Putting National Security First

August/September 1998

By Spurgeon M. Keeny, Jr.

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

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

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

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

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

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