COCHRAN: The subcommittee will please come to order.

Today, our Subcommittee on International Security, Deliberation 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 two and a half years examining the serious problem of weapons of mass destruction and ballistic missile proliferation. Along with others, we have had 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 stream 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.

Mr. Will Trafton, president of Lockheed Martin International Launch Services will be our first witness. Mr. Trafton will be followed by a panel including Ms. Catherine Novelli, assistant U.S. trade representative for Europe and the Mediterranean, Mr. Walt Slocombe, undersecretary of defense for policy, and Mr. John Holum, state department senior adviser 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 and we encourage you to make any summary comments or remarks that you think will be helpful to the committee.

Welcome, and you may proceed.

 

STATEMENT OF

WILL TRAFTON
President, International Launch Services

 

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.

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 of cooperative threat reduction and economic competitiveness.

In my remarks, I would like to talk about International Launch Services, or 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 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.

Lastly, I would like to offer our recommendations for addressing these issues.

International Launch Services was established in 1995 upon merger of Lockheed Martin -- I'm sorry -- Lockheed and Martin Marietta companies to market Atlas and Proton commercial launch services in the worldwide satellite-telecommunications market place.

Lockheed and Martin Marietta, prior to the merger, were each individual 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 exclusive market the Russian Proton launch vehicle.

Similarly, Martin Marietta had entered the commercial launch market with the purchase of General Dynamics Space Systems Division and 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 venture has generated important benefits for U.S. national security and commercial space competitors. But the quota on Proton launches jeopardizes continued growth of this venture, indeed, it's viability in the commercial launch market.

Mr. Chairman, as you know, President Clinton recently improved 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 it's near-term viability is dependent on the continued availability of Proton launch services.

White 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 a 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 guarantee to customers of the availability of launch services, the U.S. stands to loose to foreign competitors the industry's market share we worked so hard to gain over the past 13 years.

The Lockheed-Khrunichev 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 the Russia. This venture provides such an avenue and a strong record of compliance with export regulations proves this venture provides a positive incentive for nonproliferation.

The launch market is robust, and the quota should be allowed to expire. Current demands for launch services far exceed market projections. If Proton is not allowed to enter into a free and open trade environment, not only will this be ignoring requirements outlined in our country's national space policy, 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 the heavier payloads to geo-transfer orbit, GTO.

The U.S. would lose in this highly competitive international launch market. The positive nonproliferation incentives the LKEI 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 U.S. through a United Technologies Pratt & Whitney and NPO Energomash joint venture, R D AMROSS, that was established in 1997.

This U.S. joint venture has two key components: RD-180 engines built in Russia that will power our new commercial Atlas vehicles, the Lockheed Martin Atlas III and the Atlas V, and the RD-180 built in the United States that will power the next general launch system for U.S. government payloads.

The reliability and consistency of the U.S. 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.

Thank you, sir, and I'm ready for your questions.

COCHRAN: Thank you, 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?

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 United States government to encourage joint ventures with Russia. Lockheed approached Khrunichev and Energia, and in 1993, signed an agreement that permitted -- that gave Lockheed Martin -- Lockheed at the time -- worldwide marketing rights for the Proton vehicle.

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?

TRAFTON: Yes, sir, we did. I will say that Lockheed was very sensitive to proliferation concerns. We were also very sensitive and compliant with U.S. government guidelines on this issue. We consulted very closely with the United States government. We implemented a very rigorous compliance program, and in fact, we made it -- we put it into the bylaws of the joint venture that our Russian partners would comply with nonproliferation.

COCHRAN: Do you think that this joint venture in particular is useful in any way as a nonproliferation tool or to encourage nonproliferation?

TRAFTON: Absolutely, Mr. Chairman, I do. We, as I've stated in my opening statement, 100,000 very skilled Russian engineers, technicians, 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 and Khrunichev and Energia would like see this payment stream continue, we think is pretty important motivation for them to be very, very careful about proliferation.

COCHRAN: The administration -- U.S. administration, negotiated a quota agreement, 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?

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 marketplace.

COCHRAN: How could that have happened and how would that have worked?

TRAFTON: They would have come in with prices that far undercut the current competitive market pricing that we were seeing at the time, and because ...

COCHRAN: Wouldn't that have been helpful to you?

TRAFTON: Absolutely not. This is a tough marketplace, and people looking for commercial launch services are in most cases going to go to the lowest bidder.

COCHRAN: Well, you said they would undercut the pricing.

TRAFTON: Well, the trade agreement, as it was written, uses the 15 percent rule, that the Russians -- and, oh, by the way, the Chinese and the Ukrainians are involved in this as well in the end quotas -- that they could not come in 15 percent below the lowest competitive market price. Now 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, and you will find Proton has been and is today very competitively priced in the marketplace.

COCHRAN: So that leads me to the next question then: Has the purpose of the agreement, in your judgment been satisfied?

TRAFTON: Absolutely, yes, sir.

COCHRAN: Well, what is the purpose of continuing the trade agreement then?

TRAFTON: We see no purpose, and we think, as I've stated, that the quota should be lifted in its entirety.

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?

TRAFTON: The trade agreement is due to expire December 31st of 2000, and it had built in it that if certain conditions were met, the quota would be automatically increased, and it was in fact from '96 to '98. If 24 satellites were launched to GTO, that it would be increased from 16 to 18 and then from '96 to '99. If 24 satellites 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, and what is happened is that the launch trade agreement has become an instrument in the issue of nonproliferation, and we are, at Lockheed Martin ILS being held hostage. The trade agreement is being used for a purpose other than the one for which it was implemented.

COCHRAN: Well, have the joint venturers violated any terms of the agreement?

TRAFTON: Absolutely not.

COCHRAN: Have you violated any terms of the agreement?

TRAFTON: No, sir.

COCHRAN: Well, 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? Is that what you're saying?

TRAFTON: That is correct. And what's happening, even thought the president increased the quota by four, from 16 to 20 -- again, which we very much appreciate -- it is still impacting our business. Our customers cannot stand the uncertainty of not being sure that they can get their satellite up when they need it.

In fact, we just signed a contract, not too long ago -- in fact, the last competitive Proton that we sold, which in October of '97, because of this issue, the customer demanded off-ramps. We had never seen that before.

COCHRAN: Demanded what?

TRAFTON: Off ramps.

COCHRAN: Off ramps?

TRAFTON: That if the quota -- if the quota were used and impacted his ability to get his satellite up, then he had the choice of going to another launch service provider.

COCHRAN: To get out of the agreement without penalty.

TRAFTON: That's correct. And there's only one other launch service provider that can compete with Proton today, and that's the French Ariane.

COCHRAN: OK. Well, then, the central issue then 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, too -- and the added thing is, I guess, has there been any proliferation conduct by the joint venturers that would justify this action by our government?

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, if they have ever dealt with them in the past, in every case the answer has been no, they have not.

COCHRAN: Well, you've 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's lifted it from 16 to 20?

TRAFTON: Well, we have -- we have four more customers that are breathing a bit easier today. But it hasn't solved the problem. We still have two Protons under contract which fall outside of the quota, and we still have this issue of uncertainty.

And I would like to add that we are also in this -- in this activity sending a very inconsistent message to Russians across the board that we use a launch trade agreement for purposes for which it was not entered into.

COCHRAN: Well, I understand that the agreement is going to expire at the end of -- the year 2000.

TRAFTON: That's correct.

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 with customers?

TRAFTON: Again, we are aggressively pursuing customers. Have been and continue to do so. But, again, it's the whole issue of uncertainty that is causing customers to wonder: Will the trade agreement, will this quota business continue beyond December 31st of 2000? There's absolutely no assurance at this point that the State Department won't choose to continue to use this as leverage in the nonproliferation area.

COCHRAN: So you -- have you been able to book any launches at all since the quota became an issue?

TRAFTON: No, we have not. The last Proton that we sold competitively in the marketplace was October of '97, and that's about the time when this quota issue bubbled up to the surface.

COCHRAN: And do you attribute the failure to book launches as being attributable to the uncertainty over the quota issue?

TRAFTON: Yes, I do.

COCHRAN: That's your testimony. You said in your testimony also that Russian assistants to the Iran ballistic missile program is a serious problem the government, our government, must address. If they don't use the leverage given them by this quota arrangement, what other leverage would you suggest they consider using that would encourage Russia to deal with proliferation problems more effectively?

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 go after the ones -- and punish the companies and joint ventures that don't comply.

What's happening today is, we're all being lumped together and we're all being shot together. We would only ask that the government go to a two-track policy.

COCHRAN: There seems to be two issues here that you've identified. You mentioned the RD-180 engine issue. It's my understanding that Lockheed Martin is one of two companies in the U.S. participating in the Defense Department's so-called evolved expendable launch vehicle, or EELV program. Tell us about that program and why it's important to our nation's defense and to the U.S. commercial space launch industry.

TRAFTON: We think at Lockheed Martin that EELV is the future of the U.S. space launch industry. The Air Force has put in half a billion, Lockheed Martin has put in $1 billion to develop the new family of EELV vehicles, which we also call Atlas V. The RD-180 engine is going to be -- is the engine of choice for this vehicle, and you've heard me describe the engine somewhat. It's a wonderful, reliable, inexpensive engine, and it contains technology that we in this country don't have, haven't developed. It's a very powerful engine, and, again, it's our future.

COCHRAN: Is it your judgment that you're better off purchasing this technology and this engine rather than developing your own heavy engine?

TRAFTON: Yes, Mr. Chairman, it is. We, in this country haven't done well in rocket engine development. In fact, in -- geez -- in over many, many years, the Russians have developed up to about 45, we think it is, rocket engines. This country in the last 25, 30 years has developed one rocket engine, the shuttle, the space shuttle main engine. The Russians are very far ahead of us in rocket engine technology, as demonstrated by the RD-180. It is not a paper engine. We have almost 15,000 seconds of tests. We've had it on a test stand at the Marshall Space Flight Center and the first RD-180 is on a launch pad at the Cape in Florida today as we speak with the first Atlas III-A rocket. It's a wonderful engine.

I will just state that today's Atlas II-AS has nine engine- staging events in getting a satellite to geo transfer orbit. The RD- 180 takes us to two staging events. WE can install and checkout this engine in six days, process a rocket in 12 -- a process that today can take us up to 80 days.

COCHRAN: So what you're 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 ...?

TRAFTON: And for the United States government.

COCHRAN: ... for the United States government. This is an Air Force program, is that right, that you would be participating in with this engine?

TRAFTON: Yes, that's correct.

COCHRAN: Do you feel that you could compete in this program without acquiring this engine?

TRAFTON: No, I don't. I think that -- well, I'll 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, and that will have devastating on the EELV program and the future of the space launch business in this country.

COCHRAN: Well, 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?

TRAFTON: It's -- it's one of being seen as a reliable partner, and again, I would state that the Russians are very confused over the quota issue. They see the United States government acting in a very inconsistent manner, and I feel that if -- if they see the United States government let the LKEI joint venture come unraveled and fail, they will then have to ask themselves: Why would they go down the same road with an RD-180 joint venture?

COCHRAN: Now you've also had a payment to your contracting partner in Russia held up by the government, have you not?

TRAFTON: That's correct.

COCHRAN: On a license application procedure. Tell us about that.

TRAFTON: It's -- 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 as they retool their plant and modernize it with this $25 million, again, an advance on a $1-billion contract for 101 RD-180 engines. They would go within Russia and to Europe and buy off-the-shelf machine gear tools, et cetera, -- essentially retool their plants. We want them to be able to produce 19 engines a year. Currently they can only produce nine.

We didn't see this as brokering activity -- brokering being getting between a customer and a provider, that's our definition of brokering.

A $25-million advance on a billion-dollar contract to help them retool we didn't see as brokering. State said, "It is brokering and we want to see a license application." We immediately, in July of '98, submitted a license application for our brokering license.

We are not advancing the $25 million to NPO Energomash until of course we get the license. Today, one year later, we're still awaiting approval of this license.

COCHRAN: And you entered into the arrangement to buy the engine, the RD-180 engine, back -- when? 1996? Was that the date?

TRAFTON: 1997.

COCHRAN: '97?

TRAFTON: Yes, sir.

COCHRAN: Well, let me ask you this. I think you 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 or with this application to make this $25-million payment. Will 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?

TRAFTON: I would expect Khrunichev and Energia to find another partner. The French have been aggressively pursuing Russian space entities, looking for partnerships, and 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.

COCHRAN: That wouldn't have an effect one way or the other on proliferation, would it?

TRAFTON: Well, I think it would. I think it would have a very negative effect on proliferation.

COCHRAN: But it wouldn't have a positive effect.

TRAFTON: It certainly wouldn't.

COCHRAN: It wouldn't keep Russia from proliferating technology to Iran, for example.

TRAFTON: Well, we think that -- not all governments in the western world are as concerned as we are about proliferation. And I think that what you would see is 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 factor in partnership with us is making them toe the line very carefully.

COCHRAN: And then what 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.

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 satellite manufacturers are involved. A lot of folks are involved in these two programs.

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 now on these companies.

TRAFTON: That is a correct assessment, Mr. Chairman.

COCHRAN: Well, Mr. Trafton, I appreciate your comments and your statement and answering our questions very much.

I'm pleased to welcome my friend and colleague from Hawaii. I know he's -- I have no further question of the witness, Senator, and I was going to turn to you, if you have any questions for Mr. Trafton at this time or if you had any comments or opening statement you'd like to make, you're certainly are recognized at this time.

AKAKA: Thank you very much, Mr. Chairman, and I regret that...

COCHRAN: There's a lot going on.

AKAKA: ... (OFF-MIKE).

I have a statement I'd like to place in the record.

COCHRAN: Please.

AKAKA: And I'm sorry for being late. I hope -- I have some questions here. I hope they were not asked.

TRAFTON: All right, Senator.

AKAKA: And if so, please inform me about it.

TRAFTON: Yes, Senator.

AKAKA: The kind of question has been whether the Russian 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 the American satellite launch providers.

And Mr. Cochran's -- president and chief operating officer of Lockheed Martin space and strategic missile sector written just (OFF- MIKE) the Senate on 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." That's a quote from him.

With regard to the trade agreement expiring on December 31, 2000, what is administration's position toward extending or renegotiating a new trade agreement?

TRAFTON: Well, Senator, I can't speak for the administration. We're hopeful that the trade agreement is permitted to expire without extension on December 31st.

AKAKA: And now to you -- to your question as representative from Lockheed Martin. To combat the loss of critical technology that occurred during the launches of the U.S. satellites by Chinese launch providers, the Cox Committee recommended the 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 satellites and satellite launch technology?

TRAFTON: We have proven, I think, since 1993 that -- 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's been a very successful joint venture.

We have, at Lockheed Martin, absolutely no evidence that our partners have done anything wrong with regard to proliferation.

And 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, and that has to be good. It's good for us and it's good for Russians.

And it keeps their engineers and scientists occupied doing good things for the industry and not proliferation, and it frankly it brings a source of revenue into this country as well. A lot of Americans benefit from the LKEI joint venture.

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 entity involved in business relationships with Lockheed Martin discussed the topic of tying continued operation with Lockheed Martin in using the RD-180 to the U.S. lifting or the removing the launch quota?

TRAFTON: Well, the Russians are watching the quota issue very closely. And as I've stated earlier, they're 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. And quite frankly, we anticipate success with the quota issue, and we're very hopeful that it will be resolved. But on December 31st of 2000, the trade agreement will be allowed to expire without extension. That's key to the continued success on the Proton side.

On the RD-180, again, now we're talking about transfer of technology into this country, a significant, good technology, technology we don't have. The Russians don't have to do that, and they're wondering why it is taking over a year for us to obtain a brokering license to advance them $25 million in order to make very basic improvements to their factories.

AKAKA: What do you see as affect both Lockheed Martin

(AUDIO GAP)

TRAFTON: ... in the marketplace that satellite end-users will not -- cannot tolerate and they will not tolerate it, and they will go to other launch service providers.

And I have heard the words that are pretty appropriate: Continuing the trade quota will eventually squeeze the life out of this joint venture. This joint venture will not survive.

AKAKA: Well, I thank you very much for your responses.

Thank you very much, Mr. Chairman.

COCHRAN: Thank you, Senator.

Thank you, Mr. Trafton, for your cooperation with the committee and for your testimony.

We will now hear from our second panel of witnesses. Our second panel includes Ms. Catherine Novelli, assistant U.S. trade representative for Europe and the Mediterranean; Mr. Walt Slocombe, undersecretary for policy of the Department of Defense; and Mr. John D. Holum, senior adviser 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've 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 will ask Ms. Novelli to proceed. We have a copy of your statement, I think. We'll make that a part of the record. You may proceed in any way you think will be helpful to the committee.

Thank you.

 

STATEMENT OF

CATHERINE NOVELLI
Assistant U.S. Trade Representative for Europe
and the Mediterranean

 

NOVELLI: Thank you very much, Mr. Chairman, Senator.

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 very important issue for the administration, and we've 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 demands for launch services, added on top of the already existing government demand, has led to a marked increase 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 in revenue annual and employ tens of thousands of people and 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 and transition countries, like Russia and Ukraine.

One of the first of these opportunities was in the space launch area, where Lockheed 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 were more demand now for commercial launches, and to the new opportunities that were created by these kind 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 -- 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 orbiter, geo, and 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 benchmarks, the U.S. 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 skill 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 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. And we have had some complaints from U.S. firms that have alleged that the Russia ex-ICBMs could representative 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've agreed to do that.

NOVELLI: 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, and 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, and 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 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 that unavailability of Proton rockets for U.S.-built satellites could give a competitive edge 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 a 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 it's 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 committee, 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 based services and also meets our overall national security, foreign policy and economic interest.

Thank you.

COCHRAN: Thank you, Ms. Novelli. I think we'll go ahead and hear from the other members of the panel, and then we'll have an opportunity to ask questions of you as a group.

Secretary Slocombe, you may proceed.

 

STATEMENT OF

WALT SLOCOMBE
Under Secretary for Policy, U.S. Department of Defense

 

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 issue -- 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.

It's a pleasure to be here with representatives from the Department of State and USTR. As the Defense Department representative, I will obviously focus on the national security aspects.

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. Whatever the future -- 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.

(LAUGHTER)

And so the issue is the Russian -- 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, and 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 pricing in their view 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 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. And the quota 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 of these transactions, with or without a quota arrangement.

The second, there is complex executive orders and statutes which require that sanctions be imposed on Russian entities that are involved in the improper transfers of technology to Iran or indeed to certain other countries of concern from a proliferation point of view, and we have invoked those provisions as appropriate.

We've also made the issue of proliferation a major focus of all of our contacts with the Russian government. It remains the top of the U.S.-Russia agenda.

In December 1998, the administration affirmed that the United States would not increase current launch quotas -- or then-current launch quota for Russia without improved efforts on the part of the Russian government to halt all missile proliferation, particularly to Iran. In pursuance of this policy, we impose tough trade penalties against 10 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, but our approach has yielded some success and has produced modifications in our policy.

The steps the Russian government have taken, represent 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 the 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 has made about their -- the long-term impact on their ability to negotiate future contracts, and we will bear that -- we will bear that very much in mind as we consider both the specific policy with respect to quotas and the broader policy -- the broader question of what to do as we look toward the expiring 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 fairly standard competition reasons in our interest to have two potential U.S. suppliers engaged in the business and who 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 United States government launches should not be dependent on the continued willingness of any foreign supplier to supply the launch technology. Therefore, there is a link between the -- the 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 -- the quotas, essentially, and the RD-180 deal is not a direct one. I 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.

But the license for future -- 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 with the Department of State, and approval will depend on assessment of relevant nonproliferation considerations.

In some, 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 to forward to answer the committee's questions.

COCHRAN: Thank you very much, Secretary Slocombe.

Mr. Holum, you may proceed.

 

STATEMENT OF

JOHN D. HOLUM
Senior Adviser for Arms Control and International Security,
Department of State

 

HOLUM: Thank you, Mr. Chairman. It's a pleasure to be back the subcommittee.

Now, 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.

The space launch quota was part of the solution to a nonproliferation problem we faced in the early 1990s. 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 guideline, and the U.S. 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've 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 an non-market economy as we work 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 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.

I know I don't have to underscore the seriousness of that problem with you, Mr. Chairman or Senator Akaka.

HOLUM: 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. Koptiv (ph).

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 Adviser Berger and other senior officials actively engage their Russian counterparts on the Iran missile program at every opportunity.

Now 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 Koptiv (ph) 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've imposed on 10 Russian entities for missile and nuclear cooperation with Iran. We believe it is both logical and in our security interests 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 penalties, our policy is intended to encourage the Russian government to police the Russian aerospace industry.

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, that's the Russian government.

Our recent 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 wrongdoers.

But we need to sustain the pressure to use these new tools to curtail technology transfers to Iran. That's why our increase is incremental -- to give the Stepashin government, perhaps another six months, to follow through on the commitments that's 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.

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?

NOVELLI: With respect to Russia, Mr. Chairman, we believe that launch agreement is operating to -- to achieve that purpose and that LKE, because they're in a joint venture, has greatly helped that situation by having U.S. pricing methods be 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.

COCHRAN: Well, what were any of the other purposes that we don't know about?

NOVELLI: Well....

COCHRAN: I thought that was the purpose of the agreement, was to guard against predatory pricing.

NOVELLI: Yes, just of the narrow agreement per se, yes, that was how we -- we were trying to balance our own defense industries' launch capability with that of -- with our needs of the 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, who was trying to launch satellites.

COCHRAN: That was my question. That that was the principal objective -- isn't that correct -- of the agreement?

NOVELLI: Yes.

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 conditions in the agreement, what's the justification for continuing to impose quota restrictions on this commercial launch venture?

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 Undersecretary Slocombe has noted, we have a -- irrespective of the quotas -- a licensing requirement for commercial satellite launches in Iran that is obliged to take into....

COCHRAN: You don't mean....

HOLUM: In Russia -- that is obliged to take into account nonproliferation concerns.

(CROSSTALK)

COCHRAN: Oh, excuse me.

HOLUM: The reason we've 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've made demarches at all levels to the space agencies 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 gets the attention of the Russian space agency, and therefore we have, as we've seen in recent weeks, begun to see some progress. I think there's a connection.

COCHRAN: Is there a connection between a commitment by a new prime minister to the lifting of the quota? Was that the action that you're talking about, a verbal commitment by the new prime minister that he would work more effectively to control proliferation to Iran?

HOLUM: Well, there's a series of tangible steps. And one of the reasons why we've 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 criminal penalties.

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?

HOLUM: That's, so far as we know, correct. We've made no suggestion that they've 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.

COCHRAN: But neither Khrunichev nor Energia, as I understand it, is involved in proliferation, and therefore why is the administration singling out these countries -- these companies to impose quotas on in their transaction with Lockheed Martin?

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 space companies, all of the aerospace companies in Russia, is to deny or limit the benefits of commercial space launches.

COCHRAN: Does this not operate, in your view, as a disincentive for good behavior to penalize companies that are not engaged in proliferation?

HOLUM: No, I don't think it does. The -- 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.

COCHRAN: Aren't there other actions that could be taken, other than this? I mean, is there no other leverage available to our government that would motivate Russia to do a better job of controlling proliferation?

HOLUM: Well, I think we are -- as I said in my statement, we are taking other actions. We've targeted the companies that are specifically involved that we have identified and have strong evidence with regard to with trade and administration actions. We have, under the terms of the 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're 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 -- the controls across the board on the aerospace industry is the space launch quota.

COCHRAN: Secretary Slocombe, do you view continuation of the Russian launch quota as the best nonproliferation tool available?

SLOCOMBE: I don't think it's best, but I do think it a -- under present circumstances, it is a legitimate part of a range of instruments that we have to try to influence the actions of the Russian government.

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, the EELV program?

SLOCOMBE: It's very important to the Defense Department.

COCHRAN: Well, is the RD-180 engine more capable and more advanced than any heavy-lift engine produced in the United States?

SLOCOMBE: My understanding is that that is true as of now. Presumably the Boeing competitor would seek to meet that requirement as well. But it is certainly -- as of now, that is the case, as I understand it.

COCHRAN: What would be the impact to the Defense Department of losing Lockheed Martin participation in the EELV program?

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, and 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.

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 marketshare from U.S. industry by the French company, Arianespace. 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?

NOVELLI: Well, Mr. Chairman, I hope that we'll be able to strike a balance so that we are not in a situation where there's 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 online, we feel that we should be in a pretty good situation for meeting demands of our satellite industry and of U.S. launches being able to -- launchers being able to launch satellite for the future.

And at this moment, in terms of demand, while it's true that there's 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're based on the number of launches, commercial launches, that are done worldwide, and an average of those being 24, and we aren't close to that average. We're only at an average of 21 right now.

COCHRAN: What do you expect will happen when the agreement expires December 31 in the year 2000? Is there an administration plan, or what do you expect will happen regarding Russian launches of U.S.-built satellites? Is there any authority to prohibit them, for example?

NOVELLI: Well, in terms of what we think will happen, we are -- we recognize that we need to come up with a plan of how we're going to deal with this at the end of the year 2000, and that is why we've begun consulting with our industry and interagencies to discuss what should be the next steps. So it's hard for me to say exactly what those will be since we haven't reached any decision yet on that.

COCHRAN: Are you surprised to learn, as a result of this hearing, that this cloud of uncertainty that's been created by the quota imposition and the future of the quota thing has so adversely affected the ability of this company to get any future business, even beyond the expiration date of the agreement? Were you surprised to learn that today?

NOVELLI: I was aware that they were having trouble selling more launches because of the uncertainty regarding quotas, so it was not surprising.

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 United States government?

NOVELLI: It's -- obviously it's 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.

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?

SLOCOMBE: I think it -- I think it does, for two reasons, one negative. That if they -- 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, have real bite to those companies as such.

And second, there is an obvious affirmative advantage in providing a legitimate -- legitimate work for Russian companies like this and the technological expertise that they have working on these projects, working on this rather than something illegitimate.

COCHRAN: We've spent about $2 billion in U.S. taxpayer dollars in the Cooperative Threat Reduction program, the Nunn-Lugar program -- or now since Senator Nunn's no longer here, it's the Lugar-Nunn program.

(LAUGHTER)

SLOCOMBE: I thought that happened in 1994.

(LAUGHTER)

COCHRAN: I mean, but some of this money is used to do exactly what we're 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 kind of activity ought to be rewarded and encouraged rather than 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? There's no tax dollars.

SLOCOMBE: It does. There's no question about that. That does not entirely answer the question of whether maintaining the quota system as a -- as one of our instruments, one of our sources of incentive or disincentive, is appropriate, but I agree. This is a creative program. It's the reason that we agreed to the agreement in 1993 when we did.

COCHRAN: In the EELV program, it was my understanding that many national security-related problems have resulted from launching -- you mentioned the China thing -- from launching U.S.-built satellites in foreign countries. 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 of that technology to serve our security interests?

SLOCOMBE: Well, 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 a foreign product in the sense -- as will be the initial -- for the initial RD-180 launches imports from Russia or anywhere else. So it's extremely important from the Defense Department and the broader government point of view that there be a domestic industry that is -- that will -- that is not dependent on foreign sources but 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's dependent entirely on U.S. government launches, and it needs to be able to compete and operate in the commercial market as well.

COCHRAN: Mr. Holum, the Arms Export Control Act enacted in 1996 was amended to add this munitions list licensing requirement for brokering activities. And we heard Mr. Trafton talk about the fact that the State Department interpreted this transaction between Lockheed Martin and Energomash -- Energomash, close, I guess -- and Energomash -- there, got it -- as a brokering arrangement. He says it was like part of a transaction to buy the technology and buy the engine.

The $25-million payment is going to permit the company to upgrade and retool so that it can carry out the transaction. It's not a relationship between Lockheed Martin and some third entity, 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?

HOLUM: I don't believe it's a stretch, but I'll have to provide for the record -- and I can -- a detailed description of the legal rationale.

COCHRAN: Well, the purpose, as I understand it...

HOLUM: (OFF-MIKE)

COCHRAN: ... 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.

And I guess, to be on the safe side -- that's my understanding of the industry 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're complying with the interpretation by sitting and waiting. And they wait, and they continue to wait.

It's my understanding that it was not intended -- this amendment -- to cover activities in the normal course or ventures already authorized. This transaction was already authorized by a munitions list license.

I mean, 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 and they stop and say: Well, we better check and be sure this doesn't require a separate license.

And they come back with, oh, yes, it does. It's almost like a Kafkaesque experience. That's my reaction to it, anyway. I may be totally wrong.

But you're going to supply an answer and an explanation for that for the record?

HOLUM: Yes, I'll provide a more detailed answer.

COCHRAN: How many brokering licenses -- while you're at it, answer this: How many brokering licenses have been applied for and how long did it take to grant them?

HOLUM: I can provide that. I don't know the answer off hand.

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?

HOLUM: I'll supply that.

COCHRAN: Senator Akaka.

AKAKA: Thank you very much, Mr. Chairman. And I want to say thank you for holding this hearing on Russian space launch quota, and also having implications on commerce in our country and proliferations 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?

SLOCOMBE: Senator Akaka, I would associate myself with what Secretary Holum said -- 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 at this problem that we're so concerned with. So I think it did have a favorable effect.

AKAKA: Mr. Holum, on January 28, 1998, the U.S. sanctioned seven of the Russian entities I believe to have assisted Iran's missile program, and about a year later, on January 12, 1999, the Clinton administration announced economic sanctions against three more Russian institutions for sharing nuclear missile technology with Iran.

Hence, has the Russian government taken any action against these entities? And if so, what actions have they taken?

HOLUM: They have taken action to the extent of commencing their own investigation with reference to these -- these various entities. Eight of them were engaged in, by our information, in missile cooperation and two in nuclear. But they got -- the Russian government has been investigating those cases and made a public announcement to that effect.

AKAKA: Mr. Chairman, those are my brief questions. Thank you very much.

Thank you for the responses.

COCHRAN: Thank you very much, Senator.

I appreciate very much the cooperation of all our witnesses today, especially the administration -- oh, excuse me, the senator from Georgia. Slipped in here and you were so quite, I didn't know you were here.

Senator Cleland, one of the very important members of this committee, we welcome you and recognize you for any comments or questions you might have.

CLELAND: Thank you very much, Mr. Chairman. Thank you for our distinguished panelists today.

I tell you, it's been fascinating the last two and a half years to sit here on this committee that deals with proliferation issues and also the (OFF-MIKE).

I came in here one day and I didn't know whether I was dealing with nuclear proliferation. I found that the postal inspector from the postal service was here, and I told him when they tried to shut down the post office in my down, that was nuclear proliferation.

(LAUGHTER)

But it does seem to me that in terms of space launch -- or satellite launch capacity, when we try to go outside -- and particularly through the Hughes experience, and I guess it's Loral too -- that we had some problems with the Chinese. This seems a little bit different here.

It does seem that Lockheed's got a good argument here. I kind of feel like I echo the sentiments of Mr. Trafton that I think this is not only critical importance for Lockheed's international economic viability, but the ability to provide 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 Russian launch industry as opposed to maybe a French company in such a partnership. Is that your feeling?

SLOCOMBE: It is, and it is the reason that the Department of Defense supported the 1993 arrangements.

CLELAND: Did the...

SLOCOMBE: As well as continuing the support.

CLELAND: Sir?

SLOCOMBE: As well as continuing the support.

CLELAND: Right. Is the Pentagon gaining any insight into the Russian aerospace industry through these joint ventures, especially with what I'm told is the RD-180 engine joint venture in which technology actually flows from Russia into the United States? Are we gaining in this arrangement?

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 has the unique capability in terms of what's presently available in the world, and that the access to that capacity is equally important to a domestic launch industry for supporting both military and other government and commercial launches in the United States.

CLELAND: Yes, sir, I think so. And I agree with that point of view.

Another point I'd like to just mention. I guess since I've sat in Senator Nunn's former seat -- I'm not sure I'm up to that task -- but it did seem like it was in the national security interests for the Lugar-Nunn legislation to go through and for that to -- I think it's been very successful.

It's interesting, I understand Lockheed Martin's joint venture in Russia actually employs about 100,000 Russian scientists and technicians and engineers. What do you believe would be the consequences of these workers -- should the U.S. not end the quota? Would it -- 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 proliferationists?

SLOCOMBE: We certainly see advantages to having the Russian scientists and 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 that they would (ph) go off and do other work. But it would be one of the reasons why we have supported these arrangements.

CLELAND: 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.

Let me -- I'm trying to get in mind, if these positives that we've just talked about are there, what is the rationale for the quota system? I'm not sure I'm 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've discussed here?

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, and 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 pricing, normal pricing, but also that they would create a glut of supply on the market and depress the prices as well. So that's why the quotas were established, to provide an ability for these countries to actually play in the market but not kill of our own domestic launchers.

And when they were established, we were just in a different situation. The situation has changed.

CLELAND: Yes.

NOVELLI: The agreements are due to expire, the Russian one, at the end of 2000, Ukraine and China at the end of 2001. And that's why we're 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.

CLELAND: Yes. It does seem to me that every American now wants their -- going to their own Internet company and have their own satellite. I mean (OFF-MIKE) that there's much more demand out there now....

NOVELLI: Yes.

CLELAND: ... for commercial satellites for many reasons. I've seen on the telecommunications subcommittee of the Commerce Committee and the whole telecommunications world is exploding.

And it seems to me now that it would be in our interest as a nation to have some capabilities there, 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 having seen the market change that now there's more demand than I think supply? Would it 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?

NOVELLI: Mr. Senator, our national space policy had contemplated the fact that we were going to have basically rethink what we were going to do when these agreements expired, and it set forth the fact that we were going to have -- we were now have to have some sort of transition policy so that we would be able to deal with the fact that the market is changing. And that's why we're currently beginning discussions of how we're going to deal with this change and balance all of our other priorities that we have.

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?

HOLUM: (OFF-MIKE) agreement expires.

But let me underscore that the -- 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've supported it, we think it's good, we think it should continue.

At the same time, we've 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 please the entire industry, all of the companies that have this technology to transfer.

Sanctions generally are a blunt instrument. They're difficult to deal with. They're inherently hard to calibrate. You either have blow-back on our interests if they are effective because they're usually involving trade with the United States, or they don't have an effect on the target because there's no meaningful trade there.

But what they -- sanctions are an indispensable part of our nonproliferation strategy, internationally. They're not the only two 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. And what we're trying to do is reward positive progress, proliferation behavior -- and there's 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 the -- that those promise steps are fully implemented, the export control plans in the companies, the implementation action plans that they've agreed to, but having that implemented

So we've got a six-year -- or six-month breathing space now by raising the quota to see if those commitments are in fact carried out. And if they are, then we'll have a more positive environment.

So it's a balancing act that we're trying to portray -- 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 having an impact on our nonproliferation objective.

CLELAND: So this is caught up in the sanctions, or the whole relationship with Russia and the proliferation policy over the technology leaking out to other rogue nations.

Did I hear you say correctly -- did I hear you say that there was a six months...?

HOLUM: Well, we've raised the quota from 16 to 20, and our anticipation in that is that will take launches through roughly a six- 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.

CLELAND: So there might be some -- some hope, if we get some positive response from the Russians that we might be able to do better with the quota after six months?

HOLUM: I certainly hope so. It is not my objective to interfere with this business, but it is my objective -- it is our objective that 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.

CLELAND: And this is somewhat the carrot.

HOLUM: Yes, precisely.

CLELAND: Well, I think it's a fascinating subject, Mr. Chairman, and I appreciate you holding this hearing and I appreciate our panelists being here and engaging in this quite impressive conversation. And I think it is in our nation's interest to make sure that we do all that we can with our Russian partners along these lines.

Thank you very much, Mr. Chairman.

COCHRAN: Thank you, Senator, for your contribution to the hearing. We appreciate it.

And 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'm 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's 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 principle 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.

This hearing is adjourned.

END

XXX was being targeted.

CASTLE: And he apparently made some efforts to communicate that and for whatever reasons that did not succeed. I'm not interested in developing a case against that person or even all the details of that. But I am interested in -- maybe both of you could answer this.

But I am interested in -- as you set up a system, because you both have critiqued this system to some degree, as to whether or not you're allowing for some methodology for somebody who might have some coincidental knowledge in being able to input, and I'm not suggesting anybody should be able to stop a bombing strike or anything of that nature.

But this was a person who apparently had some knowledge and in this case obviously probably should have been listened to. In the future if we do all this, is there some way that we could address that?

TENET: I think that internally as I establish more rationale...

CASTLE: (OFF-MIKE) internally, I don't mean you put it on the Internet or something like that.

TENET: I think internally as I put together a series of procedures and thorough understandings about if you're in the target nomination business, where does the focus of accountability lie? Who is in charge? What actions are being taken? Who do you go speak to? How do you input the process? And make that clear to everybody in the building, I think that we can minimize this.

I think people who have knowledge should be able to come forward and I also think it's the process itself should be agile enough to know where those pockets of knowledge are and draw it in. So I think there are obviously things we can do to a lot better then we did this time.

HAMRE: Mr. Castle, we have very explicit procedures where individuals can stop a strike. And we had a number of those during the operation. Where an anomalous data came forward at the end. It caused a senior officer to say, we better hold off on this. There maybe evidence that it may conflict with one of the guidelines that's used to develop a no-strike list or something.

So we had a number of instances where we do preposition the authority down the line to stop something. We don't give anybody authority down the line to start something. But we do give them the authority down the line to stop something if it looks like it's in conflict with guidance that everybody understands should guide the military activity.

In this case, they had the authority at the headquarters to stop it, if the evidence was there that we had something that was genuinely amiss. Nobody felt that that was being presented to them so they didn't stop it.

CASTLE: Well thank you for that. I'm going to sort of change the questioning for a moment. I do not like warfare any more than you all do and you've expressed that, at least Dr. Hamre expressed it in his statement. But at times it is necessary and when there's ethnic cleansing and other things going on I understand that and I think I was supportive as anybody in Congress of what we had to do not what we wanted to do.

I'm also aware that when you have warfare you're going to have collateral damage. I mean, it is going to happen and quite frankly it sort of keeps everybody on their toes. I think it all really started in the Persian Gulf War and now we're at the point where if there's any collateral damage at all people scream, how can you do this, or whatever. I mean, you're in harm's way sometimes when you're in the area where unfortunately a form of warfare is taking place.

I'm not excusing in any way what happened to the Chinese embassy. I wish it had never happened. We should apologize forever to those people and their families and whatever it may be. But I understand that is something that you're never going to get rid of entirely. It's never going to be a perfected system. And you said this, Mr. Tenet, and I just want to make absolutely sure.

You both are totally confident. You've checked in every way possible that there's no conspiracy, no disgruntled people, no element, no suspicion whatsoever that anything other then a plain basic mistake was made here with respect to the bombing of this embassy. Can you confirm that for me?

TENET: Absolutely.

HAMRE: Absolutely, sir.

CASTLE: Mr. Tenet, again, in your discussion and I've heard you discuss this more then once now, several times as a matter of fact. And read about what you said also. It is clear that the CIA is sort of taking on a different role then it has before. I think you said in your statement, I wrote down, "CIA does not normally determine the sites." Usually you provide sort of more general information if you will.

And so I assume that you're in a little bit of -- you're not breaking totally new ground, you're sort of in essence taking on procedures that were a little more specific in terms of recommendations of these things then you have before.

First of all, I assume that's correct. If it's not, straighten me out on that. But if it is correct, do you feel comfortable now that you have refined these procedures so that if we were to have another event such as this that you would be more comfortable in the management aspects of those decisions? And Dr. Hamre is comfortable with what you all are doing with respect (OFF-MIKE).

TENET: I think I'm much more comfortable today. I think John and I will be much more comfortable as we refine this process. I think that the guidance that we're laying internally in terms of how, if we're in the target nomination business and I believe we will stay in the business to support the military -- how it's going to work. The precision with which we expect. The management oversight that must be there.

The confidence with which we assess the package that we're sending forward to the military because when it comes out of the Central Intelligence Agency, you the American people should assume that it doesn't just take on the mantel of fact, that it is fact. And I have to ensure that when it goes forward that it is factual and the best possible work has been provided and I have a confidence that we'll get that done.

HAMRE: I'm confident we won't make this mistake again. But I also have every reason to believe we'll probably make other mistakes. We'll absolutely do our best to never have them. And this one won't happen again because we know where it happened. We've already taken steps to make sure that the forces, the underlying factors are corrected and checked here.

But, sir, war is about violence. It's about destruction and unfortunately it's about accidents. And I can't tell you that we won't have them again.

CASTLE: No, I understand that and I thank you gentlemen. I yield back my time.

GOSS: I understand that Mr. Romer had a brief follow-up question which we will be very happy to permit because of the time situation. Mr. Dixon, I understand possibly had a follow-up remark and I have a closing remark and we promised we would try and have this concluded as close to noon as possible and I think we're going to be close. Mr. Romer.

ROMER: Director Tenet, you said in your testimony on page eight which again I completely concur with and agree with. At the bottom, "individuals in both the CIA and the DOD who knew the correct location of the Chinese Embassy should have been consulted." How do we bring our personnel who may have known about the more updated locations of Belgrade facilities at that point and they're obviously kicked out or we bring them out of our embassy when we go to war.

How do we then bring them into the process institutionally to bring in their intimate knowledge of the latest details and relocations of these facilities so that they can contribute in a fundamentally important way to a no-strike list so these kind of things don't happen again? How have you improved your process?

TENET: I think it's actually fairly simple. That it is absolutely a statement of policy that the chief of station, the defense attache and all those with knowledge of a particular urban environment that you're about to strike have to put their eyes on this targeting package and must, must sign off on what a satellite picture says a site is or isn't. Fairly straight forward and we have to then state that confidence to the targeting process to say this is how we came to this conclusion and here is our level of confidence based on what we know and based on eyes on the ground validating this target. There's nothing confusing about that.

ROMER: So in the future as we all agree that the CIA should be involved in packaging these targets we will bring those people in early in the process.

HAMRE: Absolutely. And we have to have the CIA and the other partners in the national security establishment to have to help us. That's no question. And I don't need to condition anything that Director Tenet just said. When we get into a war -- when we were doing the Operation Desert Storm, we were processing 2000 strikes a night. Now it's going to be a lot harder in a big war to be able to have eyes on absolutely every target. So I just have to say we're going to have to draw some perimeters around what we will do.

ROEMER: Certainly you would agree that participation should include the no-strike list? Maybe not eyes on every single target put together but initially compiling a no-strike list.

HAMRE: Absolutely, sir.

TENET: Yes, sir.

ROEMER: Finally, Mr. Chairman, you and our ranking member I believe sent a letter of deep concern that I believe the entire committee concurred with about leaks that had been taking place, where we were reading about this story and other stories for weeks in the press. And this is our first public hearing on this particularly sensitive topic.

And I just wanted to say to Director Tenet that we want to do all we can to work with you and to encourage you to help us address these leaks that take place, whether it be on this story or other stories that may hurt public safety and national security.

TENET: Well, Mr. Romer, I just want to tell you and I'm sure I speak for Dr. Hamre here and everybody that works in the intelligence business and the defense business that the nature of the leaking that's going on in this town is unprecedented. It is compromising sources and methods. It is jeopardizing American security and there are people in our government who think they have some free pass to do this for their own pleasure.

I want to catch somebody more than anybody else in this government because what it does to the effort of the men and women of our intelligence community and how it abuses the security of Americans. And sooner or later we will catch somebody and we'll fire them or prosecute them. But what they're doing is devastating to the security of this country.

It's shameful and we're doing everything we can to catch them. And the devotion that this committee has to maintain security practices to ensuring the confidentiality of our discussions has been very, very high. I would say to all of my colleagues in the executive branch that 95 percent of what leaks comes out of the executive branch of the government because people believe they have some free right to disseminate this information.

And we have to get our house in order and we are all working hard. The secretary of state, the secretary of defense, the chairman and I with the attorney general recognize that this is a very difficult problem that we have to solve.

ROEMER: Dr. Tenet, I just want to conclude by saying thank you again for the great job you're doing at the CIA and again going back to my initial remarks, my opening remarks, thank you for practicing Harry Truman's "the buck stops here." You're saying responsibility is with you, with us as the oversight committee and trying to prevent processes in an institutional way of not repeating this mistake in the future. Thank you again.

GOSS: Thank you very much. I want (OFF-MIKE) staff and the members of this committee for helping us prepare what is somewhat unusual for this committee which is a public hearing. I conclude that this has been useful after listening. Obviously members who are given the prepared statements of Dr. Hamre and Director Tenet before and have a chance to review them because of security aspects.

I believe there has been an extraordinary amount of cooperation and candor and I'm grateful for that. I think it does speak to the trust that exists. I'm well aware that this committee has responsibilities of oversight intelligence community. And I think the American people need to be reassured on that point.

This is a bipartisan committee as everybody can see. Mr. Dixon and I have an extremely close working relationship. We do our very best to treat national security for what it is, a very important part of our responsibility here in Washington for the well-being of all Americans. And we're very grateful for the work that Americans in the intelligence committee do as well as the armed service piece of that.

And it is also true that we have an advocacy role for intelligence because of the nature of intelligence. We don't talk about all of the aspects of it. I hope people are reassured that we are able to make the distinction between advocacy and oversight on this oversight committee. Indeed, I think we do a fair job of that.

The last conclusion I would make in addition to expressing my gratitude for your time and I know the extensive amount of preparation and the work that is ongoing to get to the bottom of what actually happened to make sure we don't have this problem again. My conclusion is that there is a dilemma and it's a legitimate dilemma. We are in fact the world's dominant power.

I think the director has said that the idea that anywhere, anything, anytime is beyond our means as the world's dominant power. We just can't do all that. We have a problem of understanding what it is we can't do as well as what it is we can do. And I think that the question of the connection between the policy makers and our national security side and the people who have to execute needs to be reexamined in some depth.

This is not a new statement for me I've said that many ways before. I think it is extremely important that that happened. I am well aware that the intelligence community had provided our national security policy makers good information about what was going on in the Balkans about the possibility of ethnic cleansing get out of control.

I also know that the intelligence community was providing additional information about other very egregious sore spots. Troubles that were going on in the world simultaneously. I could mention terrorist opportunities. I could mention proliferation of nuclear weapons and dissemination capabilities or chemical or biological warfare.

I could mention the regrettable problem in the trend in drug use, particularly heroine, in this country. These transnational type threats as well as the (OFF-MIKE) state problems. These effect the quality of life and the security of Americans home and abroad. All of these things warrant attention by our national security policy makers. The dilemma that we have today is what triggers actions?

Which will get the priority today? And do we have the capability to do the maximum possible good for the American national security interest when that trigger is pulled because we are so in fact engaged on every subject. That is an area that deserves further attention and I think we've heard testimony today that if we can't do it all, then we darn well better decide what it is we can't do and what we can do and get the processes in place to accomplish that.

I want to thank you for helping us achieve what I think is a step forward on that and I would welcome your comment on that.

HAMRE: Thank you for that. I had a very different comment I wanted to make which was the last time I appeared before this committee. It was on the matter of encryption. As I said at that time we had 1.4 million men and women in our armed forces that are around the globe protecting this country every day. The director has agents all around that are protecting this country every day.

There are policemen and firemen and everybody else trying to protect this country. And when it got tough and when the shooting was heavy and when somebody had to step into the breach (OFF-MIKE) this committee and I want to thank you.

GOSS: Thank you. I am glad you were able to find a safe way into encryption. We will be talking more about that soon. I thank you all, committee hearing is adjourned.