U.S.-Russia Uranium Pact Stalls

A landmark 1993 agreement to sell tons of uranium stripped from Russian warheads to fuel American power plants is in jeopardy because of a dispute over price between the Russians and a U.S. company.

The standoff between the Russians and the U.S. company responsible for carrying out the deal already has stalled shipment of uranium to the United States. And arms control specialists are concerned that a collapse of the deal could increase the chance of terrorists or rogue nations obtaining the nuclear material.

A senior Bush administration official, Energy Undersecretary Robert G. Card, told the American company in a letter last week that “U.S. strategic interests may be at risk if the [firm] cannot ensure continuity of shipments of Russian down-blended [uranium] to the United States.”

Card said the disagreement could also lead to “a nuclear power fuel shortage” here; the U.S. company relies heavily on the uranium purchased from Russia for sales that it makes to American nuclear power plants. The company supplies about 70% of the uranium fuel used in American nuclear plants, which generate about one-fifth of all electricity used in the U.S.

The high stakes illuminate an anomaly in how the United States has handled a crucial national security function: Since mid-1998, the government has ceded to the private company, USEC Inc. of Bethesda, Md., far-reaching responsibility for implementing the agreement with the Russians to purchase 500 metric tons of military uranium.

Because USEC and the Russians remain at odds over pricing, no shipments have been authorized for 2002. Ordinarily, the year’s first load of uranium--three metric tons, or enough for about 120 nuclear warheads--would have been ordered by October and would begin flowing to the United States in March.

In a written response to Card on Thursday, USEC President William H. Timbers Jr. said that the energy official’s letter “undermines and could significantly affect the ability of [USEC] to reach prompt and successful agreement” with the Russians regarding the 1993 uranium deal. Timbers also termed Card’s concerns about a possible shortage of nuclear-power fuel “unwarranted and disingenuous.”

Copies of the letters were obtained by The Times.

A USEC spokesman said Tuesday that the company expects to resolve its differences with the Russians without any serious consequences.

A Bush administration official familiar with the current talks said that USEC and the Russians “seem to be at loggerheads. . . . I think [the uranium agreement] is in jeopardy. I would not characterize this as normal negotiations.” The official spoke on condition of anonymity.

1993 Agreement Is Seen as a Watershed

From the standpoint of those concerned about the potential spread of nuclear weaponry in the aftermath of the Cold War, the 1993 U.S.-Russian accord, known as “Megatons to Megawatts,” was a watershed.

During a 20-year period, the U.S. government would purchase about 500 metric tons (about 1.1 million pounds) of highly enriched uranium stripped from former Soviet warheads. The purchase proceeds would employ thousands of Russian scientists and technicians, who would blend down, or dilute, the material for use as fuel in commercial nuclear power plants.

The deal appeared to have several attractive features.

The securing of the weapon-grade uranium--at a price of approximately $12 billion--would keep it from well-capitalized terrorists such as Osama bin Laden. And by employing Russians to blend down the material to commercial-grade fuel, the deal would help dissuade them from selling their services to others who covet nuclear materials and expertise, such as Iraq or Iran.

The purchases of Russian uranium began in 1995, under the purview of the U.S. Department of Energy and the government-held United States Enrichment Corp., a precursor of USEC Inc. Then-President Clinton, with bipartisan congressional backing, approved privatizing the corporation in 1997. And in 1998, investors bought the entity from the government in a deal worth nearly $1.9 billion. Its shares trade on the New York Stock Exchange.

The newly privatized USEC Inc. remained the exclusive U.S. agent for the Russian uranium deal. In the last seven years, USEC has paid $2.2 billion for fuel derived from 141 metric tons of weapon-grade enriched uranium from the Russians, the equivalent of about 5,600 warheads.

More than half of the uranium fuel that USEC sells to utility companies comes from Russia; the company also produces it at a single plant in Paducah, Ky.

For the Russians, the value of the uranium deal is huge--as much as $700 million a year. The sale proceeds provide a significant revenue source for Russia’s Ministry of Atomic Energy, which is responsible for safeguarding nuclear material at production and research facilities.

Security at many of the sites has long been lax, U.S. officials say. A number of government reports have documented the shortcomings, such as porous fencing, an absence of video surveillance and nuclear workers who have gone unpaid for months at a time.

“The uranium deal is the only thing that stands between anarchy and stability in the Russian nuclear weapons complex,” said Thomas L. Neff, a Massachusetts Institute of Technology physicist who in 1991 first proposed the Megatons to Megawatts concept to the White House and the Russians.

Indeed, the decision to turn day-to-day implementation of the agreement over to private industry raised concerns among some policymakers. The chairman of Clinton’s Council of Economic Advisors, Joseph B. Stiglitz, opposed the arrangement at the time. He later termed it “bad national security policy and bad economic policy.”

USEC executives have consistently said that the company’s profit-making imperatives do not conflict with the federal government’s national security needs.

The specifics of the current dispute can be traced to early 2000, when USEC made a contract proposal--subject to the approval of both governments--for new pricing terms that would have taken effect this month. The proposed terms would have enabled USEC to purchase uranium for about 15% less than the Russians received in 2001.

However, the Russians did not agree to the revised terms at an annual review last fall, when the first order for a 2002 uranium shipment was to have been placed. With no new terms ratified, USEC would be obligated by contract to pay the same price for uranium this year that the Russians charged in 2001.

But USEC has declined to order deliveries for 2002 unless Russia accepts its lower-price terms through 2013. Neither side has yielded, precipitating the potential breakdown in the Megatons to Megawatts deal.

The uncertainty over the uranium agreement comes at a time when USEC is counting on a restructuring of the deal to help its bottom line.

The company warned in a financial statement filed with the Securities and Exchange Commission for the quarter ending Sept. 30 that it could suffer without the more favorable terms. Without the Russian and U.S. governments agreeing to those provisions by Jan. 1, USEC said, “earnings and cash flow in fiscal 2002 and thereafter would be adversely affected and would be substantially lower than currently projected, absent USEC making other arrangements.”

USEC engaged in multiple rounds of negotiations in Moscow last month without success. Just last week, it sent its senior vice president, Phillip G. Sewell, back to Moscow in an attempt to push the Russians to accept USEC’s latest offer. The Russians declined.

The interruption of the uranium shipments comes only a month after President Bush vowed to expand U.S. cooperation with Russia. The president said he wanted to “dismantle strategic weapons, reduce nuclear material and increase security at nuclear sites” as part of an international effort to “keep the world’s most dangerous technologies out of the hands of the world’s most dangerous people.” He cited this as a heightened priority after the Sept. 11 attacks.

Charles B. Curtis, deputy Energy secretary under Clinton, said that any schism in implementing the uranium agreement with the Russians creates related national security problems.

Such discord, Curtis said, “has an immediate consequence. And putting that [U.S.-Russian] cooperation at risk is a tremendous national security consequence.” Curtis noted that on other occasions when the Russians took umbrage at the American handling of the uranium purchases, they blocked U.S. observers from visiting Russian nuclear facilities, preventing verification of whether weapon-grade materials were adequately safeguarded.

“The U.S. government needs to play a stronger supervisory role over the commercial activities of USEC,” Curtis said. “There needs to be an active and purposeful oversight of this commercial arrangement. And I think that’s not evident.”

The spokesman for USEC, Charles B. Yulish, said the company is continuing to actively negotiate and fully expects to reach an agreement.

“We’re seeking a prompt resolution to this matter and that’s why we’re fully engaged with the Russians to seek mutually acceptable terms,” Yulish said. “ . . . They have the incentive to take the right deal and we have the incentive to offer it. But right now it’s one of those negotiating deals that you just have to be patient with.”

Yulish said that USEC’s efforts to win new terms for the uranium agreement have been complicated by the changeover of administrations in Washington and by new leadership at Russia’s atomic energy ministry. Both governments must approve any change in terms.

A spokesman for the Russian Embassy in Washington said Tuesday, “We’re not in a position to comment.”

Bush Team Urges Firm to Avoid Further Delays

In his letter last week to USEC’s president, Card emphasized that the Bush administration wants the company to immediately take steps necessary to resume shipments of the Russians’ military uranium. Card suggested that USEC should not risk further delay of shipments in 2002 by holding out for better long-term prices.

“Our first priority remains the continuity of shipments of down-blended Russian [uranium] in 2002,” Card wrote in his letter to USEC’s president, Timbers. “ . . . I want to stress that this is a requirement for the U.S. Government and that no long-term contract will be reviewed favorably unless it contains a separate mechanism to ensure 2002 deliveries. Given the lack of progress on [the] negotiations, we support focusing on 2002 at this time.”

Timbers countered in his letter to Card that USEC has “been working diligently in these negotiations to advance the long-term strategic interest of the U.S. by pursuing the long-term stability of the [uranium] Agreement--not some stop-gap approach that will lead to continued uncertainty in this important program.”

According to Timbers, four previous disruptions to the uranium shipments were the fault of the Russians. But critics say that USEC contributed to some delays out of financial interest.

The current dispute comes as USEC is discussing a range of issues with the Bush administration, including continuation of its role as the exclusive agent for the Russian uranium deal. The administration can, at any time, appoint a new agent or an additional agent to compete with USEC for the purchases.

Several U.S. electric utilities that purchase uranium from USEC have told the administration they are now interested in buying the product directly from Russia.

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Times research librarian Janet Lundblad in Los Angeles contributed to this report.

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Key Moments

1992: U.S. and Russia agree that the United States will purchase from Russia highly enriched uranium from dismantled nuclear weapons. The uranium is to be converted to low enriched uranium for commercial nuclear reactor fuel. Congress creates United States Enrichment Corp. and makes it exclusive U.S. agent to buy the uranium.

February, 1993: U.S. agrees to buy at least 10 metric tons of highly enriched uranium a year from Russia in the first five years and 30 metric tons in next 15 years.

January 1994: United States agrees to pay Russia $12 billion for 500 metric tons of highly enriched uranium over 20 years. The corporation is given the option to buy uranium up to amounts specified annually, at a price to be negotiated yearly.

December 1996: The corporation signs a five-year deal to buy specific amounts of Russian uranium at a price agreed to by both governments.

July, 1998: The corporation is sold by the U.S. to investors through an initial public offering. It remains the U.S. governmenteithers exclusive agent for the Russian uranium agreement.

December 1999: Citing shortfalls from the Russian uranium deal, the corporation threatens to withdraw as U.S. agent without a $200-million federal subsidy. The Clinton administration refuses; the corporation backs down.

Dec. 31, 2001: The five-year agreement with Russia expires. The corporation and Russia do not reach a new agreement, disrupting uranium shipments.

Jan. 8, 2002: Energy Undersecretary Robert G. Card advises the corporation that “U.S. strategic interests may be at risk if [the corporation] cannot ensure continuity of shipments of Russian down-blended HEU [highly enriched uranium].” Card also says that if outstanding issues with Russia “are not resolved expeditiously, the United States could find itself with a nuclear power fuel shortage.”