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Nuclear News - 04/20/01
RANSAC Nuclear News, April 20, 2001
Compiled by Kelly Turner

A. Nuclear Waste
    1. Russian Duma Endorses Bills to Import Nuclear Waste, Bloomberg (04/18/01)
    2. Russia Approves Controversial Nuclear Waste Law, Agence France Presse (04/18/01)
    3. Nuclear Waste Bill Passes Its 2nd Reading, Ana Uzelac, ITAR-TASS (04/20/01)
B. Plutonium Disposition
    1. Russia Needs More Funds From West To Process Weapons-Grade Plutonium, BBC Monitoring Service (04/16/01)
C. Nuclear Safety
    1. Scientists Meet in Kiev Ahead of Chernobyl Anniversary, Agence France Presse (04/19/01)
    2. Ukraine: Fifteen Years Later, Chornobyl's Victims Still Looking For Help, Askold Krushelnycky, RFE/RL (04/18/01)
D. U.S. - Russian Relations
    1. Russian Foreign Minister Laments Bad Start To Bilateral Relations Under New U.S. Administration, Associated Press (04/20/01)
    2. Powell, Ivanov Set May Date For Us Visit, The Russia Journal (04/20/01)
E. Brain Drain and Conversion of Weapons Expertise
    1. Russian Scientist Held for Selling Secrets to China, Yelena Smirnova, Reuters (04/18/01)
    2. Investing, Pentagon-Style, Matt Bivens, Moscow Times (04/04/01)
F. EU-Russian Relations
    1. EBRD Looks Further East after 10 Years, Reuters (04/20/01)
G. Russian Military
    1. Russia Offers High-Precision Arms for Market, Anatoly Yurkin, Itar-Tass (04/20/01)

A. Nuclear Waste

Russian Duma Endorses Bills to Import Nuclear Waste
April 18, 2001
(for personal use only)

Russia's lower house of parliament, the Duma, endorsed three bills to allow nuclear waste imports, ignoring environmentalists and some politicians who warned the country can't deal safely with its own wastes.

A week before the 15th anniversary of the world's worst nuclear accident, the Duma backed Nuclear Energy Minister Alexander Rumyantsev's plans for Russia to earn $20 billion over the next 10 years by importing spent nuclear fuel from Western nuclear power generators forced by environmental concerns at home to seek storage space elsewhere at tremendous cost. The bills received less support today than at their initial readings in December.

Duma security guards chased off a handful of environmentalists who tried to picket the parliament lower chamber Duma this morning. The Central Electoral Commission in November rejected a 2.5 million- signature petition from environmentalists for a referendum on keeping Russia's ban on nuclear waste imports.

"Most of the population is against this while the majority of the parliament supports it," said Ilya Yashin, a 17-year-old member of Yabloko, a party with 19 seats in the 450-member Duma.

The bills, which had the second of three required hearings today, were approved by the majority of deputies ranging from 230 to 267 votes depending on a draft legislation. They gained preliminary approval from 319 Duma deputies in December.

"Technologically our (spent nuclear) fuel and the U.S.'s are identical" and we can process both sorts, Rumyantsev told the Duma.

"We need to support this legislation, otherwise we lose nuclear security and nuclear weapons," said Nikolai Kharitonov, leader of the Agrarians, who hold 42 Duma seats, speaking before voting began on the bills. "This money can be used for our nuclear scientists and to treat our own wastes."

Kharitonov, whose party regularly votes with the Communists, found backing from the other end of Russia's political spectrum, Vladimir Zhirinovsky's ultra-nationalist Liberal Democratic Party of Russia.

Good Money

"We have a good chance to get good money from abroad," said Alexei Mitrofanov, a member of the LDPR's 14ong Duma faction. " We have a dozen thousand tons (of waste) -- we can take another thousand tons for good money."

Russia's civil and military nuclear authorities have been criticized in a series of reports that the country is lax in its treatment of radioactive waste and other pollutants.

U.S. and Russian environmentalists said last year that Russia has dumped untreated radioactive waste into a river in Siberia in what appeared to be "the largest discharge of nuclear contaminants in the world."

Facilities Lacking

Former Nuclear Minister Yevgeny Adamov, who was sacked this month, had said Russia lacks treatment facilities to process or store imported wastes, said Igor Artemyev, a Yabloko Duma deputy.

NTV television last night aired a report on a town in the Bryansk region in central Russia still suffering the effects of fallout from the explosion at Chernobyl's fourth nuclear reactor on April 26, 1986, which spewed radiation across Ukraine, Belarus, Russia and northern Europe and killed as many as 30,000 people, by some estimates.

Residents of the town told NTV they feared its high background radiation, which is well above Russian safety standards, said they feared the radiation was to blame for health problems, especially among the town's children.

"If deputies approve these draft legislations, they will force Russia to return to use of the old, dangerous and uneconomic technologies of the Cold War," said Vladimir Slivyak, leader of Ecodefense, an environmental group.
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Russia Approves Controversial Nuclear Waste Law
Agence France Presse
April 18, 2001
(for personal use only)

Russian deputies on Wednesday adopted a controversial law allowing Russia to import and store nuclear waste from other countries.

The law was easily adopted on the second of three required readings. The project has been furiously opposed by Russian ecologists and liberal lawmakers. However the government argues that it will earn Russian some 21 billion dollars over the next 10 years.

The bill, which is split into three smaller sections, was approved in the State Duma lower house of parliament thanks to support from pro-government factions and leftist lawmakers. A third and final vote on the bill has not yet been scheduled.
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Nuclear Waste Bill Passes Its 2nd Reading
Ana Uzelac
April 20, 2001
(for personal use only)

MOSCOW - Ignoring environmentalists' warnings, the State Duma on Wednesday passed in the second reading a set of highly controversial bills allowing the import and storage of spent nuclear fuel rods in Russia.

If passed, the Kremlin-backed legislation would open the doors for the import of around 20,000 tons of spent nuclear fuel over the next decade, which its supporters claim could bring $20 billion in revenues to prop up the country's cash-starved nuclear sector.

The bills' proponents say part of the funds would go toward cleaning up contaminated areas and also hope to use the processed fuel as an alternative energy source - in both existing nuclear reactors and as yet undeveloped reactors that would rely on plutonium.

But opponents in the Duma argued Wednesday that, in their current form, the bills, which feature amendments to existing legislation, would turn the country into a nuclear waste dump, where any state-run or private organization would have the right to sign import contracts.

For this to happen, the bills will have to pass an as-yet unscheduled third reading, but they are predicted to receive approval in their newly amended form, which cannot be changed prior to the third reading. The legislation would then be passed to the Federation Council, where it is also expected to pass.

After repeated rounds of voting, the three-bill package was pushed through with counts of 230-116, 244-114 and 267-67. While clearing the 226-vote minimum required for passage, the counts reflected a significant drop from the 319 votes the package garnered in the first reading earlier this year.

Several deputies complained that government environmental experts had not submitted their assessment of the bills between the two readings - a procedure required by law for environmentally risky projects.

"We were shown no new documents whatsoever in between the two readings," Sergei Mitrokhin, a Yabloko deputy, said Wednesday. "There were parliamentary hearings, but no documents were produced. The only papers we got were Nuclear Power Ministry propaganda leaflets and a stand with a model of a spent nuclear fuel rod set up in the corridor."

One of the most hotly disputed amendments introduced between the two readings was penned by President Vladimir Putin. The president proposed that the contracts for importing spent nuclear fuel be drawn up as "civil" contracts - a definition, in theory, allowing government and commercial trading companies to sign their own import deals.

Robert Nigmatulin, a member of the Duma's ecology committee, argued that provisions in the two other bills - stipulating that contracts must be signed within the framework of international agreements - were enough to ensure against loose cannons seeking profits.

Nigmatulin, the legislation's most outspoken lobbyist, is the brother of Deputy Nuclear Power Minister Bulat Nigmatulin.

The Nuclear Power Ministry has lobbied for the amendments, saying they were a money spinner needed for the modernization and maintenance of nuclear power plants and radioactive cleanup. Both the former minister, Yevgeny Adamov, sacked last month under a flurry of corruption allegations, and his successor Alexander Rumyantsev are fervent supporters of the bills.

Their opponents from the Yabloko and Russia's Regions factions fought in vain to install control mechanisms regulating the import contracts, insisting without success on mandatory Duma ratification of every contract.

Even some of the pro-Kremlin deputies opposed the presidential amendment, warning that it removes the import deals from public scrutiny.

The bills' opponents failed to push through amendments guaranteeing that both the reprocessed fuel and any waste by-products would be returned to the countries of origin.

But the ecology committee's Nigmatulin insisted that repatriating some by-products, such as radioactive plutonium, would contradict Russia's international obligations on non-proliferation of nuclear technologies.

Furthermore, Nuclear Power Ministry officials have argued that plutonium could be used as fuel in a new generation of nuclear reactors, called breeders, which, they acknowledged, have yet to be fully developed.

Deputy Minister Valentin Ivanov said it would take Russia "some time" to build reliable breeders, which, because of the way they process plutonium fuel, actually creates more - sometimes purer - fuel in the process.

The money for research and construction, he said, would come from importing the spent fuel. That is why the fuel should be kept in Russia for at least 30 to 35 years, he added.

The bills' supporters said imports are the only way the government can raise cash for cleaning up areas contaminated during Soviet times, and maintaining safety in the nuclear industry.
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B. Plutonium Disposition

Russia Needs More Funds From West To Process Weapons-Grade Plutonium
BBC Monitoring Service
April 16, 2001
(for personal use only)

Western countries can so far offer Russia only 600m dollars, instead of the 2bn dollars necessary for the processing of war-grade plutonium, Russian First Deputy Minister of Atomic Energy Valentin Ivanov said at a press conference in Moscow today.

"Negotiations with Western partners about the financing of this programme are under way," he stressed.

Only France, Great Britain and Japan have announced their readiness to assign funds for the project, Ivanov said.

A fund for financing the project of processing war-grade plutonium may be formed before the end of 2002. Some of the 2bn dollars, which Russia expects to receive from Western partners, will be used to construct two processing plants and one storage plant, Ivanov noted.

The next round of negotiations will take place in late June. If the Western partners fail to collect funds, the sides will gather to discuss a way out of the situation, Ivanov said. Russia cannot work on processing war-grade plutonium if there is no financing, he said.
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C. Nuclear Safety

Scientists Meet in Kiev Ahead of Chernobyl Anniversary
Agence France Presse
April 19, 2001
(for personal use only)

More than 500 experts from 20 countries gathered Wednesday in Kiev, a short car-ride from Chernobyl, scene of the world's worst nuclear disaster, to discuss strengthening security at power stations around the world.

Officials from the International Atomic Energy Agency, the European Commission and the Council of Europe were also attending the meeting called just a week ahead of the 15th anniversary of the explosion that shook the world.

On April 26, 1986 reactor number four at the Chernobyl nuclear power plant, some 100 kilometers (60 miles) north of Kiev and a short distance from the Belarus border, blew up and spewed a trail of radioactivity dust across much of Europe.

Between 15,000 and 30,000 people are believed to have died as a result of the disaster.

The UN Commissioner for Human Affairs Kenzo Oshima, attending the conference, called on the international community to pay greater heed to the lessons of Chernobyl, local Inter television reported.

The conference, which continues until Friday, will also discuss the consequences for health and the ecology of nuclear accidents, the Interfax news agency reported.

Chernobyl was not finally closed down until December 15 last year, reactors one and two having been shut in 1991 and 1996 respectively.
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Ukraine: Fifteen Years Later, Chornobyl's Victims Still Looking For Help
Askold Krushelnycky
April 18, 2001
(for personal use only)

Fifteen years ago on April 26, a reactor at Ukraine's Chornobyl atomic power plant exploded. Today, it is generally considered the worst civil nuclear accident in history.

This week, in preparation for the anniversary, the Ukrainian government is hosting a three-day conference (April 18-20) in the capital Kyiv to discuss the effects of the accident, aid for its victims, and steps taken to ensure the safety of the Chornobyl facility and others like it.

In addition to Ukrainian government officials, conference participants include the UN coordinator for International Cooperation on Chornobyl, Kenzo Oshima, and Zygmund Domaratzki, the deputy director-general of the International Atomic Energy Agency (IAEA).

There are also representatives from Belarus, whose population in areas across the border just north of Chornobyl also suffered. The Russian government is also represented.

The UN, together with the European Union, has helped in funding last year's closure of the Chornobyl plant, and continues to aid efforts to encase the makeshift shelter erected 15 years ago around the reactor with a new, more secure one. Experts say the temporary shelter is in danger of collapsing and causing another disaster by releasing tons of nuclear waste into the atmosphere.

Oshima said that as a Japanese national from the city of Hiroshima -- which was destroyed during World War II by an American atomic bomb -- he sympathized with those who had suffered as a result of the Chornobyl catastrophe.

He said: "Over the past 15 years [Chornobyl victims] have endured the hardships of living in a contaminated land. In the face of an invisible danger they persevered in their efforts to return their families and communities to a state of normalcy."

Oshima said many of the victims were not yet born at the time of the accident, but still face physical, psychological, environmental, and socio-economic consequences. He added that many lessons had been learned from Chornobyl -- one of the most important being the need for preparedness in case of a future similar emergency.

Oshima said that much financial aid was needed to tackle the human consequences of Chornobyl and that during this 15th anniversary year, the UN would try to spotlight the accident's victims in a bid to increase international support for them.

IAEA's Domaratzki praised Ukraine for shutting down Chornobyl and pledged continuing support for Ukraine in maintaining nuclear safety.

"There's no question that decommissioning [of reactors] has to be done properly and there's also no question that within Ukraine there is the expertise to do it. And there's also no question that we from the international community are prepared to support Ukraine in its work."

Outside Kyiv's "Ukrainian Home" conference hall, where the conference is being held, around 100 demonstrators gathered to protest the plight of people affected by the Chornobyl accident.

Most of the mainly female protesters were from the town of Pripyat, which is located near the power station and was home to many of the plant's employees. Its inhabitants were evacuated following the accident and Pripyat is now a ghost town. Its former residents say they receive help from international charities in the West but little or no help from the Ukrainian government.

One of the protesters, Valentyna Rebrina, belongs to the All-Ukrainian Chornobyl Group. She says that between the group's calculations and government figures, thousands of people -- including 10,000 children -- are now suffering from radiation-linked illnesses. She said that everyone living in or around Pripyat at the time of the accident is now ill. Rebrina began crying as she described the plight of her own daughter, Olena:

"My daughter is 23 years old and she has hypergrowth of her thyroid gland. Can you imagine that, 23 years old and to have such illness -- and nobody pays any attention to us?"

Another protester, Oleksandra Lelyk, said she has a 16-year-old son who was born healthy and only began to be ill five years after the accident. Lelyk says he now has to have two complete blood transfusions each year, and that her family receives no support for medical expenses.

Lelyk said victims of the accident continue to die nearly every week:

"Each day people we know are taken out for burial. We're not even shocked any more. We just ask the name of the dead person and collect money for their family."

She says that although most of those dying are adults, everyone is worried about the health of their children. Protesters had presented a petition to the Ukrainian government pleading for legislation to make financial and medical help available for those affected by Chornobyl-related illnesses.

The person who received the petition was Ukrainian Emergencies Minister Vasyl Durdynets, whose ministry deals with Chornobyl issues. He said he understood the feelings of the protesters:

"That they (the protesters) write letters and turn to us for help, I have to say they have this right because the funds available today really are inadequate for treatment, for recuperation, and for other needs, particularly for the proper buildings needed."

He said that one of the main aims of the three-day meeting was to discuss how to put into practice aid programs already sanctioned by the UN, the European Commission, and other donors. Durdynets also said the Ukrainian parliament must act to ensure funds for victims of Chornobyl.
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D. U.S. - Russian Relations

Russian Foreign Minister Laments Bad Start To Bilateral Relations Under New U.S. Administration
Associated Press
April 20, 2001
(for personal use only)

Russian Foreign Minister Igor Ivanov on Friday reiterated Moscow's insistence on the need to preserve the 1972 Anti-Ballistic Missile Treaty and lamented that Russian-U.S. relations had gotten off to a rocky start under U.S. President George W. Bush's administration.

"Understanding the importance of U.S-Russian relations for the entire system of international relations, we would have liked to see a different start in relations with the new American administration. But what has happened has happened, and we cannot reverse it," Ivanov said.

In addition to sharp divisions over the United States' plans to develop a limited national missile defense system, a recent spy scandal resulting in the tit-for-tat expulsions of 100 Russian and American diplomats has rocked bilateral relations. Even before the new administration took office, Russian officials voiced worry that the U.S. government was assuming a tougher line toward Moscow.

Ivanov is scheduled to meet with U.S. Secretary of State Colin Powell in Washington next month, and he said Friday that Moscow was ready for dialogue.

"We take a constructive position. We are prepared not only to defend our approaches, but "We must solve these problems without destroying the 1972 ABM treaty. There are opportunities to do so," he said, noting Russian initiatives for developing a European missile defense and erecting new barriers to nuclear proliferation.

While he devoted much of his speech at a foreign policy conference at the Moscow State Institute for International Relations to U.S.-Russian relations, Ivanov also underlined that Russia's top foreign policy priority now was improving ties with the former Soviet republics and European countries.

"We have managed to give a new quality to our relations with the European Union," Ivanov said.

He repeated Russian objections to NATO's alleged domination of European affairs, and said Moscow had long warned that the troubled Balkans region could spark wider security problems beyond its borders.

"Kosovo has developed into the main source of terrorism and crime in Europe," he alleged.
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Powell, Ivanov Set May Date For Us Visit
The Russia Journal
April 20, 2001
(for personal use only)

Russian-U.S. relations are back on track after reciprocal mass expulsions of alleged spies and Foreign Minister Igor Ivanov in May will make his first official visit to Washington since President George W.

Bush took office, a State Department spokesman said on Thursday. "He will be here on the 18th. When exactly he arrives and when they start the meetings, remains to be scheduled," State Department spokesman Richard Boucher told a news briefing.

"The relationship as we've said before is back on track. We are working with the Russians again on areas where we need to work," he said. "It's a very important relationship to us."

But he also touched on a thorny subject which could cast a shadow over Ivanov's visit, which he said could start May 17.

Boucher repeated a charge that seizures by Russia's state-dominated gas monopoly this month of parts of the Media-Most empire including NTV, the only national independent television station, were politically motivated.

Boucher said Ivanov and Secretary of State Colin Powell had just agreed the visit in a telephone call during which they discussed the Middle East, Iraq, Afghanistan and strategic issues including the Anti-Ballistic Missile Treaty of 1972 - all topics he said would be addressed during Ivanov's visit.

Last week in Paris, Powell and Ivanov met for the second time since Bush entered the White House in January - and since the Cold War-like reciprocal expulsions of 50 diplomats apiece following the arrest of a Federal Bureau of Investigation officer accused of being a double agent.

Powell and Ivanov told reporters that the first Russian-U.S. summit would take place by the time of a Group of Eight summit in Genoa July 22-24 at the latest. "It will be up to the White House to specify if there is something settled before that. The schedules were, obviously, quite difficult to work out," Boucher said Thursday.
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E. Brain Drain and Conversion of Weapons Expertise

Russian Scientist Held for Selling Secrets to China
Yelena Smirnova
April 18, 2001
(for personal use only)

Russia's domestic security service said on Wednesday it had charged a scientist with trying to sell space research secrets to China, but colleagues said the accused man was innocent.

The FSB in the Siberian town of Krasnoyarsk said scientist Valentin Danilov was arrested and charged with treason for trying to sell information on the effects of space on satellites. Danilov, head of the Thermo-Physics Center of Krasnoyarsk State Technical University, is the latest scientist to fall foul of the FSB, a successor to the Soviet-era KGB, in a spate of spy scandals that has hit Russia. Colleagues, who have written an open letter to local prosecutors demanding that Danilov be released from detention, said he was arrested in connection with work carried out under contract for a Chinese research center.

One fellow researcher said Danilov's work dealt with the effects of solar activity on satellites, which the FSB might see as sensitive due to its relation to the development of anti-satellite weapons.

"This is Star Wars stuff. ...But anyone with experience in the field could have put together what he was doing," said the man, who declined to be named for fear of implication in the case.

But FSB spokeswoman Stella Alexeyeva said by telephone from Krasnoyarsk that investigators had clear grounds for the arrest. "Damage has been done to Russia's external security," she said. "Danilov's actions have allowed foreign countries to significantly cut the amount of time money spent on the development and creation of space craft."

Danilov's fellow workers said his research had been secret until 1992, but its security status was then lifted. "There is really nothing at all secret about the work. Virtually all his research has long been in the public domain," the colleague said. "A mistake is being made here." He said Danilov was arrested on February 16 but was first detained and questioned for three days last May. Danilov's lawyer, Yelena Yevmenova, said she had expert testimony that her client had revealed no state secrets. She said Danilov "felt as well as can be expected for a man in prison" but that she hoped to see him granted bail in the case, which was unlikely to go to court before September.

"Within two weeks I hope to be able to again ask [for bail]. ... It is even possible that we could see this case dismissed altogether," she said. His colleagues demanded any trial be held in public and not behind closed doors as is usually the case in secrets trials. Some of Russia's recent spy scandals have involved scientists working with foreigners. One involved U.S. businessman Edmond Pope, who was sentenced to 20 years for allegedly stealing secrets of an underwater missile but later pardoned by President Vladimir Putin and freed.

Igor Sutyagin, an arms expert at Russia's respected USA-Canada Institute, is still on trial on charges of passing secrets about Russian nuclear submarines to the United States and Britain. Sutyagin was arrested by the FSB in October 1999 and faces up to 20 years in prison if found guilty. He denies the charges. The FSB has said the Sutyagin case should serve as a warning to other researchers to consider carefully any work they do for foreign firms. Military researchers in Russia say they run a daily risk of being accused of espionage because the guidelines regulating their work are so vague.
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Investing, Pentagon-Style
Matt Bivens
Moscow Times
April 4, 2001
(for personal use only)

They had millions of dollars and a mandate from Washington: Help demilitarize the Russian economy, and feel free to get rich along the way if you can. But six years later, a former employee has accused them of frittering away the money, and the Pentagon is conducting a criminal investigation. The program's backers concede some mistakes, but argue the jury is still out on the Defense Enterprise Fund.

Matthew Maly is passionately holding forth in his kitchen about everything wrong with U.S. foreign aid to Russia. It's a field in which he has worked for the past few years, and he spins tales of greed and incompetence: of a failed scheme to coax gold out of trash; of a bungled telecom investment that sucked the American and Russian governments into a little-known spat; of a book published by USAID and then bought back and shredded by USAID.

Maly's harshest stories involve the U.S. Defense Enterprise Fund, an organization given $67 million by Congress and told to shepherd Russian military scientists and factories into civilian work. Maly worked at the DEF from 1996 to 1999, right up until management laid off the last 16 employees of what had once been a 48-person staff. Struggling to communicate his exasperation with his time there, he launches into what seems a long digression:

In 1985, Maly was a recent émigré to the United States and a graduate student at Columbia University. One day, a fellow countryman is steered to Maly's New York doorstep by relatives back in Moscow. This man, Vladimir

Furman, introduces himself as a brilliant inventor who has developed a vague sort of water heater that will be able to cheaply satisfy the energy needs of the entire planet known as Earth. All he needs is some money.

"He says, 'Introduce me to George Bush,'" Maly said. "I tell him I don't know George Bush. He says, 'Then introduce me to some millionaires.' I don't know any millionaires, I'm a poor grad student.

'Who do you know?'

'I know my geography professor.'

'OK, let's go meet your geography professor.'"

They go. Furman waxes eloquent about his miracle heater and tells the professor he could sell the technology to him for $2 billion. Perhaps the professor should get some investors together?

"Later, we are all three walking down the street in New York, and Furman stops and stares up at this skyscraper. We say, 'What are you doing?' and he says, 'I'm contemplating buying this building after I sell my technology.'"

Thirteen years later, Maly was working in Moscow at the DEF, and growing ever more frustrated with the fund's management. One day his boss told him he had just met a Russian scientist - a Vladimir Furman - and the DEF was going to invest in some of his ventures.

It was the same Furman. Maly says he immediately told his boss, DEF senior vice president Richard Nordin, that Furman was crazy.

Nordin - a 47-year-old burly former U.S. military paratrooper who runs the DEF's Moscow operations - confirmed that in an interview.

"Matthew claimed he knew Furman and that he was crazy," Nordin said.

Maly's cautions aside, the DEF and Furman went into business. Nordin said the DEF invested $110,000 into a project brought to them by Furman to commercialize a lubricant to make machinery less abrasive.

Nordin said the science belonged to another man, and the DEF's technology experts judged it sufficiently promising to flirt with. Therefore Furman himself, Nordin said, "was not all that critical to the deal." Among other things, the $110,000 investment let the DEF test-run the lubricant on the equipment of AvtoVAZ, Russia's largest car manufacturer. DEF officials concluded the lubricant did not work well enough to justify pursuing it commercially.

Another consideration was that Furman - who could not be found for this article - was apparently a pain in the neck. "Mr. Furman was doing ever increasing amounts of screaming and shouting, and we just cut him off," Nordin said.

A 'Missing' $41 Million?

Over the years the DEF has spent $67 million on obtaining and managing stakes in businesses in Russia, Ukraine and Kazakhstan. The businesses all must somehow qualify as "conversion" - as somehow moving an institution or its personnel out of the Soviet military past and into a free-market future.

Early on, the DEF indulged itself in six offices in four nations (including offices in Richmond, Virginia, and Washington), and managers were asserting that business was too good to handle - that they would have to set up a second, private fund to deal with it all.

That never happened. Instead, the DEF managers have spent lots of time over the years trying to extract themselves from bad situations.

These days, Nordin manages the portfolio out of the offices of Russia Partners, a Moscow-based fund manager. It's a far cry from the 50-person DEF team of 1998, which Nordin said some years cost as much as $7 million to run. Managing the modern-day DEF is so low-key that last year Nordin had time to take on an extended stint as acting president of another Russia Partners property, MTV Russia.

On busier days, when Nordin needs help on a DEF project he can mobilize a dozen or so Russia Partners employees. But instead of scouting for the next big thing, the job now is unraveling old problems, recovering long-lost money and planning for the day when the DEF's modest portfolio - stakes in six companies worth about $26 million - can be "harvested" for cash. (More fun is planning what to do with that cash. Nordin said the Pentagon's Defense Threat Reduction Agency - the DEF's main supervisor - would put the money back into conversion in Russia, this time probably as a grant of some sort.)

How did the DEF turn $67 million into a handful of investments worth less than half that? Where did the other $41 million or so go?

There are many ways to tell that story. One way would be to reject the premise: The figure of $26 million can be reached by updating a Pentagon report issued last August that said the DEF portfolio included seven companies valued at $31 million. (One company valued at $5 million has since dropped out). But Nordin said it was he who gave the Pentagon that figure, and he characterized it as a back-of-the-envelop guess. He also argued against trying to put a value on the DEF portfolio before it is harvested.

But it is Maly's version of events - angry, impassioned, at times unapologetically speculative - that has launched a series of official investigations in Washington.

About $20 million, according to Nordin, was spent just running the DEF for six years - on the rent, the staff compensation, the legal and consulting fees. That might raise some questions about costs, and indeed an internal DEF study rapped the American managers for running an expensive shop.

It would also leave another $21 million or so to account for. At least some of those "missing" millions can be chalked up to Furman's superlubricant and other investment misadventures. For Maly, 42, this has always been the story: bad investments, bad management. In July 1999, as he and others were laid off, he was furious to think DEF's managers might consign talk of mismanagement to the fires of the ruble devaluation.

That month he wrote a six-page letter to William Taylor, a top State Department official in Washington who then oversaw assistance to the former Soviet bloc, asking him to look into "a catastrophic situation with the DEF's investments." Maly wrote that the DEF's troubles were caused by "serious wrongdoing" on the part of its managers, and he singled out Nordin by name. He said DEF managers failed to do proper due diligence before investing, failed to keep control over money once invested, hired incompetent staff, did not avail themselves of enough legal advice and were generally sloppy and free with the money in their care.

The managers of Enterprise Funds like the DEF (see related article) are allowed to set up their own venture capital funds and start beating the bushes for private cash. But this is hard to justify unless they are well on their way to having fully invested their public monies. Maly and other DEF employees say there was a constant urgency to invest rapidly, and Maly argued in his letter that DEF managers were in a rush because they had their eyes on the prize of their own fund.

"The DEF rule was: Never, ever do any due diligence lest it interfere with the speed of investment," Maly says.

Maly also wrote that DEF management "may have violated U.S. law," although in that letter he was vague as to how. Later Maly made clear he was referring to payments the DEF made to a former deputy prime minister, Valery Serov, for lobbying work. Maly suggested the DEF's 1998 payments to Serov - who at that time was out of office and who today is a vice president of the natural gas company Itera - were cash delivered in brown envelops, and so may have been bribes.

That's a serious allegation, and it's worth noting it's based on hearsay: Maly claims no direct knowledge of dollar-stuffed envelopes, he only says he was told of them. (He has named his sources to investigators, but those people could not be reached for this article.)

Serov in a telephone interview dismissed talk of being paid in cash as "complete delirium." Nordin is equally testy on this point. He refuses to comment on the size of Serov's payments - Maly, again citing office colleagues, has put them at $20,000 a month - but he said flatly Serov did not get paid in cash "in brown envelopes, or in any other color envelopes."

Many who worked at the DEF or had dealings with it - including some who, like Maly, believe the fund was poorly managed - recoiled when told of Maly's suggestion Nordin paid bribes.

Consider Paul Thomas, an American who runs the Ukrainian auditing and assets appraisal company IRE. Thomas has worked with both Maly and Nordin on a DEF project in Kiev, he has been in business in the former Soviet Union for more than eight years, and Maly lists him as one of his character references. Thomas was surprised to hear that, in addition to slamming the DEF as poorly run, Maly had suggested Nordin might have knowingly paid bribes.

"Rich Nordin is a Boy Scout!" Thomas exclaimed indignantly. "He makes George Bush Sr. look like a pickpocket! It's incomprehensible that this guy, who fought for God and country in [the 1989 invasion of] Panama, is somehow giving bribes to enrich himself. Matthew [Maly] is really

grabbingat straws on that one - it's not good for him and patently unfair to other people."

(Nordin actually helped invade Grenada, not Panama, but point taken.)

Maly counters that he never pretended knowledge he did not have, and only suggested the State Department examine the matter. And he points out that no action was taken for 13 months after he wrote his letter: Only last August did the Pentagon's Defense Criminal Investigative Service open up a probe.

Nordin said the Pentagon is obliged to investigate any such accusation, no matter how well or poorly documented. He and other DEF managers say they expect to be exonerated. "Every so often [the Pentagon investigators] will call and ask for something," said Robert Odle, a lawyer representing the DEF board. "We've prided ourselves on trying to reply instantly."

'A Shitty Job' Investing

If they firmly reject suggestions they somehow violated U.S. law, the DEF's managers are more willing to concede the fund was not a triumph of management. In fact, Nordin himself in a September 1999 e-mail put it more bluntly and succinctly than Maly ever has:

"I think you will be the cause of a report that accomplishes what I assume you set out to do - which is to show that a small number of people did a shitty job of investing a fund and that it did not have to be that way. This being Washington, the impact on me will be predictable," Nordin wrote to Maly, who provided a copy of the e-mail.

John Nowell, the DEF's chief executive officer, also declined to argue the point. "As for 'the DEF could have been better managed,' I can't say much," Nowell wrote in an e-mail reply to written questions. "I suppose Winston

Churchill could have been a better peacetime prime minister, and maybe Joan of Arc could have been more virtuous. I know I could have done a better job managing the DEF. I apologize."

Nowell added that he believed everyone working for the DEF had "done their best in a continuously tough environment." "If you think it didn't work out, then it's my fault," he wrote. "The successes belong to [the DEF's Moscow team]. The failures and shortcomings belong to me."

Yet even while offering their mea culpas, the DEF managers say Maly is wrong on details. They insist they did do due diligence, use lawyers and handle money with care. And they explain their fund's poor performance by pointing out that it was in bad shape when they got it, and by arguing that similar investors in the unfriendly environment of late 1990s Russia have done as bad or worse.

'A Very Rough Start'

A tendentious early history of the U.S. Defense Enterprise Fund might go like this:

The DEF set aside $2.9 million to invest in OrbitSoft, a startup designed to farm out the services of Russian computer programmers. But the DEF decided not to go forward and OrbitSoft was shut down. It put $800,000 into RAIES International, a venture that was going to use the expertise of nuclear labs to zap timber with radiation to sterilize it before export.

That too was abandoned. The DEF put $2.5 million into KK Interconnect, a venture with Kazakhstan's National Nuclear Center to make consumer electronic devices - and KKI even came up with the World Connect, a universal modem adapter that made its way into the pages of the swank Sharper Image catalogs for $49.95. But KKI's isolated factory was hundreds of kilometers from the nearest airport, making shipping costs prohibitive. So the World Connect was another bust. "Essentially KKI has had to reinvent itself," says the DEF's 1998 annual report. KKI's process of self-discovery has been an expensive one for U.S. taxpayers: In addition to the $2.5 million it got from the DEF, KKI got another $3.9 million directly from The Pentagon arm that oversees the DEF, the Defense Threat Reduction Agency.

What's more, Oleg Gapanovich, a St. Petersburg-based DEF official, described visiting KKI with a colleague, Karen Westergaard, in 1998, and finding that "half of the money [the DEF had invested] was lost" because it had been used to pay a second company's debts. (Westergaard could not be reached.) These days, KKI is, among other things, assembling Samsung televisions for the Kazakh market.

The DEF also toyed with going into business with an Alabama company, R&G International, to make vacuum tubes on the site of a St. Petersburg defense plant. R&G executives, however, complained about the legal and consulting fees the DEF was racking up on that project - a whopping $524,000, including $150,000 to Ernst & Young accountants and more than $250,000 to Steptoe & Johnson, a Washington law firm with one of its partners on the DEF's board of directors. The DEF board killed its $3 million investment into the vacuum tube project. R&G sued, claiming the DEF wanted to punish it for pointing out the large legal and consultancy fees. The DEF's then-CEO, Kevin McDonald, agreed. He resigned, and wrote to the DEF board: "I believe that a decision to stop funding this deal would indeed be a form of punishment against our U.S. partners [R&G] for their 'whistleblower' activities."

This was the picture at the halfway point in the DEF's life span. Three years into its six-year existence, the most remarkable things the fund had to show was its eyebrow-raising legal and consultancy fees. A USAID analysis in 1997 found them larger than all but one of the other 10 Enterprise Funds - even though the DEF itself was one of the smallest of those funds. In 1995 and 1996, for example, the DEF paid Steptoe &' Johnson $739,000 for legal services.

Some of the above was covered in the Chicago Tribune, which took a long look at the DEF a few months after Congress held hearings on Enterprise Funds in 1997. That Tribune article, however, also held out the hope of a brighter future: Nowell and Nordin had just been brought in as the new brooms. Nowell conceded the DEF had had "a very rough start" and promised change.

"Under Nowell," the Tribune reported, "the fund has moved into telecommunications and scrap metal deals that he says" will turn matters around.

As promised, the DEF did indeed move into telecoms and scrap metals. But among such projects were two of its more egregious missteps. It was a $9.65 million telecommunications venture called MPS-Telekom that dragged the DEF - and the U.S. departments of State, Commerce and Defense, and the Russian prime minister - into an agonizingly extended feud. And it was an ill-considered scrap metals deal called MZA that saw the DEF lose $5 million by loaning it to a dying French company.

$3 Million to a Restaurant?

More about MPS-Telekom and MZA in a moment; first, consider another up-and-coming project Nowell talked of once upon a time to the Chicago Tribune: RAMEC, a St. Petersburg-based computer manufacturer the DEF has put $6 million into.

More accurately, the DEF put in $3 million for 40 percent of the company - but the money evaporated. So the DEF put in a panicky second transfusion $3 million, this time as a loan, accompanied by a stern finger-wagging. In an interview, Nordin characterized the RAMEC project as "a success, but a very expensive one." The Pentagon's August 2000 report estimated RAMEC's value at a mere $1 million, and stated not enough had been done to figure out what had happened to the other $5 million.

Maly alleged in his letter to the State Department that RAMEC had "reportedly" diverted the first $3 million to build a restaurant in St. Petersburg. Gapanovich, a former member of the Russian parliament who oversaw DEF operations in St. Petersburg, agreed the fate of the first $3 million was a mystery.

"I can't say whether it was diverted to a restaurant, but I can say that from the very beginning the transfers of money were unprofessionally and poorly documented," Gapanovich said in an interview.

Nordin said he knew nothing of any restaurants, but he did volunteer, "We're convinced [the money] wasn't used the way it was supposed to be."

"[The RAMEC managers] are involved in lots of businesses, and they've had a hard time distinguishing between our money and their money," Nordin said in an interview a few months ago. Since then, the DEF and RAMEC have come to an agreement under which RAMEC will pay back the second $3 million loan with a mix of company shares and cash.
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F. EU - Russian Relations

EBRD Looks Further East after 10 Years
April 20, 2001
(for personal use only)

In the decade since its birth, the European Bank for Reconstruction and Development has survived a scandal over its extravagance, the 1998 Russian financial crisis and Balkan wars which hit its clients' economies.

With up to eight of its 27 client countries preparing for European Union membership by 2004, the bank must now shift its attention further east, in many cases to countries where progress towards the free market has been slow, or non-existent.

The EBRD is the largest single investor in eastern Europe and the former Soviet Union.

Some 37 percent of its 12.2 billion euro ($10.73 billion) portfolio is in what it terms advanced countries, such as Poland and Hungary. But it must now invest more in Russia, Ukraine and Central Asia if it is to fulfill its mandate of having the largest possible impact on restructuring economies.

"The challenges for the bank in the future are in Russia and Ukraine, in Central Asia and the Caucuses, and we do not yet have sufficient knowledge to do this to maximise the transition impact," said Heiner Luschin, the independent director for Austria, Israel, Cyprus, Malta, Kazakhstan and Bosnia.

Unlike the advanced countries on the verge of EU membership which have ready access to international capital markets at a sovereign and company level, many of these countries have huge capital requirements and little or no access.


Many observers say the EBRD has done a good job so far and recovered from its first president, Frenchman Jacques Attali, whose lavish spending on marble halls and private jets won the bank the nickname of the "glistening bank."

But some question whether the bank has the appetite for financial risk in the wake of the Russian financial crisis.

More risky projects would mean a greater number of failures.

"The bank needs to be incentivised to shift into countries where the projects are higher return and higher risk, but also where the leadership may be less receptive to its involvement," said Richard Segal of consultancy Emerging Market Economics.

The bank says it can do this thanks to the prudent management of the past two years which enabled it to return to positive cash reserves for the first time since the Russia crisis.

It is profitable and lending a record 2.7 billion euros annually, which will soon rise to 3.5 billion euros. It also says 74 percent of its projects are successful.


The EBRD has announced it will re-enter Russia in a big way. Projects there last year doubled to 579 million euros and the bank plans to raise its investments in the country to 1.0 billion euros a year by 2003-4.

The bank has announced a series of investments, which it says will help improve Russia's appalling record on corporate ethics.

"We are ready to put money under certain conditions and it will help once more build confidence in Russia. We take part in this exercise by our money, skills, but mainly by our conditionality," EBRD President Jean Lemierre told Reuters.

It is mulling loans for electricity giant UES, oil major LUKoil and has approved a $132 million investment for a joint venture between General Motors and Russia's AvtoVAZ.

"We are here to take risks where the risk is too high for markets, today the best example is GM," Lemierre said. "Without us, GM would never have done this."


Some observers say there are contradictions between eastward expansion and the key tenet of the EBRD, Article One, which states it should be "committed to and applying the principles of multiparty democracy, pluralism and market economics."

"The EBRD was supposed to be the institution which came to the region with goals to build democracy and sustainable development," said Petr Hlobl of CEE Bankwatch, a non governmental organisation (NGO) from eastern Europe which monitors the activities of international financial bodies.

"I do not have a feeling that any of these large statements were fulfilled," Hlobl said.

The EBRD does not lend to state companies in Turkmenistan due to a lack of democracy, yet it remains in Ukraine where the opposition accuses the president of thwarting democracy.

The issue of financing the completion of two nuclear reactors in Ukraine to replace Chernobyl has also tarnished the image of the EBRD among environmental groups and prompted accusations that it is to make loans for political reasons.

It is also engaged, at a low level, in Belarus and Moldova.

Among Central Asian states, which need additional funding from the EBRD, there are political or economic problems in Georgia, Uzbekistan and Kyrgzyzstan.

Even the most developed Central Asian state, Kazakhstan, has a long way to go on reforms, according to the EBRD.


Lemierre will tell the bank's annual meeting in London next week he believes the bank must start to take greater notice of the social impact of the massive transformation in eastern Europe and the former Soviet Union in the past 10 years.

In the case of Russia for example, earnings inequality has almost doubled since 1990, according to EBRD data. Lemierre believes the early concept that the market was all and the sole aim of the transition process was misconceived.

"There is a different approach from 10 years ago. The message then was that we needed to destroy the state but my message today is that we need a state," Lemierre said.
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G. Russian Military

Russia Offers High-Precision Arms for Market
Anatoly Yurkin
April 20, 2001
(for personal use only)

Russia offers unique high-precision defensive-offensive weapons for the world market, the deputy general director of the state-owned design office Konstruktorskoye Byuro Priborostroyenia, Vyacheslav Dudka said.

He said in an interview published by the military daily Krasnaya Zvezda on Friday that guided missile systems Metis-M, Kornet-E and Vikhr-M can effectively destroy tanks, armoured personnel carriers, fortifications, machine-gun emplacements and manpower.

"Fire support units can be set up on the basis of the missile systems. They can be part of an infantry, mountain or aeromobile divisions, a separate amphibian or airborne brigade. The systems allow operatively solving tasks in the responsibility area with a tactical depth on the direction of the enemy up of up to 10 kiometres," Dudka said.
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