An Explosive Matter

 President Leonid Kuchma was present at the commissioning of company's first plant in Ichnia. Then it was said that advanced technologies would help Ukraine get rid of an explosive legacy, thousands of tons of old shells, mines, and missiles. The current state of the project gave cause for the two countries to straighten out their relations. And there is every reason to consider this a truly explosive matter.

THE IDEA

During a five year period, from 1993 onwards, Alliant-Kyiv was to recycle 220,000 tons of ammunition, which was approximately two-thirds of the total amount of the dangerous obsolete materiel stored in Defense Ministry arsenals. The American counterpart in the joint venture was represented by Alliant-Techsystems, which for nearly half a century been supplying defense systems to the US army and navy. The Ukrainian party was represented by the Ministries of Defense and Industrial Policy, and the State Property Fund. Alliant-Techsystems turned out to be surprisingly quick and invested more than $20 million into an ammunition recycling facility in Ichnia, and a powder grinding plant in Tsvitokha, Khmelnytsky oblast. It was expected that the receipts from selling the processed ammunitions components in the domestic and foreign markets would be about $100 million. The profit, $43.8 million was to be shared equally between the Ukrainian and American parties. Sustainability was the key factor in this project.

PRO AND CONTRA

"Having started all this we faced things no one had thought of. Thus, one can blame both parties, and one can blame no one. Some were not aware what they were agreeing to and the others of what they wanted," now says Alliant-Kyiv General Director Larry Fenning. Of the total 220,000, only 28,000 tons of ammunitions were processed. Of the promised money, only $7 million was received. The western parties demand the loan be recalled, while the Ukrainian military is saying: "How can you have business with the Americans if they failed to do what they had promised?"

Dismantling the ammunitions subject to recycling is performed by the Defense Ministry at its bases. And if the documents show that of 220,000 we received 77,000 tons of munitions, in fact they dismantled only 58,000. "We were restrained by their speed of work," say the Americans, "We had agreed that in the first years they would hand over us profitable ammunitions containing a certain amount of brass, so that after selling the recycled products we could accumulate certain funds required for the installation of facilities to process the entire quantity of the ammunitions. But they gave us the wrong ammunition and not the amount stipulated".

In addition, after the Ichnia facility was opened in January, it aroused interest in the Military Prosecutor's Office. The representatives of the Ukrainian bodies (the State Property Fund, Ministries of Defense and Foreign Economic Relations) that were the members of the Alliant-Kyiv Supervisory Board, immediately went into the shadows. And although no written charges were made against the company, it was returned its license to export raw materials only one year later, in 1996. It became clear that one would not be able to make the promised $40 million under such conditions. The world market was affected by a dramatic drop in for steel, brass and copper prices (price for brass fell from $2090 to $1100-$1300 a ton, and for copper from $2300 to $1500), while it had been expected that the income generated from the sale of these materials would repay all costs with interest. On the other hand, Ukraine saw a sharp growth in living standards, with labor becoming more expensive, and transportation costs increasing.

Previously, Alliant-Kyiv planned that its modular plants would travel from one military depot to another, processing the ammunitions on site, but then it became known that this violates Ukrainian legislation. It was promised that the laws would be changed, but those who gave the promise probably did not have sufficient power to do so.

The Americans probably also repent the incautious statement they made at the beginning of this epic, that their technologies can be used to recycle any sort of ammunitions. "The Ukrainian party did not tell us that they had ammunitions stuffed with RDX and aluminum powder, which requires special treatment." This was a surprise for the Americans. And yet, Alliant-Techsystems decided to create the required processes and paid for the upgrading of its modules in order to be able to wash out RDX and aluminum from Soviet-made ammunitions. For that purpose, the Kransoarmeysk Mechanical Institute in Russia was enlisted.

The list of discrepancies can be continued. It could have been not that long, had all these details been stipulated in the contract. However, this basic document is singularly imperfect. There appears only one number, 220,000 tons of ammunitions designed for total recycling. All the other details are contained in the businessplan. But plans were interpreted as laws only, perhaps, under socialism, and even then this was a forced interpretation. And the obscure cooperation agreement between the Ukrainian military and Alliant-Kyiv can be applied - and with no consequences - to any situation, no matter how critical it may be. Now the Alliant-Kyiv managers harvest the fruits of the work of their predecessors, and write letters to the President of Ukraine, the National Security and Defense Council, the Prime Minister, who do not respond. In one such letter to NSDC Chairman Volodymyr Horbulin one can see the surprise at the new Defense Ministry officials who bluntly say that they are not responsible for the commitments previously undertaken by this military entity. Is there anything to be surprised at? Both parties played according to the same rules which included everything except trust.

RESULTS

"We would like the Defense Ministry make a new contract with us, a more specific one. Which would spell out the responsibilities of the parties, fines, types and sorts of ammunitions to be handed over for recycling. This is what we have been insisting on for the last two years. The Ministry refuses to sign a contract that would satisfy our company and our US counterpart," says Larry Fenning. This includes, among other things, enabling the company to operate with minimal taxes and without export limitations, that is, under the conditions which existed when Alliant-Kyiv started its business in Ukraine. And if there is no way whatsoever, then "give us an opportunity to sell at least the 400 tons of brass which has been stored in warehouses since September 1, when the Ministry prohibited its export. This will enable the company to settle with the creditors and military bases," plead the businessmen.

Answering The Day's correspondent whether the military will continue to cooperate with Alliant-Kyiv, Deputy Defense Minister for Arms Anatoly Dovhopoly was laconic: "We will give them ammunitions for recycling if they work within Ukrainian legal limits." The company says that they have never exceeded the limits of the law. And if current Ukrainian legislation allows only state entities to be engaged in the production and sales of explosives (which is also what Alliant-Kyiv is in), then there are legal explanations in this regard, which entitle the company to such activities. However, this is already details... Their explanation lacks the key point: no one except the company itself is interested in its survival.

The officials that had okayed the project with Americans have quit the Ministry. Under the Defense Ministry, a number of state companies are now operating, whose task is to bring profit to this military entity. For instance, Ukroboronresursy (Ukrainian Defense Resources) has been established to sell scrap. Probably, it will not be very difficult to this firm to sell those 400 tons of brass that have been lying too long in the depots and are being claimed by Alliant-Kyiv. If they are sold, about $500,000 will be paid into the account of the Defense Ministry, rather than the distant Credit Lyonnaise Bank. The collapse of the project with Americans will make it possible for a Ukrainian enterprise association called Spivdruzhnist (Commonwealth). which is also engaged in ammunition recycling, to take over. Currently they have 100,000 tons at their disposal, and without competitors their share will grow. It is also not to be ruled out that there will be others wishing to enter the military business to get funds from the state budget.

As far as Alliant-Techsystems is concerned, it won't be reduced to poverty either, for the company has already asked OPIC to consider the failure of the Ukrainian project because of political risk. The US counterpart is convinced that Alliant-Techsystems has sufficient grounds to demand an indemnity which would partially cover its losses associated with investments in Ukraine. OPIC will decide on this in 1999. It is not known yet, to what extent the insurance policy will be satisfied. But the most interesting thing will come later. According to the US-Ukraine agreement on mutual protection of investments, Ukraine will have to compensate OPIC for its insurance costs. And no matter how high they will be - one, ten or twenty million dollars - the result will be same. The incapability of our generals to negotiate with American businessmen is to be paid for out the pocket of the completely unsuspecting poor Ukrainian taxpayer.