Investing In Nonproliferation - Managing Systemic Risks

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R e s e a rc h for Living Sustainably on Earth

INVESTING IN N O N P R O L I F E R AT I O N

A $100 BILLION REVOLVING CREDIT FACILITY FOR FINANCING TIMELY NUCLEAR NONPROLIFERATION PROJECTS DRAFT FOR DISCUSSION ONLY PROPOSAL CONTACT: LYLE BRECHT PHONE: EMAIL: [email protected]

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TRANSMITTAL LETTER

RE: INAF

M A R K E T S

R E S E A R C H

PROPOSAL SUBMITTED:



VIA FAX: Dear Attached is a proposal to develop an international nuclear assurance facility (INAF), a revolving credit facility for financing nuclear nonproliferation projects using funds provided from the private capital markets. This may be an auspicious time to build such a facility: given the present depressed state of the economy, the capital markets are presently seeking safe havens for long-term investments of capital; today’s global economic situation will make it easier for nuclear weapons, plutonium, and HEU to fall into the wrong hands if additional nonproliferation funds are not injected rapidly into these failing economies; and the continued threat of nuclear terrorism hangs like a Sword of Damocles over the capital markets and puts at grave risk economic recovery measures being taken today by the U.S. and other national governments. An INAF funding mechanism may assure that nonproliferation measures were being taken, for example, in other parts of the world not readily accessible to present government-run programs or could be undertaken more rapidly through private sector negotiations rather than often lengthly government-to-government negotiations. INAF could help to make the global economy more stable by reducing the threat from nuclear terrorism and heighten the private sector’s awareness of nonproliferation. INAF might prove highly attractive to the private capital markets at this time. Sincerely yours,

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N O N P R O L I F E R AT I O N :

INAF ABSTRACT The purpose of an International Nuclear Assurance Facility (INAF) is to improve the scale, speed, and management of present nonproliferation efforts and for rapidly establishing new, highly desirable initiatives. For example, some nonproliferation programs such as the IAEA International Fuel Bank and the MOX fuel fabrication program may lend themselves as natural candidates for the infusion of private capital that could shorten the technology adoption cycles for such new nonproliferation programs. Any impetus to involve the private sector and its capital markets in achieving nonproliferation objectives will require a new level of private/public cooperation involving present U.S. and international governmental institutions, the nongovernmental organization (NGO) community, as well as new participants from the private sector. A world without nuclear weapons is profoundly in America’s interest and the world’s interest. It is our responsibility to make the commitment, and to do the hard work to make this vision a reality…. The biggest nuclear security risk is not from a rogue state lashing out with ballistic missiles, but a terrorist smuggling a crude nuclear device across our borders. We spend more than $10 billion a year on missile defense, but far too little on securing nuclear materials around the world and improving security (including detection) at our ports and borders…. I will not authorize the development of new nuclear weapons. And I will make the goal of eliminating nuclear weapons an element of U.S. nuclear policy. - President-elect Barack Obama, September 10, 2008, Arms Control Today 2008 Presidential Q&A, available at http://www.armscontrol.org/print/3360 (accessed 2/27/09).

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WHY INAF IS IMPORTANT NO W The present collapse of the normal functioning of global markets and international finance reflect an inflection (tipping) point. 1 The present economic crisis may be a symptom, not just of macroeconomic policies and the instability of international finance engendered by the second globalization, 2 but also of fundamental and structural inefficiencies in the markets that makeup the global economic system. Countries that do not now posses nuclear weapons, seeing the landscape of strategic and economic decision-making now seek to acquire nuclear weapons or, at a minimum, the capacity to build nuclear weapons in order to secure their position in this precarious world order.3 Today maybe nine countries have nuclear weapons; potentially 40 countries posses the technology and capacity to build nuclear weapons if they so choose. The U.S. and Russia still have the largest stockpiles of of nuclear weapons (about 97% of the total) and weapons-usable HEU (highly-enriched uranium) in the world. All together about 27,000 weapons still exist in national nuclear weapons stockpiles, down from 75,000 during the height of the cold war; and HEU for about 240,000 more weapons. But today, the highest probability of use of these weapons & HEU is by terrorists to disrupt or destroy a nation’s economic support systems. Thus, there is an urgency to seek out means and ideas for speeding nonproliferation efforts at the present time and growing political will to envision a world free from the threat of nuclear terrorism. Conditions include the depressed state of many national economies that has heightened concerns for the stability of governments that possess nuclear weapons, plutonium, HEU, or the technical know-how to construct nuclear weapons.

All systems have a tipping point, a set of stresses (an overload beyond a threshold rate of change of inputs) beyond which they breakdown (loose complexity and cease to function within normal ranges) and sometimes collapse (recovery is uncertain) or suffer deep collapse (multiple systems experience synchronous failure when systems are tightly coupled). As failure proceeds, moments of contingency arise. 1

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The first globalization was during the 19th and early 20th centuries.

See Kurt Campbell, et. al., The Nuclear Tipping Point: Why States Reconsider Their Nuclear Choices (Washington, D.C.: Brookings Institution Press, 2004). 3

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I NA F ASSUMPTIONS Given the economic consequences of a nuclear terrorist attack, the capital markets may agree that providing additional, permanent funding than what is available through annual budgetary provisions from government sources and current international mechanisms to reduce the probability of nuclear terrorism or eliminate this threat is of high value; Terrorists would plausibly attack a nuclear facility and that insiders would plausibly steal from such a facility; that terrorists could plausibly make a nuclear bomb if they got the material (or detonate a stolen bomb if they got one of those); and that there is minimal chance of detecting and stopping a terrorist bomb before it was delivered; Terrorist’s have only three primary means to obtain nuclear weapons, plutonium, or HEU to produce a nuclear weapon: (1) by active support by a rogue state; (2) by terrorists exploiting a state’s weakness or negligence at securing nuclear material; and (3) through proliferation of technology from nuclear capable states to aspiring nuclear states in their pursuit of nuclear weapons.4 Each of these avenues are presently open for terrorists to exploit. As defending against a nuclear attack once it has begun is not technically feasible at the present time and given the state of current technology may not be feasible in the near future, at any cost securing nuclear existing material and disarmament is high valueadded;5 Present nonproliferation activities are limited in that they may contain too few incentives for nuclear states to not cheat on destroying unneeded weapons, plutonium, and HEU and for non nuclear states to not seek nuclear weapons. 6

Michael A. Levi and Michael E. O’Hanlon, The Future of Arms Control (Washington, DC: Brookings Institution Press, 2005) , 50. 4

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Levi and O’Hanlon, 47.

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Levi and O’Hanlon, 48.

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Securing the existing stockpile of nuclear weapons and weapons-usable fissile materials to a gold-standard level of security would dramatically reduce, if not eliminate, practicable threats from nuclear terrorism and/or a nuclear accident;7 Adequate capital has not been readily available to secure all existing nuclear weapons and weapons-usable fissile materials to current gold-standard security levels; Additional capital could be productively used to: secure the global stockpile of nuclear weapons and weapons-usable fissile materials; provide incentives for existing states to destroy unneeded nuclear weapons, plutonium, and HEU; provide incentives to nonnuclear states for not seeking to acquire nuclear weapons; and invent new programs and policies specifically designed to stop terrorists from acquiring nuclear weapons;8 The capital markets would willingly provide adequate capital to reduce the risk of nuclear terrorism and/or nuclear accident if there was an investment vehicle to accomplish this purpose; 9

The use of the term gold standard anticipates the intent of the Nuclear Gold Standard Act of 2008 (H.R. 3814) that Directs the Secretary of Energy, the Secretary of State, and the Secretary of Defense to develop a framework for a global alliance against nuclear terrorism that would incorporate the "gold standard" developed under this Act for the security of nuclear materials. In this context, “gold standard” comprises a formal set of verifiable and enforceable standards to which all U.S. and Russian nuclear materials shall be secured and against which inspectors can test ("gold standard"). 7

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Levi and O’Hanlon, 48.

For example, this would be a much more prudent and productive investment than providing capital to Bernie Madoff, who ran a $60 billion Ponzi scheme, providing capital to Enron, WorldCom or a host of companies that have produced negative returns for long term investors over the past ten years. 9

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INAF PHASES Phase I: Feasibility study; Phase II: Establish the institutional relationships, legal structures, insurance provisions, nonproliferation project selection and management mechanisms, capital protection guarantee provisions, and accountability structures that would assure private sector investors to employ private capital for nonproliferation projects. Phase III: Demonstration - $500 million - $2 billion; Phase IV: Buildout $100 billion facility. FEASIBILITY METHODOLOGY Business case for financing scale 10, 11 Business model Participants Facility staff Identify gotchas and institutional barriers PR OJ EC T RISK S Protection against defaults Protection against fraud and abuse SCHED ULE OF DELIVERABLES PHASE I B UDGET

Economic Value Added monetizes the value of the activity to the community or society as a whole or calculates the opportunity costs for not funding the activity to continue at the optimal level. This involves very different thinking than “how do we maintain current budget levels” which assumes zero economic consequences if that budget is halved or eliminated due to funding constraints. Also, a purely budgetary perspective also rarely asks if capital employed to another project could produce greater value. 10

Social Value Added measures how activities “generate improvements in the lives of individuals or society as a whole.” 11

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ST RU C T URE

What is needed is a “fast-paced global partnership…to secure the world’s nuclear stockpiles before terrorists and thieves get to them.”12 RATIONALE In return for the IMF/World Bank’s (or other identified international entity) help, a nuclear state agrees to embark on an IMF and International Atomic Energy Agency (IAEA) monitored nonproliferation program, known as Structural Nuclear Assurance Policies (SNAPs).13 INAF would have the authority to allocate funds based on nonproliferation proposals from states possessing nuclear weapons or weapons-useable fissile material. The INAF would also be responsible for coordinating its activities with those of nuclear states’ nonproliferation programs and projects.

Matthew Bunn and Anthony Wier, Securing the Bomb: An Agenda for Action (Belfer Center, JFK School of Government, Harvard University, May 2004), 101 available at http://bcsia.ksg.harvard.edu/ BCSIA_content/documents/securing_the_bomb.pdf (accessed 07/10/04). 12

Such policies might include a nuclear state’s demonstrating its financial ability to shoulder the ongoing operational and maintenance costs for providing adequate security for buildings containing nuclear weapons and weapons-usable fissile material once the initial capital costs of providing the building with modern ‘gold standard’ security (perimeter intrusion detection and assessment system [PIDAS], etc.) and accounting systems through the INAF funding mechanism is accomplished. 13

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