National Security for Sale
Aizenmann, Nurith C.
National Security For Sale How our obsession with privatizing government has left us vulnerable to nuclear terrorism BY NURITH C. AIZENMAN IN NOVEMBER OF 1991, THOMAS NEFF HAD a stroke of...
...By February of 1995 the talks between USEC and the Russians had reached an impasse...
...However it was not in USEC‘s commercial interests to buy the extra uranium, so they declined...
...In the 1992 Energy Policy Act-passed less than two months after the United States and Russia had reached their preliminary agreement on the swordsintoplowshares deal-Congress directed the Department of Energy to transfer its uranium production activities to a newly created semi-governmental company, dubbed the United States Enrichment Corporation, or USEC, which would be charged with preparing itself for full privatization...
...By the 1980s the U.S...
...The 1996 USEC Privatization Act was lumped into a larger appropriations bill called the “Down Payment Towards a Balanced Budget Act,” in which USEC’s impending sale was counted as a $1.3 billion gain.in revenues for the federal government...
...Even if Shustorovich fails to buy USEC, it is by now painfully clear that the US...
...The Final Countdown An interagency group including representatives of the National Security Council, the State Department, the Department of Energy, the National Economic Council, and the Council of Economic Advisers was convened to decide whether and when Clinton should sign off on USEC‘s privatization...
...After all, what would happen once the five-year contract was up...
...Early that month, the Russians once again extended their offer to sell extra uranium...
...Furthermore the $100 million advance USEC had given to the Russians smacked to some of a kind of bribe to buy the Russians’ silence...
...In fact, for just &s reason, in 1987 Congress passed a budgetary law prohibiting one-time sales of government assets from being counted as revenues...
...But other government sources contend that this is merely a bit of revisionist history intended for public consumption-that in fact the Russians were perfectly capable of producing the extra fuel all along, and that while the State Department might have known, key officials in the Department of Energy and the National Security Council were simply unaware of both the Russian offer and USEC‘s refusal...
...This downturn was of particular concern to two powerful Republican legislators: Sen...
...The company did, however, offer the Russians a $100 million advance on the uranium it was buying...
...But this good news also had a dark side: once the nuclear warheads were taken apart, the bomb-grade uranium inside would be more vulnerable to theft...
...government, the United States presumably would have jumped at the opportunity...
...But even worse, USEC‘s privatization could deal a devastating blow to the vital swords-into-plowshares agreement with Russia...
...People tried to deal in the art of the possible,” explains one official...
...After all, if USEC did not have the exclusive right to purchase the Russian uranium, other groups might begin buying and selling it-creating competition for USEC and possibly flooding the market with enough fuelgrade uranium to cause a nosedive in prices...
...To be sure, the government’s uranium production program had room for improvement...
...To USEC‘s credit, the contract actually increases the rate at which USEC will be buying Russian uraniu such that when the contract expires in 2001, USEC will have purchased one-third of the 500 tons it is supposed to eventually buy-40 percent more than the amount it would have had at this stage in the game had it stuck to the deal’s original time frame...
...Domenici-who was soon to question the wisdom of letting USEC implement the swords-into-plowshares deal-found a solution to the natural uranium problem...
...Soon afterwards the president gave his OK...
...And they were right, no one else had thought of that...
...So you’re putting something that’s in our national security interests in direct conflict with USEC’s private property interests...
...Meanwhile, hundreds of tons of bomb-grade uranium in Russia’s existing stockpile lay scattered across the country in insecure storage sites-guarded, if at all, by demoralized soldiers and nuclear workers who in many instances had not been paid, or even fed, by the cashstrapped Russian government in months...
...So even on its own merits USEC is hardly a model candidate for privatization...
...However in every other respect the company’s employees would be autonomous from the government...
...USEC had calculated that, while not a money-losing proposition, buying uranium from the Russians at the initially agreed upon price was not nearly as profitable as producing it in the United States...
...And the unhappy impact of the former on the latter provides an instructiveand depressing-example of how a knee-jerk commitment to privatizing government can seriously compromise America’s national interests...
...However, in light of USEC’s two potentially competing missions-to maximize its profits and to implement the Russian deal-the contract’s leniency provided a dangerous opportunity for mischief...
...The privatization wave attracted a strong following in the United States as well...
...A special interagency group was also set up to more closely monitor USEC‘s activities...
...Quite the opposite, argued William Timbers, USEC‘s CEO, “there is a confluence of interests between USEC and the federal government.’’ Timbers contends that USEC has good reason to want to retain its position as sole executor of the swords-into-plowshares deal...
...To make matters worse, USEC announced that, since U.S...
...By January 1994 USEC completed those negotiations, and the company’s CEO, William Timbers, traveled to Moscow for an official contractsigning ceremony with Russia’s minister of atomic energy...
...This is also causing some new national security headaches: Among the interested buyers is an ahance of companies that includes the Pleiades Group, a New York-based energy company whose chief, Alexander Shustorovich, though a naturalized American, has strong ties to Victor Mikhailov, head of Russia’s Mmistry of Atomic Energy...
...The new agreement was hailed as a historic achievement and promisingly titled the “Megatons to Megawatts contract...
...And as high-ranlung members of the Energy and Natural Resources Committee, they were in a position to put their plan into action...
...for the next 15 years after that, the United States would buy at least 30 tons a year...
...Furthermore, once USEC is privatized, it will be tricky to monitor it...
...Thus USEC sought to slash the price by nearly 20 percent...
...The government was also encumbered by various requirements, for instance that it follow federal procurement rules, and that it apply to Congress for appropriated funds every year...
...For example, the Department of Energy had continued to build a new processing plant for several years after it became apparent that the facility would be unnecessaryspending $3 million before the project was fmally abandoned...
...And most disturbing of all, in a quest for hard currency, the Russian government might itself be moved to sell wholesale quantities of nuclear material to the highest bidder...
...In the words of one source familiar with the negotiations: “We snookered them...
...embassy officials who were present at the meeting, but there are conflicting accounts as to who in the government knew about it, and whether USEC had actually gotten clearance from the Department of Energy or the White House to turn the Russians down...
...government was already in the business of producing and selling such fuel to nearly all of the commercial nuclear power plants in the US...
...This made the government’s uranium processing business vulnerable to foreign competition...
...In fact, in 1995 evidence surfaced that the head of Russia’s Ministry of Atomic Energy, Victor M~khailovw, as trying to reach just such an arrangement with Iran...
...The more Stiglitz analyzed the situation, the more convinced he became that privatizing USEC was folly: ‘You don’t have to use a lot of imagination to see that the economic incentives are not there for USEC to import the Russian uranium...
...The Deployment One month after Clinton took office, the U.S...
...You find out that when you went to a meeting where you were supposed to be discussing whether to privatize USEC, and you were weighing these incentive issues, at least half the people at the meeting didn’t even know that PSEC had refused to buy additional uranium],” explains Joseph Stiglitz...
...Rather than paying in cash, USEC would compensate the Russians with natural uranium from its own reserves, and American trade restrictions would be modified so that the Russians could sell that uranium to prospective consumers for delivery at a future date...
...Undaunted, the privatization advocates found themselves a juicy target...
...Although an advocate of USEC’s privatization, Domenici was incensed at the company’s behavior...
...Given the small quantity of enriched uranium required to build a nuclear bomb, the possibilities for disaster seemed limitless: a terrorist group might break into one of the many nuclear warehouses that lacked even rudimentary electronic detection systems and make off with enough uranium to blow up Manhattan...
...A starving soldier might sneak home a few handfuls of the stuff to sell on the black market-where it could be snapped up by eager buyers from Iraq, Iran or North Korea...
...Soon afterwards, Sen...
...New Mexico Sen...
...The billion dollar question, then, was whether USEC would be able to do so while still fulfilling the goals of the swords-into-plowshares deal...
...Not really...
...The senator fired off an angry letter to Deputy Secretary of Energy Charles Curtis-subsequently leaked to Peter Passel1 of The Nm Erk Times-in which he expressed his conviction that “USEC is acting directly contrary to the national security interests of the United States...
...Poneman insists that “my focus was always on ensuring that whatever happened on USEC privatization, the [Russian] deal was protected...
...government, first under President Bush and then under Clinton, eventually took up Neff’s plan...
...As Harvard professor and nuclear security specialist Richard Falkenrath has noted in a comprehensive study, the Megatons to Megawatts contract contained three potentially problematic provisions...
...In Western Europe, hundreds of billions of dollars worth of government enterprises ranging from telephone companies to steel mills were put on the auction block...
...The Russian uranium deal was, as its advocates have noted, a classic conversion of swords into plowshares...
...But whereas the government’s chief objective is to get as much bomb-grade uranium as possible out of Russia without losing money, as a private corporation, USEC‘s interest-in fact its fiduciary obligation to its shareholders-would be to maximize its profits...
...In the case of any officials who were aware, their acquiescence to USEC’s actions is troubling...
...And, not long after, negotiated a five-year contract with the Russians that locked in a price and increased the yearly amount of uranium that USEC would buy...
...However, in contrast to Europe, most major services in the U.S...
...There were, for instance, some grumbles among those familiar with his work that Dan Poneman, the point man at the National Security Council, was not sufficiently vigilant toward USEC-regarding himself more as an ally than as an overseer...
...So instead of producing all of that nuclear fuel in our own facilities, Neff reasoned, why not buy a portion of it from the Russians...
...The Day After Despite these measures, the danger of privatizing USEC was still considerable...
...National Security For Sale How our obsession with privatizing government has left us vulnerable to nuclear terrorism BY NURITH C. AIZENMAN IN NOVEMBER OF 1991, THOMAS NEFF HAD a stroke of genius...
...USEC, said Domenici, should “be immediately replaced as executive agent” of the swords-into-plowshares deal...
...And in the case of those who were not aware, this raises serious questions about their fulfillment of their responsibility to monitor USEC’s implementation of the Russian deal...
...And sure enough, the result was that by September of 1994, USEC was able to boast of achieving an “all-time enrichment production record” at both of its processing plants...
...They were trying to think of something that no one else had thought of,” Clinton’s former chairman of the Council of Economic Advisers Joseph Stiglitz explains only half-jolungly, “and then someone had a brilliant idea: Why not privatize the making of atomic bombs-or at least the processing of the uranium that goes into atomic bombs...
...But in 1995 Congress changed its budget accounting rules such that USEC could be tallied in...
...The trouble began almost as soon as the Russians and USEC sat down for their first annual price renegotiating session-held in October of 1994...
...government will have to keep an eagle eye trained on USEC at all times...
...USEC quickly agreed...
...This past July, Assistant to the President for Economic Affairs Dan Tal10 and National Security Adviser Sandy Berger signed a joint memo recommending USEC’s privatization...
...and Russian governments officially signed off on the swords-into-plowshares deal: Over the course of the next five years the United States would purchase the diluted uranium from 10 metric tons worth of bombgrade Russian material a year...
...It was only after months of stalemate that Sen...
...As a result, a ruling against USEC‘s privatization would have created a $1.3 billion hole in the budgetsomething many administration officials would be understandably loathe to do...
...As a further step towards privatization, USEC was also freed from many of the obligations that had been hampering the government’s program...
...nuclear weapons experts who were visiting Russian facilities...
...were already handled by private industry...
...Finally, whereas USEC would pay the Russians upon delivery for diluting the bombgrade uranium themselves, it would not immediately compensate them for one of the key ingredients the Russians would have to use in the dilution process namely, the $4 billion worth of natural uranium needed to blend down the bomb-grade uranium into the lesser-enriched kind used for nuclear fuel...
...About a week later, they mentioned their frustration to a group of US...
...Either way, it doesn’t look good...
...The more USEC becomes enmeshed in contracts with the Russians, the more impractical it will be for the U.S...
...But Stiglitz was unconvinced...
...And since USEC inherited the government’s long-term contracts with nearly all American and over one-third of the world’s power plants, it would be difficult for the Russian deal to be implemented unless USEC were charged with carrylng it out...
...But this is Washington, where even the brightest ideas can be clouded by muddy thinking...
...Pete Domenici learned of the affair...
...First, while USEC was given the option of buying the Russians’ uranium, the contract did not actually obligate it to do so...
...Which brings us to Neff‘s ingenious proposal...
...Thus the threat of losing its status as executor of the Russian deal is hardly as powerful a deterrent as Timbers implies...
...True, the prospects of a nuclear armageddon with Russia had never been more remote-particularly since, as a result of the START I and I1 treaties, Russia was already in the process of dismantling 80 percent of its nuclear arsenal...
...The Russian offer and USEC‘s refusal were reported in diplomatic cables written by US...
...and while this epic event was greeted with sighs of relief by most Americans, nuclear proliferation experts like Neff, a professor at M.11, knew better than to pop open the champagne just yet...
...The act, which was signed into law in April, also gave congressional approval for USEC‘s privatization and requested that Clinton make a final determination on the matter...
...Given Washington’s strong interest in ensuring the success of the swords-into-plowshares deal, it would have been unlikely to take advantage of the contract’s flexibility to try to fleece the Russians...
...Recall that the whole idea behind the deal was to make it “budget neutral” by reselling the processed uranium purchased from the Russians to commercial nuclear power companies...
...A highly trained, but unemployed nuclear worker might be forced to make ends meet by going to work for one of those rogue nations...
...Tlhe agreement’s imminent breakdown, clearly Washington’s fault, is a huge national security blunder,” wrote foreign policy analyst Jessica Mathews in a Washingtorz Post op-ed...
...The Russians accepted the advance but were not entirely mollified...
...The president would have the power to hire and fire USEC’s board of directors...
...In any event, the incident remained under the radar until the following July...
...As if on cue, even while still a semi-governmental enti$ USEC provided Stiglitz with a perfect iflustration of just this scenario...
...Thus, even before it was officially created, USEC was envisioned by the Bush administration as the deal’s exclusive executor...
...Domenici and Ford concluded that the solution was to make the government’s uranium business more competitive by handing it over to private owners...
...Meanwhile, the Russians would receive a desperately needed infusion of cold cash-a good chunk of which could be used to improve the security of their remaining nuclear stockpile...
...At a meeting in Moscow in January of 1996, the Russians offered to sell USEC nuclear fuel from six more tons worth of bomb-grade uranium than the 12 tons USEC had already agreed to purchase in 199% From an American national security standpoint this was great news-those six tons were enough to obliterate about 300 Hiroshimas...
...government has the power to remove USEC‘s designation as sole executor with as little as 30 days notice, USEC has a strong incentive to demonstrate that it is carrying out the swords-into-plowshares deal in accordance with American national security interests...
...Meanwhile the Treasury Department is slowly moving ahead with USEC‘s sale either to another company or through a public stock offering...
...Similarly, if the primary goal had been to make USEC as attractive as possible to potential buyers, the leeway afforded USEC in the contract would have been an undisputed plus...
...All that was now needed was a nod from Clinton, and USEC could be put up for sale...
...It soon became apparent that USEC was prepared to squeeze the Russians for every last advantage-even at the risk of causing a breakdown in negotiations, and despite the fact that this might dangerously delay the removal of literally tons of bomb-grade material from unsafe Russian storage sites...
...And since the U.S...
...The Megatons to Megawatt contract’s provisions would have made perfect sense if it had strictly been a pact between the United States and Russia...
...At this point, Charles Curtis at the Energy Department sprang into action, urging USEC to buy the extra six tons...
...Charles Yulish, USEC‘s vice president of corporate communications, says he “can categorically state that at no time has USEC made decisions with regard to contract quantities without consultation with national security [officials].’’ And one government source holds that, at the time, the administration had doubts as to whether the Russians were actually capable of processing the extra uranium and feared that ordering it would give the Russians an incentive to cheat by substituting in nuclear fuel that had not been made from the uranium in dismantled weapons...
...Second, the contract established an initial price but stipulated that it was to be renegotiated each October...
...trade restrictions prevented it from immediately selling an equivalent portion of the natural uranium ingredient in the diluted uranium purchased from the Russians, and since the company also deemed it unprofitable to use that equivalent portion of natural uranium in its own processing activities, USEC would be unable to pay Russia for the natural uranium ingredient until at least 2003...
...From a financial point of view this was no skin off of USEC‘s back...
...As word of the matter spread, so did the outrage of administration officials who felt they had been deliberately kept in the dark...
...as well as one-third of those abroad...
...And by mid-1995 outside critics had begun to take notice...
...In addition, thousands of Russia’s dangerously idle nuclear workers would once more be pnfully employed, this time in re-processing the bomb-grade uranium...
...It took some prodding, but the U.S...
...USEC would pay for the natural uranium that had been added in only after the company was able to sell or use an equivalent amount from its own reserves...
...Wendell Ford of Kentucky feared that it might lead to pay cuts or even layoffs at the large uranium processing plant the government operates in his home state...
...One might have expected that, given USEC‘s key role in the swords-into-plowshares deal, combined with its lackluster performance as the deal’s executor while still a semi-governmental corporation, the national security folks might be dead set against turning the company over to private ownership...
...Although it is now up to the Russians, rather than USEC, to find a buyer for their natural uranium, this has not proved easy...
...Thus, noted Stiglitz, the company might be quietly sabotaging the uranium deal without the government’s knowledge...
...So far so good, right...
...And once again, USEC turned them down...
...But in reality, our former Communist adversaries had proved woefully inadequate on the battlefield of business...
...However, American national security interests were clearly being compromised...
...Thus the privatization scheme and the swords-into-plowshares deal evolved in tandemintertwined from the very start...
...This is robbery in broad daylight!“ fumed Russia’s minister of atomic energy, Victor Mikhailov...
...The experts reported this exchange in their cables back to the US...
...Thus for much of this year Russia’s shipments to USEC were delayed -increasing the chances that the wrong people might get their hands on vast quantities of dangerous material...
...But when one considers the estimated $4 trillion we spent during the Cold War to build a nuclear arsenal capable of deterring Russia from sending its nukes toward our shores, the fact that we wbuld even contemplate endangering a plan to keep 500 tons of bomb-ready nuclear material-capable of killing over 3 billion people-out of the hands of tomorrow’s Saddam Husseins and Timothy McVeighs, all in exchange for a piddling billion-plus dollars would be almost funny, were it not so frightening...
...At best this will prove a time-consuming and difficult responsibility for succeeding administrations...
...Economists note that even if a privatized USEC does become more efficient, it’s questionable whether those savings will filter down to American nuclear power consumers: With an almost total monopoly on nuclear fuel production in the U.S., USEC would have little reason to lower its prices...
...By August of 1992, the United States and Russia had reached a tentative agreement: Over the next 20 years, the United States would pay Russia about $12 billion for the reprocessed uranium derived from 500 metric tons of nuclear material from its warheads-40 percent of Russia’s total supply of bomb-grade uranium and enough to destroy Hiroshima 25,000 times over...
...And the U.S...
...Citing Thomas Neff‘s efforts in “proposing . . . the historic pussian uranium] agreement,” the American Physical Society chose to honor him with its 1997 Leo Szilard Award for Physics in the Public Interest...
...A year earlier, the once-fearsome Soviet empire had abruptly collapsed into a heap of disordered republics...
...And unfortunately for the deal, at the same time that the United States and Russia were hammering out its specifics, proponents of privatizing government were gaining bipartisan support for a plan to sell off Uncle Sam’s uranium production business...
...The only issue seriously considered was how to limit its negative impact...
...From the American point of view, the arrangement would cost nothing because we could still get the Russian material at a lower price than we’d be re-selling it to the power plants...
...And the difficulties continue...
...Had the Russians been making their offer directly to the U.S...
...However, though he’s still hopeful, Neff concedes that, as a result of USEC‘s privatization, his plan has proved lot more difficult to implement than I’d thought” when he first dreamed it up back in 1991...
...Instead, USEC‘s privatization appears to have been regarded as inevitable...
...But if you think the revelations about USEC‘s behavior caused the privatization advocates both in and outside of the Clinton administration to reconsider their position, think a p . The Clinton administration was clearly satisfied that enough safeguards had been put in place to justify preserving USEC’s role in the Russian uranium deal-and to allow the company’s privatization to go forward...
...Pete Domenici worried that as more and more uranium production moved overseas, the large number of uranium mines in his state would suffer...
...This was actually something of a gimmick-at most the government would simply be getting in cash today an amount equivalent to the value of the revenues USECwould have brought in over the years were it not privatized...
...Domenici’s scheme was set forth in the 1996 USEC Privatization Act...
...Complicating the picture, by this point, anyone contemplating a halt to the privatization plan would have had to contend with an uncomfortable budgetary conundrum...
...world market share had declined precipitously from the near 100 percent of its heyday to less than 50 percent...
...At worst, once the five-year deal is up, USEC will once awn engage in activities that sacrifice our national security interests to its commercial ones...
...Best of all, huge quantities of deadly Russian nuclear material would be moved beyond the reach of would-be bomb-makers...
...A Private Matter The notion that the private sector can run just about anything more efficiently and effectively than the federal government was well on its way to becoming international gospel by the early 1990s...
...Although of high, bomb-grade quahty, the uranium from Russia’s dismantled warheads could potentially be diluted into the lower grade kind used to fuel nuclear power reactors...
...Yet, interestingly it was the economists at the Council of Economic Advisers-led by Stiglitz-who actually raised the possibility of vetoing USEC‘s privatization...
...Or, to put it more starkly, would USEC‘s profit motive conflict with American national security interests...
...And how well would the interagency group be able to monitor USEC once it was in private hands...
...However it was left to USEC‘s management team to work out the rest of the detailsincluding the price to be paid for the uraniumwith the Russians...
...True, at least on paper, USEC‘s sale has helped to offset our deficit by $1.3 billion...
...The Russians were furious...
...Mikhailov is hardly the saint in this story, but he had a point...
...government to yank it out of the deal...
...And this, in effect, is precisely what happened...
...It ought to have been a crowning achievement of America’s post-cold war foreign policy...
Vol. 29 • December 1997 • No. 12
