-owned firms to continue the project. In addition to the title to the property, Ivanov wanted the 1.2 million pound down payment returned and about one half million dollars in damages. The insurance company would not cover the damage claim but they would pay ninety-five percent of the 1.2 million if it was returned. Amendment number five to the contract provided that we return the down payment if the tests were not successful. I signed a counter check for the amount in Ivanov's presence. He did not think it was real until his financial people told him that the check was good.
Machinoimport completed the agreement to close the contract that included the half million damage clause. At the same time they had agreed to give Calcarb an order with enough profit to cover the five percent lost on the 1.2 million and the half million damages. That order was not ready when my visa ran out so I would not sign the agreement. They gave me two signed copies to take back to Scotland.
The Scots agreed to pay Ivanov about one hundred fifty thousand dollars in damages to get this matter behind them. I used white ink to revise the sum downward. It had already been revised in this manner in Moscow and both of our initials were near the revision. Wilson then signed the agreements. I sent one original and a Xerox copy to the buyers by express mail, with a note saying that was the best we could do and we would send the payment when they agreed by Telex.
Ivanov sent me a telex accusing me of breaking every international trade law in the book. I called Ivanov to tell him that I had found the way out of the problem. On the 17th of June 1985 I returned to Moscow with a plan. I also had a sample of Calcarb with increased density but no one to give it to. I asked Vera to contact Yuri and he introduced me to another Alex from Kiev. This Alex was able to guide me through the mine fields during this period. Later he would help me with the joint venture, Allcarb, in the Ukraine.
We could use the spare parts to settle his claim as long as no money changed hands. He did not completely understand but agreed to meet me the following week in Moscow. We almost reached an agreement that trip, but the paperwork system was moving too slowly and the end user was pushing for personnel in the field. I told Ivanov the only way to do that was to hire another firm and I just might arrange that. I showed him a letter from Vacuatherm in which he offered his services. He said he knew me but did not know Tom Dick.
A board of directors meeting was scheduled for the 3rd of July. I did not tell the board about my new plan and did not tell Rowan that the down payment had been returned because I was sure Commerce would give me a "no" answer, so we could really use clause ten. Vera had to have a minor operation as an outpatient so we stayed about ten days in the New Jersey area. Rowan was serious when he asked why we did not use the National Health of England rather than using our insurance company. The employees of Inductotherm companies pay for their dependents' health insurance. Vera thought the CIA interviewed her while she was recovering from the anesthesia. Actually, a doctor from India who spoke Russian did talk with her during her recovery.
The Scots wanted to get rid of me but they could not as long as the contract with the Soviets was open. No matter what Roberts thought about clause 10 the Soviet buyer was not going to cancel the contract as long as the British government would allow us to complete it.
I was sure that the US government would soon issue a ruling that would not allow American's finish the embargoed project. I wanted to continue to service the Soviet market because I saw some very promising possibilities under Gorbachev.
Rowan knew I was out of a job due to the embargo. He allowed me to set up a selling operation for his full range of products. Roberts was pleased, because he saw this as a way to cover my costs and make a lot of money.
FROM: Inductotherm Industries, Inc. July 10, 1985
TO: Minister of Foreign Trade
We are pleased to advise that James F Metcalf has been assigned to introduce some of the products made by our group of companies to the Soviet Union on the assumption that there may be interest in some of these products. In many cases Inductotherm companies have become world leaders in the technology that they cover. The companies involved and the products which may be of interest are shown on the attached list.
We will be happy to supply brochures and information on these products as needed
Very truly yours
H. M. Rowan, President
Rowan asked me to attempt to sell items that would not cause so much fuss. Improving the foundry industry using Inductotherm furnaces would improve the Soviets' basic infrastructure and be more important than any furnace I had sold. It would not be on the control lists and therefore acceptable. Rowan was to learn later that shipping items to Iraq could cause the same fuss.
I was in Scotland in a meeting with the management to plot our next course of action when the letter from Commerce was delivered to me. I read the letter with surprise but did not inform the Scots of its contents. The way was now clear I would use my own company to finish the project and set up a sales office in Moscow with headquarters in London. Vera would be pleased and I would have an easier life with my Russian wife.
United States Department of Commerce
July 8, 1985
Andrew N. Vollmer, Esquire
Wilner, Cutler and Pickering
Dear Mr. Vollmer:
This letter is in response to your request for advise concerning the applicability of the Export Administration Regulations (ERA) to a technical visit to the USSR of your client, James F. Metcalf. In your letter you stated that Mr. Metcalf, a U. S. citizen in the employ of Consarc Corporation and currently working with its subsidiary Consarc Engineering in the U. K., intends to assist the USSR importer in the assembly and testing of nine induction furnaces and an isostatic press, which were sold by Consarc Engineering. We understand that Mr. Metcalf would supervise the assembly, installation and testing of these items. In this function you confirm that Mr. Metcalf will not instruct or teach the Soviets in the installation, operation or use of the referenced equipment.
In light of the information provided we can advise you that Mr. Metcalf's visit may be carried out under General License GTDR in conformance with Section 379.4 (b) (iv) of the ERA. No formal application to the department of Commerce is required for the use of this General License.
Should you need further assistance or clarification please free to contact me. I can be reached at 377-5695.
Henry D. Mitnan
In the cover letter my lawyer noted that the result was "contrary to our hope and expectation." He noted that the teaching reference came from our final letter that stated that I would not formally teach the Soviets. He also concluded that this answer should not concern me because we had reached a satisfactory commercial conclusion. That was true if the answer was no, but the answer was yes. I did not call the lawyer before acting. The letter clearly set forth my legal position as for as American law was concerned.
FMI obtained an order during this time for equipment to process carbon-carbon from a company in India for their Scottish subsidiary. In the normal scheme of trade Britain would have issued a license for this export. The CoCom agreement tied the hands of the Department of Trade in London and they would sit on the application for a long time before deciding not to allow the sale.
FMI was not an equipment builder but had put together their own equipment to process carbon-carbon for rocket nose cones for several years. They had also sold equipment and technology to France, Japan and Taiwan in previous years. They were the only producers of this product for the Pentagon. Consarc had no technology and had never built this type of equipment before.
This chapter will cover my actions to close the complex contract by sticking my neck out.