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 unamuous geopolitical wins - is apparently happy to turn a blind eye to Russia’s uranium ambitions.
When the USSR collapsed, Russia inherited over a thousand tons of weapons-grade fissile material and a sizable nuclear refining and fabricating infrastructure. Russia’s holdings of weapons-grade highly-enriched uranium (HEU) became a key currency in US-Russian diplomacy. 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.
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. 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. 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.
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 per cent 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 . 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.
Mongolia is one 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 claim to have invested $600 million overall on Mongolian uranium exploration and development. Material from Dornod was railed 400 km 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). 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 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, 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. ARMZ then injected itself into the issue, publicly announcing that Khan’s mining licences 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 licences 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”. 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.
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.”
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 Medvedev came to Ulaanbaatar a month later, with ARMZ’s president in tow, also to discuss uranium.
President Ts. Elbegdorj’s relations with the Russian leadership are rumoured to be icy, and it was further rumoured that the mysterious summer 2011 interruption of Russian diesel fuel deliveries that threatened Mongolia’s harvest (and its full enjoyment of the Naadam 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.
In May 2011, the Mongolian Embassy in Vienna had posted a vociferous denial of the rumour. The US government, despite the fact that it had originally floated the proposal, obligingly papered over the situation with a supporting statement. 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 it 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:
[The 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.”
Now, for whatever reason - and thanks to a law banning the importation, transit, and storage of nuclear waste - Mongolia is down to one partner for its uranium programme: 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 and world uranium supplies for commercial purposes will be largely in the hands of Russia’s opaque autocracy and its cowed foreign clients.
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.
(Abridged from an article by Peter Lee that Mineweb reprinted from Asia Times.)