Is America Ready for Russian Capitalism?

By Daniel McGroarty

Should the U.S. Government care whether a Russian government entity acquires majority control of a U.S.-based uranium mine? That's the question at the core of a commercial acquisition with geo-political implications for the global competition for strategic resources.

The deal involves a complicated asset swap that ends with Russia's Atomredmetzoloto (ARMZ) owning 51 percent of Canadian-based Uranium One. The U.S. angle comes from Uranium One's properties in Wyoming - one of which has just received U.S. Government approval to proceed to the mining phase - plus claims in Texas, South Dakota and Utah.

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Interest in the uranium acquisition, confined at first to the business pages, has been quietly building in Washington. Last week, four Republican members of Congress - ranking minority members of the Foreign Affairs, Financial Services, Homeland Security and Armed Services Committees - sent an open letter to Treasury Secretary Timothy Geithner asking him to pull the plug on the Uranium One deal.

There's a step short of that, written into U.S. law: Review of the proposed purchase by CFIUS - the Committee on Foreign Investment in the United States - created to vet foreign investments for national security implications adverse to the U.S. Thus far, however, there's no indication CFIUS plans to put Russia's U.S. uranium purchase on its docket.

It should, if for no other reason than to raise the issue of reciprocity in the context of Russian resource policy. Reverse the roles of buyer and seller, and a majority acquisition of a Russian uranium asset - whether by a U.S. company or one from any other nation - simply would not happen. Under Russian law, uranium mines are classified as "Strategic/National Defense assets." For "deposits of uranium, diamonds, high-purity raw quartz, the yttrium group of rare earths, nickel, cobalt, tantalum, niobium, beryllium, lithium, and metals of the platinum group," the permissible percentage of foreign investment in a Russian mining enterprise is capped at 10 percent.

If we grant Russian state agencies carte blanche, we're tacitly acquiescing in a Russian resource policy under which what's mine is mine - and what's yours is acquirable.

And for the free marketers among us, let's quell any qualms that conducting such a review amounts to interfering with free play of private markets. Atomredmetzoloto is a wholly-owned subsidiary of Russia's state atomic energy agency, Rosatom. It's akin to the U.S. Department of Energy or Nuclear Regulatory Commission announcing the intent to buy a majority stake in a Russian uranium mine. But the parallel doesn't pertain, because the U.S. Government does not put the power of the state behind resource ownership. Russia does - which is why the U.S. neglects such asymmetry at its own peril.

To put the proposed U.S. acquisition in context, ARMZ is already at the forefront of Russian efforts to add significant non-Russian assets to its uranium portfolio. In the past year alone, ARMZ has entered into a joint venture with Mongolia and an agreement to invest $1 billion in a Namibian uranium venture. In addition to the U.S. uranium assets, Russia's purchase of Uranium One would give it majority control over Australia's Honeymoon Well uranium property as well.

While Russia ranges beyond its borders for new sources of supply, the U.S. imports more than 90 percent of the uranium it currently consumes. The proposed purchase of Uranium One would put approximately one-fifth of that small "mined in America" sliver under Russian control. Responding to concerns that U.S.-mined uranium might be diverted elsewhere - to Russia or even Iran - Uranium One officials were quoted as calling such a diversion "highly unlikely." Not quite the categorical "no" that might provide comfort. Meanwhile Uranium One's Canadian CEO spoke in enthusiastic terms about bringing "Russian-style state capitalism" to North America.

U.S. Congressmen wary of seeing Russian-style state capitalism in action might want to make a call to Canadian-registered Khan Resources, which found itself on the receiving end of a hostile takeover bid by ARMZ in 2009. Khan, then developing uranium properties in Mongolia, fought off the Russian takeover attempt, but that's not where the matter ended. In April 2010, Mongolian mining authorities revoked Khan's uranium licenses. Khan has now brought suit in a Canadian court, alleging that ARMZ - which had partnered with government-run MonAtom in a uranium joint venture - pressured the Mongolian Government to rescind Khan's Mongolian mining rights.

Do these dots connect? That's hard to say - and not surprisingly, Russian authorities aren't advertising the logic behind their uranium acquisition strategy. But leading Russian energy experts posit that global uranium production will crest in 2020 and decline beginning in 2024 - just as hundreds of newly-commissioned nuclear power plants create a sustained surge in uranium demand. Whoever controls the lion's share of uranium supply post-2024 will enjoy considerable economic and geopolitical advantage.

Perhaps that's why Russia restricts foreign control over its own uranium resources.

Whatever the reason behind Russia's concerted efforts to acquire uranium mines in Africa, North America, East Asia and Australia, there's no reason to rubber-stamp this proposed acquisition, which more than meets the criteria for CFIUS review.

As Robert Abel of the Center for Strategic and International Studies has noted, "The United States is dependent on Russia for a significant portion of its nuclear energy. I don't think a lot of Americans know that." But cabinet secretaries and congressmen should be among the few who do. So before we green-light Russia's purchase of a significant slice of what little uranium we do produce in the U.S., perhaps the U.S. Government should make the Uranium One deal a "teachable moment."

CFIUS could start with a simple question: If a U.S. mining company - to say nothing of a U.S. Government-backed agency - made a bid for majority control of a Russian uranium miner, what would Moscow do?

Daniel McGroarty, principal of Carmot Strategic Group, an issues management firm in Washington, D.C., served in senior positions in the White House and at the Department of Defense.

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