Mongolian core to Russia's nuclear bid....

Mongolian core to Russia's nuclear bid....
By Peter Lee

Over the last two decades, Russia has aggressively exploited and leveraged the nuclear legacy of the Cold War competition between the United States and the Soviet Union.

In places like Kazakhstan, Canada, Niger, Australia, the United States and Mongolia, Russia's (AtomRedMetZoloto) Uranium Holding Co or ARMZ is seeking to dominate worldwide uranium production.

The United States - which counts the Russian reset as one of the few unambiguous geopolitical wins - is apparently happy to turn a blind eye to Russia's uranium ambitions.

In the nuclear arms race with the United States, the USSR always went over quantity rather than quality. As the US poured research and development into smaller, more efficient warheads, the Soviets made sure they had a lot of bombs.

When the USSR collapsed, Russia inherited over a thousand tons of weapons-grade fissile material and a sizable nuclear refining and fabricating infrastructure. As Russia lurched through its post-Soviet adjustment, its control over most of the USSR's nuclear assets became one of the few effective bargaining chips in its dealings with the United States, and not only for negotiation of the Strategic Arms Reduction Treaty.

Russia's holdings of weapons-grade highly-enriched uranium (HEU) became a key currency in US-Russian diplomacy.

Under the "Megatons for Megawatts" program, it was agreed that 500 tons of Russian HEU would be downblended and shipped to the United States for use in commercial nuclear reactors. Today, approximately half of the fuel in US nuclear power plants comes from ex-Soviet warheads. [1]

Russia also uses its various uranium stockpiles to help meet its commercial export obligations - which reportedly exceed its domestic production capabilities by 6,000 tons per year.

Since the end of the Cold War, releases of material from Russian and US stocks have accounted for almost 60% of uranium demand, exerting significant downward pressure on uranium prices and mining activities.

Russia treats its nuclear industry as a national resource and it is aware that the uranium cupboard - at least as it pertains to HEU and other legacy stocks - will be bare in 10 to 15 years. As a matter of prudence, economics and national security, it is making plans for the future. [2]

The future includes an expected spike in uranium ore prices from US$55 to $70-$80 a pound as the price of commercially-mined ore is no longer depressed by a steady stream of government-owned HEU downblends into the marketplace.

It also includes a spike in demand, if South Korea, India and China assume that a multi-billion dollar nightmare like the Fukushima cleanup will never happen to them, and they continue with their program to build nuclear power plants.

If the nuclear power industry continues to grow as anticipated, there will be a shortfall of supply as existing uranium reserves worldwide experience accelerated depletion after the legacy feedstock kitty is gone. [3]

And the future will also probably see Russia and ARMZ at the heart of the global nuclear fuel industry.

Russia is exceptionally well-positioned to become the prime player in the 21st century commercial nuclear industry, in large part because of its dominant role in the business of refining uranium ore into usable fuel.

Russia has the world's largest uranium refining capacity, inherited from the USSR's oversized weapons program. It is estimated that Russia's refining capacity is four to five times that of the United States, and almost half of the world's total.

It is an advantage that Russia is likely to keep, thanks in part to American anxieties over proliferation and its policy of discouraging any new entrant - not just Iran - from developing refining capability.

One of the more utopian schemes to reassure nervous operators of nuclear power plants that they can have continued access to nuclear fuel even if they can't refine it in-country is the proposed "Nuclear Fuel Bank". It is not surprising that Russia promptly agreed to host the fuel bank because, in the words of the International Atomic energy Agency (IAEA), "Russia has already produced the low-enriched uranium" needed to stock it. [4]

One thing Russia doesn't have is lots of domestic uranium ore. Access to imported low-cost uranium ore is key to keeping the Russian refineries humming - and profitable.

Therefore, ARMZ - which accounted for only 7% of the world's uranium production when its sourcing was limited to Russia - has gone abroad to tie up sources of supply in the grand tradition of transnational energy companies.

Journalist and Kazakhstan hand Hal Foster described ARMZ's strategy and ambition in a 2010 piece:

[AMRZ hopes to] produce between 25 and 30 percent of the world's supply [of uranium ore] by 2030.

ARMZ is already in the process of becoming a powerhouse, accounting for 40 percent of the world's enriched uranium.

Chief Executive Sergei Kiriyenko has made no secret of ARMZ's desire to become one of the driving forces on the international uranium market ...

That's because it gives ARMZ a much larger share of world reserves at a time when the price of uranium is expected to soar due to the increasing demand for reactors. "We're looking at a shortage-driven market, with an inflexible supply," Kiriyenko said. [5]

Depending on how one keeps score, ARMZ is already perhaps the third or fourth largest producer of uranium, thanks to a recent overseas acquisition binge. But that doesn't take into account ARMZ's aggressive efforts to lock up supply from outside sources and the extra clout the Russian government brings to the table on its behalf.

ARMZ's business approach can be seen in its most important move, into the near-beyond of Kazakhstan, which has quickly become the world's leading supplier of uranium ore, with one-third of the global market.

Although Kazakhstan controls only an estimated 12% of world reserves, it is most aggressive in exploiting them. In 2009, it increased output by 69% over the previous year, and has promised to double production by 2015.

The primary production technique involves drenching the underground ore body with sulfuric acid to leach out the uranium. Squeamish environmentalists may not be reassured by Kazatomprom's declaration that "the natural hydrochemical environment of uranium deposits of South Kazakhstan has a unique capability for self-restoration". [6]

Russia has displayed an integrated commercial and governmental strategy toward Kazakhstan and its uranium industry.

On the commercial side, beyond its direct investments in Kazakhstan, ARMZ purchased controlling interest in Canada's Uranium One, thereby gaining control of the company's sizable interests inside Kazakhstan. Almost as an afterthought, ARMZ thereby became the owner of almost half of America's uranium output (US capacity constitutes an inconsiderable 3% of global output). [7]

On the governmental side, the two nations have signed agreements for construction of nuclear reactors and uranium refining capacity.

And there is this, as reported by Martin Sieff:

Russia's Rosatom nuclear agency and Kazatomprom, the national nuclear development corporation of Kazakhstan have reached agreement about setting up a joint venture to market uranium around the world, Kazakhstan has ... joined Russia in a new customs union that became operative on July 1. Coordinating uranium exports and uranium production policy is the first concrete achievement of cooperation between the two nations under the CU umbrella. [8]

The government-to-government angle may have also involved some combination of traditional Soviet heavy-handedness and new-style nomenklatura skullduggery against Mukhtar Dzakishev, the young technocrat credited with leading Kazatomprom's charge to the top of the uranium league table.

In March 2010, Dzakishev was sentenced to 14 years for various crimes, including alleged collusion with a self-exiled opponent of Kazakhstan's president to illegally and profitably alienate uranium reserves or production rights to overseas companies.

There are widespread allegations that Dzakishev's conviction is a political hatchet job - or an effort to remove a potential stumbling-block from Russia's uranium cooperation with Kazakhstan, as Joanne Lillis reported at Eurasianet:

... suspicions have been aired that Dzhakishev's case was linked to a redistribution of lucrative uranium assets. Misgivings were compounded after interrogations of Dzhakishev, in which he suggested that Russian nuclear interests had benefited from his arrest, were leaked in a video that was posted on the YouTube video sharing site. [9]

The road to Mongolia
With this background, we can turn to the Russian campaign in Mongolia, another sector of Russia's near-beyond with significant uranium reserves.

Thanks to the travails of a small Canadian company, Khan Resources - and its court filings - we have a privileged view of how Russian nuclear sausage is made.

Mongolia has a major uranium play at Dornod, a reserve discovered during the socialist era and exploited for a time by the USSR. It has reserves of at least 25,000 tons, and can support an extraction rate of 2,000 tons per year - an estimated cash flow of $300 million per year, much of it probably profit.

After the communist regime was replaced by a multi-party democracy in 1989, the Dornod deposit was opened up to investment by Western commercial mining interests.

Through a series of transactions, by 2009 the rights to exploit the deposit were held by Khan Resources of Canada (58%), a Russian company (21%), and the Mongolian government (21%).

According to court documents, Khan claimed that it had spent $20 million on surveys and construction at the mine site by this time.

However, in 2009 the Russian government and ARMZ turned their interest toward Mongolian uranium and proceeded government/business tag team fashion similar to what they had employed in Kazakhstan.

Russia feels a strong sense of entitlement over Dornod. A 2010 Pravda news report on Dornod was titled "Russia to retrieve control over uranium".

The Soviets and Russians operated the mine from 1988 to 1995, had 10,000 Russian workers on site, and claims to have invested $600 million overall on Mongolian uranium exploration and development.

Material from Dornod was railed 400 kilometers to ARMZ's Priargunsky operation in the Trans-Baikal region of Russia, which still mines domestic uranium and processes it into yellowcake.

Russia's nuclear establishment covets Dornod as a component of a "single infrastructure" of uranium extraction and refining that signals Priargunsky's return to economies of scale (Dornod material would double the current output of the Priargunsky refinery). [10]

On the government-to-government level, in January 2009, Russia and Mongolia announced a uranium extraction joint venture.

According to Khan Resources' court filings, this signaled the beginning of a campaign to squeeze it out of the Dornod project. Toward the end of the year, ARMZ made a hostile takeover bid against Khan in Canada; the Khan board rejected it.

Then, in January 2010, the Mongolian parliament or Great Khural passed a law giving the Mongolian government an uncompensated 51% share in any project - like Dornod - in which it had previously invested money.

Khan acquiesced, presumably not happily (Asia Times Online's attempt to contact Khan's management was unsuccessful), but its efforts to determine its new diminished share in the project were frustrated by a boycott of proceedings by its Russian partner.

The situation was further complicated when Khan entered into ultimately fruitless negotiations to be acquired by a Chinese company, Overseas Uranium Corporation of the China National Nuclear Corp.

According to Pravda, bringing the Chinese into the picture did not endear Khan Resources to Sinophobic Mongolians.

Yet, Ulan Bator with whom the Canadians have not coordinated their actions did not want the Chinese. On these grounds, TSAUK [the acronym of Khan's operating combine in Mongolia] had its license revoked, and the Mongols will be developing the uranium deposit with Russian companies. [11]

ARMZ then injected itself into the issue, publicly announcing that Khan's mining licenses for Dornod had been invalidated. Khan protested that its licenses were still valid and it had received no adverse notification from the Mongolian government.

Then, in April, Khan's licenses were, in fact, invalidated, albeit on grounds that Khan declared were specious. Indeed, when Khan took the case to court in Mongolia, the Mongolian court ruled in its favor.

To date, Khan is involved in three legal proceedings over the Dornod project. The Mongolian case is winding its way through the appeals process.

Khan has also served the Mongolian government with a demand to take the matter to arbitration, which Khan claims is mandated by Mongolian resource laws, to settle a claim for $200 million in compensation.

Finally, Khan is suing its ARMZ and Priargunsky, its erstwhile partner, in a Canadian court for $200 million in damages. The Russian Ministry of Justice has refused service on the grounds of "security or sovereignty". [12]

Khan's antagonists could be in a position to stonewall the various proceedings until Khan has burned through enough of its modest nest egg to lose hope and accept a settlement well below the US$200 million it is asking for ... and, perhaps, less than what it was previously offered.

According to a report on Voice of America, the hostile Russian bid valued Khan at C$0.65 per share (for a total valuation of approximately C$35 million) and the Chinese bid at C$0.96/share (C$53 million). [13]

It is not a good sign for Khan that the market which has pounded Khan's stock from a high of $5.64 a share in 2007 down to 24 cents, a market capitalization roughly equivalent to the $20 million Khan said it actually disbursed on the project before it shut down, and less than the Chinese and even the Russian offers.

The attitude of the Mongolian government - and its enthusiasm for tarnishing its image as an investment destination with its manhandling of Khan Resources - is unclear.

The World Nuclear Association's profile of the Mongolian nuclear industry stated that "[t]he Mongolian prime minister said that the government decision on this project had been vexed, which relates to Rosatom's impatience with the delay in finalizing it." [14]

There is no question, on the other hand, that the driving force for restructuring the Dornod project to exclude Khan comes from the Russian side. The focus of Prime Minister Vladimir Putin's July 2009 visit to Mongolia was reportedly Mongolian uranium.

President Dmitry Medvedev came to Ulan Bator a month later, with ARMZ's president in tow, also to discuss uranium. To sweeten the deal, Russia wrote off over 98% of Mongolia's debt and promised to "give Mongolia 375 million roubles for the vaccination of livestock to increase the import of meat and milk to the Russian market". [15]

It is also rumored that Russia's precondition for participating in the Tavan Tolgoi coal mining project (and building an expensive and economically suspect railroad line from the mine to Russia) is a cooperative Mongolian attitude on Dornod.

President Tsakhia Elbegdorj's relations with the Russian leadership are rumored to be icy, and it was further rumored that the mysterious summer 2011 interruption of Russian diesel fuel deliveries that threatened Mongolia's harvest (and its full enjoyment of the Nadam Festival) was a message to Elbegdorj that he should toe the line on the uranium issue that preoccupies Russia.

While Mongolia deepened its uranium ties with Russia, Mongolia's nuclear negotiations with the United States came undone.

In September 2011, Elbegdorj pulled the plug on secret negotiations with the United States and Japan to establish Mongolia as a nuclear waste storage facility, and fired the negotiating team - including the ambassador-at-large, A Undraa, who had gone to the US earlier in the year to discuss the US proposal - after a bizarre cavalcade of denials and misinformation. [16]

In May 2011, the Mongolian Embassy in Vienna had posted a vociferous denial of the rumor, which read in part:

Mongolia's mass media clarified the issue with relevant officials in accordance with information distributed by the world's bigger news agencies such as Reuters, CNN and Japan's Mainichi newspaper and distributed the position of Mongolia's officials. Authorities of the Foreign Affairs Ministry, Nuclear Energy Agency (NEA) and Mon-Atom state-run company all denied this information and affirmed that Mongolia's government has not held any talks on burying nuclear spent fuel with any one nor is there legal basis for any such activity. [17]

The US government, despite the fact that it had originally floated the proposal, obligingly papered over the situation with a supporting statement that Jeffrey Lewis of Arms Control Wonk characterized regretfully in May 2011 as "a lie":

I really hate to use the word "lie" to describe the DOE statement. However, Dick Stratford [director of the Office of Nuclear Energy, Safety and Security in the Bureau of International Security and Nonproliferation at the US Department of State] confirmed at the Carnegie International Nuclear Policy Conference that US and Mongolian officials had held "discussions about whether or not Mongolia would harbor - or take a spent-fuel storage depot for third-country fuel". Conveniently, I asked Stratford directly and on-the-record about US-origin spent nuclear fuel. He said "Yes, I would support allowing [South Korea and Taiwan] to transfer US-obligated spent fuel." [18]

There is understandable resistance within Mongolia to using its pristine steppes and/or deserts as a dump for nuclear waste.

But the Mongolian denial also included this interesting passage:

Mongolians are not stupid to store other countries nuclear waste if they do not buy nuclear fuel from Mongolia. [Emphasis added]

In reporting the collapse of the deal, Mainichi reported:

The Mongolian government was considering processing uranium into nuclear fuel and exporting it in an attempt to make good use of the uranium resources. For this purpose, Mongolia was exploring the idea of introducing "nuclear fuel lease contracts" in which Mongolia would receive spent nuclear fuel from countries that buy uranium nuclear fuel from Mongolia.

If Mongolia - with US support - was able to establish itself as an accredited nuclear waste depository, and leverage that capability to become a preferred supplier of nuclear fuel for users with spent fuel disposal problems, Mongolia would have become an important - and independent - player in the uranium fuel business.

If this was actually the plan, Elbegdorj backpedaled with breathtaking speed. In a September 15, 2011 interview, he stated:

[T]he nuclear waste of other countries is a 'snake grown up in another body', he said. "Receiving back the nuclear waste after exploiting and exporting uranium must not be, as I think, this is a pressure from foreign superpowers, and we must throw out this delusion." [19]

Now, for whatever reason - and thanks to a law banning the importation, transit, and storage of nuclear waste - Mongolia is now down to one partner for its uranium program: Russia and one apparent role: provider of feedstock to ARMZ's Priargunsky plant inside Russia.

In any case, one can expect that after the smoke clears Russia will be firmly entrenched at Dornod.

The US government's lack of interest in the Russian push to dominate the uranium trade is curious, especially when contrasted with the Chinese rare earths furor that consumed the West's diplomats and press corps in 2010.

There are plenty of rare earths reserves around the world, including the United States, reserves that the Chinese government fully expected would enter into production as China rationalizes its own industry and cuts down on exports.

In an interesting side note to last year's national security hysteria, the world's largest rare earth mine, at Mountain Pass, California, in the United States resumed mining on October 24, 2011; its operators, Molycorp, expect to be in production for another 30 years. [20]

On the other hand, there is not that much uranium in the world beyond the reach of Russia when its extensive interests in mining, its purchasing agreements, and its dominant position in refining are taken into account.

Perhaps the US military establishment has no worries about weapons-grade uranium, since it can reprocess and repurpose its current inventory to make ever smaller and more efficient nukes.

But the supply of world uranium supplies for commercial purposes will be largely in the hands of Russia's opaque autocracy and its cowed foreign clients.

That doesn't seem to concern the United States or its national security advisers and critics overmuch. Why not?

In discussing Russia's move into Kazakhstan, Martin Sieff pointed out the Great Game element, at least as it pertains to China:

The new agreement with Russia means that Kazakhstan will cooperate with Russia rather than having Rosatom as a formidable rival in its efforts to increase its uranium exports. Together, the two nations will be in a position to dominate the global uranium market.

The move is of great strategic importance since China has already expressed a strong interest in purchasing vastly increased quantities of Kazakhstan's uranium ore for the 500 next-generation civilian nuclear reactors that Beijing is planning to build over the next 30 years.

It appears that China, if it makes the strategic shift from fossil fuel to nuclear power, can anticipate replacing the geopolitical risks of getting oil out of the Middle East with the complications of dealing with a uranium cartel along the lines of the Organization of Petroleum Exporting Countries based on Kazakhstan and Mongolian reserves and headed by Russia.

Maybe that's why the US doesn't see a downside.

Notes
1. Global Uranium Supply and Demand, Council on Foreign Relations, Jan 14, 2010.
2. Russia Becomes Major Uranium Supplier, Energy Daily, Jul 14, 2008.
3. Russian Uranium mIning Industry Dioversification Strategy, ARMZ, Aug 6, 2011.
4. Multinational Fuel Bank Proposal Reaches Key Milestone, IAEA, Mar 6, 2009.
5. Uranium One approves Russian takeover in exchange for Kazakh mine interests, Universal Newswire, Sep 1, 2010.
6. Kazakhstan – uranium hotspot, Industrial Fuels and Power, Feb 2, 2011.
7. Russian Company Gets Wyoming Uranium Mine, Lacks Export License, Bloomberg, Dec 7, 2011.
8. Kazakhstan, Russia join forces for uranium dominance, Universal Newswire, Jul 6, 2010.
9. Kazakhstan: Ex-Nuclear Boss Sentenced Amid Claims of Political Reprisals, Eurasianet, Mar 16, 2010.
10. Uranium in Mongolia, World Nuclear Association, October 2011.
11. Russia to retrieve control over uranium, Pravda, Dec 16, 2010.
12. Khan Applies to Court Regarding ARMZ Litigation, KHAN, Apr 12, 2011.
13. Canadian Mining Company Faces Troubles In Mongolia, Radio Free Europe, Apr 3, 2010.
14. Uranium in Mongolia, World Nuclear Association, October 2011.
15. Russia to retrieve control over uranium, Pravda, Dec 16, 2010.
16. Mongolia abandons nuclear waste storage plans, informs Japan of decision, Mainichi Daily News, Oct 15, 2011.
17. Mongolia denies talks about nuclear waste storage, Embassy of Mongolia in Austria, May 30, 2011.
18. More Mongolia Spent Fuel Storage, Arms Control Wonk, May 12, 2011.
19. President: "Receiving back nuclear waste? - no", Mongolian Economy and Finance, Sep 15, 2011.
20. Rare-earth mine to resume digging in California, Las Vegas Review Journal, Oct 22, 2011.

Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.