Consulting firm McKinsey & Co. advised state-owned Russian defense firm Rostec that supplies Putin’s military
Russia has fired more than 2,000 missiles on Ukraine since invading in February. The engines for many…
Russia has fired more than 2,000 missiles on Ukraine since invading in February. The engines for many of these missiles were manufactured by a massive state-owned enterprise called Rostec, and executives for that company hired the global consulting giant McKinsey & Co. in recent years for advice.
At the same time McKinsey was advising the Russian defense conglomerate, though not on any work directly involving weapons, the firm was carrying out sensitive national security contracts for the Defense Department and the U.S. intelligence community, according to an NBC News investigation.
McKinsey has come under scrutiny in Congress for its work with state-owned companies in China, with lawmakers questioning if the company should be awarded national security-related contracts given its extensive presence in China. McKinsey also faces accusations of ignoring possible conflicts of interest when it advised both opioid manufacturers and officials regulating opioids at the U.S. Food and Drug Administration.
By carrying out consulting work with a company like Rostec, McKinsey placed itself in a potentially risky position, given its work with the U.S. government, according to Scott Blacklin, a former head of the U.S. Chamber of Commerce in Russia and president of the consultancy Blacklin and Associates.
“It’s really hard to understand how an American consulting firm … would want to be involved in sensitive areas of the Russian defense or intelligence or scientific establishment. And when you talk about Rostec, you’re talking about all of those mixtures,” Blacklin said.
Sen. Maggie Hassan, D-N.H., told NBC News that McKinsey has displayed a “pattern of behavior” in its consulting abroad and in Washington that raised “grave concerns about conflicts of interest.”
“Whether it be the substance misuse crisis or work for state-owned enterprises in places like Russia and China, I am deeply concerned by McKinsey’s choices and by the fact that the U.S. government continues to contract with McKinsey despite those potential conflicts,” the senator said.
But the company, which has its headquarters in New York, says it does not see its recent work in Russia as posing a conflict with its consulting for the Pentagon and other federal agencies. When asked by NBC News, a company spokesperson, Neil Grace, said McKinsey has strict rules and firewalls to safeguard against conflicts of interest, and that its work abroad is walled off from its work in Washington.
“As we have stated previously, McKinsey complies with all applicable U.S. contracting laws, including those regarding conflicts of interest,” Grace said. “When we serve the U.S. government, we do so through a separate legal entity with separate operational structures and separate information technology where required.”
As for McKinsey’s consulting for Rostec, Grace said, “Our past work for Rostec subsidiaries did not concern weapons systems. This work concerned core commercial and operational topics of the sort that we routinely advise our clients on all over the world.”
“For example, our work for one subsidiary concerned buses used in public transit systems,” said Grace. “It would not be fair or accurate to describe this work as benefiting the Russian military.”
McKinsey also provided research on the global helicopter market and advice on a project related to an engine for commercial aircraft, he said.
To examine McKinsey’s potential conflicts of interest, NBC News reviewed federal contracting documents, court filings, statements from the company and Russian media reports, and interviewed experts, lawmakers and former officials.
Federal laws require companies to divulge any potential conflict of interest and to show how they plan to address the possible conflict. In four federal contracts obtained by NBC News, for the Defense Department, the Navy and Customs and Border Protection, McKinsey did not note any potential conflict of interest due to its work with state-owned enterprises in Russia.
U.S. authorities have not charged McKinsey with violating federal contracting laws related to its work in Russia or China, and there are no allegations that McKinsey has damaged U.S. national security due to its work with governments hostile to the United States.
In its opioid-related work, McKinsey faces accusations that its employees may have shared inside information gleaned from FDA regulators with drug companies. McKinsey denies those claims and denies any wrongdoing.
In the case of its consulting in Russia and in Washington, it’s unclear if McKinsey staff shared information across accounts and there’s no evidence that happened.
About a week after Russia launched its invasion of Ukraine on Feb. 24, McKinsey and the other two consulting firms that make up the so-called Big Three in the industry, Bain and the Boston Consulting Group (BCG), said they were pulling out of Russia and suspending business operations. But McKinsey and the other two consulting firms chose not to withdraw in 2014, when Russian forces invaded Ukraine and seized Crimea. The international reaction at the time was not as severe, and there was no corporate exodus.
McKinsey had promoted its work with 21 of the country’s 30 biggest companies. And according to a 2020 bankruptcy court filing and documents filed this week in Puerto Rico’s bankruptcy proceedings, the firm did consulting work for Russia’s largest bank, SberBank, VTB bank and state energy companies Gazprom and Rosneft, all of which are closely tied to the Kremlin. (The value and duration of McKinsey’s consulting work for those firms have not been disclosed.)
McKinsey is not the only management consulting or accounting firm to have worked with state-owned enterprises and other major companies in Russia.
But the firm’s work with one of Russia’s most powerful and politically connected players in Russia’s defense industry appears to set the firm apart.
Rostec is a massive defense conglomerate that dominates Russia’s military-industrial complex. It oversees hundreds of companies and makes an array of weaponry and military hardware. The company’s subsidiaries produce military attack helicopters now operating in Ukraine, engines for both lethal cruise missiles now raining down on Ukraine and Russian naval frigates, as well as electronic warfare systems and night vision goggles.
In the aftermath of Russia’s seizure and annexation of Ukraine’s Crimean Peninsula in 2014, the company’s subsidiaries have sought to build energy plants in Crimea and take over defense manufacturers to cement the region’s ties to Russia, according to the British government. McKinsey’s links to Rostec date to at least 2010, according to several reports in Russian media. In 2015, they were hired to implement “large-scale reform” at Russian Helicopters, a Rostec subsidiary that manufactures a range of civilian and military helicopters.
The CEO of Rostec is Sergei Chemezov, a staunch supporter of Russian President Vladimir Putin who served as a KGB officer with him in Dresden during the Soviet era. Spain recently seized a $153 million superyacht that was linked to Chemezov, Reuters reported.
Rostec has “unlimited state money and the ability to capture anything it wants in the Russian landscape,” said Blacklin. “It’s kind of like if the Pentagon and the CIA decided to tie up with Raytheon and Lockheed and Cisco Systems.”
Rostec did not respond to a request for comment.
State-owned companies in Russia are under tight control by the Kremlin and are routinely plundered by government officials, according to Bill Browder, an outspoken critic of Putin who once ran the largest foreign investment fund in Russia.
As one of the world’s leading consultant firms, McKinsey’s work with state-owned enterprises helps lend the Russian firms an air of legitimacy, said Browder, who now heads the Global Magnitsky Justice Campaign and has written a new book, “Freezing Order: A True Story of Money Laundering, Murder, and Surviving Vladimir Putin’s Wrath.”
“McKinsey puts an enormous stamp of approval on everything. It’s like the most sort of revered blue-chip firm around. If they’re willing to work with somebody than anyone else can say, ‘Look, McKinsey is there — how can we have any questions about that company?’” he added.
McKinsey came in for criticism last year from some U.S. lawmakers when The Moscow Times obtained a company email telling employees in the Moscow office not to take part in demonstrations supporting opposition leader Alexei Navalny.
Republican Sen. Marco Rubio of Florida expressed “dismay and disbelief” over the incident and said it raised fresh questions about McKinsey’s consulting work with the federal government.
“With every new report of McKinsey & Company’s work with authoritarian regimes, I grow increasingly concerned about its work on behalf of the U.S. Government,” Rubio wrote in a letter to the firm.
The managing partner at McKinsey’s Moscow office wrote to staff the next day clarifying the earlier memo, saying it had incorrectly reflected company policy.
“McKinsey employees are free, in their personal capacity, to exercise their freedom of expression, including taking part in civic and political activities. This applies in Russia as it does to all countries where we operate,” the company wrote in a letter to the Financial Times.
McKinsey’s Pentagon contracts
McKinsey does consulting work for a range of federal agencies, but the Defense Department is the firm’s top federal client, providing McKinsey with nearly $875 million worth of work since 2008. Over the past 14 years, the firm has worked on more than 60 contracts for different branches of the armed services and agencies within the department, according to the federal government website USA spending.gov.
The company has provided advice to senior officials and commanders on the Defense Department’s IT network, the F-35 fighter jet program and weapons budgets. In March, the Army awarded McKinsey a $16 million contract to evaluate the country’s ammunition industrial base and possible risks associated with its international supply chain.
When contacted by NBC News, the Army said McKinsey did not flag any potential conflict of interest.
“At this time, the Army is not aware of any acknowledgement by this company of a possible conflict of interest. The Army followed all applicable contracting laws, policies and procedures,” said Army spokesperson Lt. Col. Brandon Kelley.
During the Obama administration, McKinsey advised the CIA on a sweeping reorganization of the agency. After the 9/11 attacks, McKinsey advised the FBI on building its intelligence-gathering ability.
Information about McKinsey’s consulting work with the intelligence community is not publicly available, as details about the U.S. intelligence budget remain classified. A former senior U.S. intelligence official told NBC News that McKinsey continues to carry out consulting work for the country’s intelligence agencies.
In China, McKinsey has advised a number of powerful state-owned enterprises that are linked to Beijing’s efforts to bolster the country’s naval network and to assert its control over disputed territory in the South China Sea. Some of McKinsey’s clients were blacklisted in 2019 and 2020 by the U.S. government as actively undermining U.S. national security interests.
One of the blacklisted firms, the China Communications Construction Company (CCCC), and its subsidiaries built a network of artificial islands in the South China Sea, U.S. authorities say. Washington and its allies say the island-building project was aimed at intimidating neighboring countries that have competing claims in the waterway. The Defense Department last year placed CCCC on a list of companies deemed to have ties to the Chinese military.
Citing McKinsey’s work for firms involved in China’s military-industrial complex, Rubio has argued that the Pentagon and other federal agencies should stop hiring the consulting company.
“At this point, no one should be surprised by McKinsey’s relationships. Whether it is with Russia, China, or some unethical foreign firm, McKinsey is constantly working against American interests to make a profit,” Rubio said in an email to NBC News.
Rep. Carolyn Maloney, D-N.Y., chair of the House Oversight Committee, which is investigating McKinsey’s role in the opioid crisis, called for “a full picture of McKinsey’s conflicts stemming from its expansive work for the U.S. government so we can ensure the health and safety of the American people and protect our national security.”
Apart from its work in Russia and China, McKinsey has faced criticism and legal challenges over alleged conflicts of interest in other consulting work.
This month, the Food and Drug Administration said it will not issue any consulting new contracts to McKinsey pending investigations into its work for opioid manufacturers and federal drug regulators. McKinsey has denied any wrongdoing in its consulting for the FDA and pharmaceutical companies.
The company last year agreed to pay $573 million to settle allegations from 49 states that its work for opioid manufacturers helped “turbocharge” sales of the drugs, contributing to a deadly addiction epidemic. At the same time the firm was working for the pharmaceutical companies, McKinsey was advising the Food and Drug Administration on its prescription drug policy, according to court documents.
McKinsey has been sued and investigated by federal authorities over allegedly violating bankruptcy laws that require advisers to be disinterested advocates for clients and to disclose all relationships that might give rise to a conflict of interest.
In 2019, McKinsey paid $15 million to settle an inquiry by a unit of the Justice Department into whether it breached disclosure rules designed to prevent conflicts of interest in corporate bankruptcies. The firm did not admit to any wrongdoing.
In 2020, McKinsey agreed to forfeit millions of dollars in fees for advising Westmoreland Coal Co. in its bankruptcy, as part of a deal with federal officials probing Westmoreland’s compliance with bankruptcy laws.
An unregulated industry
With 36,000 employees operating around the world, McKinsey has built up a vast consulting business over decades and has helped influence how major corporations and federal agencies operate.
The company’s business model relies on secrecy, or what McKinsey refers to as confidentiality, according to Duff McDonald, author of a 2013 book on McKinsey, “The Firm: The Story of McKinsey and its Secret Influence on American Business.”
As a rule, McKinsey prefers not to disclose who its clients are or the nature of its consultant work. When its advice proves successful, the client claims the credit, and when things go badly, McKinsey suffers no blame, McDonald said.
McKinsey’s approach is not unique among management consultancies, and conflicts of interest are rife in an industry that is shrouded in secrecy and virtually unregulated in the United States and other countries, experts say.
Consultant firms often argue the market serves as a safeguard against abuses, promoting best practices and weeding out unethical actors. But Andrew Sturdy, professor of management at the University of Bristol in Britain, says the track record of the management consultancy industry suggests otherwise.
“If you take at least those situations where there’s extreme conflicts of interests, and large amounts of money at stake, there are undue pressures on people to bend the rules,” Sturdy said. “The lack of regulation, lack of transparency and the reward structures … put those firewalls and professionalism under pressure.”