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"The Arms Control Association’s work is an important resource to legislators and policymakers when contemplating a new policy direction or decision."

– General John Shalikashvili
former Chairman of the Joint Chiefs of Staff
Russia

U.S., Russia Sign 'Nuclear Cities' Agreement

Secretary of Energy Bill Richardson and Russian Minister of Atomic Energy Yevgeny Adamov signed an agreement September 22 to create commercial enterprises that will provide peaceful employment for displaced weapons scientists and technicians in Russia's 10 closed "nuclear cities." Unlike past efforts to provide employment opportunities for Russian weapons workers, through the International Science and Technology Center in Moscow and the Department of Energy's Initiatives for Proliferation Prevention program, the new program, called the Nuclear Cities Initiative, will focus exclusively on the closed nuclear cities. In fiscal year 1999, DOE expects to spend a total of $30 million to support activities in these cities. The agreement responds to growing U.S. concerns that former Soviet weapons scientists may be tempted to sell their expertise abroad due to deteriorating economic conditions at home.

U.S. and Soviet/Russian Strategic Nuclear Forces

START I was signed July 31, 1991, and entered into force on December 5, 1994. Under the treaty, the five parties—the United States, Russia, Belarus, Kazakhstan and Ukraine—semi-annually exchange memorandum of understanding (MOU) data providing numbers, types and locations of accountable strategic nuclear weapons. The tables below compare the number of START-accountable deployed warheads declared in the initial September 1990 MOU with data from the July 1998 MOU, demonstrating the progress the parties have made in nuclear force reduction thus far.

 


U.S. Strategic Forces:

Warheads by Delivery System1

  September

1990

July

1998

ICBMs    
MX 500 500
Minuteman III 1,500 1,950
Minuteman II 450 1
Total 2,450 2,451
SLBMs    
Poseidon (C-3) 1,920 320
Trident I (C-4) 3,072 1,536
Trident II (D-5) 768 1,920
Total 5,760 3,776
Bombers    
B-52 (ALCM) 1,968 1,596
B-52 (Non-ALCM) 290 48
B-1 95 91
B-2 0 20
Total 2,353 1,755
Total Warheads 10,563 7,982

Soviet/Russian Strategic Forces:

Warheads by Delivery System1

  September

19902

July

19983

ICBMs    
SS-11 326 0
SS-13 40 0
SS-17 188 0
SS-18 3,080 1,800
SS-19 1,800 1,008
SS-24 (silo) 560 100
SS-24 (rail) 330 360
SS-25 288 360
SS-27 (silo)4 2
SS-27 (road)4 0
Total 6,612 3,630
SLBMs    
SS-N-6 192 16
SS-N-8 280 192
SS-N-17 12 0
SS-N-18 672 624
SS-N-20 1,200 1,200
SS-N-23 448 448
Total 2,804 2,480
Bombers    
Bear (ALCM) 672 512
Bear (Non-ALCM) 63 4
Blackjack 120 48
Total 855 564
Total Warheads 10,271 6,674

Strategic Forces on Non-Russian Territory1

  Belarus Kazakhstan Ukraine
ICBMs 0 0 54 (SS-19)

460 (SS-24)

SLBMs 0 0 0
Bombers 0 0 200 (Bear)

152 (Blackjack)

Total 0 0 866

NOTES

1. Warhead attributions are based on START I counting rules. This results in bombers having fewer warheads attributed to them than they actually carry. On the other hand, even though all nuclear warheads from Ukraine have been removed to Russia, they remain START-accountable until the delivery systems have been destroyed. [Back to Table 1 , 2 or 3]

2. Includes weapons in Belarus, Kazakhstan, Russia and Ukraine. [Back to Table]

3. Weapons in Russia only. [Back to Table]

4. Also known as the TOPOL-M or RS-12M Variant 2 ICBM. [Back to Table]

Sources: START I Memorandum of Understanding, July 1, 1998; ACA.

 

Privatizing U.S. National Security: The U.S.-Russian HEU Deal At Risk

Just before their end of summit press conference on September 2, Russian President Boris Yeltsin informed President Bill Clinton that he was going to announce the end of the historic "HEU deal" signed by the two countries in 1993. Under this unprecedented government-to-government agreement, the United States agreed to purchase, over a 20 year period, 500 metric tons of highly enriched uranium (HEU) from dismantled Soviet weapons that Russia would "blend down" to low-enriched uranium (LEU) for sale to the United States as fuel for civilian nuclear reactors. The deal—worth an estimated $12 billion to Moscow—would guarantee that the Russian HEU, enough to build more than 20,000 nuclear weapons, would never again be used for weapons purposes.

The HEU deal, initiated by President George Bush and signed by President Clinton in February 1993, arose from a proposal to U.S. and Russian officials in October 1991 (only weeks before the dissolution of the Soviet Union)< 1 > and subsequently became the centerpiece of U.S. efforts to address what is arguably the most extreme proliferation threat since the beginning of the nuclear age: the possibility that nuclear weapons, the fissile material from them, or the technical skills necessary to make them would be diverted from the rapidly decaying Soviet military industrial complex to rogue states, terrorist groups or countries with nuclear ambitions. To date, Russia has shipped LEU made from about 50 tons of HEU (10 percent of the total)—the equivalent of about 2,000 nuclear weapons.

Because Russia's closed "nuclear cities" that are responsible for making nuclear weapons are unavoidably involved in the destruction of these weapons and the purification and blending down of HEU, the U.S.-Russian deal ensures that money flows to precisely those places and people that present the largest proliferation threat to the world. The need to verify that the LEU that Russia sells under the deal truly comes from HEU has given the United States the opportunity not just to monitor the destruction of Russian weapons-usable fissile material, the so called transparency process, but also to assist Moscow in improving fissile material protection, control and accounting systems that further protect inventories of these materials. In addition, U.S. national laboratories have developed active relationships with an increasing number of Russian "nuclear cities," an engagement that builds peaceful relationships with the most capable of Cold War adversaries and the most dangerous potential contributors to global nuclear weapons proliferation. These otherwise intrusive measures—and new initiatives on plutonium and closed cities—are possible largely because of the more than one half billion dollars per year Russia gains from the HEU deal.

In short, the HEU deal benefits Russia, the United States and international security. Why then did Yeltsin threaten to end the deal? The answer lies in recurrent failures on the part of both governments to implement the deal. While this failure is due in part to Russian bumbling and commercial incompetence, it is the United States that has created the real impediments to success. Despite warnings and opportunities to intervene, Washington has consistently put domestic commercial and financial interests, most notably those involved in the recent privatization of the U.S. Enrichment Corporation (USEC), ahead of U.S. national security interests. If the deal is to be repaired, the United States must reassume the responsibility it has abdicated. If decisive action is not taken, shipments will end, perhaps permanently.

 

An Unusual Deal

The basic terms of the HEU deal are outlined in an agreement signed by the United States and Russia on February 18, 1993. However, the HEU deal is unusual in that it calls for the parties to carry out their obligations through commercial mechanisms. Under the agreement, each government was to appoint an "executive agent" that would carry out commercial implementation of the deal through contracts for the purchase and sale of the Russian LEU.

Russia assigned implementation to its Ministry of Atomic Energy (MINATOM), which would utilize its experienced government trade organization AO Techsnabexport (TENEX). In a fateful move, the United States, which initially made the Department of Energy (DOE) its executive agent, committed to make USEC—a newly created, government-owned corporation—its ultimate executive agent. Created by the Energy Policy Act of 1992 and slated for eventual sale to private investors, USEC was the result of a 20 year effort to make the government's uranium enrichment operations more "business-like."

Unfortunately, actions taken by U.S. government officials—some of whom later joined USEC—to assure the corporation profitability and increase its value at privatization have systematically worked against the HEU deal. National security officials, skilled in negotiating agreements and wielding U.S. power in conventional ways, have either failed in their oversight of the commercial implementation at home, been misled, or simply been outvoted in the administration.

While some administration officials now take the position that the United States has no financial responsibility for the HEU deal, and that Russia must simply take what it can get, the 1993 agreement is quite clear that the ultimate responsibility belongs to the governments. The agreement specifies that the "[commercial] terms (including price), shall be subject to approval by the Parties." The United States committed to "use the LEU converted from HEU in such a manner as to minimize disruptions in the market and maximize the overall economic benefit for both Parties." Such provisions show the responsibility of both governments to manage carefully the commercial implementation of the HEU deal. From the Russian perspective, the United States has failed to do so.

The Uranium Problem

While the United States is committed under the government to government agreement to purchase LEU from Russian HEU and the initial contract was for the purchase of LEU, that is not how things have turned out. The Russian LEU contains two inputs of value: the natural uranium (as uranium hexafluoride, or UF6) and the "enrichment" services (measured in separative work units, or SWUs). (See sidebar.)

The current problem is that Russia is not being paid for the uranium component, which is a state asset of the Russian government, like gold. The enrichment component is being purchased by USEC, with that money going to MINATOM. Because it is not possible to ship a SWU (except as an input of enriched uranium) and because Russian law prohibits export of state assets without a contract for sale and payment within 180 days, LEU derived from HEU cannot be exported from Russia without a uranium sales agreement. Thus, the whole HEU deal rests on finding a workable solution to the uranium problem.

The uranium problem has been present from the beginning of the deal. Following the intergovernmental agreement, an implementing contract for the HEU deal was negotiated with MINATOM and TENEX by DOE Deputy Assistant Secretary Philip Sewell in May 1993. That contract called for DOE to purchase Russian LEU but to pay immediately only for the enrichment component. The uranium component (actually, an equivalent amount of feedstock material that USEC customers had previously delivered for enrichment) was to be paid for when USEC "used or sold" the uranium equivalent or at the conclusion of the deal, which might be as late as 2013. At the time the contract was negotiated, it was expected that USEC would be assigned the contract after the company came into existence in July 1993. Indeed, Sewell left government for USEC several months later and the final contract was signed by USEC and TENEX at the January 1994 Moscow summit.

This defective LEU purchase contract, which Russia contends did not carry out the intent of the 1993 agreement, was designed more to benefit the commercial interests of USEC than to implement the intergovernmental agreement. USEC would get control of the uranium component of Russia's LEU without having to pay for it until the company wanted to. Of course, USEC would not be able to resell the accumulating inventory of displaced feedstock for some years because of trade restrictions on the sale in the United States of Russian uranium. USEC could have used the uranium for a process called "overfeeding," that is, using more uranium in the enrichment process to reduce consumption of electricity. DOE had been overfeeding the two gaseous diffusion plants it owned for years, a practice that was assumed to continue when the HEU deal was proposed. However, subsidies provided to USEC (in particular, DOE's below-market-value electricity contracts) eliminated incentives to overfeed and it soon became apparent that Russia would not get paid for its uranium anytime soon.

Thus, even from the beginning, the United States did not act to ensure payment to Russia for the uranium component of the LEU, which was estimated to be worth up to $4 billion over the course of the agreement. But USEC supporters were too clever by half: the corporation would, two decades hence, have to pay for the Russian uranium it held title to under the contract, a major liability that would interfere with the ultimate privatization of the corporation.

The uranium problem was addressed, but not fully solved, by the USEC Privatization Act, which Congress passed and President Clinton signed into law on April 26, 1996.< 2 > The legislation called for the United States to purchase the uranium component of the Russian LEU delivered in 1995 and 1996 and, overriding the defective LEU purchase contract, returned title to the uranium content (rather, the displaced uranium set aside by USEC) to Russia for it to sell on its own beginning January 1, 1997. To facilitate Russian uranium sales, the legislation overrode trade restrictions imposed on Russia in 1992 (as a result of an anti dumping action against uranium exporters from the former Soviet Union) by creating a new and gradually expanding quota for Russian sales of uranium to the United States.

By returning title of the displaced uranium to Russia, USEC was relieved of a $4 billion liability on its books, but Russia was left with a substantial amount of uranium to sell. When annual Russian LEU shipments to the United States are scheduled to reach 30 metric tons HEU equivalent in 1999, the uranium component will reach 9,000 metric tons (23.4 million pounds U3O8) annually. By comparison, the United States consumes about 17,000 tons of uranium each year, while other Western nations together consume about 36,000 tons.

Moscow will face serious obstacles to selling such large amounts of uranium in the current market. Both the United States and the European Community impose restrictions on the amount of Russian uranium that can be sold, and Japan is reluctant to buy Russian uranium because of ongoing territorial disputes with Moscow. In addition, because most utilities purchase uranium under long term contracts that cover requirements for several years forward, there is little near term market for new sales of any kind of uranium. Thus, Russia will not be able to sell its uranium directly to utility end users, but only to companies that are willing to purchase the uranium and hold it for future sales when market demand and trade restrictions allow.

On June 2, 1998, Russia reached a preliminary agreement with a consortium of three Western uranium companies (CAMECO of Canada, COGEMA of France and NUKEM of Germany) to purchase its uranium at USEC for a 10 year period, including the 11,000 tons remaining from LEU deliveries to USEC in 1997 and 1998. Under the preliminary agreement, Russia would receive payment promptly when the uranium contained in the LEU delivered to the United States was returned to Russian control at USEC. The companies offered to pay the going market price, less a profit margin when prices rose above $29 per kilogram of uranium (as UF6).

For this deal to make commercial sense, the price of uranium would have to be expected to increase at a rate at least as great as the interest rate used to finance the purchase and holding of the uranium. Based on their own market analyses, the companies clearly believed that uranium prices would rise, particularly if the sale of the Russian uranium was handled responsibly, and that they would not have to hold the Russian uranium for more than a few years. After an extensive review, the Russian government approved the draft agreement by issuing a formal decree. In its own effort to be clever and put pressure on the companies to pay a minimum price in a final contract, MINATOM asked that the decree establish $29 per kilogram of uranium as the minimal acceptable price.

 

USEC Privatization

Unfortunately, just as Russia was approving its agreement with the uranium companies, the United States was completing its plans for USEC's privatization. Unbeknownst to all but those directly involved, USEC had convinced mid-level DOE and Office of Management and Budget (OMB) officials to transfer large amounts of DOE inventories of uranium to USEC to increase the company's value. The existence of this uranium was not generally known until May, when merger and acquisition bidders involved in USEC's privatization tried to find buyers for the uranium as part of their plans to finance the company's acquisition.

On May 20, the author alerted national security officials at the State Department and the National Security Council to the uranium transfers, and the potential negative implications for the HEU deal of USEC sales of uranium in competition with Russia. National security officials subsequently met with DOE and Treasury Department officials to discuss the implications of possible USEC uranium sales for the HEU deal. However, Treasury and White House officials pushing USEC privatization overruled any actions. The reasons given ranged from the parochial to the absurd: nothing could be done that might threaten the privatization, and government officials were forbidden to discuss any matters concerning USEC (even among themselves) during the "quiet period" mandated by the Securities and Exchange Commission (SEC). The latter turned out to be a fabrication—SEC rules apply only to company management's public disclosures and only after a securities offering is filed with the SEC. Neither was the case.

On June 26, Senator Pete Domenici (R-NM), who co authored the USEC Privatization Act, wrote to national security advisor Samuel Berger (with a copy to Secretary of the Treasury Robert Rubin) stating his concern that "sale of [the USEC uranium inventory] would negatively impact the sale of HEU Agreement derived natural uranium and could significantly reduce the Russian Federation's incentive to continue the [HEU] Agreement." Domenici concluded: "I have worked for over a decade to privatize the USEC. But if circumstances are different than what we have assumed, you need to take those new circumstances into account before a decision to privatize is made." Three days later, the Treasury Department proceeded to file the prospectus for the sale of USEC with the SEC, starting the countdown to the sale of USEC shares to private investors.< 3 > Domenici never received an answer to his letter.

If the president's highest national security advisor could, or would, do nothing, Secretary Rubin should have been in a position to weigh the foreign policy implications of USEC privatization against the domestic forces promoting privatization. But on June 24, Rubin delegated to the undersecretary for domestic finance the necessary authority for all matters relating to the privatization of USEC.< 4 > Whatever Rubin's reasons, he delegated the decision-making authority to the government's leading cheerleader for USEC privatization, a move that had the full support of more than 60 Wall Street investment firms set to profit from the sale of USEC.

The June 29 SEC filing confirmed not only the huge size of USEC's uranium stockpile, but also the fact that USEC was stockpiling additional uranium at one of the plants it was leasing from DOE by a process called "underfeeding."< 5 > To make matters worse, the SEC filing committed USEC to sell more than 60 million pounds of uranium on an accelerated schedule, before July 2005. A subsequent leak of an internal USEC planning document revealed plans to sell nearly 90 million pounds in this period, reaching a peak level of more than 22 million pounds in 2002.< 6 > If USEC and its administration supporters had intended to sabotage Russia's pending agreement with the three uranium companies, they could not have done more. USEC's planned sales totally changed the economics of any commercial deal to buy and hold Russian uranium. Not only would the holding time, and thus holding costs, increase, but the ultimate price received would be lower because of the additional supply to the market.

Perhaps coincidentally, DOE, under pressure from OMB (which strongly supported USEC privatization and DOE uranium transfers to the company), advanced a proposal in May to sell about 30 million pounds of its uranium inventories (in addition to that already transferred to USEC) between 1998 and 2003. New projections of uranium prices by industry analysts and the independent Energy Information Administration soon showed reductions of up to 40 percent in future uranium prices.< 7 > Not surprisingly, in the face of USEC plans and DOE uncertainties, the three Western companies re evaluated the draft agreement and informed Russian authorities it would have to be revised.

As USEC's privatization moved forward, Russia also made clear its serious reservations about the future of the HEU deal. On July 17, Russian Minister of Atomic Energy Yevgeniy Adamov wrote a letter to Domenici, who had visited Moscow in early July and discussed the deal with Russian officials. Adamov wrote:

 

We are not sure that after actual privatization USEC as a private company will be able to fulfill its commitments of the U.S. executive agent under this Agreement and ensure further acceptance and full payment for the low enriched uranium supplied…. We think that this constitutes deviation of the U.S. Party from the implementation of agreed provisions of the Agreement and affect its fulfillment. In such situation Russia will bear significant financial losses and this will result in strengthening the negative reaction of the Russian legislators both with respect to the implementation of this Agreement and other arrangements with the USA on the issues of nuclear arms control.

Adamov was undoubtedly referring to the opposition in the Russia Duma (the lower house of parliament) to the ratification of START II, to intrusive transparency and security measures, and pending legislation to end the HEU deal itself. Adamov's warning, which foreshadowed Yeltsin's threat to end the deal at the upcoming Moscow summit, should have made the dangers clear to the United States.

Additional interagency meetings on the HEU deal broke down because OMB officials insisted that President Clinton had approved a go ahead on privatization on July 25, 1997, and had not altered this order. In fact, Clinton reportedly had read a press article questioning privatization and forwarded it to his advisors, asking: "Are we sure we are doing the right thing?" Despite U.S. officials' prior knowledge of the impending problem and sober warnings from responsible Russian officials, the privatization juggernaut plowed on, raising questions about the source of the pressure to proceed at any cost, including U.S. national security interests. On July 28, USEC became a private company.

 

The Current Situation

At the Moscow summit, Clinton managed to dissuade Yeltsin from withdrawing from the HEU deal by assuring him that the United States would find a solution to the problems. Adamov and Energy Secretary Bill Richardson were appointed to coordinate the effort. However, Richardson was soon handicapped by differences within the administration about how to deal with the uranium feed issue. For a long time, White House officials steadfastly refused to consider a U.S. purchase of any part of the uranium feed component, arguing that Moscow must recognize that market circumstances had changed (even if the United States changed them) and therefore must settle for much less money from commercial buyers. In effect, these officials contended that the United States had no responsibility under the government-to-government agreement, and that Russia was on its own in the commercial implementation of the HEU deal.

This position arises from a fundamentally flawed assumption about the HEU deal. When it was first proposed, it was thought that the HEU deal would be "budget-neutral." At that time, it was the U.S. government, through DOE, that was to purchase the Russian LEU. DOE would then resell the LEU without requiring an appropriation by a Congress that was trying to balance the U.S. federal budget. It was thus politically and budgetarily necessary to assert that DOE would incur no costs when it entered into the contract. In fact, under government accounting rules for the enrichment enterprise, the HEU deal would not only be budget-neutral, but "profitable." The price the United States would pay for the uranium content of the Russian LEU would be recovered by reduced costs (according to government accounting rules at least) from overfeeding the enrichment plants, and the price paid for the SWUs would be far below the full-cost recovery values attributed to operation of the enrichment plants.

In privatizing the U.S. enrichment enterprise and transferring large amounts of uranium, administration officials themselves destroyed the budget neutrality of the HEU deal. The transfer of below-market-value electricity supplies to the new government corporation and the failure to charge a capital cost per SWU for use of the enrichment plants not only destroyed any incentive to overfeed and thus buy the uranium, but also subsidized USEC production costs for SWUs so that they were below what was promised Russia. The privatization of USEC compounded this problem, since the private corporation—unlike the government corporation—must make a profit in reselling the Russian SWUs. As discussed below, it is now impossible to pay Russia a fair market value for its enrichment services. Transfer of amounts of uranium greater than was statutorily authorized and aggressive USEC uranium sales plans made it impossible for Russia to sell the uranium from HEU at prices even close to those originally agreed.< 8

If U.S. actions taken in connection with USEC privatization have altered not just the economic factors, but also the fundamental assumptions of the deal, it is important to ask what responsibilities the United States retains under the original government-to-government agreement. In the world of commercial agreements, the answer would be clear: the United States would be obligated to compensate Russia for any lost income. Of course, Russia lost the Cold War and is desperate for money. Perhaps U.S. officials believe Russia will just have to accept the dictates of the victors.

For its part, Russia holds the United States responsible for purchasing the LEU and will not continue to ship without payment. Russia is undoubtedly counting on the importance of the HEU deal to the United States to force a resolution. However, this is a dangerous game of brinkmanship: Washington may push Moscow so far that it is impossible to revive the deal. The inability of policy makers to perceive the consequences of their actions, or inaction, or to act to fix things, does not give confidence. Nor is it easy to identify anyone in Russia who would champion a resumption of the deal once it ended.

 

Domenici's Proposal

In a September 8 letter to Clinton, Domenici wrestled with this dilemma and came down on the side of prudence. Commenting that he did not think Russia could bend further on terms and that changed political circumstances in Russia would make it difficult for ministries involved to accept much lower prices, Domenici suggested that the United States take partial responsibility for the situation and intervene in a limited way.

Under Domenici's proposal, the United States would, in effect, purchase about 28 million pounds of uranium from Russia's 1997 and 1998 LEU shipments—at a cost of about $300 million—conditional on Moscow reaching a long term commercial agreement for the uranium component of its future deliveries. The United States would hold the Russian uranium and remaining DOE stocks of uranium off the market for 10 years. The hope was that removing an estimated 58 million pounds of uranium from the market (28 million pounds of Russian uranium and 30 million pounds of DOE inventory) would partly reverse the negative market impact of uranium transfers to USEC. Domenici also called for the United States to define terms for returning the uranium component of the LEU to Russia for use in the blending down of HEU or as fuel in Soviet design reactors in Russia and elsewhere.

Essentially, Domenici invited Clinton to join in a bipartisan effort to strengthen the HEU deal and signaled congressional receptiveness to a budget request under the president's emergency appropriation powers. Such a presidential request would not be unusual; Congress finally settled on more than $20 billion of such emergency requests. On September 22, Richardson and Adamov, meeting in Vienna, issued a joint report on the status of implementation of the HEU deal.< 9 The framework proposed in the report was intended to facilitate a purchase agreement between Russia and the Western companies. The framework included most of the Domenici proposal, but no commitment to purchase the uranium from 1997 and 1998 deliveries. Subsequently, after a great debate at high levels, the administration agreed to accept a congressional appropriation of $325 million for the 1997 and 1998 deliveries, which was passed into law on October 21.

The resolution of the uranium problem is still uncertain. Russia continues to insist on prices for its uranium that are now significantly above market and refuses to recognize that commercial buyers will have to pay even lower amounts due to the high costs of holding the uranium until market and trade conditions allow it to be resold. Some in the administration still resist spending the funds authorized by Congress and seem unwilling to accept limits on DOE sales of uranium. Between Russian inflexibility, administration equivocation, and worsening uranium market conditions, it will be hard to reach a commercial deal that relieves the United States of all future responsibility for the HEU deal.

 

The Future of the Deal

If the uranium problem can be solved, the next challenge to the HEU deal will come from USEC's obligation to pay Russia for the enrichment component of its LEU deliveries. As a government owned corporation, USEC was—at least in principle—under the control of the U.S. government. The United States could ask USEC to pay for Russian enrichment services even if the cost was greater than the company's own cost of production and the corporation made no profit on the Russian SWUs. With privatization, USEC has no strong incentives to continue its role in the HEU deal. In fact, according to revelations in its SEC filing, USEC has a strong incentive to quit its role and even to seek to end the HEU deal.

Moreover, even when it was a government-owned corporation, USEC put its business interests ahead of the HEU deal. In 1996, Russia asked USEC to increase its 1997 purchases of LEU from 10 tons HEU equivalent to 18 tons. According to a protocol, or summary, of discussions in Moscow in July (in which no non-USEC U.S. government official participated), "USEC responded that because of power and labor commitments and level of demand for SWUs, this could not be done in 1997," offering instead to purchase the HEU equivalent of 12 tons.< 10 USEC officials asked U.S. government officials to approve the 12 ton level, but failed to inform them of the Russian offer to deliver more. Russian officials naturally assumed that USEC was speaking on behalf of the U.S. government. Without outside intervention, Washington might never have detected this subversion of the HEU deal.

The dominance of USEC's commercial interests has been amplified by privatization, enrichment market developments and continued ineffective oversight by government officials. According to the company's SEC filing: "Unit costs of SWU purchased under the Russian HEU Contract are substantially higher than the Company's marginal cost of production." Increasingly large volumes of Russian SWUs result in USEC having to operate its two enrichment plants at inefficient levels, raising unit costs on the SWUs that USEC does produce. The plants are most efficient at a production level of about 13 million SWUs per year. USEC sells 11 million to 13 million SWUs per year, but, by next year, Russian LEU deliveries will reach 5.5 million SWUs, meaning that USEC will have to operate its plants far below their optimum production levels.

Meanwhile, USEC's portfolio of old high priced SWU contracts, inherited from DOE, are ending and market prices for new contracts are declining. Under its present contract with Russia, USEC must, in 1999, pay about $88.90 per SWU (including transportation)—more than the current price for new SWU contracts, implying that USEC must market Russian SWUs on which it can make no profit. When USEC was owned by the U.S. government, the United States could simply tell USEC to buy and resell the SWUs even if it did not make a profit. Obviously, privatization has changed this; private shareholders demand a profit.

Thus, the best outcome, by far, for USEC is for the HEU deal to fail entirely; that is, for the Duma or the Russian government, in nationalistic frustration, to stop exporting its sensitive national treasure. Based on the above SWU-cost factors and the higher prices expected for uranium if Russian uranium were kept from the market, USEC's profits would be approximately three times as high as at present if the HEU deal ended completely.< 11 USEC's private investors and the Wall Street firms that still hold stock could see an increase in their return on investment from about 7 percent to 22 percent, or, equivalently, a trebling of share price.

The transfer of large amounts of uranium to USEC by its administration supporters, together with USEC leaks of aggressive sales plans, nearly caused an end to the HEU deal on September 2. Failure of the United States to ensure payment for Russia's uranium may yet guarantee that result. Given declining SWU prices and increased deliveries, it is inevitable that USEC will seek a deferral of Russian SWU purchases and a substantial reduction in the price paid to Russia to ensure the company's profitability. The U.S. government would either have to explain to Russia why it has to sell at a price well below the market price—so a private American company can make a profit—or subsidize that profit from taxpayer funds. Of course, it may not come to such a clear conclusion: there are many ways to frustrate performance of a contract to the point that Russia finds continuing the HEU deal unacceptable.

 

Solutions

The United States must recognize that its own actions have severely undermined the HEU deal and that the assumption that the deal can be accomplished at no net cost to the United States is a serious mistake. In subsidizing and otherwise biasing USEC financial incentives against the SWU part of the deal and by transferring large amounts of uranium to the corporation without limits on sales, Washington may have increased the value received by the Treasury Department for USEC's sale but created a threat to national security that will most likely require continued expenditure of funds to alleviate. But even if the United States cannot shift the entire cost of the deal to the private sector, the HEU deal is a good buy, perhaps the most cost effective national security initiative in history. Trillions of dollars were spent in the Cold War to counter the threat of tens of thousands of Soviet nuclear weapons. If the United States can forever remove large numbers of such weapons from the world for less than the cost of one B-1 bomber, it will be money well spent.

There are several immediate tasks for the administration. The first is to use the uranium-funding "carrot" provided by Congress to secure the best possible long-term commercial agreement for the sale of Russian uranium beginning in 1999, and to formalize such an agreement in a way that ensures that it will continue in the future. To do so, the United States needs to convince Russian officials to be realistic about market conditions and the low salability of its large volumes of uranium, recognizing the Russian complaint that U.S. actions—from USEC transfers to trade restrictions—have significantly worsened the market situation for Moscow.

The second is to improve U.S. oversight over the HEU deal to a level commensurate with its national importance and U.S. commitments under the intergovernmental agreement. The president appointed an interagency oversight committee, but it has failed to recognize problems and take timely action. This failure is due partly to inadequate staffing and lack of information, partly to the inattention by national security officials preoccupied with other crises, and partly to the lack of influence of national security advisors in the White House policy process.

An immediate need is better information about what is happening in the HEU deal. The memorandum of agreement between the U.S. government and USEC defers excessively to USEC commercial interests.< 12 The United States should not depend on limited self reporting by the corporation about what is happening in the HEU deal. USEC's position, endorsed by the agreement, is that all information connected with the HEU deal is proprietary, preventing public as well as government scrutiny of developments—including those initiated by USEC—that involve profound public and national security interests. In short, privatizing USEC appears to have resulted in the privatization of an important aspect of U.S. national security. At the very least, a U.S. government observer should participate in all negotiations and meetings relating to the HEU deal and all documents should routinely be provided to a more knowledgeable and attentive oversight process.

With regard to the impending SWU problem, the United States could take several actions to alter USEC's economic incentives so that it was more willing to continue the HEU deal. After all, the United States owns the enrichment plants that USEC leases for only a few million dollars a year, and DOE holds the below market-value electricity contracts that benefit the company. One measure would be to increase power costs; another would be to impose an increasing fee per SWU for use of the enrichment plants above a certain level of production, so that USEC would have to pay more to produce SWUs that would otherwise replace Russian SWUs. Such a fee would also correct the artificial incentives that lead USEC to underfeed its enrichment plants and thus accumulate more uranium. If this cannot be done, the United States should itself (through DOE, for instance) replace USEC as executive agent for the HEU deal, taking over direct relations with Russia and reselling Russian SWUs to the highest bidders. If politically necessary, USEC might be given a right of first refusal to purchase the Russian SWUs.

Alternatively, while one must always be wary of institutional invention, creating a government owned corporation that could take on nuclear security tasks on a multi year basis, without the constraints of annual budget cycles and with a certain amount of commercial intelligence and flexibility, offers a number of advantages. Indeed, USEC was not a bad idea in principle; it was largely the pursuit of privatization and inadequate supervision that led to problems. The creation of a USEC II, for example, would provide the United States with a vehicle with which to bargain with both Russia and commercial parties to achieve the most efficient implementation of the HEU deal, including the ability to enter into long term commercial agreements that are impossible for government agencies. Such a government-owned corporation could also take on other post-Cold War tasks, including those relating to plutonium disposition, securing (including by direct purchase) smaller quantities of HEU and plutonium at diverse sites across the former Soviet Union, and other nuclear security matters that require sustained attention and funding.


NOTES

1. Author's meeting with Soviet Minister of Atomic Energy Viktor Mikhailov, October 18, 1991; Thomas L. Neff, "A Grand Uranium Bargain," The New York Times, October 24, 1991, and author's subsequent meetings in Washington and Moscow in 1991 and 1992.

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2. The USEC Privatization Act (Public Law 104-134) treatment of uranium reflected a delicate compromise between the interests of USEC, the domestic uranium mining industry, and the HEU deal. The legislation imposes a 4-million-pound annual limit on the sale of uranium transferred under the act to USEC. However, Congress was not aware of other transfers made by DOE to USEC, sales of which USEC contends are not limited by the act. U.S. uranium producers have brought legal action against DOE, contending that the other transfers were illegal.

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3. The SEC "S-1" filing is available at http://www.sec.gov or from Morgan Stanley Dean Witter at (212)761-4000.

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4. Treasury Order Number 103-04, Federal Register, June 30, 1998, pp. 35644-35645.

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5. By using additional electric power, USEC can produce LEU using less uranium than its utility customers actually deliver, keeping the remainder. Underfeeding is commercially feasible for USEC because DOE resells its below-market-value electric power supplies to USEC at cost.

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6.Nuclear Fuel, Vol. 23, No. 14, July 13, 1998, p. 1.

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7. "The Uranium Market Outlook," Quarterly Market Report, Uranium Exchange Company, July 1998; and U.S. Energy Information Administration, unpublished analyses, July to September 1998.

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8. The original contract negotiated by DOE listed prices of $28.50 per kilogram of uranium and $82.10 per SWU, or $780 per kilogram LEU (enriched to 4.4 percent U-235). The current market price for uranium is about $25 per kilogram, while the value if purchased and held for later resale is about $15 per kilogram due to substantial holding costs.

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9. The text of the report was obtained unofficially and published in Nuclear Fuel, Vol. 23, No. 20, October 5, 1998, p. 6.

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10. "Protocol of Meetings Between MINATOM, Techsnabexport and USEC in Moscow," July 8-11, 1996.

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11. Thomas L. Neff, "The U.S.-Russia HEU Deal: Strategic Realities," presentation to the Nuclear Energy Institute Forum, July 29, 1998.

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12. Under the April 28, 1997 memorandum of agreement between the U.S. government and USEC, the United States would only be able to detect actions, like those taken in 1996 by USEC to limit purchases of HEU, if USEC chose to report them.

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Thomas L. Neff is a senior member of the Center for International Studies at the Massachusetts Institute of Technology in Cambridge.

Just before their end of summit press conference on September 2, Russian President Boris Yeltsin informed President Bill Clinton that he was going to announce the end of the historic "HEU deal" signed by the two countries in 1993.

Russia Seeks to Speed CFE Adaptation

Russia declared on September 15 that "it is necessary to accelerate negotiations" on adapting the 1992 Conventional Armed Forces in Europe (CFE) Treaty to the post-Cold War environment. Moscow seeks a completed treaty before the April 1999 summit at which Poland, the Czech Republic and Hungary are expected to be welcomed formally into NATO. That same day, NATO members endorsed a more relaxed timeline, aiming to conclude negotiations before the Organization for Security and Cooperation in Europe summit late next year. Both NATO and Russia, however, have stated they would like to record progress by this December.

A.V. Grushko, head of the Russian delegation to the Joint Consultative Group (JCG)—the governing body of the CFE Treaty—also called on NATO to drop a proposal that would limit temporary deployments of tanks, armored combat vehicles and heavy artillery within the treaty's "flank zone" covering the northern and southern flanks of Europe. (See ACT, June/July 1998.) Moscow seeks to limit the NATO presence on new members' territories as the alliance expands, while NATO maintains it needs flexibility to conduct its missions and to ensure equal status for new members. The adaptation talks on the CFE Treaty have been underway since January 1997.

House Prohibits Funds for ABM Succession

On August 5, the House approved (240-188) an amendment to the departments of Commerce, Justice, State and Judiciary appropriations bill prohibiting any funds to be used by U.S. delegates to the Standing Consultative Commission (SCC) to implement the Memorandum of Understanding (MOU) on ABM Treaty succession. Signed in September 1997, the MOU identifies Russia, Belarus, Kazakhstan and Ukraine as the successor states to the former Soviet Union under the treaty. The amendment, introduced by Representative David McIntosh (R-IN), seeks to prevent implementation of the MOU before the Senate has given its advice and consent to ratification. The administration has stated that it will not submit the MOU (as well as the START II extension protocol and the ABM-TMD "demarcation" agreements) to the Senate until Russia has ratified START II. Some congressional Republicans have argued that the ABM Treaty is not currently in force pending Senate approval of the MOU.

The final language on the McIntosh amendment must still be worked out in a House-Senate conference. The administration maintains, however, that it has no plans to implement the MOU at the current session of the SCC, which began on September 9. During this session, the United States, Russia, Belarus, Kazakhstan and Ukraine are scheduled to conduct the latest five-year review of the ABM Treaty and complete the implementing details for the September 1997 agreement on confidence-building measures (CBMs) for theater missile defense systems.

Putting National Security First

August/September 1998

By Spurgeon M. Keeny, Jr.

The U.S. agreement to purchase 500 tons of highly enriched uranium (HEU) from dismantled Russian nuclear weapons over 20 years stands out as one of the most important and innovative initiatives of the post-Cold War world. The deal, initiated by President Bush and signed by President Clinton in 1993, appeared to be the paragon of a mutually advantageous arrangement to reduce nuclear dangers. Yet, after five years of troubled implementation, the deal remains on shaky ground. And with the July privatization of the U.S. Enrichment Corporation (USEC), the future of the agreement is in serious jeopardy.

On its face, the HEU deal appears almost too good to be true—a clear win-win proposition for both parties and the international community. The U.S. purchase would permanently eliminate enough fissile material to make more than 20,000 nuclear weapons. The estimated price tag of $12 billion would provide Russia with desperately needed cash in return for material it does not need; and the United States would receive $12 billion worth of fuel for nuclear power reactors. Moreover, the money would go directly to the Russian nuclear establishment, thereby helping prevent the deterioration of the institution responsible for the security and safety of Russian nuclear assets and requiring increased transparency in its operations. To make certain that the HEU can never again be used for weapons, Russia mixes HEU with natural uranium to produce low-enriched uranium (LEU) suitable for use in nuclear power reactors but not weapons. Transparency procedures verify that the LEU shipped to the United States actually comes from HEU.

This remarkable deal nearly collapsed at the September summit when President Yeltsin threatened Russian withdrawal, charging U.S. non-performance of its obligations. How could this deal possibly end so ignominiously? The answer lies in the inability of the U.S. and Russian bureaucracies to focus on true national priorities. While insisting on a "budget neutral" purchase formula, the United States has combined very generous subsidies to USEC with protectionist "anti-dumping" laws, which result in a complex artificial pricing policy (separating the cost of enrichment from the cost of the contained uranium). Together, these provisions make the sale of LEU on equitable terms extremely difficult. Russia complicated the process by placing a value on the uranium component of its LEU out of line with world prices, which continue to fall due to abundant supplies, lack of demand and U.S. manipulation of the market.

The United States unwisely assigned the negotiation and implementation of the deal to the government-owned, but highly independent, U.S. Enrichment Corporation, which was finally privatized in July, putting it completely outside the control of the U.S. government. While part of the government, USEC arranged ridiculously low rent for government-built enrichment facilities powered by highly subsidized electricity and acquired at no cost large stocks of uranium, which allow it to undersell the already depressed uranium market. After privatization USEC retained its subsidies, but its sole objective is to maximize the return to its new stockholders. In this economic environment, USEC has a strong incentive to see the HEU deal fail since honoring the agreement will substantially reduce its profit margin.

In a last minute effort to save the deal, $325 million was included in the 1999 Omnibus Appropriations Bill at Senator Pete Domenici's initiative to pay Russia for the uranium content of LEU delivered to USEC during the past two years. But release of these funds is conditioned on the success of an extremely complex arrangement whereby Russia must negotiate long-term purchase contracts with companies for uranium Russia holds title to at USEC (equivalent to the uranium content of the Russian LEU). Russia will find it difficult, if not impossible, to obtain what it considers fair prices since buyers know USEC can undersell Russia from its large stockpile of uranium. Nevertheless, Russia may settle for whatever it can get in order to obtain the desperately needed $325 million immediately and to continue the overall deal, which in enrichment charges alone will be worth some $500 million annually. This action will at best kick the problem down the road a few years since USEC, which by virtue of its lavish U.S. government subsidies can enrich customers' uranium for much less than the agreed price for Russian enrichment services, will undoubtedly try to cut payments to Russia for the enrichment component of the LEU price.

The time has come for President Clinton to cut this economic Gordian knot and direct his administration to find a solution that puts U.S. security ahead of corporate profits in making good on this unprecedented deal. We cannot afford to miss this opportunity to eliminate forever enough fissile material to make as many nuclear weapons as are today deployed in the entire world.

Putting National Security First

IBM Fined $8.67 Million for Supercomputer Sale

On July 31 a federal district court judge imposed an $8.6 million fine on the Russian subsidiary of International Business Machines (IBM) after the firm pled guilty to selling 17 high-speed computers to a Russian nuclear weapons lab in Sarov (formerly known as Arzamas-16). The fines, the maximum criminal ($8.5 million) and civil ($171,000) penalties allowable, will be paid by IBM East Europe/Asia Ltd. Additionally, the Commerce Department's Bureau of Export Administration placed the company's export privileges on probation for a two-year period. During its probation, IBM East Europe/Asia has agreed it will not engage in transactions involving any nuclear or military end-users and will not use certain Commerce Department license exceptions to export high-performance computers. U.S. export laws restrict the sale of supercomputers to nuclear or military end-users in countries of security or proliferation concern, including Russia.

The case against IBM developed after Viktor Mikhailov, Russia's minister of atomic energy, announced in January 1997 that Russia had acquired several high-performance computers from IBM and Silicon Graphics for use in maintaining the safety and reliability of Moscow's nuclear arsenal. (See ACT, March 1997.) According to the U.S. Attorney, the ensuing investigation revealed that IBM East Europe/Asia, with the aid of two Russian companies, Jet InfoSystems and Ofort, had sold 16 IBM RS/6000 computers in September 1996 and 1 RS/6000 computer in November 1996 for a total of $2.1 million. Although Arzamas-16 claimed to want the computers for peaceful purposes, IBM admitted it had "reason to believe" the machines would be used for nuclear or military purposes. IBM had begun negotiating with Arzamas-16 in early 1995 and in February 1996 had requested Commerce Department approval for sale of a different model of the RS/6000, but Commerce rejected the license application in mid-October 1996.

Russia has refused to return the group of 16 RS/6000 computers and claims to have no knowledge of the whereabouts of the remaining IBM machine. U.S. officials, including Vice President Al Gore, have approached Moscow on the issue without result. Assistant Secretary of Commerce Amanda DeBusk said on July 31, "We are in extensive engagement with the Russian government and are trying to get those [supercomputers] back." The case involving Silicon Graphics, which allegedly sold four "Power Challenge L" servers to Chelyabinsk-70, another Russian nuclear weapons lab, remains under investigation by the Justice and Commerce departments. [Back to top]

Moscow Summit Brings Two Minor Arms Control Agreements

IN A SUMMIT dominated by other issues, including the Russian financial crisis and regional security issues such as Kosovo and Iraq, Presidents Bill Clinton and Boris Yeltsin signed two minor arms control-related agreements during their September 1–2 meeting in Moscow. The agreements concerned the sharing of early-warning information and the disposition of plutonium no longer required for military purposes. Other arms control and non-proliferation issues, such as Russian ratification of START II, were discussed, but without major breakthroughs.

The "Joint Statement on the Exchange of Information on Missile Launches and Early Warning" has two main components. First, the United States and Russia will share, on a "continuous" basis, early-warning information on the launches of ballistic missiles and space-launch vehicles by any nation, a measure that goes beyond previous information-sharing agreements. (North Korea's August 31 test of the Taepo Dong-1 "is exactly the kind of information that we would have passed on to the Russians" had this agreement been in effect, explained Robert Bell, special assistant to the president for national security affairs, in a September 1 White House briefing.) Each side will be responsible for processing its own early-warning data, retrieved from launch-detection satellites and ground-based radars, at its national center before providing it to the other party. In addition, Yeltsin announced in his September 2 press conference with Clinton that a joint early-warning center, the first of its kind, will be established on Russian territory. Many details of the agreement must be worked out in the months ahead, however, especially with respect to the scope of the data to be shared.

Second, the United States and Russia agreed to establish a multilateral pre-launch notification regime for ballistic missiles and space-launch vehicles. In this way, any state that chooses to participate could provide advance notification of a missile launch.

The joint statement aims to bolster the reliability of Russia's early-warning system. In his September 1 briefing, Bell said the joint statement "is especially relevant at a time when Russia's early-warning system is under stress from budget difficulties, systems failures and the closure of early-warning radars on the soil of nations outside Russia." Despite these concerns, however, the U.S. government remains confident that there is little chance of an accidental Russian nuclear launch. Ted Warner, assistant secretary of defense for strategy and threat reduction, said at the September 1 briefing that there are not "significant dangers" of an accidental launch today and that the joint statement will reduce this small risk even further.

Washington and Moscow have been sharing information on missile launches and early warning for nearly three decades. Under the 1971 "Accidents Measures" agreement, the United States and Soviet Union agreed to provide each other with advance notification of any planned missile launches that "will extend beyond its national territory in the direction of the other Party." In addition, both sides were required to notify each other immediately if their early-warning systems detected "unidentified objects," though this provision was implemented only on a case-by-case basis. The 1971 agreement was expanded in 1988, when the United States and Soviet Union agreed to provide advance notification of any launch of an ICBM or submarine-launched ballistic missile (SLBM) by either side. At their 1995 and 1997 summit meetings, Clinton and Yeltsin also agreed to share early-warning information related to theater missile defense systems.

Under the "Joint Statement of Principles for Management and Disposition of Plutonium Designated as No Longer Required for Defense Purposes," the latest of several plutonium-management agreements between the two countries, the United States and Russia declared their intention to remove approximately 50 metric tons of plutonium each from their nuclear weapons programs so that the materials can never again be used to fabricate nuclear devices. According to Gary Samore, senior director for non-proliferation at the National Security Council, this amount represents approximately 25 percent of Russia's total plutonium stockpile and as much as 50 percent of the U.S. stockpile. The joint statement specifies that the plutonium must either be consumed as fuel in nuclear power reactors, or immobilized in glass or ceramic together with high-level radioactive waste.

Details of the plutonium agreement, such as transparency and verification measures, must be finalized. Also, the financial arrangements to implement the agreement remain to be made. In a September 1 White House briefing, Samore estimated that the agreement, which is expected to take at least five years to implement, is likely to cost hundreds of millions of dollars in the United States and Russia—a price tag that Moscow can ill afford at this time. (Financial issues have plagued a related agreement on the disposition of highly enriched uranium removed from dismantled Russian nuclear weapons. See story.) Nevertheless, the two governments hope to complete negotiations on the agreement by the end of the year.

Clinton-Yeltsin Summit Announced

June/July 1998

Reversing his earlier position, President Bill Clinton announced on July 6 that he and President Boris Yeltsin would hold a summit meeting in Russia in early September, even though Moscow has not yet ratified START II. The Clinton administration had sought Russian ratification prior to a summit so that official negotiations could begin on a START III agreement limiting the United States and Russia to 2,000 to 2,500 deployed strategic warheads each. However, on June 10, the Duma, the lower house of the Russian parliament, postponed consideration of START II until the fall.

Meanwhile, on July 23–24, Vice President Al Gore and Prime Minister Sergei Kiriyenko held an executive session of the U.S.-Russian Joint Commission on Economic and Technological Cooperation (also known as the Gore-Kiriyenko Commission). During their meeting in Moscow, Gore and Kiriyenko announced the completion of two agreements on nuclear security issues, involving the economic diversification of the Russian "nuclear cities" and the management of plutonium no longer required for defense purposes.

Clinton-Yeltsin Summit Announced

Habiger Praises Russian Nuclear Security

June/July 1998

Upon returning from his May 31–June 6 trip to Russia, General Eugene Habiger, commander-in-chief of U.S. Strategic Command, once again expressed his strong confidence in the safety and security of the Russian nuclear arsenal. During a June 16 Defense Department briefing, Habiger described his visits to five major Russian nuclear facilities: an SS-19 ICBM base at Kozel'sk, a national nuclear weapons storage facility at Saratov, a bomber base at Engels, an SS-25 road-mobile ICBM base at Irkutsk and a naval base at Severomorsk. Habiger said he was impressed with the stringent security measures implemented at each of these facilities, even though Russian security policies (such as relying more heavily on manpower than technology) differ from those of the United States. Habiger reached similar conclusions about the strength of the Russian nuclear command and control system during his last trip to Russia in October 1997. (See ACT, October 1997.)

Habiger also discussed the status of Russian ratification of START II. Based on his discussions with senior military officials, Habiger said the Russian Duma currently has three main concerns regarding START II: U.S. ballistic missile defense activities, U.S. capability to break out of the treaty by "uploading" warheads on ICBMs, and receiving assurances from the Yeltsin administration that the nuclear forces will have stable funding.

Habiger Praises Russian Nuclear Security

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