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Bloomberg News
August 27, 2018
Fissile Material

U.S. Finishes Packaging Kazakh Plutonium, Reviews Next Step

Philipp C. Bleek

In late June the United States and Kazakhstan completed a joint project to package spent fuel containing weapons-grade plutonium for permanent storage. Conclusion of the work represents a key milestone in a multi-year effort to inventory, secure, and permanently store material containing some three tons of plutonium in order to make it less susceptible to theft.

Presidents Bill Clinton and Nursultan Nazarbayev agreed in November 1997 to a three-part program to accurately inventory spent fuel produced by a Soviet-era BN-350 breeder reactor located in Aktau, Kazakhstan; seal the material in casks; and place it in permanent storage under International Atomic Energy Agency safeguards. Under a parallel agreement signed in December 1999, the United States is also helping to shut down the breeder reactor permanently.

The packaged fissile material is currently stored in cooling ponds at the breeder-reactor complex on the shores of the Caspian Sea. Technicians have been working on-site since December 1998 to place the reactor’s used fuel assemblies into an estimated 2,800 one-ton, 13-foot long, welded steel canisters. Radioactive waste was placed in the canisters before they were sealed, resulting in a “heavy, hot, and highly radioactive package that is far more difficult to steal,” according to the Energy Department’s Defense Nuclear Nonproliferation office.

The project’s next step involves construction of a longer-term storage facility for the material, since the fuel canisters in which the plutonium is currently stored are only designed to maintain their integrity for five years while submerged in the cooling ponds. Scientists from the U.S. Argonne National Laboratory have proposed constructing a dry-silo facility that would be engineered to contain the material for 50 years. (A U.S. official indicated that after 50 years Kazakhstan, which is currently pressed for funds, is expected to be able to finance the construction of a more permanent disposition facility.)

After evaluating 10 possible locations for the dry-silo facility, a team of Argonne scientists recommended two long-term sites, one at the former Soviet nuclear test site of Semipalatinsk in northeastern Kazakhstan, near the Russian border, and the other in Aktau, near the reactor complex. Aktau’s coastal location in the vicinity of several nuclear weapons aspirants, notably Iran, served as a prime motivator for the joint threat reduction effort. As a result, early discussions on the issue of permanent storage focused on moving the material far inland, and the Kazakh government has announced that it would like the material to go to Semipalatinsk, the more costly of the two possibilities. But U.S. government officials emphasized that both storage site options remain on the table.

No agreement has yet been reached on the issue, and according to a U.S. official, the whole issue of short- and longer-term storage options “is now being re-evaluated.” However, because the plutonium can only be kept dry in the cooling ponds for five years, terminating the cooperative U.S.-Kazakh effort at this stage would make any long-term storage effort considerably more difficult, the official said.

Even among Clinton administration officials, who initiated the project, there was some disagreement regarding the necessity of constructing a costly longer-term disposition site at Semipalatinsk. Although the fissile material’s quantity, quality, and location put it at risk of diversion or even forcible seizure, the fact that it remains in spent fuel elements and is now protected by additional highly radioactive waste significantly reduces those risks. With the administration seeking substantial nuclear threat reduction budget cuts, Energy Department officials may ultimately decide that other projects—some involving unprotected, separated fissile materials—pose a greater short-term proliferation threat. (See ACT, April 2001 and May 2001.)

A Response to Thomas Neff’s ‘Decision Time for the HEU Deal’

Philip Sewell

We want to call attention to some of the inaccuracies and distortions in Thomas Neff’s recent article in Arms Control Today (“Decision Time for the HEU Deal: U.S. Security vs. Private Interests,” June 2001) and the implications of a number of his recommendations, which, if implemented, would actually damage the continued success of the Highly Enriched Uranium Purchase Agreement (or “HEU deal”) and would endanger the economics of the domestic uranium enrichment industry. Rather than responding to each and every point Dr. Neff makes, we would like to examine them in the context of the issues he raises.

U.S. Security vs. Private Interests

The underlying premise of Dr. Neff’s article is that U.S. national security and private-sector interests are in basic conflict. Your readers will no doubt recognize the fallacy in that premise. Government national security goals are achieved through business partnerships every day. The fact is that U.S. national security interests and USEC’s commercial interests are aligned—not in conflict.

The government routinely partners with private-sector companies to achieve U.S. national security goals—from building stealth aircraft, submarines, satellites, tanks, and all the other military hardware our security depends upon, to designing, building, testing, and dismantling nuclear weapons. Clearly, there is no inconsistency in meeting the national security goals of the HEU deal through USEC as a commercial entity.

There are a number of ways in which the alignment of U.S. national security interests and USEC commercial interests support full and timely implementation of the Russian HEU contract to remove weapons-grade material from harm’s way.
First, both the U.S. government and USEC want Russian HEU from warheads converted to low-enriched uranium (LEU) fuel. We both want a stable, reliable supply of this HEU-derived fuel material. This ensures continued mutual success in implementing this important national security initiative, and it helps USEC optimize the sole domestic source of uranium enrichment production in a manner that supports domestic energy security.

Second, we both want to establish fair, equitable pricing under the Russian HEU contract. This provides Russia with a substantial, stable revenue stream for nuclear safety and environmental cleanup purposes. Pricing equity also allows USEC to maintain financial health and continue to economically provide nuclear fuel to U.S. utilities.

Third, we both want to ensure that nuclear utility orders for fuel are met when needed. This requires stable Russian HEU deliveries and the ability to minimize and manage supply interruptions through inventory use, infrastructure capabilities, logistic support, and market distribution channels—all attributes that an executive agent must have and which USEC possesses.

Clearly, the alignment of these interests supports, rather than puts at risk, successful implementation of this national security program.

To be sure, the HEU deal is unique. Its implementation by USEC as executive agent owes to the fact that USEC is the sole domestic producer of enriched uranium, that it has the market to dispose of the large amount of Russian material, that it has the inventory to assure customer orders can be met if supplies are interrupted, that it has the financial resources to fund this $8 billion program over its 20-year implementation period, and that it has the trained workforce to implement the program.

Government Control

Dr. Neff asserts that the government did not exercise enough control over the initial implementation of the deal and that, since the 1998 privatization of USEC, the company has been a virtual free agent in administering the deal with Russia. Dr. Neff has marketed such allegations and opinions consistently since USEC became executive agent. However strong his interpretations of events might sound, they are misleading and inaccurate.

USEC has always acted in consultation with the U.S. government. The facts are that, before and during every significant activity, USEC has consulted with the government, sought its approval, and followed its directions—what better example than the negotiations between USEC and Tenex (the Russian executive agent) for new pricing arrangements when the current terms expire at the end of 2001. Beginning in 1999, in consultation with their respective governments, USEC and Tenex worked for nearly a year to hammer out new terms going forward.

After receiving administration guidance on negotiations, in May 2000 USEC reached an agreement-in-principle with Tenex on a new contract amendment to implement market-based pricing and a firm commitment to purchase at least 30 metric tons per year of Russian weapons HEU blended down to LEU fuel through the end of the contract in 2013. We submitted it to the administration for final review and approval. The matter is under review at this time. This is one in a series of continuing actions taken by both USEC and the U.S. government to coordinate interests and to ensure actions are taken after government reviews and approvals are issued.

Contrary to Dr. Neff’s assertions, it has been amply demonstrated that USEC has consistently and scrupulously worked with the administration to achieve its national security objectives and to reconcile commercial realities with national security dictates. The government has always been in full control of this program.

USEC’s Trade Action

Again, the facts do not support Dr. Neff’s assertion that USEC’s trade action against European competitors is wrong and that it will lead to a USEC monopoly. U.S. trade laws do not create monopolies. They are there to restore fair pricing and fair competition to the U.S. market. This helps U.S. consumers and workers by protecting domestic producers from unfair market practices. Competitors that are affected by the imposition of duties by the U.S. government are not precluded or excluded from the U.S. market; they are merely required to sell their products at price levels that are not below cost or subsidized and that are not injurious to U.S. producers.

It is anticipated that foreign enrichment suppliers will be able to supply the U.S. market at fair market prices that will not harm the U.S. nuclear industry. The cost of nuclear fuel is only about 10 percent of the cost of generating electricity. With nuclear power as the low-cost producer of electricity in the United States (about 1.83 cents per kilowatt-hour, according to the Nuclear Energy Institute), any increase in enrichment costs due to the restoration of fair market pricing would not affect the low-cost leadership of nuclear power.

Regardless of the outcome of the trade action and USEC’s role as executive agent, the allegation of a potential monopoly position by USEC falls flat on its face given some simple math. Having closed one of its plants in response in part to increased import penetration, USEC cannot economically service total U.S. utility demand under current economic conditions, meaning the remaining demand must come from other supply sources. Although the remaining U.S plant is capable of greater production levels, USEC’s economic production under current conditions is about 5 million SWU (separative work units) and Russian HEU SWU purchases amount to 5.5-6.0 million SWU. This results in a total supply of about 11 million SWU. After accounting for USEC’s foreign sales commitments of about 4 million SWU, USEC is not in a position to economically meet all U.S. demand. Therefore, foreign competitors can meet this remaining demand, and a competitive, multiple-supplier market will remain available to U.S. utilities. USEC’s trade action will not preclude U.S. utilities from purchasing enrichment services in a competitive market with alternative supplies. In fact, our foreign competition is continuing to successfully sell in the United States.

The Pending Contract Terms

A proposed amendment to the Russian HEU contract with new contract terms involving market-based pricing is pending approval by the Bush administration. Both parties to the proposed agreement have concluded that the commercial terms are fair, equitable, and supportive in terms of ensuring stable, reliable contract implementation.

Dr. Neff’s assertions that USEC would earn a 50 percent profit under the proposed market-based pricing terms and that the proposed pricing mechanism is detrimental to continued contract implementation are completely wrong.

The actual margin is far, far lower than the 50 percent Dr. Neff alleges. The price to purchase Russian HEU is based on a modest margin from a three-year average of published market prices by independent sources. This three-year average dampens the effect of abrupt price changes—both up and down—and thereby ensures predictable, stable pricing and revenues for both U.S. and Russian executive agents. The market-based pricing terms therefore ensure that over time the price paid for Russian HEU will be equivalent to a modest margin from market.

Dr. Neff’s high figures fail to account for costs that are incurred by USEC in implementing the contract. These costs include maintenance of a sizeable inventory to protect against supply interruptions (which have occurred because of unilateral Russian actions four times over the last seven years), hardware and transport costs, and administrative costs for the delivery, distribution, and management of material representing 50 percent of the U.S. demand.

Another pricing feature that Dr. Neff fails to recognize involves a provision whereby both parties can revisit and adjust the pricing margin if the published price indices do not reflect actual market sales prices that USEC and the Russian executive agent are experiencing. This represents a protective mechanism to ensure pricing equity is preserved.

Taken in full context and recognizing how the proposed new market-based pricing arrangement works, the new terms are fair, equitable, and beneficial to both parties.

USEC’s Non-Proliferation Record

USEC has a seven-year track record of success in implementing the Russian HEU contract. We are ahead of the original delivery schedule, having purchased 118 metric tons of weapons-derived HEU, which is equivalent to the elimination of nearly 5,000 nuclear warheads. One provision left out of Dr. Neff’s article is that the proposed agreement provides for the Russians to make up delivery of 8.7 metric tons that were ordered by USEC but not yet delivered by Russia. Nuclear safety upgrades and environmental cleanup programs in Russia have benefited from the payment of $2 billion that USEC has made to Russia for this material.

Dr. Neff resurrects old allegations of foot-dragging and conflicts that the record does not support. For example, USEC signed the contract in January 1994 and ordered LEU derived from 10 metric tons of HEU. Although Russia was unable to downblend the HEU to commercial specifications until June 1995, USEC worked with its Russian counterpart to resolve this issue and then take as much material as possible in both 1995 and 1996.

In November 1996, after considerable negotiations with Russia and approval by the U.S. government, USEC and Tenex adopted a five-year, fixed-price term and an accelerated delivery schedule. When combined with the fact that USEC has made nearly $500 million in advance payments under the contract to facilitate Russian implementation, the record indicates that USEC has consistently supported full and timely implementation of the Russian HEU contract.

Dr. Neff also fails to inform your readers that four supply interruptions experienced over the first seven years were caused by unilateral actions by the Russians for their own purposes and were not due to any action by USEC. In fact, the failure by Russia to deliver on the schedule to which USEC and the Russians had agreed caused production changes and inventory schedule issues that were costly to USEC. Despite these problems, USEC was able to meet its order commitments and then identify a procedure under which the shortfall of deliveries caused by the Russians could be recovered.

The comments by Dr. Neff relating to the “inheritance” by USEC at privatization in July 1998 of above-market contracts and credits against advance payments made by the Department of Energy(DOE) are also misleading. The fact is that about 40,000 investors paid the government nearly $2 billion for assets, including those contracts and credits against advance payments (which expired in 1999) that USEC, not DOE, made to Russia. Therefore, the government received full value for this asset, and there was no gift to USEC as Dr. Neff purports.

Multiple Executive Agents

USEC’s performance as executive agent has been successful in achieving the national security goals assigned to it and there is no need to fix what is not broken. In fact, replacement or additional U.S. executive agents will have unintended consequences for domestic energy security and national security.

In order to achieve the most effective implementation of the Russian HEU contract, USEC has adjusted its business as the sole domestic uranium enricher to fully accommodate and integrate Russian HEU material into its market base, including domestic nuclear utilities. The combination of lower cost enrichment from Russian HEU with higher cost of production at the Paducah, Kentucky, plant allows USEC to economically meet nuclear utility orders for enriched product, and it supports the continued implementation of the HEU agreement.

If USEC were replaced or other agents were added, there would be several ramifications. Because it would have to rely more on its domestic production, USEC would have to increase prices to customers, resulting in higher U.S. energy costs. This potential outcome would encourage foreign competitors to increase prices to U.S. utilities, again resulting in higher U.S. energy costs.

With the Russian HEU material, USEC can economically meet its large volume of existing U.S. annual customer commitments. Altering this balance will diminish domestic energy security from the sole U.S. enricher and increase reliance on foreign sources at a critical time when the nation is already facing an energy shortage of other fuels.

USEC’s concerns aside, unnecessary adjustments to a deal that is working well with Russia puts at risk continued implementation success. Multiple executive agents introduce the likelihood of conflict that could interrupt implementation. It has been widely reported that a few U.S. utilities are eager to become executive agents. To allow multiple U.S. agents that do not include “all” U.S. utilities would result in an unfair competitive advantage for some utilities over others and would only further complicate the matter.

The logistical complexities, supply fluctuations, and frequent special needs of Russia for delivery and revenue changes are complications that would be more difficult to handle with multiple executive agents who would have varying capabilities and needs. USEC has in place unique infrastructure capabilities that are needed to address the many complex issues related to the Russian HEU contract implementation.

  • USEC maintains a 2 million SWU inventory buffer against previously demonstrated Russian supply interruptions, which represents a substantial cost to build and maintain.
  • Significant hardware and transportation logistics are in place at an annual cost of $10 million. These include the purchase of 1,000 product cylinders and overpacks, arrangement and payment for 40 or more shipments from Russia to the United States and back again, as well as U.S. inland transport.
  • USEC arranges and implements monitoring and product sampling at the Russian plants while also paying insurance, customs fees, and harbor maintenance taxes.
  • Resources and distribution channels are also in place to execute transfers, swaps, or transport to Russia of 9 million kilograms of natural uranium at an annual cost of $1 million.


To replicate these capabilities with multiple executive agents would be difficult, expensive, and time-consuming.

In conclusion, USEC’s commercial interests are aligned with U.S. national security and non-proliferation goals. Approval of the pending new contract amendment, with fair, equitable pricing terms that will stabilize deliveries through 2013, needs to be secured soon. Per contract provisions, USEC must place its order with Russia soon for it to be able to downblend HEU to commercial fuel in time for deliveries to begin in early 2002 and therefore meet Russian revenue objectives, U.S. non-proliferation goals, and USEC customer order requirements for 2002.

We submit that this is a national security program that is being successfully implemented on a sound commercial basis with our Russian partner. The consequences of fixing what is not broken are fraught with unintended negative consequences.

 


Philip Sewell is senior vice president of USEC, Inc.

Russian Duma Passes Bill Allowing Import of Spent Fuel

Philipp C. Bleek

Russia’s lower house of parliament approved a controversial bill June 6 that would allow Moscow to import spent nuclear fuel from other nations. Importing spent fuel could generate billions of dollars for the cash-starved country, but the initiative has raised concerns about the environmental and proliferation consequences of making Russia the world’s nuclear-waste dumping ground.

The Duma approved the hotly contested legislation by a vote of 250-125. The bill, which will bypass the Federation Council and must now be approved by President Vladimir Putin, would amend an existing environmental protection law that bars the import of spent fuel for storage or disposal.

Opponents of the measure claim that, given Russia’s lax safety and environmental practices and deteriorating infrastructure, making the country a major nuclear waste repository could have dire environmental and proliferation impacts. But after stagnating for years, the plan was shepherded through the Duma by Putin and the influential Ministry of Atomic Energy, who argued that portions of the potential revenue stream could in fact be used to improve Russia’s infrastructure and finance much-needed cleanup work at contaminated nuclear sites.

Demand for the spent-fuel storage services Russia may soon offer is evident. In many countries, temporary spent-fuel storage ponds located at reactor sites are reaching capacity. Construction of several geologic repositories—such as the one proposed for Yucca Mountain in the United States—has been delayed, and a number of reprocessing programs have been cancelled or postponed.

Assuming transfers could be made politically palatable—which is far from certain, given the vociferous protests already coming from both Russian and international environmental groups—it appears likely that countries such as South Korea and Taiwan would pay considerable sums to be relieved of their spent-fuel burdens. Russian officials have indicated that they hope to import and reprocess 20,000 tons of spent fuel over a 10-year period, which they have predicted would yield more than $20 billion in revenue and about $7 billion in profit.

In the short term, Russia would store the imported spent fuel, but in the future Moscow apparently hopes to transition from a storage provider to a supplier of advanced-technology reprocessing services and nuclear fuel. Not only would providing such services yield significant additional revenue, but it would also mesh with Russia’s long-term vision of generating energy by using plutonium in a proliferation-resistant fuel cycle. (See ACT, October 2000.)

The U.S. government remains the primary barrier to the plan’s implementation. Nearly all the fuel in countries likely to be interested in the Russian service is of U.S. origin, and nuclear cooperation agreements with those countries give Washington a veto over shipment to third parties. The United States does not have a nuclear cooperation agreement with Russia, and historically it has only approved transfers to states with which it has such an arrangement.

Russian officials have indicated in recent weeks that they hope to reach agreement on nuclear cooperation with Washington. U.S. officials have responded by emphasizing that a range of non-proliferation, environmental, and safety considerations need to be taken into account.

According to a State Department official, the negotiation of a nuclear cooperation agreement with Russia has been impeded since the early 1990s by the U.S. government’s decision to use the issue to discourage Russian nuclear cooperation with Iran. It appears that the Bush administration remains firmly committed to making a deal on Iran a requirement for agreement, while Russia appears equally committed to completing at least the first power reactor at Iran’s Bushehr nuclear site.

Whether the differences can be bridged remains unclear. The official put the matter bluntly, saying, “Russia will have to make a decision about whether to cast its lot with the United States or with Iran.”

Establishment of a peaceful nuclear cooperation agreement requires a lengthy process, including congressional review and approval, that the State Department official indicated would likely take at least two years.

Washington is also concerned that Russia’s potential reprocessing plans would work at cross-purposes to U.S.-financed initiatives to secure and dispose of fissile materials and reduce the proliferation risk from Russia’s deteriorating nuclear weapons complex. Washington has sought a commitment from Moscow that it will not reprocess any more spent fuel and thereby produce weapons-usable plutonium. The Clinton administration came close to reaching, but did not secure, an agreement with Russia on a 20-year plutonium-reprocessing moratorium.

In a policy statement released after the Duma’s passage of the new law, the Bush administration said that Washington would not allow Russia to reprocess U.S.-origin spent fuel. Whether this policy would apply to future reprocessing technologies that would not fully separate reprocessed plutonium into weapons-usable form, as apparently envisioned in both Russia’s plans and the administration’s recently released energy policy document, remains unclear.

Decision Time for the HEU Deal: U.S. Security vs. Private Interests

Thomas L. Neff

In 1992, the Bush administration initiated a program with Russia to destroy 500 metric tons of highly enriched uranium (HEU) from Russian nuclear weapons—the equivalent of about 25,000 nuclear weapons—and turn it into fuel for U.S. nuclear power plants.Codified in a 1993 government-to-government agreement, this program has become the centerpiece of U.S. efforts to prevent the nuclear arsenal of the former Soviet Union, and the personnel responsible for it, from proliferating around the world.

The flow of nuclear fuel from Russian nuclear weapons has also become essential to the 100 nuclear power plants in the United States, which supply more than 20 percent of the nation’s electricity. Half of all U.S. nuclear fuel now comes from Russia, with the other half being provided by a single aging domestic facility and imports from Western Europe, which are restricted by capacity limits. This makes a secure supply of nuclear fuel from Russia at reasonable prices critical to U.S. electricity supply.

The Highly Enriched Uranium Purchase Agreement, or “HEU deal” as it is called, is thus now fundamental to U.S. energy security, as well as national and international security. Although the HEU deal was originally administered by the U.S. government, it is now run by the private U.S. Enrichment Corporation (USEC), formerly a government company under Washington’s direct control. When USEC was privatized, it was given control of U.S. enrichment facilities and supply from Russia, effectively putting the future of the nation’s nuclear fuel supply in the hands of a single private company.2

USEC’s actions as a private company have often been in conflict with the public objectives of the HEU deal, but two recent actions the corporation has taken to better its financial situation have now brought this tension to a crisis point.

Late last year, USEC filed a trade action with the Commerce Department against the only other foreign suppliers of nuclear fuel to the United States, the European companies Urenco and Eurodif, potentially eliminating competitive supply to U.S. utilities. A successful trade action, together with exclusive control over Russian supply and U.S. domestic production, would give USEC monopoly power over the U.S. nuclear fuel supply and drive up electricity prices in the United States.

USEC is also in the process of renegotiating the terms of its contract to purchase Russian HEU and is seeking to pay a far-below-market price, a strategy that threatens the non-proliferation goals of the agreement. In 1996, before USEC was privatized, the United States directed the company to enter into a five-year, fixed-price contract with Russia. Under the terms of that contract, USEC paid Russia a discounted, but acceptable, price below what USEC resold the material for. However, that contract expires at the end of this year, and the new terms USEC has proposed could, given current and expected market conditions, result in a profit markup for USEC of 50 percent or more.3

As the only U.S. authorized buyer, USEC has tremendous power to dictate low prices to Russia. This power is limited only to the extent that the U.S. government is willing, or even able, to direct USEC’s commercial activities. The great danger is that a Russia forced by USEC and the United States to accept a bad deal will lose political support for, and ultimately end, a program that is important not only to U.S. national security but also to domestic energy supply. A situation in which USEC can survive only by charging high prices to U.S. utilities while paying Russia prices far below market levels is a thus a serious threat to the United States, and steps must be taken to change it.

The HEU Deal

Nuclear fuel is made by enriching uranium so that it contains higher levels of the isotope U235 (from the naturally occurring 0.7 percent U235 to about 5 percent U235). This can be done either by using enrichment services, which are measured in separative work units (SWU), or by blending down uranium that has already been enriched to very high levels for use in nuclear weapons (HEU, which typically has greater than 90 percent U235). The result is known as low-enriched uranium (LEU), and it is suitable for use in nuclear power plants.

The price component of low-enriched uranium thus consists of two parts: the natural uranium and the work required to enrich it. Blended-down HEU is priced as if it had started as natural uranium and been enriched to low levels of U235. When the United States purchases low-enriched uranium from Russia that was blended-down from HEU, it pays only for the SWU component. The amount of natural uranium that would have been needed to produce the received quantity of low-enriched uranium is then returned to Russia. In short, when USEC buys blended-down HEU, it is not buying the uranium itself, which can be obtained from many sources, but rather the SWU, of which there are very few providers.

From the beginning, the HEU deal was intended to be a government-to-government arrangement, with fuel derived from Russian weapons to be sold in commercial markets to defray the costs of the program. With luck, the deal would be “budget neutral” for the United States. It was never envisioned that the HEU deal would become a profit center for a private U.S. company. Indeed, discussions in April 1993 between the U.S. government and Russian Minister of Atomic Energy Victor Mikhailov emphasized the need to pay Russia a fair market price, and in correspondence the parties agreed to certain principles:

    Partnership: Neither side subsidizes the other.

    Commercial transaction: No profits or losses.

     —Reasonable fixed costs covered.

     —All avoided costs returned to Russia.

     Prices and cost adjusted for inflation and changes in market conditions.


The government-to-government agreement signed on February 18, 1993, reiterates this intent:


    The Executive Agent of the United States of America shall use the LEU converted from HEU in such a manner so as to minimize disruptions in the market and maximize the overall economic benefit for both Parties.


The HEU deal is unusual for a government project in that it requires the products of weapons destruction to be sold in commercial markets. Originally, when the Department of Energy (DOE) ran the enrichment supply business, it delivered the HEU SWU along with domestic production to utilities. As a government business, there was no strong profit motive: domestic supply and non-proliferation were the main objectives. The Energy Policy Act of 1992 created a new government corporation, USEC, which took over from DOE in July 1993. USEC was, in turn, privatized in July 1998.

The original assumptions of the HEU deal started to erode soon after deliveries began in 1995. For example, in July 1996, Russia offered to increase the amount of HEU destroyed (as called for in the government-to-government agreement) to 18 metric tons of HEU, but USEC refused to take LEU from more than 12 metric tons of HEU on the grounds it would reduce the profitability of its U.S. production operations. USEC was at the time operating two domestic enrichment plants, and larger Russian deliveries would have reduced output and increased unit costs of production by spreading fixed costs over a smaller volume of production. The U.S. government attempted to force the government corporation to perform according to the HEU deal. In the end, however, USEC took delivery of LEU from only 13.4 metric tons of HEU in 1997.

When it was privatized in July 1998, USEC gained even more autonomy from the U.S. government and became responsible primarily to private shareholders. Government influence over USEC is now quite limited. The United States has the legal right to appoint additional agents, or transfer the HEU agency to another party, but little other enforcement power. USEC is supposed to obtain State Department approval of commercial terms proposed to Russia, but lack of commercial intelligence and analysis capability puts the government at a severe disadvantage.4  As a result of this, and a lack of alternatives, U.S. energy security and national security are currently hostage to a private company.

The conflict between public and private interests did not become serious until late 1999, when USEC faced rising prices from Russia, declining sales prices, and high corporate overhead. USEC then threatened to resign as the U.S. agent for the deal unless it received a $200 million subsidy from the United States, contending that it needed to be paid to carry out U.S. policy.

It is instructive to examine closely USEC’s 1999 complaint that it was subsidizing U.S. national security and its “need” for a subsidy. Under the 1996 contract amendment negotiated under government direction, USEC has paid fixed prices to Russia for SWU that have roughly tracked prices for new enrichment contracts, with a modest discount of about 12 percent to cover USEC costs. These contract provisions nominally expire at the end of 2001, but the 2001 price would apply to 2002 deliveries if the contracting parties do not agree on a price for that year.

Contrary to its repeated complaints, USEC has, until recently, been making substantial cash profits on the HEU deal for two reasons. First, it inherited from the Department of Energy a number of long-term contracts to provide enrichment services at above-market prices. Second, the company had the advantage of certain credits that DOE had provided to Russia which were repaid through discounts on HEU SWU prices in 1998 and 1999, subsequent to USEC privatization in July 1998. Instead of USEC subsidizing national security, the reverse was true: USEC was profiting greatly from the HEU deal.

Figure 1 shows the average price USEC has received for selling enrichment services to customers since 1996 and the price actually paid to Russia (taking into account credits in 1998 and 1999). Until the year 2000, USEC earned a profit of about $30/SWU on the HEU SWU because of credits and high prices in the contracts it took over from DOE. From the Russian perspective, the price it received was close to the market price for new long-term contracts at the time of delivery, as also shown in Figure 1, before it took account of the repayment of credits.

It was in the fall of 1999, when credits ran out and USEC contract sales prices began to decline as DOE contracts expired, thereby shrinking profit margins, that USEC demanded its subsidy, contending erroneously that it could produce SWU cheaper than what it paid Russia.6  In December, when it did not receive such a subsidy, the company threatened to resign as the U.S. agent for the HEU deal. USEC subsequently backed down when the United States not only still refused to provide the subsidy but also began to interview companies that might replace USEC as the U.S. agent.

This skirmish did not end USEC’s efforts to obtain an HEU subsidy for its business. Instead of seeking such a subsidy from the United States, USEC sought a subsidy from Russia, in the form of steep discounts on HEU SWU.

The Current Situation

In May 2000, USEC proposed a new pricing mechanism to its Russian counterpart, the government-run Techsnabexport (Tenex). Based on the best available information, the new price, which would take effect beginning in January 2002, represents a discount from the average of seven published price indicators.7 Three of these reflect spot, or short-term, market prices outside the United States; three represent the spot price in the United States; and one is the estimated U.S. price for new long-term contracts. The contract price in a given year is the rolling average of the previous three years’ prices minus a 12-13 percent discount.

In May 2000, such terms may have seemed fair to Russia and to U.S. government overseers. However, neither government party appears to have known what USEC knew. In June 2000, USEC announced that in June 2001 it would shut down the Portsmouth, Ohio, enrichment plant—one of only two in the United States—virtually eliminating what had been a world surplus of enrichment capacity and driving enrichment prices up (Portsmouth ceased production in May 2001). Although the natural uranium market is diverse and competitive, the SWU market is highly concentrated. (Figure 2 shows the major sources of supply to Western countries, along with annual Western requirements.) The shutdown of the Portsmouth plant thus replaced what had previously been a world oversupply of SWU with a tight supply-demand balance.

During this period, USEC was also preparing a trade action against its only real competitors in the U.S. market, Eurodif and Urenco, an action finally filed in December 2000 that would quickly drive up U.S. prices.8  The trade action alleged that European suppliers were not only subsidized by their governments, but were dumping, or selling below cost, in the United States. Because the procedures and calculations used by the Department of Commerce in reviewing trade actions strongly favor domestic suppliers, USEC’s action is likely to succeed.

The possibility of a successful trade action, combined with the already tight SWU market, presents a potentially serious problem for the United States. Of the supplies shown, Russian commercial SWU (listed as “Tenex” in Figure 2) cannot be imported into the United States because of a 1992 suspension agreement. If USEC prevails in its trade action against Urenco and Eurodif, supplies from Europe may also effectively be excluded from the United States. If so, the United States will have access to only limited domestic production, with the rest coming from Russian HEU SWU. This supply would be entirely controlled by USEC. Because up to half of domestic SWU production must go to Asia under existing contracts that require SWU of U.S. origin, USEC would have to increase imports from Russia, making the United States even more dependent on Russian supply.

In the past five months, the U.S. price for enrichment services has risen rapidly due to the USEC trade action, reduced overall supply from the closing of the Portsmouth plant, and prospects for monopoly supply to U.S. utilities. Because of the time lag built into the price formula proposed by USEC for the new contract, Russia would not see an improvement in price for several years. Moreover, when prices did go up, they would not do so with a commensurate increase because the price index proposed to Russia is nearly 45 percent weighted by prices outside the United States. Those prices will not rise, and they may even decline if the USEC trade action forces European suppliers to sell outside the United States, causing an oversupply situation abroad. The gap between what Russia would be paid and what USEC would resell the SWU for in the United States would thus remain wide, maintaining USEC’s large profit margin.

Figure 3 shows how the new price proposal would compare with market prices over time. The data are actuals through the end of April 2001; thereafter they are projections. The U.S. price projections assume that USEC is at least partially successful in its trade action, allowing prices to rise to $120/SWU (the price is currently about $105/SWU). If USEC were to achieve the maximum duty on foreign imports it seeks, the price in the United States could rise to about $145/SWU. If the pricing provision proposed by USEC to Russia were in place today, USEC would pay about $73/SWU to Russia and earn a profit of about $32/SWU from reselling Russian HEU SWU. This would represent a markup of more than 40 percent on resales. If prices rise to $145/SWU for USEC resales, the markup over the price paid Russia would be nearly 100 percent.

U.S. utilities estimate that the potential resulting increase in cost for nuclear fuel would be on the order of $1 billion per year.9 USEC maintains that this would not make nuclear power uncompetitive with coal,10  but the utilities believe that the increased costs would undermine the economics of existing nuclear plants and make it even more difficult to build new ones. Obviously, increased costs for fuel would increase electricity rates, and at a time when the Bush administration is considering new nuclear power plants to offset the growing “energy crisis,” USEC’s actions could deal a devastating blow to U.S. energy policy.

USEC argues that it would use the large gains from the Russian deal to subsidize the sole remaining U.S. enrichment plant, located in Paducah, Kentucky. However, USEC has refused to guarantee that it will keep Paducah open, and it is highly unlikely that any company with a fiduciary duty to shareholders would waste profits on more expensive supply when it could simply buy additional cheap supply.11  In fact, USEC is proposing just that to Russia: to buy more HEU SWU, and newly produced commercial SWU (which would require amendment of the 1992 suspension agreement), all at low prices.12  If it does so, the more likely outcome is the shutdown of Paducah, making the nation largely dependent on Russian supply for its nuclear power plants.

Ironically, recent increases in SWU prices due to the USEC trade action and capacity reductions have eliminated any urgent need to replace the current contract between USEC and Tenex. Under the existing deal, USEC is now paying $90.42 per SWU to Russia but can sell at $105 or higher, a substantial margin.

Such a margin, however, is not enough for USEC. A deeply discounted deal with Russia is essential to USEC survival if USEC is to cover its high business overhead and generate any profit. These high overhead costs mean it is virtually impossible for the United States to utilize USEC to implement the HEU deal, unless either Russia or the United States provides a substantial subsidy. Even with a low-priced Russian deal beginning January 1, 2002, USEC would be close to the financial edge: in April, it predicted negative cash flow of $30-50 million for its fiscal year 2002 (beginning July 1) even if it got the Russian deal and cut costs.

Based on its filings with the Securities and Exchange Commission, USEC’s overhead costs can be broken down as follows: headquarters costs total about $50 million per year; interest on bonds with a face value of $500 million that USEC issued at privatization totals about $40 million per year13  (there is no current provision for repayment of principal); and dividend costs total about $40 million per year, even after USEC cut the dividend from $1.10 to $0.55 per share and bought back shares. The total for these costs is about $130 million. If USEC sells 10 million SWU (e.g., 4.5 million domestic and 5.5 million Russian), these costs amount to about $13/SWU.

If USEC were to set aside funds for repayment of debt, research and development, or other investments, there might be an additional cost of $70 million per year. A company with more than $1 billion in annual sales might expect to earn on the order of $100 million per year in profits if it were to succeed and invest for the future. If one adds these amounts, USEC would need to make about $30/SWU over and above production or Russian acquisition cost to be a successful company.

USEC’s proposal to Russia would generate such a margin today, and in 2000 USEC lobbied the Clinton administration heavily to approve its offer to Russia, an approval held back largely by the Department of Energy. In January 2001, in the waning hours of the administration, DOE capitulated and the United States cabled Moscow that it favored the offer. By this time, however, Russian authorities had become aware of rising U.S. prices and the potentially unfair nature of the USEC offer and held back approval of the deal until the new U.S. administration could review it.

It is unlikely that either Russia or the Clinton administration knew in advance of USEC’s plans for the trade action or understood the market effect of capacity reductions and the potentially huge differential between what USEC might pay Russia and what it might receive on resale. Nevertheless, these effects are now known, as is the fact that the price formula offered by USEC in May 2000 is already far out of line with market conditions. According to Russian authorities, USEC has rebuffed Russian proposals to bring new contract prices closer to market levels on the grounds the United States would not approve any such changes.

Improving U.S. Security

Given the importance of the HEU deal to both U.S. energy and national security, it is essential that the implementation be put on a fair and solid footing. Disruption of cash flow to Russia is not in the U.S. non-proliferation interest—the money from HEU does more than any other U.S. nuclear security program in Russia to protect the weapons-usable fissile material and human assets coveted by rogue states. Disruption of fuel supply to U.S. utilities is not in the interest of a stable electricity supply, and high prices and an insecure supply would seriously undermine the Bush administration’s efforts to make nuclear power an option for the United States.

The risk of disruption arises largely from efforts to force Russia into signing a deal it cannot live with. By granting an exclusive right to USEC, the United States has essentially allowed it to dictate self-interested terms to Russia, restrained only to the extent that the government can control USEC’s commercial actions. But the government is compromised by lack of information and competence in commercial matters and by susceptibility to lobbying and other political influence. As already mentioned, the Clinton administration gave in to USEC in its last hours in office, urging Russia to sign the USEC proposal.

The effort to privatize the U.S. enrichment enterprise, a process that originated in the Energy Policy Act of 1992, was intended to make U.S. enrichment services more business-like and efficient. In the intervening nine years, however, that effort has led to an unfortunate collision of commercial issues with U.S. domestic policy and national security imperatives. Today, it appears that USEC can survive and prosper only at the expense of U.S. security and a competitive domestic supply of nuclear fuel and that it can only do so with exclusive rights granted by the government. An experiment that results in such outcomes must be deemed a failure.

What then might be done? One alternative is to try to save the experiment by subsidizing USEC with government funds in exchange for USEC writing a fair contract with Russia, withdrawing its trade action against European suppliers, and committing to continue U.S. enrichment production. The cost of this would be perhaps $200-300 million per year, perhaps for the 12 or more years remaining in the HEU deal.


A second alternative would be to eliminate the special government dispensations that put USEC in control of the HEU deal and domestic supply. Competition is capitalism’s principal weapon against economic inefficiencies and monopoly behavior. It can also be the solution to the HEU problem.

When the HEU deal was negotiated, and when the five-year contract was signed in 1996, the only way to place the large amounts of Russian HEU SWU was through the large portfolio of DOE contracts being fulfilled by USEC. That is no longer the case. In contrast to the situation in 1996, other agents could begin to implement the HEU deal beginning in 2002 or 2003 because USEC’s contract portfolio is rapidly shrinking, as shown in Figure 4. The ultimate users of the HEU SWU are U.S. nuclear utilities, many of whom argue that they could pay Russia a fairer price than USEC is offering and thus stabilize this important supply. The United States has the legal right to appoint additional agents for the HEU deal.

The real principals in the HEU deal are U.S. utilities—the ultimate users of HEU material—and Russian facilities destroying nuclear weapons, acting under the umbrella of the two governments. Anyone else is a middleman.14  To give a fair price to Russia and to U.S. utilities and electricity ratepayers, it is essential to minimize the cost of intermediation. This simple brokerage task can be accomplished for a tenth of the current and prospective cost of having USEC do the job.

Appointing an additional U.S. agent would introduce competition that would lower enrichment prices in the United States while ensuring a fairer deal for Russia. This would stabilize supply from that now essential source to the United States as well as protect the HEU deal itself. An additional agent would also give the U.S. government options in dealing with USEC and Russia, options it does not now have. With only one agent, the United States must serve that agent’s interest, rather than the reverse. Major U.S. utilities have already met with administration and congressional leaders to propose introducing one or more additional agents.

Because of the long-term contract commitments shown in Figure 4, it is unlikely that an additional agent could immediately replace USEC as the U.S. agent. Instead, it would be a gradual process, over several years, as existing enrichment contracts expired. In the meantime, Russia would sell to a new agent, probably at a higher price, and USEC would continue to buy what it needs to meet its contract commitments, perhaps at a lower price because Russia could not immediately place the entire volume at higher prices. With less cheap Russian supply, USEC would favor continuing domestic production to meet its contract commitments, stabilizing supply from domestic sources.15

USEC is lobbying heavily to remain the sole agent of the United States in order to preserve its bargaining power with Russia as the only possible buyer. It is also seeking to enlist congressional pressure to induce the Bush administration to support USEC’s May 2000 proposal to Russia, apparently believing that endorsement by the new administration would force Russia to accept its terms.

The Bush administration has deferred any decisions, pending a comprehensive review ordered by Condoleezza Rice, the president’s national security adviser. Given the importance of the HEU deal for national security as well as domestic energy security, it is imperative that the United States decide whether to subsidize USEC so that it can continue to act as agent and be the sole supplier to U.S. utilities, or to introduce competition that will stabilize and reduce the cost of implementing the HEU deal, and the cost of nuclear fuel, by introducing an additional agent. The United States needs a better approach to implementing the HEU deal if it is to reap the agreement’s non-proliferation benefits and secure a cost-effective fuel supply for U.S. power plants.

Figure 1. HEU Purchase Price vs. USEC Sales Price and New U.S. Long-term Contract Price

Figure 2. SWU Supplies Available to Meet Future Western Requirements

Figure 3. Proposed HEU Contract Price vs. New U.S. Long-term Contract Price

Figure 4. U.S. SWU Requirements vs. Commitments

NOTES

The author thanks Ux Consulting Company (UxC) for the market data used in the figures in this article. UxC bears no responsibility for the conclusions drawn from that data.  For additional information, see www.uxc.com.

1. This initiative was proposed by the author to officials of both governments in October 1991.

2. There are two possible sources of Russian enrichment supplies: from blending down HEU, and from new production from Russian commercial facilities. Under a 1992 trade agreement (“Suspension Agreement”) between the United States and Russia, the latter cannot be sold in the United States.

3. Russia is typically willing to price its exports with a small discount to capture business in the West, but a larger discount raises suspicions in Russia and is likely to result in cancellation of any such deal. Russia is particularly sensitive in the case of weapons material, a national patrimony and source of great-power status.

4. U.S. government officials appear to rely on information provided by USEC about commercial negotiations with Russia, rather than having information directly from Russian sources.

5. The United States made $260 million in advance payments to Russia through USEC, when it was a government corporation, in order to facilitate removal of nuclear weapons from former Soviet states to Russia and for other non-proliferation purposes. USEC was privatized in 1998 but took with it the repayment obligations by Russia of $48 million in 1998 and $50 million in 1999. These repayments took the form of reductions in the prices paid for HEU SWU. As a result, the private company did not pay the full contract price to Russia until 2000.

6. USEC’s argument was that its marginal cost of production was lower than the price it paid Russia. This might be true for a small volume of SWU, but certainly not for the 5.5 million SWU per year to be purchased from Russia. USEC’s marginal cost for larger volumes is set by the cost of electric power, which has risen tremendously, especially in the summer. Production of one SWU by gaseous diffusion requires about 2,500 kilowatt-hours of electricity. USEC has operated its plant(s) only part of the year, when power is cheap; to replace the large volume of HEU SWU, USEC would have to buy power at rates that would put its production cost well above what it pays Russia.

7. Although uranium contract prices are often indexed to published spot-price indicators, buyers of enrichment services will not write contracts indexed to published spot indicators because the spot enrichment market is very thin and for this reason is not considered representative of prices at which much larger volumes can be transacted. In addition, because the spot market is thin, it is easily subject to considerable downward pressure by even modest inventory sales by major companies. Long-term enrichment price indicators are also unreliable because of the secrecy of such contracts and the complexity of their terms, which makes it difficult to determine a specific price.

8. Because import duties on imports would be retroactive, prices would rise immediately.

9. Letter from Ad Hoc Utilities Group (representing 20 U.S. nuclear utilities) to Congressman Joe Barton (R-TX), April 26, 2001.

10. Letter from Philip Sewell, senior vice president of USEC, to Congressman Joe Barton (R-TX), April 12, 2001. If one accepts the figure for nuclear generation cost of 1.83 cents/kilowatt-hour cited by USEC, the 27 percent figure for percentage fuel cost by the Ad Hoc Utilities Group, and a 73 percent duty rate, the increase in cost of nuclear electricity would be 0.36 cents, raising the cost of nuclear generation to 2.19 cents. This is greater than the average cost of coal generation cited by USEC of 2.07 cents/kilowatt-hour.

11. For domestic production, USEC estimates “factory” production costs at Paducah of about $105/SWU. Outside estimates are for about $110/SWU. Russian supply would be $32-37 cheaper than production. According to congressional sources, USEC has argued that it would match one Russian SWU with one U.S. produced SWU to get an average cost of about $90/SWU. There are two problems with this argument: first, this would not generate enough to cover USEC’s overhead and profit in today’s market (and certainly not if USEC does not succeed in its trade action); second, shareholders are unlikely to allow nearly $200 million in profits from Russian resales to be wasted on high-cost domestic production.

12. USEC, which has long supported the exclusion of Russian commercial SWU from the U.S. market, has proposed making an exception for purchases by itself (but not other parties) as an inducement to Russia to sign the May 2000 HEU contract extension terms USEC proposed. Russian commercial sales generate cash flow that is not overseen as carefully by the central government as that from HEU sales.

13. USEC management and the board of the government corporation had a choice of how to privatize the company: through merger and acquisition (M&A) or initial public offering (IPO). M&A bids were in excess of $1.8 billion. USEC bankers could only raise $1.425 billion by sale of shares, and in order to proceed by IPO, USEC sold $500 million in bonds to increase the amount it could pay the U.S. Treasury by going this route. In effect, USEC’s current cost structure is the result of how the privatization was done.

14. A similar statement applies to domestic production: U.S. and Asian utilities are the end-users and would buy at or near the cost of production, without the substantial markup required by some agents. Any number of contractors could operate the Paducah plant—the government-owned plant and the trained workers are the essential factors; the rest is merely administrative.

15. USEC’s lease on the Paducah plant expires in 2005.

Thomas L. Neff is senior researcher at the Massachusetts Institute of Technology’s Center for International Studies in Cambridge.

Russia Ships Nuclear Fuel to India

In apparent violation of its non-proliferation commitments, Russia followed through in February with a deal to ship low-enriched uranium to India's nuclear power station at Tarapur. The Tarapur site, located in the state of Maharashtra, contains two U.S.-built 160-megawatt light-water reactors that the United States supplied with fuel until 1980.

The deal, which was reportedly made in August, has raised objections from Washington. A February 16 statement by State Department spokesman Philip Reeker expressed deep "regret" over Russia's "violation" of its commitments as a member of the Nuclear Suppliers Group (NSG). The group, a 39-nation regime of nuclear supplier states, has undertaken not to transfer nuclear materials or technology to non-nuclear-weapon states without International Atomic Energy Agency (IAEA) safeguards at all their nuclear sites. While the Tarapur reactors have been under IAEA safeguards since 1994, other Indian nuclear sites are not safeguarded.

Under the nuclear Non-Proliferation Treaty, India is considered a non-nuclear-weapon state, despite its nuclear tests in 1974 and 1998.

Reeker added that at a December NSG meeting the "overwhelming majority" of members expressed their "strong concerns" about the then-pending transfer, which "they regarded as inconsistent with Russia's commitments." He said that Washington joins "other nuclear suppliers in calling on Russia to cancel this supply arrangement and live up to its non-proliferation obligations." Reeker further said that Russia's transfer of "sensitive technologies to other countries" would be an "important item" on the Bush administration's agenda.

Moscow claims that it is not violating its NSG commitments, contending it is supplying the fuel for the reactors' "safe operation." NSG guidelines do permit nuclear material transfers to non-nuclear-weapon states without all their facilities safeguarded if the shipment is essential for safety purposes.

IAEA Inspects Iraqi Nuclear Materials

The International Atomic Energy Agency (IAEA) conducted an inspection of Iraqi nuclear materials January 20-23, successfully verifying "the presence" of non-weapons-grade fissile materials under IAEA safeguards, according to Mohamed ElBaradei, the agency's director-general. ElBaradei's comments, made in a February 12 letter to the UN Security Council, added that Iraq had provided the inspectors with the "necessary cooperation" and access required to perform their mission "effectively and efficiently."

The inspection, known as a physical inventory verification (PIV), sought to ensure that Iraq's known remaining nuclear material—which is non-weapons-grade and all located near Baghdad at the Tuwaitha C storage facility—was accounted for and properly safeguarded. As a member of the IAEA and nuclear Non-Proliferation Treaty, Iraq is required not to divert to weapons purposes any of the 1.8 tons of low-enriched uranium or several tons of natural and depleted uranium held at the storage facility.

PIV inspections are not conducted under the terms of UN Security Council Resolution 687, which was passed after the Persian Gulf War and required Iraq to give up its weapons of mass destruction. Under the resolution, the IAEA carried out full-scale monitoring and inspection activities and removed "weapons-relevant" nuclear materials from Iraq. PIVs are conducted under the agency's 1972 safeguards agreement with Baghdad, which requires inspections at declared nuclear facilities at least every 14 months. The last PIV was conducted in January 2000.

Due to its limited scope, a PIV cannot verify that Iraq has not been attempting to develop or acquire nuclear weapons. According to the IAEA, it will only be able to give such an assurance when it resumes the activities established under Resolution 687, which were suspended in December 1998 just before U.S.-British airstrikes against Iraq.

Clinton Administration Approves 'HEU Deal' Contract With Russia

Philipp C. Bleek

In its final week in the White House, the Clinton administration approved an amended contract to implement the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement. If approved by the Bush administration and the Russian government, the as-yet-unsigned deal would allow for the continued implementation of the agreement when its current contract expires at the end of the year.

Under the 1993 deal, the United States pledged to purchase, over a 20-year period, 500 metric tons of Russian weapons-origin uranium blended down to low-enriched uranium for use in commercial power reactors. Since 1995, Russia has converted and shipped to the United States 111 metric tons of bomb-grade uranium—enough to make 5,000 nuclear weapons. The so-called HEU deal is implemented in Russia by the government-run Techsnabexport (Tenex) and in the United States by the privately owned United States Enrichment Corporation (USEC).

With the expiration of the current implementation contract approaching, USEC and Tenex began negotiating an amended contract in the spring of 1999. Faced with a declining market price for enriched uranium, USEC sought to tie the HEU deal to market prices and pay a discounted price for the blended-down uranium so that it would be able to make a profit. In exchange, USEC agreed to purchase from Russia a limited quantity of commercially produced low-enriched uranium—in addition to the material blended down from weapons-grade uranium—in order to provide the Russian Ministry of Atomic Energy with an additional revenue stream it sought.

Both USEC and Tenex were prepared to sign the agreement last May, but the U.S. Enrichment Oversight Committee (EOC) declined approval. Established by executive order in 1998, the interagency EOC has oversight responsibility for USEC and the HEU deal. According to former Undersecretary of Energy Ernest Moniz, who served as the Energy Department's representative to the committee, the EOC had become concerned that, because USEC had recently decided to close the Portsmouth enrichment facility, one of its two domestic enrichment plants, the HEU deal could leave the United States vulnerable to disruption of its uranium supply. Currently, Russia supplies about half of U.S. low-enriched uranium needs, which include both domestic nuclear power reactors and statutory commitments to supply fuel to other countries.

Political concerns, most notably fears about layoffs raised by unions representing workers at the Portsmouth facility, also appear to have played a role in the election-year decision not to approve the amended contract in May.

Following its refusal to endorse the contract, the EOC worked to craft an acceptable compromise that would permit continued implementation of the HEU deal, which, at its conclusion, will have removed from Russia enough material to make some 25,000 weapons, reducing a major proliferation risk. According to Moniz, the committee tried to find a solution that "preserved the existing non-proliferation program in full bloom" while meeting domestic energy security needs.

In the end, the EOC was able to address its concerns and approve the amended contract, as originally written, by clarifying with USEC that the purchase of commercially produced low-enriched uranium was a "one-time" offer, by deciding to keep the Portsmouth enrichment plant in a standby mode for five years, by assuring there would be no layoffs at USEC's other enrichment plant, and by restarting research and development on a less expensive domestic enrichment capability.

 

Congress Raises Concerns

In a January 30 letter to White House national security adviser Condoleezza Rice, a bipartisan group of House Energy and Commerce Committee members raised concern about the long-term implications of the amended contract. In the letter, Commerce Committee Chairman Billy Tauzin, ranking member John Dingell, and six other congressmen expressed concern that the amendment "dilutes the important non-proliferation objectives of the HEU Agreement" and may negatively impact the "struggling domestic uranium industry."

The congressmen appear to be concerned that the purchase of commercially enriched uranium, rather than additional weapons-origin material, is contrary to the intent of the original agreement and that the Russian commercial uranium would displace equivalent domestic production. The legislators also claimed that the Clinton administration had ignored a recommendation to assess the national security and domestic impact of the amended contract, contained in a December 2000 General Accounting Office report commissioned by the committee. Rice responded to Tauzin in a February 7 letter, stating that the administration would review "recent decisions related to this agreement."

Before USEC and Tenex can sign the contract, the Bush administration and the Russian government must approve it. USEC Vice President for Corporate Communications Charles Yulish stated in a February 22 interview that Tenex was prepared to sign the amended contract last May and that USEC "still" considers the prospects for Russian government approval "very good." If approved, the new contract will run through the end of the HEU deal in 2013.

Slovakia Completes Destruction of SS-23s

Slovakia destroyed the last parts of its six remaining Soviet-era SS-23 intermediate-range ballistic missiles on October 27. The dismantling of the technologically obsolete missiles, which was begun in May, has been a long-standing U.S. policy objective and received U.S. funding. (See ACT, June 2000.)

The SS-23 "Spider" missile was banned under the 1987 Intermediate-Range Nuclear Forces (INF) Treaty between the United States and the Soviet Union, which eliminated all ground-launched ballistic and cruise missiles with ranges between 500 and 5,500 kilometers. Slovakia acquired the 400-500 kilometer range SS-23s following the 1993 dissolution of Czechoslovakia, which had acquired the missiles from the Soviet Union. Poland, the Czech Republic, and Hungary, which also received the missiles from the Soviet Union, all disposed of their SS-23 systems years ago. The Slovak missiles reached the end of their service lives in 1998, but financial constraints prevented their destruction at that time.

Presiding over the final destruction of the missiles in Slovakia, John Holum, U.S. undersecretary of state for arms control and international security, said that Slovakia had made "a huge contribution toward realizing the goals of the INF Treaty and to improving European security."

Slovakia Completes Destruction of SS-23s

G-8 Addresses Russian Plutonium Disposition

The world's leading industrialized nations committed to developing a plan to finance Russian disposition of weapons-origin plutonium at the July 21-23 Group of Eight (G-8) summit in Okinawa, Japan. The agreement, enunciated in a summit communiqué issued July 23, states that the group's goal for the 2001 summit is to develop an "international financing plan for plutonium management and disposition" as well as a "multilateral framework" to coordinate cooperation on the issue. Michael Guhin, U.S. negotiator for plutonium disposition, characterized the agreement in an August 23 interview as a "major accomplishment."

Russia and the United States agreed to each dispose of 34 metric tons of weapons-origin plutonium at their recent Moscow summit, and U.S. Vice President Al Gore signed the agreement September 1 after Russian Prime Minister Mikhail Kasyanov had formally approved the document earlier that week. (See ACT, July/August 2000.) Washington has made it clear that Moscow's fulfillment of its side of the agreement is contingent on international assistance. "[Russia's] program will simply not go forward unless there is a very substantial international financing plan," Guhin stated at a June 29 press briefing.

The Russian program is estimated to cost $1.7 billion, and Guhin emphasized that the United States is willing to provide "up to $400 million in assistance," in addition to the $4 billion it is expecting to spend to meet its own commitments under the agreement. Anticipating a deal, Congress had allocated $200 million for the Russian effort in 1998, funds that will soon be available now that an agreement has been reached.

To date, Russia has made no financial commitment to the program. It is not clear at this time how the remaining funds will be raised.

Although the United States had initially hoped to reach agreement on a more concrete financial assistance plan, in the months prior to the G-8 summit it became clear that relevant details of the agreement would need to be worked out with Russia before such a package could be negotiated. Britain announced at the summit that it was allocating just over $100 million, in addition to $18 million for Russian chemical weapons demilitarization.

Netherlands to Help Russia With Fissile Material

April 2000

Under an agreement signed March 14, the Dutch government will assist Russia with safely transporting and storing fissile material from its dismantled nuclear weapons and submarines. The agreement, negotiated during the past year and signed in Moscow by Russian Minister of Atomic Energy Yevgeny Adamov and Dutch Foreign Affairs Minister Jozias van Aartsen, commits the Netherlands to providing initial funding of almost $3 million for the initiative. According to Annemieke Ruigrok, first secretary in the Political Section of the Dutch Embassy in Washington, "This is a framework agreement…. We still have to discuss with the Russians the concrete projects this money will go to."

The agreement, which represents the first joint Dutch-Russian effort to address the proliferation threat posed by the Russian nuclear arsenal and fleet, outlines two specific projects that could be pursued. One involves building inserts for containers used to store fissile material from dismantled nuclear weapons and would likely be implemented in conjunction with ongoing U.S. fissile material storage efforts at Mayak. The second option is to manufacture metal-concrete containers for the transportation and storage of spent nuclear fuel from decommissioned nuclear submarines and would probably be pursued alongside cooperation that exists between Russia and Norway in this area.

According to a Russian Atomic Energy Ministry spokesperson, long-term cooperation with the Netherlands on nuclear disarmament will extend beyond the two projects now being considered. If the currently planned cooperation is successful, additional funds would likely be available for further joint projects, Ruigrok indicated.

Netherlands to Help Russia With Fissile Material

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