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.
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.
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.
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.
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.