[Senate Hearing 106-177]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-177


 
        HAS THE RUSSIAN SPACE LAUNCH QUOTA ACHIEVED ITS PURPOSE?

=======================================================================


                                HEARING

                               before the

      INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL SERVICES 
                              SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                               __________

                             JULY 21, 1999

                               __________

      Printed for the use of the Committee on Governmental Affairs


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 59-455 cc                   WASHINGTON : 1999
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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                  Darla D. Cassell, Administrive Clerk

                                 ------                                

      INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL SERVICES 
                              SUBCOMMITTEE

                  THAD COCHRAN, Mississippi, Chairman
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
SUSAN M. COLLINS, Maine              CARL LEVIN, Michigan
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
JUDD GREGG, New Hampshire            JOHN EDWARDS, North Carolina
                   Mitchel B. Kugler, Staff Director
              Richard J. Kessler, Minority Staff Director
                      Julie A. Sander, Chief Clerk



                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Cochran..............................................     1
    Senator Akaka................................................    10
    Senator Cleland..............................................    26

                               WITNESSES
                        Wednesday, July 21, 1999

Wilbur C. Trafton, President, Lockheed Martin International 
  Launch Services................................................     2
Catherine Novelli, Assistant U.S. Trade Representative for Europe 
  and the Mediterranean..........................................    13
Hon. Walter B. Slocombe, Under Secretary for Policy, Department 
  of Defense.....................................................    15
John D. Holum, Senior Advisor for Arms Control and International 
  Security, Department of State..................................    17

                     Alphabetical List of Witnesses

Holum, John D.:
    Testimony....................................................    17
    Prepared statement...........................................    78
Novelli, Catherine:
    Testimony....................................................    13
Slocombe, Hon. Walter B.:
    Testimony....................................................    15
    Prepared statement with an attachment........................    41
Trafton, Wilbur C.:
    Testimony....................................................     2
    Prepared statement...........................................    31

                                APPENDIX

Letter from Wilbur C. Trafton, dated August 2, 1999, to Senator 
  Cochran........................................................    39



        HAS THE RUSSIAN SPACE LAUNCH QUOTA ACHIEVED ITS PURPOSE?

                              ----------                              


                        WEDNESDAY, JULY 21, 1999


                               U.S. Senate,        
                 Committee on Governmental Affairs,        
                Subcommittee on International Security,    
                       Proliferation, and Federal Services,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2 p.m. in room 
342, Senate Dirksen Building, Hon. Thad Cochran, Chairman of 
the Subcommittee, presiding.
    Present: Senators Cochran, Akaka, and Cleland.

              OPENING STATEMENT OF SENATOR COCHRAN

    Senator Cochran. The Subcommittee will please come to 
order.
    Today our Subcommittee on International Security, 
Proliferation, and Federal Services convenes a hearing to 
review and assess the effect on weapons proliferation of the 
1993 Space Launch Quota Agreement between the United States and 
Russia. Specifically, we hope to be able to answer the 
question: Has the Russian space launch quota achieved its 
purpose?
    This Subcommittee has spent considerable time in the last 
2\1/2\ years examining the serious problem of weapons of mass 
destruction and ballistic missile proliferation. Along with 
others, we have advocated a comprehensive approach, from 
diplomacy to improved export controls to ballistic missile 
defense, to protect our country from the effects of weapons 
proliferation. The threat posed by this proliferation is 
accurately described by Executive Order 12938, which declares 
the proliferation of weapons of mass destruction and their 
means of delivery to be an unusual and extraordinary threat to 
the national security, foreign policy, and economy of the 
United States.
    In Senate testimony this year, Director of Central 
Intelligence George Tenet underscored the seriousness of this 
threat, particularly as it relates to the continuing commerce 
between Russia and Iran, stating: ``Politically, Russia is 
increasingly unpredictable, and the worsening economic 
situation affects all aspects of the Russian scene. As the 
desperate search for revenue streams is exacerbating a number 
of serious problems, it has magnified the proliferation threat 
across the board as growing financial pressures raise 
incentives to transfer sensitive technologies, especially to 
Iran.''
    Thus, our government must insist that the Russian 
Government exert its full authority to halt missile and missile 
technology transfers from Russia to Iran and others. Our 
government must also take those steps necessary to persuade the 
Russian Government to act quickly and effectively on this 
problem. This does not mean, though, that any action by our 
government is appropriate just because it is done in the name 
of stopping the flow of Russian technology to Iran. Our 
government should recognize and avoid taking actions that not 
only do little to stem Russian proliferation, but put the 
national security of the United States, and its allies, at 
greater risk.
    Our witnesses today, we hope, will help us sort through 
these issues surrounding our country's commercial satellite 
launch policy with Russia. Will Trafton, president of Lockheed 
Martin International Launch Services, will be our first 
witness. Mr. Trafton will be followed by a panel including 
Catherine Novelli, Assistant U.S. Trade Representative for 
Europe and the Mediterranean; Walt Slocombe, Under Secretary of 
Defense for Policy; and John Holum, State Department Senior 
Advisor for Arms Control and International Security.
    We first welcome Will Trafton, president of International 
Launch Services, as our first witness. We have a copy of your 
prepared statement, which we appreciate, and we will have it 
printed in the record in full. We encourage you to make any 
summary comments or remarks that you think would be helpful to 
the Subcommittee.
    Welcome, and you may proceed.

 STATEMENT OF WILBUR C. TRAFTON,\1\ PRESIDENT, LOCKHEED MARTIN 
                 INTERNATIONAL LAUNCH SERVICES

    Mr. Trafton. Thank you, Mr. Chairman. I really appreciate 
the opportunity to testify before you today on the use of a 
quota-based trade agreement as an instrument of commercial 
space launch trade policy between the United States and Russia.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Trafton appears in the Appendix 
on page 33.
---------------------------------------------------------------------------
    Let me begin by expressing our deep appreciation for your 
leadership, Mr. Chairman, and support in addressing this 
important issue, culminating today with this hearing. The 
progress we have made thus far is due in no small measure to 
your efforts to advance U.S. policy objectives for cooperative 
threat reduction and economic competitiveness.
    In my remarks, I would like to talk about International 
Launch Services (ILS) and, in particular, the arm of ILS, the 
Lockheed-Khrunichev-Energia International (LKEI) joint venture, 
that supplies commercial Proton launches to international 
satellite operators and service providers. I will also tell you 
what I believe will happen to LKEI if it continues to be 
restricted by quota-based trade agreements or held hostage to 
proliferation concerns. I will also address the potential 
adverse impact on another very important U.S.-Russian joint 
venture that will co-produce in the United States the world's 
best rocket engine--the Russian RD-180. Last, I would like to 
offer our recommendations for addressing these issues.
    International Launch Services was established in 1995, upon 
the merger of Lockheed and Martin Marietta companies, to market 
Atlas and Proton commercial launch services in the world wide 
satellite telecommunications marketplace. Lockheed and Martin 
Marietta, prior to the merger, were each individually competing 
in the commercial launch service market with their Proton and 
Atlas launch vehicles respectively. Lockheed entered the launch 
market in 1993 with the establishment of Lockheed-Khrunichev-
Energia International, the joint venture to exclusively market 
the Russian Proton launch vehicle. Similarly, Martin Marietta 
had entered the commercial launch market with the purchase of 
the General Dynamics Space Systems Division and establishment 
of its Commercial Launch Services subsidiary (now LMCLS, 
Lockheed Martin Commercial Launch Services) which marketed the 
Atlas launch vehicle. Both LKEI and LMCLS are within the ILS 
structure, and serve as the contracting entities for executing 
Proton and Atlas launch service contracts.
    ILS, headquartered in San Diego, California, is a 
commercial company, servicing a broad range of both domestic 
and global satellite operators and manufacturers, as well as 
the U.S. Government. Today, ILS has a backlog of $3.5 billion 
representing launch contracts for 23 Atlas vehicles and 19 
Proton vehicles.
    Mr. Chairman, the success of the LKEI joint venture has 
generated important benefits for U.S. national security and 
commercial space competitiveness. But the quota on Proton 
launches jeopardizes continued growth of this venture, indeed, 
its viability in the commercial launch market.
    Mr. Chairman, as you know, President Clinton recently 
approved an increase in the quota from 16 launches to 20. This 
is a good first step towards the elimination of the quota. It 
demonstrates to us that the administration recognizes the 
importance of this venture, and that its near-term viability is 
dependent on the continued availability of Proton launch 
services.
    While this action is commendable, the quota should be 
lifted entirely. This small increase may assist in meeting 
near-term business objectives, but there will continue to be 
uncertainty as to the long-term viability of this joint venture 
as long as a quota exists. Therefore, it will be necessary to 
increase the number of allowed launches again before the 
expiration of the Launch Trade Agreement at the end of 2000.
    The trade criteria stipulated in the Launch Trade Agreement 
have been met. Khrunichev and Energia have not only complied 
with pricing regulations, but also have implemented stringent 
internal export control safeguards and are not engaged in 
proliferation.
    U.S. leadership in the international launch market is 
essential to economic growth in the 21st Century. If LKEI is 
unable to provide a guarantee to customers of the availability 
of launch services, the United States stands to lose to foreign 
competitors the industry's market share we worked so hard to 
gain over the past 13 years.
    The Lockheed-Khrunichev-Energia joint venture continues to 
be the most successful U.S.-Russian commercial endeavor, 
promoting economic stability within Russia by providing hard 
currency to the Russian economy. Furthermore, it is U.S. policy 
to engage in activities with Russia's aerospace industry that 
will meet cooperative threat reduction objectives by providing 
a commercial avenue for scientific and technical expertise in 
Russia. This venture provides such an avenue, and a strong 
record of compliance with export regulations proves that this 
venture provides a positive incentive for nonproliferation.
    The launch market is robust and the quota should be allowed 
to expire. Current demand for launch services far exceeds 
market projections. If the Proton business is not allowed to 
operate in a free and open trade environment, not only will 
this be ignoring directives set forth in our country's National 
Space Policy, but our space industrial base could be threatened 
along with Russia's economic stability. Should this occur, the 
principal beneficiary would be the French Ariane program, 
currently the only launch system capable of taking heavier 
payloads to Geostationary Transfer Orbit (GTO). The United 
States would lose in this highly competitive international 
launch market. The positive nonproliferation incentives the 
LKEI joint venture provides to more than 100,000 Russian 
engineers, scientists, and technicians also would be lost. And 
the critically important RD-180 engine program would be 
adversely affected.
    This Russian engine, the best rocket engine in the world, 
is currently available to Lockheed Martin in the United States 
through a United Technologies, Pratt and Whitney, and NPO 
Energomash joint venture, RD-AMROSS, that was established in 
1997. This U.S. joint venture has two key components: The RD-
180 engines built in Russia that will power our new commercial 
Atlas vehicles, the Lockheed Martin Atlas 3 and the Atlas 5; 
and the RD-180 engine built in the United States that will 
power the next generation launch system for U.S. Government 
payloads. The reliability and consistency of the United States 
as a partner in these two joint ventures is critical to their 
success.
    In summary, Mr. Chairman, we have a great deal at stake in 
our joint ventures with our Russian partners. America's 
national security, economic competitiveness, and assured access 
to space in the next century will be affected by the way the 
Proton quota issue is addressed. I am ready for your questions. 
Thank you, Mr. Chairman.
    Senator Cochran. Thank you. Let me first ask you the 
purpose for the joint venture to start with. Why did Lockheed 
Martin decide to enter a joint venture with the Russian firms 
Khrunichev and Energia?
    Mr. Trafton. In 1992, Lockheed was looking for a way to 
enter into the space launch business. At about that same time, 
with the end of the Cold War, there was a conscious policy 
decision by the U.S. Government to encourage joint ventures 
with Russia. Lockheed approached Khrunichev and Energia and in 
1993 signed an agreement that gave Lockheed Martin--Lockheed at 
the time--worldwide marketing rights for the Proton vehicle.
    Senator Cochran. When you entered into this joint venture, 
or before you did, or as you were considering it, did you 
consider the possibility that these Russian firms might be 
engaged in missile proliferation activities?
    Mr. Trafton. Yes, sir, we did. I will say that Lockheed was 
very sensitive to proliferation concerns. We were also very 
sensitive to and compliant with U.S. Government guidelines on 
this issue. We consulted very closely with the U.S. Government. 
We implemented a very rigorous export control compliance 
program and, in fact, we put it into the by-laws of the joint 
venture that our Russian partners would comply with 
nonproliferation regimes.
    Senator Cochran. Do you think that this joint venture in 
particular is useful in any way as a nonproliferation tool or 
to encourage nonproliferation?
    Mr. Trafton. Absolutely, Mr. Chairman, I do. As I have 
stated in my opening statement, 100,000 very skilled Russian 
engineers, technicians, and scientists get a regular paycheck 
thanks to this joint venture. We have transferred since the 
inception of the joint venture about $1.5 billion to Russia. I 
think the fact that these 100,000 Russians would like to keep 
their jobs, the fact that the Russian Government, Khrunichev, 
and Energia would like to see that this payment stream 
continues, we think is pretty important motivation for them to 
be very, very careful about proliferation.
    Senator Cochran. The U.S. Administration negotiated a 
launch quota agreement with Russia. And as I understand it from 
your statement, it was important to have this agreement because 
of concerns over predatory pricing possibilities. Could you 
tell us what that means? Why was that a concern, and was that a 
sufficient reason to negotiate a trade agreement?
    Mr. Trafton. It was a viable concern and I think it was 
sufficient reason to negotiate a trade agreement. We, in this 
country, in the space launch business did not want to see the 
Russians or other foreign entities coming into the marketplace 
with predatory pricing and, in fact, adversely affecting our 
position in the global market.
    Senator Cochran. How could that have happened and how would 
that have worked?
    Mr. Trafton. They could have come in with prices that far 
undercut the then-current competitive market pricing that we 
were seeing at the time.
    Senator Cochran. Wouldn't that have been helpful to you?
    Mr. Trafton. Absolutely not. This is a tough marketplace 
and the people looking for commercial launch services are in 
many cases going to go to the lowest bidder.
    Senator Cochran. Well, you said they would undercut the 
pricing.
    Mr. Trafton. The trade agreement, as it was written, uses a 
15 percent rule, that the Russians--and, by the way, the 
Chinese and the Ukrainians are involved in this as well, in the 
quotas--that they could not come in 15 percent below the lowest 
competitive market price. How that was established is perhaps a 
little bit fuzzy. But it was a real threat and everybody in 
this country understood at the time that a trade agreement was 
a good idea. I will state that it worked; that predatory 
pricing did not occur. You will find Proton has been, and is 
today, very competitively priced in the marketplace.
    Senator Cochran. So that leads me to the next question 
then. Has the purpose of the agreement in your judgement been 
satisfied?
    Mr. Trafton. Absolutely. Yes, sir.
    Senator Cochran. What is the purpose of continuing the 
trade agreement then?
    Mr. Trafton. We see no purpose. We think, as I have stated, 
that the quota should be lifted in its entirety.
    Senator Cochran. Under the terms of the agreement, how do 
you get out from under such an agreement? Do you just terminate 
it by mutual agreement between you and the Russian joint 
venturers?
    Mr. Trafton. The trade agreement is due to expire December 
31, 2000. It had built into it that if certain conditions were 
met the quota would be automatically increased. So from 1996 to 
1998, if an average of 24 satellites per year were launched to 
GTO, that the quota would be increased from 16 to 18; and then 
from 1996 to 1999, if an average of 24 satellites per year were 
launched to GTO, it would be increased from 18 to 20. These 
were to be automatic increases. The U.S. Government has chosen 
not to implement these automatic increases. But what has 
happened is that the Launch Trade Agreement has become an 
instrument in addressing the issue of nonproliferation. We at 
ILS are being held hostage; the trade agreement is being used 
for a purpose other than the one for which it was implemented.
    Senator Cochran. Have the joint venturers violated any 
terms of the agreement?
    Mr. Trafton. Absolutely not.
    Senator Cochran. Have you violated any terms of the 
agreement?
    Mr. Trafton. No, sir.
    Senator Cochran. It creates a cloud of uncertainty then, 
doesn't it, for our own government to come in and actually 
interfere with the automatic escalation of launch quota? Is 
that correct?
    Mr. Trafton. That is correct. And what is happening is, 
even though the President increased the quota by 4, from 16 to 
20, again which we very much appreciate, it is still impacting 
our business. Our customers cannot stand the uncertainty of 
whether they can get their satellites up when they need to. In 
fact, when we signed a contract in October 1997 for the last 
competitive Proton that we have sold, the customer demanded 
off-ramps because of the quota issue. We had never seen that 
before.
    Senator Cochran. Demanded what?
    Mr. Trafton. Off-ramps. These are contractual provisions. 
That if the quota impacted the customer's ability to get his 
satellite up, then he had the choice of going to another launch 
service.
    Senator Cochran. That he could get out of the agreement 
without penalty?
    Mr. Trafton. That's correct. And there is only one other 
launch service provider that can compete with Proton today, and 
that is the French Ariane.
    Senator Cochran. OK. Then the central issue is in spite of 
the compliance by your joint venture partners in Russia with 
all the terms of the agreement and your compliance with the 
agreement--and the added thing I guess is has there been any 
proliferation conduct by the joint venturers that would justify 
this action by our government?
    Mr. Trafton. Mr. Chairman, there has not been. Our partners 
are clean. And each time that the State Department issues a new 
list of companies that are going to be sanctioned, we go 
immediately to our partners, we check to see if they are 
currently dealing with them, or if they have ever dealt with 
them in the past. In every case, the answer has been, no, they 
have not.
    Senator Cochran. You mentioned that last week the President 
increased the quota from 16 to 20. Has that had any effect on 
the joint venture relationship? Has it improved it? Does it 
give you hope? Or is it a continuing problem even though he has 
lifted it from 16 to 20?
    Mr. Trafton. Well, we have four more customers that are 
breathing a bit easier today. But it has not solved the 
problem. We still have two Protons under contract which fall 
outside of the quota, and we still have this issue of 
uncertainty. Additionally this sends a very inconsistent 
message to Russians across the board when we use a launch trade 
agreement for purposes for which it was not intended.
    Senator Cochran. I understand the agreement is going to 
expire at the end of the year 2000.
    Mr. Trafton. That is correct.
    Senator Cochran. That seems like a fairly short period of 
time away, 17 months. Why can't you book launches after the 
expiration of this agreement?
    Mr. Trafton. Again, we are aggressively pursuing customers; 
we have been, and continue to do so. But, again, the quota 
issue is generating uncertainty for customers that are 
wondering whether this quota business will continue beyond 
December 31, 2000. There is absolutely no assurance at this 
point that the State Department won't choose to continue to use 
this as leverage in the nonproliferation area.
    Senator Cochran. Have you been able to book any launches at 
all since the quota became an issue?
    Mr. Trafton. No, we have not. The last Proton that we sold 
competitively in the marketplace was in October 1997, and that 
is about the time when this quota issue bubbled up to the 
surface.
    Senator Cochran. And do you attribute the failure to book 
launches as being attributable to the uncertainty over the 
quota issue? Is that your testimony?
    Mr. Trafton. Yes, I do.
    Senator Cochran. You said in your testimony also that 
Russian assistance to the Iranian ballistic missile program is 
a serious problem that our government must address. If the 
government doesn't use the leverage given them by this quota 
arrangement, what other leverage would you suggest it consider 
using that would encourage Russia to deal with proliferation 
problems more effectively?
    Mr. Trafton. I would only ask that the U.S. Government 
follow a two-track policy--encourage and support the companies, 
the joint ventures that comply with nonproliferation, and 
punish the companies and joint ventures that do not comply. 
What is happening today is we are all being lumped together and 
we are all being shot together. We would only ask that the 
government go to a two-track policy.
    Senator Cochran. There seem to be two issues here that you 
have identified. You mentioned the RD-180 engine issue. It is 
my understanding that Lockheed Martin is one of two companies 
in the United States participating in the Defense Department's 
so-called Evolved Expendable Launch Vehicle (or EELV) program. 
Tell us about that program and why it is important to our 
Nation's defense and to the U.S. commercial space launch 
industry.
    Mr. Trafton. We at Lockheed Martin believe that EELV is the 
future of the U.S. space launch industry. The Air Force has put 
in a half billion dollars and Lockheed Martin has put in one 
billion dollars to develop the new family of EELV vehicles, 
which we call Atlas 5. The RD-180 engine is the engine of 
choice for this vehicle, and you have heard me briefly describe 
that engine. It is a superior rocket propulsion system, 
reliable and cost-effective, and it contains technology that we 
in this country don't have and haven't developed. It is a very 
powerful engine and, again, it is our future.
    Senator Cochran. Is it your judgment that you are better 
off purchasing this technology and this engine rather than 
developing your own heavy engine?
    Mr. Trafton. Yes, Mr. Chairman, it is. We in this country 
haven't done well in rocket engine development. In contrast, 
over many years, the Russians have developed what we think is 
about 45 different rocket engines. In the last 25-30 years, the 
United States has developed just one rocket engine, the Space 
Shuttle main engine. The Russians are very far ahead of us in 
rocket engine technology, as demonstrated by the RD-180. This 
is not a paper engine. We have had it on a test stand at the 
Marshall Space Flight Center, and have almost 15,000 seconds of 
testing completed. The first RD-180 is in our first Atlas III-A 
rocket on a launch pad at the Cape in Florida, ready for launch 
as we speak.
    The RD-180 is a wonderful engine. To illustrate: Today's 
Atlas 2 launch vehicle has nine engine staging events to get a 
satellite to Geo Transfer Orbit. The RD-180 takes us there with 
two staging events. We can install this engine in 6 hours, and 
test and check out the rocket in 12 days, a process that today 
can take us up to 80 days.
    Senator Cochran. So what you are saying is that this would 
put us far ahead of where we are if we could buy this 
technology, buy this engine and use it in our launching 
capacity commercially and for----
    Mr. Trafton. And for the U.S. Government.
    Senator Cochran. For the U.S. Government. This is an Air 
Force program, is that right, that you would be participating 
in with this engine?
    Mr. Trafton. Yes, that is correct.
    Senator Cochran. Do you feel that you could compete in this 
program without acquiring this engine?
    Mr. Trafton. No, I don't. I think--I will tie the two 
together. If the quota issue brings down the LKEI joint 
venture, it is my position that the RD-180 joint venture will 
fail as well. That will have a devastating impact on the EELV 
program and the future of the space launch business in this 
country.
    Senator Cochran. Why are they tied together in your mind? 
Why is there a relationship between the quota issue and the 
ability of Lockheed Martin to participate competitively in the 
EELV program?
    Mr. Trafton. It is an issue of whether we can be seen as a 
reliable partner. The Russians are very confused over the quota 
issue. They see the U.S. Government acting in a very 
inconsistent manner. I feel that if they see the U.S. 
Government let the LKEI joint venture come unravelled and fail, 
they will then have to ask themselves, why should we risk going 
down the same road with an RD-180 joint venture.
    Senator Cochran. You have also had a payment to your 
contracting partner in Russia held up by the government, have 
you not?
    Mr. Trafton. That is correct.
    Senator Cochran. On a license application procedure. Tell 
us about that.
    Mr. Trafton. The issue is a brokering license. Again, we 
don't understand the requirement for it but we certainly have 
complied. We wanted to make a $25 million advance to NPO 
Energomash on a $1 billion contract for 101 RD-180 engines. The 
purpose of the advance is to enable them to retool and 
modernize their plant by buying off-the-shelf machine gear, 
tools, etc., from Russian and European vendors. We want them to 
be able to produce 19 engines a year; currently, they can only 
produce 9.
    Acting as a ``middleman'' between a customer and a 
provider, that is our definition of brokering. We don't see 
advancing $25 million on a $1 billion contract to help 
Energomash retool as a brokering activity. But the State 
Department said it is brokering and they wanted to see a 
license application. We immediately complied, by submitting in 
July 1998 a license application for a brokering license. We are 
not advancing the $25 million to NPO Energomash until we get 
the license. Today, 1 year later, we are still awaiting 
approval of this license.
    Senator Cochran. And you entered into the arrangement to 
buy the engine, the RD-180 engine back when, 1996, was that the 
date?
    Mr. Trafton. In 1996, yes, sir.
    Senator Cochran. Well, let me ask you this, and I think you 
have fully explained what the relationship is in the RD-180 
engine transaction. But let me just ask you what you expect to 
happen if this joint venture collapses under the weight of the 
quota issue. Would you be able to continue in the launch 
business, or will the Khrunichev and Energia be able to 
continue in the launch business with somebody else if the 
relationship with your company falls through? What do you 
expect to happen?
    Mr. Trafton. I would expect Khrunichev and Energia to find 
another partner. The French have been aggressively pursuing 
Russian space entities looking for partnerships. I would expect 
that shortly after this joint venture failed you would see a 
joint venture between probably a French company and Khrunichev 
to market Proton worldwide.
    Senator Cochran. That would not have any effect one way or 
the other on proliferation, would it?
    Mr. Trafton. Well, I think it would. I think it would have 
a very negative effect.
    Senator Cochran. But it wouldn't have a positive effect, 
though?
    Mr. Trafton. It certainly wouldn't.
    Senator Cochran. It wouldn't keep Russia from proliferating 
missile technology to Iran, for example.?
    Mr. Trafton. We think that not all governments in the 
Western world are as concerned as we are about proliferation. I 
think that in a new joint venture with perhaps a European 
company you wouldn't see the Russians as concerned about 
proliferation as they are today. I think the fact they are in 
partnership with us is making them tow the line very carefully.
    Senator Cochran. And then what would the impact of the loss 
of the relationship on the RD-180 transaction be, both to the 
Defense Department and to the commercial launch industry here 
in the United States?
    Mr. Trafton. Well, we would have to drop out of the EELV 
program and we would not then be in a position to compete with 
Boeing for future U.S. Government launches. I think it would 
have a tremendous negative impact on the space launch business 
in this country. It would affect jobs, too. There are a lot of 
American jobs that aren't discussed when we talk about these 
joint ventures. A lot of folks are involved in these two 
programs.
    Senator Cochran. Would it be accurate to say that the only 
beneficiaries of this result would be some foreign country 
getting the new engine that you are trying to buy, like France, 
and possibly the Iranian ballistic missile program standing to 
gain because of the lack of influence of the U.S. Government on 
these companies?
    Mr. Trafton. That is a correct assessment, Mr. Chairman.
    Senator Cochran. Mr. Trafton, I appreciate your testimony 
and your comments in answering our questions very much.
    I am pleased to welcome my friend and colleague from 
Hawaii. I have no further questions of the witness, Senator, 
and I would turn to you if you have any questions of Mr. 
Trafton at this time. Or if you have any opening statement or 
comments you would like to make, you certainly are recognized 
for that purpose.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I regret 
that I am late in getting here.
    Senator Cochran. There was a lot going on.
    Senator Akaka. Yes. I have a statement I would like to 
place in the record.
    Senator Cochran. Please.
    [The prepared statement of Senator Akaka follows:]

              PREPARED OPENING STATEMENT OF SENATOR AKAKA
    I join with the Chairman in welcoming the witnesses today to 
testify on commercial space launch quotas and Russia.
    There are two important issues here. The first concerns commerce 
and the second concerns proliferation of weapons of mass destruction.
    In terms of commerce, the United States has been eager to promote 
its commercial satellite industry while not jeopardizing the 
development of an American commercial satellite launch service. We 
turned to Russia because demand was greater than launch supply. The 
Russian capability to launch payloads has benefited our satellite 
industry.
    This should be a model for Russian-American commercial cooperation: 
Building a future in which both sides benefit from each other's 
expertise.
    At the same time, there has been a dark side to Russian-American 
cooperation.
    Fears that Russian companies involved in the Russian space program 
have also been involved in assisting Iran develop a ballistic missile 
program have led to American economic sanctions being imposed on 
certain Russian companies.
    In fairness, the two Russian companies involved with Lockheed-
Martin in forming International Launch Services (ILS) have not been 
sanctioned for this type of activity. But the administration has 
hesitated to lift the quota on Russian satellite launches in an effort 
to persuade the Russians to take more seriously the issue of 
controlling dual use exports and other assistance to the Iranian 
missile program.
    An unspoken goal of our trade agreement with Russia was to promote 
cooperative programs providing commercial opportunities for Russia's 
military-industrial complex. Russia would thus see its self-interest 
served better by working with the United States rather than cooperating 
with rogue states developing weapons of mass destruction. Our policy 
has been based on the view that carrots work better than sticks.
    But there are limits to the use of carrots as we have seen 
elsewhere in the world. The most recent issue of The Economist 
editorializes that the lesson North Korea's leader seems to have 
learned ``is that the worse he behaves, the more desperately outsiders 
will try to buy him off.''
    This is not a pattern we want to see repeated with Russia.
    Unfortunately, there continues to be disturbing reports that 
Russian companies aid the Iranian missile program. Our efforts to 
convince the Russians to pursue alternative policies have only been 
partially successful.
    At times it seems the only way to get the Russian bear's attention 
is to hit it hard over the head with the large stick of sanctions.
    I hope this hearing will help clarify in which direction American 
policy should go in regard to continued cooperation with the Russian on 
commercial satellite launches. Our current trade agreement with Russia 
on launches ends next year. If we are to extend it, it should be in the 
context of benefiting our larger foreign policy goals.
    Thank you Mr. Chairman and I welcome the witnesses.

    Senator Akaka. I have some questions here and I hope they 
were not asked earlier. If so, please inform me about it.
    Mr. Trafton. Yes, sir.
    Senator Akaka. My first question is whether the commercial 
space launch quota has achieved its purpose. U.S. policy for 
the termination of the trade agreement quota system is based 
upon the premise that Russia would develop a market economy and 
thus compete fairly with American satellite launch providers. 
In Mr. Corcoran's, president and chief operating officer of 
Lockheed Martin Space and Strategic Missile Sector, written 
testimony of June 24, 1999, he stated: ``The terms of the 
launch trade agreement have been fully complied with and the 
trade criteria for lifting the quota have been met.'' With 
regard to the trade agreement expiring on December 31, 2000, 
what is the administration's position toward extending or 
renegotiating a new trade agreement?
    Mr. Trafton. Senator, I can't speak for the administration. 
We are hopeful that the trade agreement is permitted to expire 
without extension on December 31, 2000.
    Senator Akaka. To combat the loss of critical technology 
that occurred during the launches of U.S. satellites by Chinese 
launch providers the Cox Committee recommended establishment of 
a more robust domestic commercial satellite launch service 
industry. Congress has enacted legislation and is working 
actively on new legislation to aid U.S. industry in the 
development of domestic commercial satellite launch services. 
It is evident that Lockheed Martin, as part of a joint venture 
with a Russian launch provider, would benefit financially by 
raising the quotas. The question is, how do you see continuing 
cooperation with Russia as benefiting the development of our 
market and helping guard our national security interests in 
regard to satellite launch technology?
    Mr. Trafton. We have proven, I think, since 1993 that 
Proton is a robust, reliable vehicle. It is well thought of in 
the industry and it is key to meeting current demands for 
putting satellites into Geo Transfer Orbit. It has been a very 
successful joint venture. We at Lockheed Martin have absolutely 
no evidence that our partners have done anything wrong with 
regard to proliferation. We think as we approach the next 
century in the space launch business that these two joint 
ventures with the Russians, the Proton and the RD-180, are key 
to bringing Russia into the $1 trillion global 
telecommunications industry. That is good for us, and it is 
good for the Russians. It keeps their engineers and scientists 
occupied doing good things for the industry and not 
proliferating. Frankly, it brings a source of revenue into this 
country as well. A lot of Americans benefit from the LKEI joint 
venture.
    Senator Akaka. It appears Lockheed Martin is heavily 
reliant on RD-180 as its booster rocket for the next generation 
of Atlas rockets. I understand that the RD-180 is a high 
performance booster and offers an increased capability for 
Lockheed Martin's space launch services. The question is, has 
the Russian Government or any Russian entities involved in 
business relationships with Lockheed Martin discussed the topic 
of tying continued cooperation with Lockheed Martin and use of 
the RD-180 to the United States lifting or removing the launch 
quota?
    Mr. Trafton. Well, the Russians are watching the quota 
issue very closely. As I have stated earlier, they are confused 
by the inconsistency they see in U.S. Government policy with 
regard to applying a trade agreement to another issue called 
nonproliferation. We are relying very heavily on the RD-180. 
Frankly, we anticipate success with the quota issue and we are 
very hopeful that it will be resolved, and that on December 31, 
2000, the trade agreement will be allowed to expire without 
extension. That is key to the continued success of the Proton 
side.
    On the RD-180, again, now we are talking about transfer of 
technology into this country of significant, valuable 
technology that we don't have. The Russians don't have to do 
that. They are wondering why it is taking over a year for us to 
obtain a brokering license to advance them $25 million in order 
to make some very basic improvements to their factories.
    Senator Akaka. So what you are saying is this affects both 
Lockheed Martin and ILS if the launch quota agreement remains 
in place, that is, reviewed and renegotiated on a routine basis 
as was done in the past?
    Mr. Trafton. I think it will eventually cause a failure of 
the joint venture. This continuous uncertainty will create risk 
in the marketplace that satellite end-users cannot and will not 
tolerate. They will go to other launch service providers. I 
have heard the words, and they are very appropriate, that 
``continuing the trade quota will eventually squeeze the life 
out of this joint venture.'' This joint venture will not 
survive.
    Senator Akaka. I thank you very much for your responses.
    Thank you very much, Mr. Chairman.
    Senator Cochran. Thank you, Senator.
    Thank you, Mr. Trafton, for your cooperation with the 
Subcommittee and for your testimony.
    Senator Cochran. We will now hear from our second panel of 
witnesses. Our second panel includes Catherine Novelli, 
Assistant U.S. Trade Representative for Europe and the 
Mediterranean; Walt Slocombe, Under Secretary for Policy of the 
Department of Defense; and John D. Holum, Senior Advisor for 
Arms Control and International Security at the Department of 
State.
    We appreciate very sincerely the cooperation and attendance 
at the hearing of our witnesses in this panel. We have asked 
Ms. Novelli to lead off because the U.S. Trade Representative 
undertook the negotiation of this trade agreement which was 
described by our first witness.
    So we ask Ms. Novelli to proceed. You may proceed in any 
way you think would be helpful to the Subcommittee. Thank you.

     STATEMENT OF CATHERINE NOVELLI, ASSISTANT U.S. TRADE 
        REPRESENTATIVE FOR EUROPE AND THE MEDITERRANEAN

    Ms. Novelli. Thank you very much, Mr. Chairman, Senator 
Akaka. I will just give brief oral remarks and then take your 
questions however you would like to do that.
    The first thing that I would like to say is that 
international commercial space launch market and the 
development of U.S.-Russia cooperation on commercial trade is a 
very important issue for the administration. We have pursued 
policies that are aimed at developing new, lower cost U.S. 
space launch capabilities and leveling the playing field in 
commercial space launch trade simultaneously.
    Over the past decade, in particular, increasing commercial 
demand for launch services, added on top of the already 
existing government demand, has led to a marked increased in 
the number of launch vehicles needed to supply the space launch 
market. In that situation, U.S. launch vehicles have performed 
very well in recent years in terms of market share. Our 
vehicles accounted for 40 percent of the market for 
internationally competed commercial launches in 1997, and 44 
percent of the market in 1998, which is the largest percentage 
of any one country. Launches, of course, are a means to an end 
of supporting a high technology, high value global satellite 
industry which U.S. firms traditionally have dominated. 
Satellite firms take in billions of dollars of revenue annually 
and employ tens of thousands of people in some of America's 
highest paid, most skilled jobs.
    The end of the Cold War brought new opportunities for 
commercial partnerships between U.S. firms and economy in 
transition countries, like Russia and the Ukraine. One of the 
first of these opportunities was in the space launch area, 
where Lockheed Martin sought to form a joint venture with 
Russian rocket firms Khrunichev and Energia and created the 
venture now known as LKE. LKE's plan was to offer the highly 
reliable heavy lift Russian Proton vehicle for commercial 
launches. Simultaneously with that, the United States responded 
to the changing nature of the demand for space launch services 
where there was more demand now for commercial launches, and to 
the new opportunities that were created by these kinds of joint 
ventures by beginning negotiations on bilateral commercial 
space launch trade agreements with China, Russia, and then 
finally Ukraine.
    In order to prevent the disruption that these economies in 
transition providers could produce in the commercial space 
launch market, the agreements were built around core provisions 
of a quota on the number of launches to Geosynchronous Earth 
Orbit, or GEO, and price baselines of 15 percent below Western 
price levels. So that if the price of an economy in transition 
launch fell below the 15 percent price benchmark, the United 
States had the right to hold immediate consultations with the 
government that was involved. All these agreements now offer 
economy in transition providers a potential or actual total of 
20 launches to GEO. Launches to Low Earth Orbit, or LEO, are 
treated less specifically because of the still evolving nature 
of the demand for such launches.
    We think that the agreement with Russia has in many ways 
operated satisfactorily with respect to GEO. I think there is 
no question that the LKE joint venture has prospered and moved 
its pricing levels rapidly up to Western market levels, and we 
don't foresee that there will be any disruption due to the LKE 
joint venture in the GEO market.
    With respect to the LEO launches, however, the situation is 
not quite as clear. We have had some complaints from U.S. firms 
that have alleged that the Russian ex-ICBMs could represent a 
competitive threat to some U.S. small launch companies. There 
is scant evidence of market disruption because there is an 
uncertain situation in the LEO market right now. But we have 
told the Russians that we want to continue talking about these 
pricing issues, and they have agreed to do that.
    Though the administration encourages innovative use of 
space for commercial purposes, we remain deeply committed to 
preventing the proliferation of technology which could help 
spread the use of weapons of mass destruction. I know that my 
colleagues from the State Department and the Defense Department 
are prepared to address the nexus between nonproliferation and 
our commercial space launch policy objectives.
    One of the critical questions demanding attention as we 
contemplate the future of the commercial space launch agreement 
with Russia is the extent to which the continuance of our 
existing policies, and in particular the quotas, will impact 
the business prospects of U.S. space companies. USTR has been 
conducting active consultation with U.S. space firms. Most of 
the firms that we have talked to over the last couple of years 
support significant liberalization or elimination of the use of 
launch quotas as a tool for regulating the economy in 
transition market behavior. There are many firms who are 
concerned that maintaining a tight quota on Russian launches 
will jeopardize a number of the LKE's existing contracts, 
pushing those customers towards European or perhaps even 
Chinese rockets as the only available avenue to Geosynchronous 
Earth Orbit in the immediate future. In the longer term, U.S. 
satellite firms fear that unavailability of Proton rockets for 
U.S.-built satellites could give a competitive advantage to 
European satellite makers.
    Just this month, as you know, the administration decided to 
modify the space launch agreement with Russia to allow four 
more opportunities to launch commercial payloads to GEO, 
bringing the GEO quota for Russia up to a total of 20 launches 
through the end of 2000. This decision was made in part in 
response to the positive Russian moves in the proliferation 
area. Beyond this, the administration is actively examining all 
issues relating to the question of what U.S. policy should be 
once the commercial space launch agreement with Russia expires 
at the end of next year. As always, the impact of our 
commercial space policy on our proliferation objectives will be 
one of our key concerns.
    For its part, USTR plans to continue its consultations with 
the private sector, with you in the Congress, and throughout 
the administration interagency in the coming months as it 
prepares recommendations on what the appropriate options should 
be. We look forward to working with you and the other Members 
of this Subcommittee, and we hope that we will be able to find 
the appropriate balance that ensures the future health and 
growth of the American space industry--launch providers, 
satellite producers, and providers of satellite base services--
and also meets our overall national security, foreign policy, 
and economic interests. Thank you.
    Senator Cochran. Thank you, Ms. Novelli.
    I think we will go ahead and hear from the other members of 
the panel and then we will have an opportunity to ask questions 
of you as a group.
    Secretary Slocombe, you may proceed.

 STATEMENT OF HON. WALTER B. SLOCOMBE,\1\ UNDER SECRETARY FOR 
                 POLICY, DEPARTMENT OF DEFENSE

    Mr. Slocombe. Thank you, Mr. Chairman. As always, it is an 
honor to appear before this committee, in this case to address 
the national security implications of the space launch policy 
issues that are the subject of the hearing this afternoon. You 
have my full statement and, with your permission, I will 
summarize it.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Slocombe with an attachment 
appears in the Appendix on page 43.
---------------------------------------------------------------------------
    It is a pleasure to be here with representatives from the 
Department of State and USTR. As the Defense Department 
representatives, I will obviously focus on the national 
security aspects of these issues. But I think it is fair to say 
that, although all the Executive Branch agencies involved in 
formulating space launch policy approach the subject from 
somewhat different institutional viewpoints, we do agree that 
ultimately national security considerations have to take 
priority.
    In order to protect the U.S. space launch industry 
initially from predatory pricing, the quota arrangements were 
negotiated to establish price discipline on launch providers in 
non-market economies. Those apply to Russia, China, and 
Ukraine. As I understand it, the Ukraine quota doesn't have 
much impact in the real world because of limits on capacity, 
and the issues having to do with Chinese satellite launches 
are, perhaps mercifully, not before us this afternoon. And so 
the issue is the Russian quota.
    I have read prior testimony from Lockheed and other 
business representatives and listened carefully to Mr. 
Trafton's statement. I think we understand fully the position 
of Lockheed Martin, which I take to be broadly representative 
of the industry view, that the concern about predatory pricing 
that was the initial reason for the quotas and the limitations 
on the number of launches no longer apply. That said, it is 
also clear that the arrangements have made possible a good 
cooperation and partnership between American industry and 
Russian firms and entities, and have made possible the entry in 
an orderly way of the Russian launches into the international 
market and have promoted responsible market conduct.
    But the quota arrangements and, in general, the restriction 
on dealings in satellite launch technology also have a foreign 
policy dimension which goes beyond their economic purpose. The 
quota system continues to be an element in our nonproliferation 
goals. I want to emphasize it is far from being the only 
element. First of all, we have a comprehensive licensing system 
which would apply to all these transactions with or without a 
quota arrangement.
    Second, there is a complex of Executive Orders and statutes 
which require that sanctions be imposed on Russian entities 
that are involved in improper transfers of technology to Iran 
or, indeed, to certain other countries of concern and we have 
invoked those provisions as appropriate. We have also made the 
issue of proliferation a major focus of all of our contacts 
with the Russian Government. It remains at the top of the U.S.-
Russian agenda.
    In December 1998, the administration affirmed that the 
United States would not increase the then current launch quota 
for Russia without improved efforts on the part of the Russian 
Government to halt missile proliferation, particularly to Iran. 
In pursuance of this policy, we imposed tough trade penalties 
against ten Russian entities with respect to which we had 
specific and credible information that they were transferring 
missile technology to Iran.
    We continue to be concerned about the problem of transfers 
of missile technology from Russian entities to Iran. Our 
approach has yielded some success and has produced 
modifications in our policy. The steps the Russian Government 
have taken are represented by the new Stepashin government 
putting in place tough new nonproliferation policy, creating 
institutional foundations to implement that policy, and passing 
Russian domestic laws that punish wrong-doers. Those steps are 
specified in the full statement.
    Given these developments, the President decided earlier 
this month to increase incrementally the quota to allow the 
launch of four additional U.S. satellites on Russian launchers 
through the LKEI arrangements beyond the 16 previously 
authorized. We are not, however, prepared at this point to 
dispense with the quota arrangements altogether. We are 
conscious of the need to balance our nonproliferation interest 
against the potential impact on U.S. space launches. We believe 
we have struck an appropriate balance by, in effect, keeping 
the launch quota well ahead of current contracts. However, I 
understand and respect the point that Lockheed Martin has made 
about the long term impact on their ability to negotiate future 
contracts, and we will bear that very much in mind as we 
consider both the specific policy with respect to quotas and 
the broader question of what to do as we look toward the 
expiration of the current agreement.
    Now, turning to the RD-180, there is no question that the 
RD-180 engine is an important element of our domestic space 
launch policy. From the point of view of the Department of 
Defense, it is extremely important to have a strong domestic 
space launch industry. That industry cannot continue to rely 
entirely on government launches. It is also for very standard 
competition reasons in our interest to have two potential U.S. 
suppliers engaged in the business. And two are engaged--Boeing, 
which has a developmental engine, and Lockheed Martin, which 
has the RD-180 arrangement. It is also a matter of very 
strongly held policy that U.S. Government launches should not 
be dependent on the continued willingness of any foreign 
supplier to supply the launch technology. Therefore, there is 
an important link between our domestic space launch industry 
and the RD-180 deal.
    I have to say that I think the link between our current 
constraints on the number of launches, the quotas essentially, 
and the RD-180 deal is not a direct one. We don't dispute the 
concerns that Mr. Trafton raises, but the RD-180 deal and the 
space launch arrangements in Russia are quite separate 
arrangements, both as a business and as an economic 
proposition. Obviously, the quotas don't restrict the RD-180 
purchase.
    There is this brokerage license issue which is directly 
related to the transfer of the technology to allow the RD-180 
to be manufactured in the United States. That license is 
currently under review at the Department of State and approval 
will depend on assessment of relevant nonproliferation 
considerations.
    In sum, there is a complex relationship between our 
commercial space launch policy, the defense-industrial base, 
and the related issue of the domestic launch industry and U.S.-
Russian engagement to try to deal with the proliferation 
problem. We believe that we have struck the right balance at 
this point between the legitimate needs of our domestic 
industries and our insistence on providing effective safeguards 
and using appropriate leverage to attempt to restrict the 
proliferation of sophisticated launch technology, particularly 
to Iran.
    With that background, I look forward to answering the 
Subcommittee's questions.
    Senator Cochran. Thank you very much, Secretary Slocombe.
    Mr. Holum, you may proceed.

STATEMENT OF JOHN D. HOLUM,\1\ SENIOR ADVISOR FOR ARMS CONTROL 
        AND INTERNATIONAL SECURITY, DEPARTMENT OF STATE

    Mr. Holum. Thank you, Mr. Chairman. It is a pleasure to be 
back before the Subcommittee. The quota for launches of 
satellites to geosynchronous orbit on Russian boosters raises 
complex issues that touch on our nonproliferation objectives, 
our space launch and satellite industries, and on the 
integration of Russia's space sector into the international 
economy. I welcome the opportunity to address these issues with 
you today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Holum appears in the Appendix on 
page 80.
---------------------------------------------------------------------------
    The space launch quota was part of the solution to a 
nonproliferation problem we faced in the early 1990's. At that 
time, a Russian company had a contract to sell production 
technology for cryogenic rocket engines to India for a space 
launch vehicle. Transferring missile technology to India was a 
sensitive nonproliferation issue then, as it remains today.
    Following intense, high level negotiations, an agreement 
was reached in which Russia agreed to cancel the contract to 
transfer rocket engine production technology to India and to 
abide by the Missile Technology Control Regime guidelines, and 
the United States agreed to permit Russia to launch U.S. 
satellites to geosynchronous orbit, subject to a quota. That 
quota is now 16 through the year 2000, and the administration 
has decided, as you have heard, to increase the quota to 20.
    At the time of the 1993 agreement, the purposes of the 
quota were to protect the U.S. space launch industry from 
unfair competition from a non-market economy as we worked to 
allow the U.S. satellite industry the benefits of access to 
Russian launches, and to give Russia access to the space launch 
market in return for important nonproliferation commitments. It 
also made sense from a nonproliferation point of view to engage 
thousands of high-tech scientists and engineers in legitimate 
commercial activity in one of the few areas in which Russia has 
world class technology. We made clear to the Russians at the 
time that the continuation of the space launch agreement was 
contingent on Russian missile nonproliferation behavior.
    Today the market for space launch has grown substantially 
beyond what it was in 1994 and the commercial rationale for 
quotas is much less than it was then. But the nonproliferation 
problem is very much still with us, in particular, Russian 
transfers of missile technology to Iran, and I know I don't 
have to underscore the seriousness of that problem with you, 
Mr. Chairman, or Senator Akaka. We have devoted a great deal of 
effort over several years to halt cooperation between Russia's 
aerospace industry and the Iranian missile program. First, 
Frank Wisner, and now Bob Gallucci have led teams that have 
engaged in intensive exchanges with the director general of the 
Russian Space Agency, Mr. Koptev.
    This issue remains at the top of the U.S.-Russian agenda, 
and our concerns have been addressed numerous times by 
President Clinton and President Yeltsin, most recently at the 
G-8 summit in Cologne last month. Vice President Gore has made 
this a major issue with a series of Russian prime ministers, 
including Mr. Stepashin, and plans to address the issue in 
their meetings next week. As part of the administration's 
effort on nonproliferation, Secretary Albright, National 
Security Advisor Berger, and other senior officials actively 
engage their Russian counterparts on the Iran missile program 
at every opportunity.
    This intensive effort has achieved some important results, 
the most important of which is the passage of new export 
control legislation by the Duma and the Federation Council in 
the last few weeks. The new law provides a strong legal basis 
to stop transfers and punish violators. The Russian Government 
has also committed itself to implementation of a plan of 
action, drawn up by Gallucci and Koptev, designed to bring 
about an end to cooperation between Russian entities and the 
Iranian missile program.
    A key element of our nonproliferation strategy was our 
decision in early 1998 to tie an increase in the space launch 
quota to Russian performance on curtailing missile cooperation 
with Iran, just as we tied the original quota to Russian 
performance on missile cooperation with India. Our strategy 
includes other elements, including the trade penalties we have 
imposed on ten Russian entities for missile and nuclear 
cooperation with Iran.
    We believe it is both logical and in our security interest 
to control Russian access to the U.S. space launch market as 
long as Russian aerospace companies are cooperating with the 
Iranian missile program, and to encourage commercial space 
ventures consistent with our nonproliferation objectives. By 
providing both incentives and penalty, our policy is intended 
to encourage the Russian Government to police the Russian 
aerospace industry. So here's the crux of the matter: We do not 
want to wind up with a situation in which some Russian 
companies are responsible and work with the United States and 
others remain free to contribute to Iran's missile effort. 
Again, our policy is aimed at the organization that can resolve 
this across the board, and that is the Russian Government.
    Our decision to increase the space launch quota was taken 
not because the Russia-Iran missile problem has been solved, 
but because the Russian Government has taken steps in recent 
weeks to support a strong nonproliferation policy and direct 
government agencies to implement it, to create institutional 
structures to enforce compliance and strengthen export 
controls, and to pass laws needed to punish wrong-doers. But we 
need to sustain the pressure, to use these new tools to curtail 
technology transfers to Iran. That is why our increase is 
incremental, to give the Stepashin government time, perhaps 
another 6 months, to follow through on the commitments it has 
made to us.
    We remain hopeful that our strategy will in the end give us 
both the nonproliferation benefits of a cutoff in assistance 
from Russian entities to the Iranian missile program and the 
commercial and nonproliferation benefits of a strong commercial 
partnership between the United States and Russian commercial 
space industries. There are, of course, risks. But we continue 
to pursue an outcome that achieves both of these benefits for 
the United States. Thank you, Mr. Chairman.
    Senator Cochran. Thank you, Mr. Holum.
    Ms. Novelli, the principal objective of the trade 
agreement, as I understand your testimony, was to ensure that 
Russian launches of payloads into GEO orbit were priced at the 
prevailing market rate, or within 15 percent of that rate. Has 
the launch agreement achieved that purpose?
    Ms. Novelli. With respect to Russia, Mr. Chairman, we 
believe that the launch agreement is operating to achieve that 
purpose, and that LKE, because they are in a joint venture, has 
greatly helped that situation by having U.S. pricing methods 
laid on top of what the Russians would normally do. So, we do 
believe that that purpose is being achieved, which was one of 
the purposes of the agreement.
    Senator Cochran. What were any of the other purposes that 
we don't know about? I thought that the purpose of the 
agreement was to guard against predatory pricing.
    Ms. Novelli. Yes. Of just the NIRO agreement per se, yes. 
That was how we were trying to balance our own defense 
industry's launch capability with the needs of our satellite 
community from a strictly commercial purpose. But the link with 
nonproliferation is part of the whole commercial space launch 
policy. But the provisions of the agreement per se were aimed 
at ensuring that there was not predatory pricing or detriment 
to our own domestic industry which was trying to launch 
satellites.
    Senator Cochran. That was the principal objective, isn't 
that correct, of the agreement?
    Ms. Novelli. Yes.
    Senator Cochran. Mr. Holum, given that the principal 
objective of the agreement, as we have established, has been 
met, specifically that Russia has complied with the pricing 
condition in the agreement, what is the justification for 
continuing to impose quota restrictions on this commercial 
launch venture?
    Mr. Holum. Well, as I said in my statement, we tied this 
agreement and our entire space launch policy in Russia to 
nonproliferation as well as to the commercial aspects. We made 
that clear at the time. And as Under Secretary Slocombe has 
noted, we have, irrespective of the quotas, a licensing 
requirement for commercial satellite launches in Iran that is 
obliged to take into account----
    Senator Cochran. Not Iran, we don't do that.
    Mr. Holum. I mean in Russia, a licensing requirement that 
is obliged to take into account nonproliferation concerns. The 
reason we have employed this in particular is that we need the 
incentives to flow to the right people in Russia to control 
exports of missile technology to Iran. The Russian Space Agency 
needs to be a believer. We have made de marches at all levels 
to the Space Agency and to other parts of the government and 
find that the effect of words, even at the highest levels, are 
insufficient. Costs to enterprises in the space sector in 
Russia get the attention of the Russian Space Agency, and 
therefore we have, as we have seen in recent weeks, begun to 
see some progress. I think there is a connection.
    Senator Cochran. Is there a connection between a commitment 
by the new Russian prime minister to the lifting of the quota, 
was that the action that you are talking about, a verbal 
commitment that he would work more effectively to control 
proliferation to Iran?
    Mr. Holum. Well, there are a series of tangible steps. One 
of the reasons why we have made this incremental is it is 
largely verbal at this stage and we want to make sure that it 
works. The tangible step that has been taken is the adoption, 
with strong support from the government, of the new export 
control law which includes criminal penalties for entities that 
make these transfers, including individual penalties.
    Senator Cochran. Isn't it also true that neither one of 
these entities who are involved in the joint venture have been 
involved in any proliferation activity with respect to Iran's 
missile or weapons program?
    Mr. Holum. That is, so far as we know, correct. We have 
made no suggestion that they have been involved. But my concern 
is that we don't want to set up a situation where some 
companies are free to trade with Iran and others aren't because 
the government is only regulating the ones that are dealing 
with the United States.
    Senator Cochran. But neither Khrunichev nor Energia, as I 
understand it, is involved in proliferation. Therefore, why is 
the administration singling out these companies to impose 
quotas on in their transaction with Lockheed Martin?
    Mr. Holum. Because we want the government to take action. 
And the way to provide an incentive for the government to act 
across the board against all of the aerospace companies in 
Russia is to deny or limit the benefits of commercial space 
launches.
    Senator Cochran. Does this not operate in your view as a 
disincentive for good behavior if you penalize companies that 
are not engaged in proliferation?
    Mr. Holum. No, I don't think it does. First of all, we are 
doing this in a calibrated way. As of now, no agreed contracted 
space launch has been refused. But we do need to keep the 
leverage in place to encourage the government to adopt and 
implement the appropriate policies.
    Senator Cochran. Aren't there actions that could be taken 
other than this? Is there no other leverage available to our 
government that would motivate Russia to do a better job of 
controlling proliferation?
    Mr. Holum. Well, as I said in my statement, we are taking 
other actions. We have targeted the companies that are 
specifically involved that we have identified and have strong 
evidence with regard to with trade and administrative actions. 
We have, under the terms of last year's appropriation act, 
refused to certify Russia as being compliant with requirements 
on missile and nuclear proliferation and therefore have 
withheld or have had the effect of redirecting 50 percent of 
Freedom Support Act funds to Russia, redirecting those funds to 
other countries. So there are other areas where we are applying 
leverage.
    But I continue to maintain that the most effective single 
element we have, our greatest ability to influence the 
Government of Russia to apply strict controls across the board 
on the aerospace industry, is the space launch quota.
    Senator Cochran. Secretary Slocombe, do you view 
continuation of the Russian launch quota as the best 
nonproliferation tool available?
    Mr. Slocombe. I don't think it is the best but I do think 
it is, under present circumstances, a legitimate part of a 
range of instruments that we have to try to influence the 
actions of the Russian Government.
    Senator Cochran. Mr. Trafton testified that the ability of 
Lockheed Martin to acquire the Russian RD-180 engine would 
become highly questionable if the LKEI joint venture collapses 
from the weight of the quota issue. He also said that Lockheed 
Martin couldn't compete in the Defense Department's Evolved 
Expendable Launch Vehicle program without this RD-180 engine. 
How important is this program to the Defense Department?
    Mr. Slocombe. It is very important to the Defense 
Department.
    Senator Cochran. Is the RD-180 engine more capable and more 
advanced than any heavy lift engine produced in the United 
States?
    Mr. Slocombe. My understanding is that that is true as of 
now. Presumably the Boeing competitor would seek to meet that 
requirement as well. But certainly, as of now, that is the 
case, as I understand it.
    Senator Cochran. What would be the impact to the Defense 
Department of losing Lockheed Martin participation in the EELV 
program?
    Mr. Slocombe. As I said in the statement, we believe it is 
advantageous from the point of view of the Department of 
Defense and the taxpayer that there be two competitive U.S. 
companies participating in the program. So, therefore, we would 
not want to see Lockheed Martin drop out of the EELV program. 
Another company might decide to come in, but we certainly would 
not like to see Lockheed Martin drop out.
    Senator Cochran. Ms. Novelli, you heard the comment I think 
Mr. Trafton made in his statement or in answer to a question 
that I asked about one of the likely outcomes of the 
continuation of the quota system to be the gain of market share 
from U.S. industry by the French company Ariane space. How else 
would you expect the U.S. commercial space launch industry to 
be affected by the continued use of the quota as a 
nonproliferation tool?
    Ms. Novelli. Mr. Chairman, I hope that we will be able to 
strike a balance so that we are not in a situation where there 
is any adverse effects on our commercial space launch 
capabilities or industries. I think that when we did these 
agreements and looked at the number of launches, and also with 
the EELV coming on line, we feel that we should be in a pretty 
good situation for meeting demands of our satellite industry 
and of U.S. launchers being able to launch satellites for the 
future. At this moment, in terms of demand, while it is true 
that there has been an increased demand for launches, there is 
not a situation right now where even the automatic triggers of 
the agreement are triggered for raising quotas. They are based 
on the number of commercial launches that are done worldwide, 
an average of those being 24, and we are not close to that 
average; we are only at an average of 21 right now.
    Senator Cochran. What do you expect will happen when the 
agreement expires December 31, 2000? What do you expect will 
happen regarding Russian launches of U.S.-built satellites? Is 
there any authority to prohibit them, for example?
    Ms. Novelli. In terms of what we think will happen, we 
recognize that we need to come up with a plan of how we are 
going to deal with this at the end of the year 2000, and that 
is why we have begun consulting with our industry and 
interagency to discuss what should be the next steps. So it is 
hard for me to say exactly what those will be since we haven't 
reached any decision yet.
    Senator Cochran. Are you surprised to learn as a result of 
this hearing that this cloud of uncertainty that has been 
created by the quota imposition and the future of the quotas 
has so adversely affected the ability of this company to get 
any future business even beyond the expiration date of the 
agreement?
    Ms. Novelli. I was aware that they were having trouble 
selling more launches because of the uncertainty regarding 
quotas. So it was not surprising.
    Senator Cochran. Is it the policy of the U.S. Trade 
Representative of the United States to take actions or 
participate in the development of policy that makes it harder 
to do business by American companies with legitimate foreign 
businesses that are not engaged in any kind of illegal conduct? 
How do you justify that as an agency of the U.S. Government?
    Ms. Novelli. Obviously, it is not our policy to try to make 
it harder for companies to do business. We are one element in 
decision-making in the administration and there are, as my 
colleagues have said, many interests that the U.S. Government 
has, including nonproliferation interests, and those interests 
all have to be brought to bear in making any kind of decision 
on commercial space policy.
    Senator Cochran. Secretary Slocombe, does working with 
Russian companies like Khrunichev and Energia make it less 
likely that they will engage in missile proliferation with Iran 
or other rogue states?
    Mr. Slocombe. I think it does, for two reasons. One is 
negative. That is, if they have a substantial commercial 
relationship with the United States, then the sanctions which 
would be imposed if they did engage in missile proliferation 
with Iran would have real bite to those companies as such. And 
second, there is an obvious affirmative advantage in providing 
legitimate work for Russian companies with technological 
expertise to allow them to work on these projects, rather than 
something illegitimate.
    Senator Cochran. We have spent about $2 billion in U.S. 
taxpayer dollars for the Cooperative Threat Reduction program, 
the Nunn-Lugar program, or now, since Senator Nunn is no longer 
here, it is the Lugar-Nunn program.
    Mr. Slocombe. I thought that happened in 1994.
    Senator Cochran. Well, it did. But some of this money is 
used to do exactly what we are seeing done by Lockheed in this 
joint venture, and that is to engage space and defense workers 
in Russia in legitimate economic activities that don't threaten 
the security interests of the United States. It seems to me 
that this sort of activity ought to be rewarded and not 
punished or penalized or made more difficult. Doesn't working 
with companies like this on this cooperative launch venture 
accomplish the same kinds of goals, and not at government 
expense, without the use of tax dollars?
    Mr. Slocombe. It does, there is no question about that. But 
that does not entirely answer the question of whether 
maintaining the quota system as one of our sources of 
incentives or disincentives is appropriate. But I agree, this 
is a creative program. It is the reason that we agreed to the 
agreement in 1993 when we did.
    Senator Cochran. It is my understanding that many national 
security related problems have resulted from launching U.S.-
built satellites in foreign countries such as China. Does the 
Defense Department regard the EELV program as one way to 
decrease reliance on foreign launch and thus more easily 
safeguard U.S. technology and control that technology to serve 
our security interests?
    Mr. Slocombe. First of all, from the point of view of the 
Department of Defense, we absolutely do not want to be in the 
position where the launch of military or other government 
payloads would depend on the continuing availability either of 
foreign launch services, in the sense that the launch took 
place in a foreign country, or of a foreign product, as will be 
the case for the initial RD-180 launches, imports from Russia 
or anywhere else. So it is extremely important from a Defense 
Department and the broader government point of view that there 
be a domestic industry that is not dependent on foreign sources 
that can launch government payloads.
    We also believe that given the changes in the market, that 
industry is not going to be viable if it is dependent entirely 
on U.S. Government launches. It needs to be able to compete and 
operate in the commercial market as well.
    Senator Cochran. Mr. Holum, the Arms Export Control Act was 
amended in 1996 to add a munitions list licensing requirement 
for brokering activities. We heard Mr. Trafton talk about the 
fact that State Department interpreted this transaction between 
Lockheed Martin and Energomash as a brokering arrangement. He 
says it was like part of a transaction to buy the technology 
and buy the engine. That this $25 million payment is going to 
permit the company to upgrade and retool so that it can carry 
out the transaction. It is not a relationship between Lockheed 
Martin and some third party. How did the State Department come 
up with this interpretation that requires a separate license 
for that payment to be cleared? Isn't that a stretch?
    Mr. Holum. I don't believe it is a stretch. But I will have 
to provide for the record a detailed description of the legal 
rationale.
    [The information to be provided follows:]
                          Brokering Activities
    Question: It is my understanding that this amendment was not 
intended to cover activities in the normal course of ventures already 
authorized by a Munitions List license, such as transferring funds 
between or among joint venture partners. Is that your understanding as 
well?

    Answer: Yes. Payments made pursuant to the terms of contracts that 
have been fully disclosed in a munitions license application would 
rarely, if ever, require a separate brokering license. In formulating 
the regulations to implement the brokering amendment to the Arms Export 
Control Act (Public Law 104-164), the Department took great care to 
limit the impact on routine business operations. As an example, the 
requirement for prior approval (licenses) for brokering activities is 
satisfied under the ITAR by ``a license or other written approval . . . 
for the permanent or temporary export or temporary import of the 
particular defense article, defense service, or technical data subject 
to prior approval under this section, provided the names of all brokers 
have been identified. . . .'' (22 C.F.R. Sec. 129.7(b)(1)).

    Question: Can you explain, then, why the State Department has 
required Lockheed Martin to obtain a ``brokering license'' to pay the 
$25 million to Energomash, even though Energomash is Lockheed Martin's 
joint venture partner in the acquisition of the RD-180 engine, and that 
acquisition is properly licensed in and of itself?

    Answer: Lockheed Martin is seeking authority to transfer $25 
million in order to finance tooling and equipment (e.g., machine tools) 
purchases abroad for the modernization of Energomash's rocket engine 
production line in Khimki, Russia. This was not disclosed in Lockheed 
Martin's April 1996 munitions license application for the cooperative 
activities it is currently authorized to execute with Energomash. 
Therefore, this activity was never licensed in and of itself. In fact, 
the specific terms of Lockheed Martin's 1996 munitions license 
expressly prohibit ``. . . any production process improvements; 
including any production line management process/techniques that result 
in production line efficiency improvements (i.e., greater throughput, 
higher yields, lower cost per unit, etc.).'' The matter of a separate 
contractual commitment by Lockheed Martin to finance the modernization 
of the Khimki plant was not made know to the Department until 1998. It 
has only been in recent months that the Department has received from 
Lockheed Martin the names of the Russian and other foreign equipment 
providers from whom the tooling and equipment are to be purchased in 
order to modernize the Energomash plant. The Department believes that 
financing of improvements to foreign military infrastructure, such as 
rocket engine plants in Russia, is properly regulated through a 
requirement for a brokering license in accordance with section 38 of 
the Arms Export Control Act.
    Among other things, section 38 of the AECA ensures that U.S. 
defense firms do not, unintentionally, provide financial support to 
foreign persons whose behavior may present proliferation concerns. As 
an example, in this case, Lockheed Martin has already been informed 
that one of its proposed equipment suppliers (Moscow Aviation 
Institute) may not be involved in this activity.

    Senator Cochran. Well the purpose, as I understand it, just 
for the record, would be to help regulate activities that were 
not captured by the prohibition on importing or exporting 
defense articles and services without a license. My 
understanding is the amendment sought to ensure that the 
activities of international arms dealers acting as an 
intermediary between two parties would be covered by U.S. 
munitions list licensing requirements. I guess, to be on the 
safe side, that my understanding of the industry's statement is 
they asked the State Department if a license were required just 
to check, and the State Department says, well, as a matter of 
fact, yes, a license is required. They didn't think it was but 
they asked. And so they are complying with the interpretation 
by sitting and waiting, and they wait, and they continue to 
wait.
    It is my understanding that this amendment was not intended 
to cover activities in the normal course of ventures already 
authorized. This transaction was already authorized by a 
munitions list license. That's the point. They applied for a 
license to engage in the transaction. That was granted. Now 
they make a payment under the agreement, they stop and say we 
better check and be sure this doesn't require a separate 
license, and they get back, oh, yes, it does. It is an almost 
Kafkaesque experience. That is my reaction to it anyway. I may 
be totally wrong.
    But you are going to supply an answer and an explanation 
for that for the record.
    Mr. Holum. Yes. I will supply a more detailed answer.
    Senator Cochran. How many brokering licenses, while you're 
at it, have been applied for, and how long did it take to grant 
them?
    Mr. Holum. I can provide that. I don't know the answer.
    [The information to be provided follows:]
                          Brokering Activities
    Question: How many brokering licenses have been applied for and how 
long did it take to grant them?

    Answer: Since enactment of the brokering amendment to the Arms 
Export Control Act (Public Law 104-164), there have been 329 requests 
for brokering licenses or for advisory opinions as to whether a 
brokering license would be required. The time required for approval has 
ranged from a few days to 180 days for more complex proposals.

    Senator Cochran. And what criteria are being used by the 
State Department to determine whether a brokering license is 
required or not in the payment for services or in payment under 
an agreement which has already been licensed?
    Mr. Holum. I will supply that.
    [The information to be provided follows:]
                          Brokering Activities
    Question: What criteria are being used to determine whether a 
brokering license is required or not?

    Answer: The criteria for when a brokering license is required are 
set forth in considerable detail in the International Traffic in Arms 
Regulations at Sec. 129. generally, only brokering activities 
pertaining to certain defense articles involving countries other than 
members of the North Atlantic Treaty Organization, Japan, Australia and 
New Zealand, require a separate license. That is because the Department 
specifically sought to avoid unnecessary regulation of routine business 
transactions involving U.S. friends and allies when the underlying 
transactions were already properly disclosed and approved. Accordingly, 
the regulations provide a variety of ways by which the requirements of 
the law may be satisfied without need for a separate brokering license.

    Senator Cochran. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman. I want at 
this time to thank you for holding this hearing on the Russian 
space launch quota, which has implications for commerce in our 
country and proliferation of weapons of mass destruction. I 
will be very brief.
    Mr. Slocombe, did the threat in December 1998 to increase 
the launch quota have a major effect on having the Russians 
take their recent actions in export controls?
    Mr. Slocombe. Senator Akaka, I would associate myself with 
what Secretary-designate Holum said, which is that I believe 
the quota is a way, in effect, of getting the attention of the 
authorities in Russia who are responsible for the overall 
Russian space effort directed to this problem that we are so 
concerned with. So I think it did have a favorable effect.
    Senator Akaka. Mr. Holum, on January 28, 1998, the United 
States sanctioned seven of the Russian entities believed to 
have assisted Iran's missile program. About a year later, on 
January 12, 1999, the Clinton Administration announced economic 
sanctions against three more Russian entities for sharing 
nuclear missile technology with Iran. Has the Russian 
Government taken any action against these entities? And if so, 
what actions have they taken?
    Mr. Holum. They have taken action to the extent of 
commencing their own investigation with reference to these 
various entities. Eight of them were engaged, by our 
information, in missile cooperation, and two in nuclear. But 
the Russian Government has been investigating those cases and 
made a public announcement to that effect.
    Senator Akaka. Mr. Chairman, those are my brief questions. 
Thank you very much. Thank you for the responses.
    Senator Cochran. Thank you very much, Senator.
    Senator Cleland, one of the very important Members of this 
Subcommittee, we welcome you and recognize you for any comments 
or questions you might have.

              OPENING STATEMENT OF SENATOR CLELAND

    Senator Cleland. Thank you very much, Mr. Chairman. Thank 
you for our distinguished panelists today.
    I tell you, it has been fascinating the last 2\1/2\ years 
to sit here in this Subcommittee that deals with proliferation 
issues and also the Postal Service. I came in here 1 day not 
knowing whether I was dealing with nuclear proliferation and 
found that the Postal Service was here, and I told them that 
when they tried to shut down the post office in my home town, 
then that was nuclear proliferation. [Laughter.]
    Senator Cleland. But it does seem to me that in terms of 
space launch or satellite launch capacity, when we tried to 
broadside, particularly through the Hughes experience, and I 
guess it was Loral, too, that we had some problems with the 
Chinese, that this seems a little bit different here. It does 
seem that Lockheed has got a good argument here. I kind of feel 
like I echo the sentiments of Mr. Trafton that this is not only 
of critical importance to Lockheed and international economic 
viability, but their ability to provide the space launch 
services to the commercial satellite market. I think U.S. 
national security interests are at stake, too. But I think they 
are, quite frankly, enhanced by the Lockheed venture with its 
Russian partners.
    I just have a couple of questions.
    Mr. Slocombe, it seems to me that it is in the best 
interest of the Pentagon and our national security to have a 
U.S.-based company such as Lockheed in a partnership with the 
Russian launch industry as opposed to maybe a French company in 
such a partnership. Is that your feeling?
    Mr. Slocombe. It is. And it is the reason that the 
Department of Defense supported the 1993 arrangement and 
continues to support it.
    Senator Cleland. Is the Pentagon gaining any insight into 
the Russian aerospace industry through these joint ventures, 
especially with what I am told is the RD-180 engine joint 
venture in which technology flows from Russia into the United 
States? Are we gaining in this arrangement?
    Mr. Slocombe. This is an interesting example of a reverse 
technology transfer. For the reasons that Mr. Trafton 
explained, which I think correspond to the analysis of our 
experts, the RD-180 engine is a unique capability in terms of 
what is presently available in the world, and the access to 
that capacity is important to the domestic launch industry for 
supporting both military and other government and commercial 
launches in the United States.
    Senator Cleland. Yes, sir, I think so and I agree with that 
point of view.
    Another point I would like to just mention, I guess it is 
sensitive too, since I sit in Senator Nunn's former seat, I am 
not sure I am up to that task, but it did seem like it was in 
the national security interest for the Lugar-Nunn legislation 
to go through. I think it has been very successful. It is 
interesting, I understand Lockheed Martin's joint venture in 
Russia actually employs about 100,000 Russian scientists, 
technicians, and engineers. What do you believe would be the 
consequences for these workers should the United States not end 
the quota? Would there be a risk that some of those people 
would not be employed and might be courted by rogue nations 
such as Iran, Iraq, and North Korea, and actually enhance the 
chances for proliferation of nuclear technology?
    Mr. Slocombe. We certainly see advantages to having the 
Russian scientists, engineers, and technical people employed on 
legitimate activities. They are now employed under the quota 
system and I wouldn't necessarily agree with the proposition 
that simply continuing the quota system would mean that they 
would go off and do other work. But one of the reasons why we 
have supported these arrangements is exactly the point you 
make, that it is very much in our interest that the Russian 
space industry work on legitimate activities, preferably in 
partnership with Western, and particularly American, 
organizations, rather than go do things that would cause us 
very serious proliferation problems.
    Senator Cleland. If these positives that we just talked 
about are there, what is the rationale for the quota system? I 
am not sure I am clear on that. Ms. Novelli, would you like to 
try to take a stab at that? What is the rationale, the 
justification for quotas being established? Why not lift the 
quotas and magnify some of the pluses we discussed here?
    Ms. Novelli. Well, the agreements, when they were first 
negotiated, were negotiated in a very different commercial 
environment, Senator, and they were negotiated in an 
environment where we had many more providers of commercial 
launch services and where the commercial space launch portion 
of the industry hadn't really taken off. So there was less 
demand and more supply and there were these new suppliers who 
wanted to come into the market. So there was a fear that 
because they were coming in as non-market economies at the time 
that they would be able to not only price very low because they 
didn't have to meet normal pricing, but also that they would 
create a glut of supply on the market and depress prices as 
well. So that is why the quotas were establish, to provide an 
ability for these countries to actually play in the market but 
not kill off our own domestic launchers. When they were 
established we were just in a different situation.
    The situation has changed. The agreements are due to 
expire, the Russian one at the end of 2000, Ukraine and China 
at the end of 2001. That is why we are examining right now what 
should our next steps be in light of all of our concerns, 
including the fact that the market has changed dramatically.
    Senator Cleland. Yes. It does seem to me that every 
American now wants to go into their own internet company and 
have their own satellite. My understanding is that there is 
much more demand out there now for commercial satellites.
    Ms. Novelli. Yes.
    Senator Cleland. I sit on the Telecommunications 
Subcommittee of the Commerce Committee and the whole 
telecommunications world is exploding. It seems to me it would 
be in our interest as a Nation to have some capability here, 
especially with an American company like Lockheed partnering 
with the Russians, and it would be in our interest to take a 
new look at this when this expires. Do you see that, with 
seeing the market change and that now there is more demand than 
I think supply, that it would be in our interest to maybe think 
of a new arrangement where there might not be a quota with the 
Russians in this particular arrangement?
    Ms. Novelli. Mr. Senator, our national space policy 
contemplated the fact that we were going to have to basically 
rethink what we were going to do when these agreements expired 
and set forth the fact that we were going to have to have some 
sort of transition policy so that we would be able to deal with 
the fact that the market is changing. That is why we are 
currently beginning discussions of how we are going to deal 
with this change and balance all of our other priorities that 
we have.
    Senator Cleland. Mr. Holum, any comment on some of the 
things we've been talking about here--changing markets, 
shifting from the original agreement? Does that bring forth to 
your mind a need to look at some of these arrangements anew?
    Mr. Holum. Well, we'll certainly look at it again, we will 
be obliged to when the agreement expires. But let me underscore 
that we have two goals here. One which we all support, the 
administration strongly supports, is this space launch 
cooperation with Russia and with these particular companies. We 
have supported it, we think it is good, we think it should 
continue. At the same time, we have got a deep concern about 
the spread from Russia of missile technology to Iran, not by 
these companies but by other companies in Russia.
    We need to figure out a way to have leverage over the 
Russian Government to induce it, to give it incentives to 
strengthen export controls, to lay down the law, to police the 
entire industry, all of the companies that have this technology 
to transfer. Sanctions generally are a blunt instrument; they 
are difficult to deal with, they are inherently hard to 
calibrate. You either have blow-back on our interests, if they 
are effective, because they are usually involving trade with 
the United States, or they don't have any effect on the target 
because there is no meaningful trade there. But sanctions are 
an indispensable part of our nonproliferation strategy 
internationally. They are not the only tool we use. We use a 
whole range of things, including positive incentives. But 
sanctions are a crucial part of what we need to do.
    In this case, I think the sanctions are appropriately 
directed to get the attention of the people who administer, who 
have responsibility over the entire Russian space industry. 
What we are trying to do is reward positive progress on 
proliferation behavior, and there has been some lately, by 
increasing the quota, by allowing it to go up, but to not throw 
away the leverage because we want to make sure that those 
promised steps are fully implemented, the export control plans 
in the companies, the implementation action plan that they have 
agreed to but haven't yet implemented. So we have got a 6-month 
breathing space now by raising the quota to see if those 
commitments are in fact carried out. And if they are, then we 
will have a more positive environment. So it is a balancing act 
that we are trying to maintain, with full support, with a 
strong belief in what Lockheed and their partners are engaged 
in here, but also with a strong commitment to have an impact on 
our nonproliferation objective.
    Senator Cleland. So this is caught up in the sanctions, the 
whole relationship with Russia and the proliferation policy 
over the technology leaking out to other rogue nations. Did I 
hear you say that there was a 6 month----
    Mr. Holum. Well, we have raised the quota from 16 to 20, 
and our anticipation is that that will take launches through 
roughly a 6-month time period. There won't be any inhibition or 
prevention of launches during that period and that will be some 
time for the Russian commitments recently made and the new 
export control law recently enacted to be fully implemented.
    Senator Cleland. So there might be some hope if we get some 
positive response from the Russians that we might be able to do 
better with the quota after 6 months?
    Mr. Holum. I certainly hope so. It is not my objective to 
infer with this business, but it is my objective, it is our 
objective as an administration to do all we reasonably can to 
cut off this deadly cooperation in missile technology between 
Russian entities and Iran. And we don't have a lot of 
opportunities to apply leverage.
    Senator Cleland. And this is somewhat the carrot I guess.
    Mr. Holum. Precisely.
    Senator Cleland. I think this is a fascinating subject, Mr. 
Chairman, and I appreciate your holding this hearing and I 
appreciate our panelists being here and engaging this quite 
impressive conversation. I think it is in our Nation's interest 
to make sure that we do all we can with our Russian partners 
along these lines. Thank you very much.
    Senator Cochran. Thank you, Senator, for your contribution 
to the hearing. We appreciate it.
    We thank the witnesses for testifying today. There are very 
few issues our government must contend with that are more 
important than how our government can effectively act to halt 
missile and missile technology transfers from Russia to Iran. I 
am convinced that among all who are involved, Congress, the 
administration, and U.S. industry, we can all agree that the 
U.S. Government must try its best to persuade the Russian 
Government to do a far better job of stopping the assistance 
that continues to flow from Russia to Iran's ballistic missile 
program.
    But I think today's hearing makes clear there is a major 
disagreement within our government over how we can best 
persuade the Russian Government to act. If there is sufficient 
evidence to impose sanctions on Lockheed Martin's joint venture 
partners, sanctions should be imposed. What the administration 
is doing, however, is imposing sanctions through the use of the 
commercial space launch quota contrary to the trade agreement's 
principal objective.
    The administration may mean well, but here are the real 
effects of the administration's approach:
    First, Russian companies not engaged in proliferation are 
being punished for proliferation while other entities we know 
are involved in proliferation are not punished.
    Second, a legitimate, mutually beneficial U.S.-Russian 
joint venture could be driven out of business. If it collapses 
under the weight of these quotas, an American company will end 
up penalized and the Russian companies will obtain other 
partners, most likely from France. The leverage the 
administration says it needs to pressure Russia will disappear.
    And third, the United States likely will lose the 
opportunity to acquire the world's best heavy rocket engine, 
the RD-180, along with related technology only the Russians 
have. Loss of the RD-180 will harm the Defense Department's 
Evolved Expendable Launch Vehicle program and America's 
commercial space launch industry. The RD-180 will be sold 
probably to some other foreign customer, and only the United 
States will lose in that event.
    I urge the administration to reconsider its policy.
    The hearing is adjourned.
    [Whereupon, at 3:45 p.m., the Subcommittee was adjourned, 
to reconvene at the call of the Chair.]


                            A P P E N D I X

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