Breakfast with a Lord of War

By David Galland, Partner, Casey Research

For reasons that will become apparent as you read the following article, I was quite reluctant to write it.
Yet, in the end, I decided to do so for a couple of reasons.

The first is that it ties into Marin Katusa’s best selling new book, The Colder War, which I read cover to cover over two days and can recommend warmly and without hesitation. I know that Casey Research has been promoting the book aggressively (in my view, a bit too aggressively), but I exaggerate not at all when I tell you that the book sucked me in from the very beginning and kept me reading right to the end.

The second reason, however, is that I have a story to tell. It’s a true story and one, I believe, which needs to be told. It has to do with a breakfast I had four years ago with a Lord of War.

With that introduction, we begin.

Breakfast with a Lord of War

In late 2010, I was invited to a private breakfast meeting with an individual near the apex of the U.S. military’s strategic planning pyramid. Specifically, the individual we were to breakfast with sits at the side of the long serving head of the department in the Pentagon responsible for identifying and assessing potential threats to national security and devising long term strategies to counter those threats.

The ground rules for the discussion—that certain topics were off limits—were set right up front. Yet, as we warmed up to each other over the course of our meal, the conversation went into directions even I couldn’t have anticipated.

In an earlier mention of this meeting in a Casey Daily Dispatch, I steered clear of much of what was discussed because frankly, it made me nervous. With the passage of time and upon reflection that it was up to my breakfast companion, who spends long days cloaked in secrecy, to know what is allowed in daylight, I have decided to share the entire story.

During our discussion, there were four key revelations, each a bit scarier than the last.

Four Key Revelations

Once we had bonded a bit, the military officer, dressed in his civvies for the meeting, began opening up. As I didn’t record the discussion, the dialogue that follows can only be an approximation. That said, I assure you it is accurate in all the important aspects.

“Which country or countries most concern you?” I asked, not sure if I would get an answer. “China?”
“Well, I’m not going to say too much, but it’s not China. Our analysis tells us the country is too fractured to be a threat. Too many different ethnic and religious groups and competing political factions. So no, it’s not China. Russia, on the other hand…” He left it at that, though Russia would come up again in our conversation on several occasions.

As breakfast was served, the conversation meandered here and there before he volunteered, “There are a couple of things I can discuss that we are working on, one of which won’t surprise you, and one that will.”
“The first is precision guided weaponry.” Simply, the airplane and drone launched weaponry that is deployed so frequently today, four years after our breakfast conversation, that it now barely rates a back-page mention.

“The second,” he continued,” will surprise you. It’s nuclear armaments.”

“Really? I can’t imagine the US would ever consider using nuclear weapons again. Seriously?”

“Yes, there could be instances when using nukes might be advisable,” he answered. “For example, no one would argue that dropping atomic bombs on Japan had been a bad thing.” (I, for one, could have made that argument, but in the interest of harmony didn’t.)

“Even so, I can’t imagine a scenario that would warrant using nukes,” I persisted. “Are there any other countries doing the same sort of research?”

“Absolutely. For example, the Russians would love to drop a bomb that wiped out the people of Chechnya but left the infrastructure intact.”

“So, neutron bombs?”

“Yeah, stuff like that,” he added before turning back to his coffee.

“Okay, well,” I continued, “you at least have to admit that, unlike last century when hundreds of millions of people died directly or indirectly in world wars, pogroms, and so forth—most related to governments—the human race has evolved to the point where death on that scale is a thing of the past. Right?”

I kid you not in the slightest, but at this question the handsome, friendly countenance I had been sitting across from morphed as if literally a mask had been lifted away and was replaced with the emotionless face of a Lord of War.

“That would be a very poor assumption,” he answered coldly before the mask went back on.

I recall a number of thoughts and emotions coursing through my brain at his reply, most prevalently relief that I had moved with my family to La Estancia de Cafayate in a remote corner of Argentina. We didn’t move there to escape war, but after this conversation, I added that to my short list of reasons why the move had been a good idea.

Recapping the conversation later, my associate and I concurred that Russia was in the crosshairs and that if push came to shove, the US was fully prepared to use the new nuclear weapons being worked on.

Four Years Later

As I write, four years after that conversation, it’s worth revisiting just what has transpired.

First, as mentioned, the use of precision-guided weaponry has now firmly entered the vernacular of US warmaking. Point of fact: there are now more pilots being trained to fly drones than airplanes. And the technology has reached the point where there is literally no corner on earth where a strategic hit couldn’t be made. Even more concerning, the political and legal framework that previously caused hesitation before striking against citizens of other countries (outside of an active war zone) has largely been erased. Today Pakistan, tomorrow the world?

Second, instead of winding back the US nuclear program—a firm plank in President Obama’s campaign platform—the Nobel Prize winner and his team have indeed been ramping up and modernizing the US nuclear arsenal. The following is an excerpt from a September 21, 2014 article in the New York Times, titled “U.S. Ramping Up Major Renewal in Nuclear Arms”…,,

KANSAS CITY, Mo. — A sprawling new plant here in a former soybean field makes the mechanical guts of America’s atomic warheads. Bigger than the Pentagon, full of futuristic gear and thousands of workers, the plant, dedicated last month, modernizes the aging weapons that the United States can fire from missiles, bombers and submarines.

It is part of a nationwide wave of atomic revitalization that includes plans for a new generation of weapon carriers. A recent federal study put the collective price tag, over the next three decades, at up to a trillion dollars.

Third, the events unfolding in Ukraine, where the US was caught red handed engineering the regime change that destabilized the country and forced Russia to act, show a clear intent to set the world against Putin’s Russia and in time, neutralize Russia as a strategic threat.

So the only revelation from my breakfast four years ago remaining to be confirmed is for the next big war to envelope the world. Per the events in Ukraine, the foundations of that war have likely already been set. Before I get to that, however, a quick but relevant detour is required.

The Nature of Complex Systems

Last week the semiannual Owner’s & Guests event took place here at La Estancia de Cafayate. As part of the weeklong gathering, a conference was held featuring residents speaking on topics they are experts on.
Among those residents is a nuclear-energy engineer who spoke on the fragility of the US power grid, the most complex energy transmission system in the world.
He went into great detail about the “defense-in-depth” controls, backups, and overrides built into the system to ensure the grid won’t—in fact, can’t—fail. Yet periodically, it still does.

How? First and foremost, the engineer explained, there is a fundamental principle that holds that the more complex a system is, the more likely it is to fail. As a consequence, despite thousands of very bright people armed with massive budgets and a clear mandate to keep the transmission lines humming, there is essentially nothing they can do to actually prevent some unforeseen, and unforeseeable, event from taking the whole complex system down.

Case in point: in 2003 one of the largest power outages in history occurred. 508 large power generators were knocked out, leaving 55 million people in North America without power for upward of 24 hours. The cause? A software defect in an alarm system in an Ohio control center.

I mention this in the context of this article because, as complex as the U.S. power grid is, it is nothing compared to the complexities involved with long-term military strategic planning. This complexity is the result of many factors, including:

• The challenges of identifying potential adversaries and threats many years, even a decade or more, into the future.

• New and evolving technologies. It is a truism that the military is always fighting the last war: by the time the military machine spins up to build and deploy a new technology, it is often already obsolete.

• The entrenched bureaucracies, headed by mere mortals with strong biases. Today’s friend is tomorrow’s enemy and vice versa.

• The unsteady influences of a political class always quick to react with policy shifts to the latest dire news or purported outrage.

• The media, a constant source of hysteria making headlines masquerading as news. And let’s not overlook the media’s role as active agents of the entrenched bureaucratic interests. In one now largely forgotten case, Operation Mockingbird, the CIA actually infiltrated the major US media outlets, specifically to influence public opinion.
  
  All you need to do to understand the bureaucratic agenda is to take a casual glance at the “news” about current events such as those transpiring in the Ukraine.

• And, most important, human nature. We humans are the ultimate complex system, prone to a literally infinite number of strong opinions, exaggerated fears, mental illnesses, passions, vices, self-destructive tendencies, and stupidity on a biblical scale.

The point is that the average person assumes the powers-that-be actually know what they are doing and would never lead us into disaster, but quoting my breakfast companion, that would be a very poor assumption.

Simply, while mass war on the level of the wholesale slaughter commonplace in the last century is unimaginable to most in the modern context, it is never more than the equivalent of a faulty alarm system away from occurring.

Those history buffs among you will confirm that up until about a week before World War I began, virtually no one in the public, the press, the political class, or even the military had any idea the shooting was about to start. And 99.9% of the people then living had no idea the war was about to begin until after the first shot was fired.

Back to the Present

It is a rare moment in one’s life when the bureaucratic curtain falls away long enough to reveal something approximating The Truth. In my opinion, that’s what I observed over breakfast four years ago. That, right or wrong, the proactive military strategy of the US had been turned toward Russia.
Knowing that and no more, one can only guess what actual measures have been planned and set into motion to defang the Russian bear.

Based on the evidence, however, the events in Ukraine appear to be a bold chess move on the bigger board… and to be fair, a pretty damn effective move at that. The problem for the US and its allies is that on the other side of the table is one Vladimir Putin, self made man, black belt judo master, and former KGB spy master.

And that’s just scratching the surface of this complicated and determined individual. One thing is for sure: if you had to pick your adversary in a global geopolitical contest, you’d probably pick him dead last.
Which brings me to a quick mention of The Colder War, Marin’s book, which was released yesterday.
I mentioned earlier that the book had sucked me in and kept me in pretty much straight through until I finished. One reason is that while you can tell Marin has a great deal of respect for Putin’s capabilities and strategic thinking, he doesn’t shy away from revealing the judo master’s dark side. As you will read (and find quoting to your friends, as I have), it is a very dark side.

But the story is so much bigger than that, and Marin does a very good job of explaining the increasingly hostile competition between the US and Russia and the seismic economic consequences that will affect us all as the “Colder War” heats up.

Before signing off for now, I want to add that it is not Marin’s contention that the Colder War will devolve into an actual shooting war. In my view, however, due to the complexities discussed above, you can’t dismiss a military confrontation, even one involving nukes. Every complex system ultimately fails, and the more the US pushes in on Putin’s Russia, the more likely such a failure is to occur.

I recommend Marin’s book, The Colder War; here is the link.

We’ll leave the lights on down here in Cafayate.

Casey Research partner David Galland lives in La Estancia de Cafayate (www.LaEst.com).

The article Breakfast with a Lord of War was originally published at casey research.com.

Watch our new video "How you can Profit with ETFs from the Unexpected Move in the Dollar"....Just Click Here!

The Looming Uranium Crisis: Strategic Implications for the Colder War

By Marin Katusa, Chief Energy Investment Strategist

In the wake of one singular event—the disaster at Fukushima in March 2011, the effects of which are still being felt today across the planet—nuclear power has seemingly fallen into utter disrepute, at least in the popular mind. But this is largely an illusion.

It’s true that Japan took all 52 of its nuclear plants offline after Fukushima and sold much of its uranium inventory. South Korea followed with shutdowns of its own. Germany permanently mothballed eight of its 17 reactors and pledged to close the rest by the end of 2022. Austria and Spain have enacted laws to cease construction on new nuclear power stations. Switzerland is phasing them out. A majority of the other European nations is also opposed.

All of this has resulted in a large decrease in demand for uranium, a glut of the fuel on the market, and a per-pound price that fell as low as $28.50 in mid-2014, down nearly 80% from its peak of $135 in 2007.

Currently, it’s languishing around $39 per pound, still below the cost of production for many miners—about 80% need prices above $40 to make any return on investment, and even at that level, no new mines will be built. It’s easy to hear a death knell for nuclear energy on the breeze. And that may well be the case for Europe (except for France). But Europe is hardly the world.

South Korean plants are back online. Japan is planning to restart its reactor fleet (despite a great deal of citizen protest) beginning in 2015. Russia is heavily invested, with nine plants under construction and 14 others planned. China, faced with unhealthy levels of air pollution in many of its cities due to coal power generation, is going all in on nuclear. 26 reactors are under construction, and the government has declared a goal of quadrupling present capacity—either in operation or being built—by 2020. India has 20 plants and is adding seven more. And in the rest of the developing nations, nuclear power is exploding.

Worldwide, no fewer than 71 new plants are under construction in more than a dozen countries, with another 163 planned and 329 proposed. Many countries without nuclear power soon will build their first reactors, including Turkey, Kazakhstan, Indonesia, Vietnam, Egypt, Saudi Arabia, and several of the Gulf emirates.

For years, China, with its stunning GDP growth rate, has been seen as the leading destination for natural resources. “Produce what China needs” has been every supplier’s ongoing mantra. Yet, as many Americans fail to realize, it’s their own home that is the biggest uranium consumer. Despite having not opened a new plant since 1977 (though six additional units are scheduled to open by 2020), the US is the world’s #1 producer of nuclear energy, accounting for more than 30% of the global total. France is a distant second at 12%; China, playing catchup, sits at only 6% right now. The 65 American nuclear plants, housing just over 100 reactors, generate 20% of total US electricity.

Yet uranium is the one fuel for which there is very little domestic supply.

As you can see, the US has to import over 90% of what it uses. That’s a huge shortfall—and it’s persisted for many years. How has the country made it up?

In a word: Russia.

America’s former Cold War archenemy—and antagonist in the unfolding sequel, the Colder War—has in fact been keeping the US nuclear fires burning, through conduits like the Megatons to Megawatts Program.
When the USSR collapsed, Russia inherited over two million pounds of HEU—highly enriched uranium (the 90% U-235 needed to fashion a bomb)—and vast, underused facilities for handling and fabricating the material. Starting in 1993, it cut a deal with the US dubbed the Megatons to Megawatts Program. Over the 20 years that followed, 1.1 million pounds of Russian weapon-grade uranium, equivalent to about 20,000 nuclear warheads, was downblended to U₃O₈ and sold to the United States as fuel.

That source was very important in helping to fill the US supply gap for those two decades. It represented, on average, over 20 million pounds of annual uranium supply, or half of what the country consumed. I’m sure it would have come as a shock to most Americans if they’d realized that one in ten of their homes was being powered by former Soviet missiles.

Megatons to Megawatts expired in November 2013, but US dependence on Russia did not. Russia is easily able to maintain its sizeable export presence, due largely to present economics.

Because of all the uranium swamping the market since Fukushima, separative work units (SWUs) are trading at very low prices. SWUs measure the amount of separation work necessary to enrich uranium—in other words, how much work must be done to raise the product’s concentration of U-235 to the 3-5% that most reactors require for fission?

The tails that are left behind when U-235 is separated out to make warheads still contain some amount of the isotope, usually around 0.2% to 0.3%. When the price of SWUs gets low enough, it’s a condition known as “underfeeding,” meaning it’s worth the effort to go back and extract leftover U-235 from the tails. That’s done through the process of re-enrichment, the reverse of the procedure that creates HEU. It’s kind of like getting fresh gold from old ore that had already yielded the easy stuff.

After the Soviet Union broke up, Russia had a lot of enrichment capacity it no longer needed for its military program. And major uranium companies like Areva and Urenco had sent trainloads of enrichment tails to Russia in the 1990s and early 2000s.

Great stockpiles were built up, and they’ll be put to use until the pendulum swings the other way and we get “overfeeding,” where the price of SWUs makes re-enrichment too costly to continue. We will go from under- to overfeeding in the near future. Rising demand from the Japanese restart and new plants coming online ensures that it will happen, and probably within the next 24 months. The market is already anticipating it, with the per-pound price of uranium up more than 35% in the past few months. It’s going to double to $75… at the least.

Meanwhile, though, the ability to profitably produce fuel-grade uranium from tails confers on Russia a number of significant advantages. Among them:

• It permits the country to exploit a previously worthless resource.

• The more tails it can use as feedstock, the fewer it has to dispose of.

• Most important, it means Russia can conserve much of its mineral supply for a future when higher prices will dramatically increase its leverage. That includes in-ground ore, of which it has a lot, and probably uranium picked up on the cheap when Japan did its massive post-Fukushima fuel dump (though it has never been officially confirmed who the buyers of Japan’s uranium supply were, I have some very connected sources who tell me it was the Russians who snapped most of it up).

This is one part of Vladimir Putin’s plan to dominate the world energy markets. In my book, The Colder War, I call it the “Putinization” of uranium.  And he has nicely positioned his country to pull it off.
In January 2014, Sergei Kiriyenko, head of Russian energy giant Rosatom, was bursting with enthusiasm when he predicted that Russia’s recent annual production rate of 6.5 million pounds of uranium would triple in 2015.

Rosatom puts Russia’s uranium reserves in the ground at 1.2 billion pounds of yellowcake, which would be the second largest in the world; the company is quite capable of mining 40 million pounds per year by 2020. Add in Russia’s foreign projects in Kazakhstan, Ukraine, Uzbekistan, and Mongolia, and annual production in 2020 jumps to more than 63 million pounds. Include all of Russia’s sphere of influence, and annual production easily could amount to more than 140 million pounds six years from now.

No other country has a uranium mining plan nearly this ambitious. By 2020, Russia itself could be producing a third of all yellowcake. With just its close ally Kazakhstan chipping in another 25%, Russia would have effective control of more than half of world supply.

That’s clout. But it doesn’t end there.
Globally, there are a fair number of facilities for fabricating fuel rods. Not so with conversion plants (uranium oxide to uranium hexafluoride) or enrichment plants (isolating the U-235). And the world leader in conversion and enrichment is…. yes, Russia.

All told, Russia has one-third of all uranium conversion capacity. The United States is in second place with 18%. And Russia’s share is projected to rise, assuming Rosatom proceeds with a new conversion plant planned for 2015. Similarly, Russia owns 40% of the world’s enrichment capacity. Planned expansion of the existing facilities will push that share close to 50%.

That’s Putin’s goal—to corner the conversion and enrichment markets—because it wraps Russian hands around the chokepoints in the whole yellowcake to electricity progression. It’s a smart strategy, too—control those, and you control the availability and pricing of a product for which demand will be rising for decades.

And that control will tighten, because the barrier to entry for either function is very high. Building new conversion or enrichment facilities is too costly for most countries, and it is especially difficult in the West due to the influence of environmentalists.

It’s worth reiterating. Russia is on track to control 58% of global yellowcake production; currently responsible for a third of yellowcake-to-uranium-hexafluoride conversion; and soon to hold half of all global enrichment capacity.

There’s a word for this: stranglehold.

That is what Putin and Russia will have on the supply chain for nuclear fuel in a world where new atomic power plants are being constructed at warp speed, which will force the price of uranium ever higher. It will give Russia enormous global influence and great leverage in all future dealings with the US America can mine some uranium domestically and buy some more from its Canadian ally. But even taken together, those sources put only a small patch on the supply gap.

The US government would do well to make peace with Putin, if it can, because the domestic nuclear power industry—and by extension the economic health of the country—is at the mercy of Russia, indefinitely.
To get the full story, click here to order your copy of my new book, The Colder War.

Inside, you’ll discover more on how Putin has cornered the market on Uranium, and how he’s making a big play to control the world's oil and natural gas markets. You’ll also glimpse his endgame and how it will personally affect millions of investors and the lives of nearly every American.

The article The Looming Uranium Crisis: Strategic Implications for the Colder War was originally published at casey research

Get our latest FREE eBook "Understanding Options"....Just Click Here!