Prepared Statement

Hearing on “Loose Nukes, Biological Terrorism, and Chemical Warfare: Using Russian Debt to Enhance Security”

House Committee on International Relations

Dr. James L. Fuller, Director

Defense Nuclear Nonproliferation Programs

Battelle Memorial Institute

Pacific Northwest Division

Richland, Washington 99352

July 25, 2002

Thank you for the opportunity to comment on the use of Russian debt to enhance security.  I will be presenting a brief summary of my views from my prepared statement, the full text of which I respectfully submit for the record. 

My name is James Fuller and I work for Battelle Memorial Institute headquartered in Columbus, Ohio.  I am a nuclear scientist, and have been a technical practitioner in the field of U.S.-Russia nonproliferation and arms control for more than 15 years.  Battelle is a not-for-profit contract research and development organization that, among a broad variety of science and technology R&D efforts, has supported U.S. national security for decades as a contractor to virtually all elements of the U.S. national security community.  Battelle also has a robust technology commercialization enterprise that works in synergy with our support for the U.S. Government. At the Pacific Northwest Division in Richland, Washington, where we operate the Pacific Northwest National Laboratory (PNNL) for the U.S. Department of Energy under contract DE-AC06-76RL01830, my job is to direct all of the laboratory’s defense nuclear nonproliferation activities. That said, I wish to convey that the information I am providing here today reflects only my own personal views and does not necessarily represent those of any organization or other person for whom those of us at Battelle have provided support. 

The Debt Reduction for Nonproliferation Act contained in S1803 is an innovative new approach in the prevention of proliferation. This is a good tool for President Bush and future Presidents to use to elicit additional participation by the other industrialized nations. It also could help to increase the investment in Russia proliferation prevention programs to a level more commensurate with those recommended by the bipartisan 2001 Energy Department Russia Task Force.  I wish also to commend the wisdom used in drafting of the Senate bill, as evidenced by the fact that it received unanimous bipartisan support in Committee and on the Senate Floor.  However, there have been some interesting new developments, so I am also very pleased to see the House giving it careful consideration. 

We started thinking about the possibility of Russian debt swaps for nonproliferation in mid-1999 after a seminar at the PNNL Pacific Northwest Center for Global Security by a distinguished economics specialist from the Congressional Research Service, Dr. John Hardt, who came out to the Laboratory and talked to us about Russia’s economic policy dilemma and U.S. interests.[1] The thought occurred to me that if the United States and other members of the Paris Club had been willing to forgive significant amounts of debt for emerging democracies such as Poland to help with environmental issues, surely it made sense to consider doing the same thing for the Russian Federation in relation to some of the under-funded cooperative efforts to limit the spread of chemical, biological, and nuclear weapons.  Unfortunately this message was a tough sell until we de-focused from our specific ideas about how the funding might be utilized, and just concentrated on the merits of debt swaps, particularly from the perspective of their utility in the global arena for eliciting financial partnerships with the industrialized nations.  In the interim, the London Club restructured Russian Federation commercial debt, forgiving about 52% without any “debt-for” provisions; also, the Federal Republic of Germany and the Russian Federation settled their GDR debt issue without any debt for nonproliferation provisions.  I was very glad to hear about President Bush’s G8 Global Partnership Initiative at Kananaskis, its 10+10 Over 10 provisions, and the fact it might include debt swaps as a component.  An Italian colleague of mine from the NGO and academic community suggested just last week to me, as I prepared my testimony for this hearing, that swaps were the only way many on the European side were going to be able to live up to the commitments made at the G8 summit. I do not know if this is true, but if it is even close, it presents the United States with an opportunity to demonstrate leadership by passing this legislation and taking the necessary additional actions required to bring a Global Partnership to fruition. 

The pros and cons of debt for nonproliferation can be broken down into two basic categories: financial and political.  Back in 1999 before London Club restructuring and before the Russian economy had begun to rebound, good financial arguments could be made for the United States to consider restructuring of its Russian holdings in order to help offset the risk of Russian default.  Today, that is not the case.  Russia has good Central Bank hard currency reserves.  Debt restructuring financial arguments today have to be more along the lines of helping our economy indirectly by strengthening the Russia economy, and by recognizing that there is a difference between Russian economic solvency and financial liquidity.  While the Russian liquidity crisis seems to have been resolved for the time being, federal budget solvency issues are still a major concern due to the significant portion of the annual budget that must be earmarked for external debt servicing.  This burden reduces the funds available for more discretionary programs such as proliferation prevention. 

The political dimensions of debt for nonproliferation are embodied in the topics I was asked by Chairman Hyde to comment on today:  the utility of this proposal for advancing U.S. nonproliferation programs in the Russian Federation, including its potential impact on the structure and effectiveness of those programs, the prospects and conditions for ensuring sufficient cooperation and participation by the Russian government, and operational considerations and options, including participation by non-governmental organizations. 

From my own perspective, there is no question that debt reduction for nonproliferation would significantly advance U.S. proliferation prevention efforts. I wrote an article in Arms Control Today in February advocating this approach.  I have given supportive presentations at the EC and elsewhere in Europe.  I was asked late last year by the Carnegie Endowment for International Peace to participate in a Moscow Dialogue on this subject. What is needed for proliferation prevention efforts is more investment and involvement by our European and global friends, a much greater dimension of program sustainability in Russia facilitated by Russians, and additional investment by the United States.  What we are talking about is nothing short of a global proliferation prevention partnership addressing a problem that the U.S. Congress has called “the most urgent unmet national security threat to the United States.”  Debt Reduction for Nonproliferation is an actionable idea to help make this all happen. And, very importantly, it is quite synergistic with President Bush’s proposal adopted by the G8 at the recent Kananaskis Summit for a Global Partnership Against the Spread of Weapons and Materials of Mass Destruction, what is sometimes referred to as “10+10 over 10.” 

The impact of a debt reduction for nonproliferation program on existing efforts is hard to gauge at this time because in part that impact will depend on the manner in which any debt swap program is implemented.  My view is this: we should consider the $10B over 10 years commitment made by the United States at Kananaskis as a U.S. funding floor since it is consistent with recent and near-term Administration budgets. We should continue to give priority within this proposed $10B expenditure to the critical, more immediate security concerns such as accounting and protection of fissile materials and radiological dispersal device materials, and the continued production of weapons plutonium. And we should probably continue to work on such problems in the somewhat one-sided, contractually forceful service-for-fee “compliance” manner that we have been using with Russia for the last several years. We do not want to negatively impact progress by changing the construct. We should allocate U.S. “debt-for” funds, for example as prescribed in S1803, as incremental increases over the $10B in a manner that further facilitates other G8 contributions, and, as importantly, begins to actually develop a sustainable financial and programmatic proliferation prevention partnership with Russia. In this manner we can best assure that the positive impact of debt reduction for nonproliferation will be truly significant. 

I believe that there is enough flexibility in the Senate bill language to conduct implementation in a manner that would support G8 engagement and also build a sustained partnership with Russia in ways that are also within the spirit and intent of the Kananaskis agreement. I believe that a very good, visible way to facilitate these partnerships is to establish a Russia Nonproliferation (ruble-denominated) Fund, into which the Russian Federal Government would deposit appropriated monies in exchange for debt cancellation, based on bilateral financial arrangements with contributing G8 and other nations.  The charter of this fund could be made broad enough to accept ruble or hard currency aid from direct contributor deposits as well.  This approach is quite analogous to one that the United States and the Paris Club used to establish the highly successful Polish EcoFund in 1992.  A Russian Nonproliferation Fund has several concomitant advantages. These are: 

·        Allows G8 contributors to pool resources to accomplish more

·        Provides a mechanism for contributions from other national, multilateral, and even private commercial entities

·        Allows Russia a major governance role in partnership with contributors

·        Allows Russia to reduce the debt service burden on its budget and improve its credit-worthiness without further tapping into its Central Bank hard currency reserves

·        Could be used to provide loan guarantees or direct funding to help build a viable commercial security sector within the Russian Federation

·        Could include formal roles for international non-governmental organizations in supplementing resources and measuring and assuring project performance. 

I respectfully suggest that the Committee consider the merits of a Russia Nonproliferation Fund within the context of your preparations for any House and Senate Conference Committee discussions of debt reductions for nonproliferation. In my view, a Russia Nonproliferation Fund of the type I have described would be effective in accommodating key objectives of President Bush’s proposal and the G8 Kananaskis agreement.  Senate bill language describing the Investment Agreement (Section 318) and calling for the use of existing administrative mechanisms (sub-paragraph “c”) might need to be changed in this regard even though language in Section 322 encourages the President to explore the possibilities associated with a “unified fund.” 

The prospects and conditions for ensuring sufficient cooperation and participation by the Russian government are also strongly dependent on the way in which debt reduction for nonproliferation is implemented.   I am quite sure that the Russians are less concerned about drawing down their Central Bank Reserves than they are about projecting to the global financial community that they are in need of help in servicing their debt. This is a delicate matter, and if all the United States is offering is the choice between business-as-usual ($1B/year direct aid) and a smaller amount of direct aid with the difference being made up by a swap, then a debt-for initiative is dead-on-arrival, in my opinion.  The best way for the United States to help ensure Russian cooperation in this matter is to: 1) earmark U.S. debt-for monies to be a significant addition to current and projected levels of U.S. direct appropriation, 2) apply these monies in a manner that will help guarantee that the other G8 countries meet their $10B/10 year commitment, and 3) give the Russians a partnership role in governance of the programs in a way that acknowledges their global stature, as well as their sovereignty over their national security and financial matters.  This is what the Russia Nonproliferation Fund that I have advocated is designed to do. 

Regarding the operational considerations and options, including participation by non-governmental organizations, Battelle has done quite a lot of work on this subject for the Nuclear Threat Initiative.   The value of NGOs to a Global Partnership construct, such as I envision it, is one of administrative facilitation, trusted agent project accountancy, and perhaps even financial contribution, in-kind or monetary. Battelle studied the construct of ten different debt swap and nonproliferation aid programs to reach some conclusions on the best operational model. There has never been a debt swap devoted to WMD threat reduction per se, so there is no closely analogous model to consider.  The four programs that received our most intense focus were USAID debt swap activities, the Polish EcoFund, the U.S.-Russia International Nuclear Safety Program, and the U.S.-Russia Cooperative Threat Reduction program.  We recommend undertaking an approach that has significant creditor and host government involvement similar to the Polish EcoFund model. 

Debt swap funds typically incorporate one-tiered or two-tiered management structures. Lessons learned from the significant body of knowledge on debt-for-nature swaps include the observation that to achieve the best conditions for success and to serve multiple obligations and purposes, a Russia Nonproliferation Fund must be based on a partnership where decision making is authentically shared amongst creditor and debtor stakeholders, where there is efficiency and effectiveness in management and operations, and where there is full accountability in fund allocations and project performance.  I support strong payment-for-performance provisions in any fund construct, and a clear up-front understanding that without measurable accomplishments coming from the partnership approach, these debt-for and other aid programs will cease and debt obligations will be reinstated. Given the extent and complexity of the proliferation prevention issues in Russia, we recommend a modified two-tiered structure consisting of an engaged stakeholder Board of Directors made up equally of creditor and Russian representatives, and an Implementation Team that could be heavily supported by NGOs.  As I have stated, I believe that NGOs could play a significant role in the success of “10+10 over 10” that includes debt swap components.