On the results of an audit into the legality and proper use of funds allocated from the federal budget for the purpose of comprehensive decommissioning of nuclear submarines, including the fulfilment of international contracts in 2002, in the Ministry of Atomic Energy of the Russian Federation and other sites.

Basis for the audit: The work plan of the Audit Chamber of the Russian Federation for the year 2003 (Item 1.5.4.2.19).

Purpose of the audit: Determining the legality and proper use of budget and off-budget funds allocated for the purpose of comprehensive decommissioning of nuclear submarines, as well as the completeness and order of entering into the federal budget of revenues received from the sale of materials produced in the process of decommissioning of the vessels.

Subject of the audit: The process of application of funds allocated from the federal budget, as well as funds received in international financial aid, by the federal bodies of executive power performing the function of state contractees and by the contractors carrying out the works in the framework of comprehensive decommissioning of nuclear submarines, according to scope, structure, end use and goals of application.

Sites where the audit was conducted: The Ministry of Atomic Energy of the Russian Federation; the Federal State Unitary Enterprise, Far Eastern Plant Zvezda (Bolshoi Kamen, Primorsky region); the Federal State Unitary Enterprise, Northern Federal Enterprise for Radioactive Waste Treatment (Murmansk); the Shipyard Nerpa (Snezhnogorsk, Murmansk region); the Federal State Unitary Enterprise, Machine Works Zvyozdochka (Severodvinsk, Arkhangelsk region).
Duration of the audit: February 16th to August 13th 2003.

Responsible executors: S. G. Maslennikov, head of the inspection unit of the Audit Chamber of the Russian Federation; V.F. Strashko, deputy head of the inspection unit of the Audit Chamber of the Russian Federation; K. A. Shekunts, head inspector of the Audit Chamber of the Russian Federation; N. V. Karpova, principal inspector of the Audit Chamber of the Russian Federation; M. V. Chapaikina, senior inspector of the Audit Chamber of the Russian Federation.

List of acts executed in the framework of the audit:

1. Act on the audit of the legality and proper use of funds allocated from the federal budget for the purpose of comprehensive decommissioning of nuclear submarines, including the fulfilment of international contracts, at the Federal State Unitary Enterprise Far Eastern Plant Zvezda. The act was signed by Director Yu. P. Shulgan and Head of the Decommissioning Department A. M. Kiselyov, with remarks.
2. Act on the audit of the legality and proper use of funds allocated from the federal budget for the purpose of comprehensive decommissioning of nuclear submarines, including the fulfilment of international contracts, at the Federal State Unitary Enterprise Northern Federal Enterprise of Radioactive Waste Treatment. The act was signed by Director V. N. Panteleyev and Deputy Director Ye. B. Andrianova, without remarks.
3. Act on the audit of the legality and proper use of funds allocated from the federal budget for the purpose of comprehensive decommissioning of nuclear submarines, including the fulfilment of international contracts, at the Federal State Unitary Enterprise Shipyard Nerpa. The act was signed by Deputy Director for Economic Matters V. A. Alexeyev, with an opinion.
4. Act on the audit of the legality and proper use of funds allocated from the federal budget for the purpose of comprehensive decommissioning of nuclear submarines, including the fulfilment of international contracts, at the Federal State Unitary Enterprise Machine Works Zvyozdochka. The act was signed by General Director N. Ya. Kalistratov and Chief Accountant V. G. Fomenko, with remarks and clarifications.
5. Act on the audit of the legality and proper use of funds allocated from the federal budget for the purpose of comprehensive decommissioning of nuclear submarines, including the fulfilment of international contracts, in the Ministry of Atomic Energy of the Russian Federation. The act was signed by First Deputy Minister of Atomic Energy of the Russian Federation O. Ye. Antipenko, with remarks.

During the audit, the following was established:

1. Submarine decommissioning statistics:
The Russian Navy started the process of retiring nuclear submarines in 1986. With every subsequent year, the rate of retiring nuclear submarines was increasing due to both the gradual expiration of the submarines’ designed service periods and the Russian Federation’s obligation to abide by its commitments with respect to international agreements on the reduction of strategic and offensive weapons, which, among other items, provided for the process of cutting back the arsenal of strategic missile submarine cruisers.

The state orders for works within the scope of comprehensive decommissioning of nuclear submarines in the period from 1986 to 1998 were placed by the Ministry of Defence. The average decommissioning rate for this period was 3 nuclear submarines per year.

One of the principal reasons for the low decommissioning rates in the period from 1992 to 1998 was the insufficient funding provided to the Ministry of Defence for these purposes, lack of specialised industrial capacities, as well as the fact that in the period from 1992 to 1994 decommissioning expenditures were put on the self-financing basis with no provision of funds from the federal budget. This approach to decommissioning did not prove reasonable.

The high rates of retiring submarines and the low rates of submarine decommissioning led to a situation where a number of sites for permanent submarine stationing have practically become the sites of permanent storage of laid-up submarines awaiting decommissioning. It should be noted that in each bay where such submarines are kept, there are from 10 to 15 laid-up submarines of the first generation—the most dangerous in regard to nuclear, radiation and environmental safety.

In accordance with Decree No 518 issued by the Government of the Russian Federation on May 28th 1998 and entitled "On the measures of expediting the process of decommissioning of nuclear submarines and nuclear-powered surface ships retired by the Russian Navy and of environmental remediation of radioactively hazardous sites of the Russian Navy," the function of contracting and coordinating the works performed in the framework of comprehensive decommissioning of nuclear submarines was appointed to Minatom.

In the period from January 1st 1999 to December 31st 2002, 14 submarines were retired, spent nuclear fuel, or SNF, was unloaded from 58 submarines, 43 submarines were decommissioned with their reactor compartments cut out in blocs, including 17 submarines decommissioned and 14 submarines unloaded from their SNF in 2002.

Altogether, since 1992, 194 submarines have been retired by the Russian Navy, of them 81 were dismantled. The navy is keeping at its bases and facilities 100 submarines awaiting dismantlement, 13 submarines are under dismantlement at present.

In 2002, the process of equipping the submarine dismantlement programme with necessary industrial capacities and infrastructure was nearing completion at shipyards run by the Ministry of Defence and facilities operating under Rossudostroyeniye. International aid and budget funds helped build onshore facilities for SNF unloading and the floating liquid radioactive waste treatment facility "Landysh," as well as provide high-productivity equipment for submarine dismantlement to the Far-Eastern Plant Zvezda and Zvyozdochka Machine Works. These newly created productive capacities are responsible for the dismantlement of up to 18 to 20 submarines per year.

2. The regulatory base of comprehensive submarine decommissioning
2.1 An analysis of principal regulatory and legal acts
The submarine decommissioning programme was established by Decree No 644-47 issued by the Government of the Russian Federation on February 31st 1992, with the envisioned period of implementation from 1992 to 2000. It specified, among other items, a number of measures to be undertaken in the process of cutting out submarine reactor compartments and of placing them for long-term storage. This document authorised cutting out reactor compartments as part of three-compartment blocs and their subsequent storage as a temporary measure.

Due to the insufficiency of budget funds allocated to the programme, many of its goals were not reached, and as for the temporary decommissioning scheme, it practically became a permanent one.

Later, the problematic issues of submarine decommissioning were included as a subprogramme in the draft version of the federal target programme "Nuclear and Radiation Safety in Russia" for the period of 2000 to 2006.

At the same time, the approved version of the programme "Nuclear and Radiation Safety in Russia" for the period of 2000 to 2006, which came into force with Decree No 149 issued by the Government of the Russian Federation on February 22d 2000, did not contain the subprogramme for submarine decommissioning.

Based on the protocol of the meeting of the Commission for Pressing Matters of the Government of the Russian Federation "On the provision of works in the process of decommissioning of arms and military equipment" of June 16th 1999, No 9, as well as the protocol of the meeting of the Commission for Military Industrial Matters of the Government of the Russia Federation "On the condition of works in the process of industrial decommissioning of arms and military equipment" of July 9th 2001, a draft version of the subprogramme "Industrial Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships" for the period of 2002 to 2005 was developed. The main developers of the subprogramme were the All-Russian Scientific Research Institute of Interindustrial Information of the Russian Ministry of Industry, Science and Technology, and the 46 TsNII of the Russian Ministry of Defence. The draft version of the subprogramme was submitted for consideration of the Government of the Russian Federation in May 2001, but has not been approved to this date.

In September 2003, the Defence Ministry sent the draft version of the subprogramme "Industrial Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships" to Minatom, as a part of the federal target programme "Industrial Decommissioning of Arms and Military Equipment" for the period of 2004 to 2010, referred to hereinafter as the Programme.

In accordance with Instruction No MK-P4-1138 issued by the Government of the Russian Federation on September 15th 2003, Minatom was assigned to complete the preparation of the draft version of the Programme and submit it for consideration of the Government of the Russian Federation by May 1st 2004. The Government of the Russian Federation also made the decision to appoint the Russian Ministry of Economic Development the state contractee and coordinator of the Programme, while Minatom would perform the functions of the state contractee for comprehensive submarine decommissioning.

Due to the fact that no officially approved version of the federal target programme existed, Minatom developed its own Concept of Comprehensive Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships, referred to hereinafter as the Concept, and followed the guidelines of the Concept. The Concept was examined and approved by the involved ministries, approved by Minister of Atomic Energy of the Russian Federation Yevgeny Adamov on January 30th 2001, and sent for implementation to the executors of the Concept by Deputy Chairman of the Government of the Russian Federation Ilya Klebanov (Instruction No IK-P7-02738 of February 17th 2001).

The Concept includes an "elaborated system of views and approaches" to providing solutions for the tasks specified in the programme of submarine decommissioning approved by the Government of the Russian Federation by Decree No 644-47 of February 31st 1992.

The Concept also included the principle of implementing the "closed" cycle of treatment of SNF from decommissioned submarines and nuclear-powered surface ships, as well as from the Russian Navy’s radioactively hazardous sites undergoing remediation, at the existing industrial capacities of the Federal State Unitary Enterprise Production Plant Mayak in the Chelyabinsk region meant for the receiving and reprocessing of SNF, and of implementing the possibility to store, if necessary, the SNF on a temporary basis in dry containers before it is transported for reprocessing.

The principle of implementing the "closed" cycle of SNF treatment predetermined both the existing transportational and technological scheme and the whole costly mechanism of comprehensive submarine decommissioning.

As the results of this audit showed, up to 30 percent of funds allocated from the federal budget for the purpose of comprehensive submarine decommissioning is redirected to the transportation and reprocessing of SNF from the decommissioned submarines. At the same time, according to the existing regulatory acts, SNF reprocessing is not part of submarine decommissioning. Furthermore, up to 20 percent of funds is spent on maintaining the survivability of laid-up submarines, including their maintenance performed by civil crews, and another 20 percent is spent to provide safety and security for radioactively hazardous sites. As a result, no more than 30 percent of federal budget funds is spent on the implementation of priority tasks of SNF unloading and the actual dismantlement of submarines.

The definitions of comprehensive submarine decommissioning as given in regulatory acts, including the definitions developed by scientific organisations within Minatom, do not place SNF reprocessing among the functions and tasks of comprehensive submarine decommissioning. Likewise, no SNF reprocessing is envisioned by GOST RV 50811-95 entitled "Decommissioning of ships and vessels of the Russian Navy. Main principles."

Many of the provisions specified in the governmental regulation that appointed Minatom as the state contractee and coordinator of works within the scope of comprehensive submarine decommissioning—Decree No 518 issued by the Government of the Russian Federation on May 28th 1998 and entitled "On the measures of expediting the process of decommissioning of nuclear submarines and nuclear-powered surface ships retired by the Russian Navy and of environmental remediation of radioactively hazardous sites of the Russian Navy"—are not being implemented. For instance, in violation of Item 2 of the mentioned regulation, Minatom did not ensure the entering into the federal budget of funds received as revenues from the sale of products generated in the process of submarine decommissioning and meant to cover part of the submarine decommissioning costs. In violation of Item 4 (Appendix 1 of the mentioned regulation), the State Russian Centre of Nuclear-Powered Shipbuilding is not performing its function of head executor. Minatom is not maintaining control over part of financial funds allocated to the comprehensive decommissioning programme from the federal budget for the purpose of payment for SNF unloading performed by the Ministry of Defence. At the same time, Minatom transferred to the Nikolai Dollezhal Scientific Research and Development Institute of Power Engineering, or NIKIET, a much more significant number of functions than it was provided for by Item 4 of the mentioned regulation of the Government of the Russian Federation. In effect, NIKIET, through an organisation within the Industry Expertise Centre for Comprehensive Decommissioning and on Minatom’s orders, conducts feasibility studies of pricing of decommissioning products and determines the costs of works within the submarine decommissioning process. Furthermore, NIKIET is the founder of the Joint Stock Company Experimental Mechanical Plant Konversiya, which is a member of a tripartite contract—signed also by Minatom and the facilities and enterprises that execute decommissioning works—for implementing works within high-level reprocessing of decommissioning products and equipment of submarine reactor compartments. In violation of Item 12 of Decree No 518 of May 28th 1998, of the Government of the Russian Federation, not all the regulatory acts have been put in accordance with this decree. For example, according to GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy. Main principles," the function of the state contractee still belongs to the Ministry of Defence, which, in fact, handed this status over to Minatom in 1998.

It should be noted that, in accordance with the federal law "On assessment activities in the Russian Federation," no assessment of nuclear submarines, which constitute federal property, is conducted when transferring them to executor facilities.

Likewise, Decree No 1493-r issued by the Mingosimushchestva on November 23d 1998 and entitled "The order of transfer of nuclear submarines and nuclear-powered surface ships, diesel-driven submarines, surface ships and service ships, retired by the Russian Navy, as well as of sites in the jurisdiction of the Russian Ministry of Defence related to temporary storage of spent nuclear fuel, solid and liquid radioactive waste" is not being implemented wherein it specifies the process and conditions of taking over fully equipped nuclear submarines from the Russian Navy.

Decree No 738, issued by the Government of the Russian Federation on September 30th 2000 and entitled "On approving the Regulation on the use of funds entering the federal budget as revenues from sale of products generated by decommissioning of arms and military equipment," which stipulates the order of assessing salvage value subject to transfer to the federal budget, expired its legal force on January 1st 2002. At present, the order of application of funds entering the federal budget as revenues from sale of products generated by arms and military equipment decommissioning is not stipulated by any regulatory acts.

2.2 The definitions of "comprehensive submarine decommissioning," "submarine decommissioning"
The definitions of "comprehensive submarine decommissioning," "submarine decommissioning," and "industrial submarine decommissioning" are provided by the following regulatory acts:

—Concept of Comprehensive Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships;

—GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy. Main principles;"

—Regulation "On the order of accounting, storage, transportation and sale of products generated from decommissioning of nuclear submarines, nuclear-powered surface ships, surface ships, diesel-driven submarines, and service ships."

The draft version of the subprogramme "Industrial Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships" of the federal target programme "Industrial Decommissioning of Arms and Military Equipment" does not give any definitions, although it notes that the process of comprehensive decommissioning of nuclear submarines envisions the implementation of large numbers of measures in the scientific and technological, organisational, industrial and technological, environmental, social and legal areas.

GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy. Main principles" gives the following definition: "the decommissioning of a vessel is a stage which completes the lifespan of the vessel after the end of its service period, as well as a process which encompasses a complex of organisational and technological measures as part of the vessel’s preparation, storage, cutting (or) sale, and/or sale of its components or their burial."

An analysis of definitions of comprehensive nuclear submarine decommissioning and nuclear submarine decommissioning given in the above-mentioned documents reveals that there is a multitude of vague definitions of comprehensive nuclear submarine decommissioning. At the same time, SNF reprocessing is not defined by regulatory acts as a task that is part of comprehensive nuclear submarine decommissioning. Such circumstances where clear and accurate criteria of comprehensive nuclear submarine decommissioning are non-existent lead in certain cases to misspending or unfounded spending of budget funds, or implementation of works that are not related to submarine decommissioning. At the same time, tasks that are defined as first priority by both the Concept and other regulatory acts practically do not get solved as priority issues at all.

3. Distribution of budget funds allocated to submarine decommissioning
According to the state defence order, in the year 2002, 1864.3 million roubles in federal budget funds were earmarked for the purpose of comprehensive nuclear submarine decommissioning. Of these funds, 1628.1 million roubles were allocated for the section Industry (87.3 percent), 152.1 million roubles for capital construction (8.2 percent), and 84.1 million roubles for scientific research, design and experiments (4.5 percent).

In 2002, budget funds allocated to comprehensive nuclear submarine decommissioning were meant for distribution among the following types of works:

—unloading of SNF, including the preparational and concomitant works: 122.1 million roubles (7.3 percent of the whole funding allocated to comprehensive nuclear submarine decommissioning in 2002);

—the actual decommissioning, or dismantlement, of nuclear submarines: 348.2 million roubles (21 percent);

—maintaining submarines’ survivability: 291.3 million roubles (17.5 percent);

—preparation for transportation, transportation and reprocessing of SNF at FSUE Production Plant Mayak: 451.6 million roubles (27.1 percent);

—maintaining safety and security at radioactively hazardous sites for temporary storage of SNF, liquid radioactive waste, or LRW, and solid radioactive waste, or SRW, generated during nuclear submarine decommissioning: 412.2 million roubles (24.8 percent).

It should be noted that the funds earmarked for works related to SNF unloading and dismantlement of nuclear submarines make 28.5 percent, including those allocated to the priority task of SNF unloading making 7.3 percent of the 2002 allocation. Works on maintaining submarines’ survivability—equipment production, repairs of service ships, experimental use of containers, polystyrene filling of hermetically unreliable tanks, and other works—were supported by 17.5 percent of budget funds.

Another 27.8 percent of budget funds is earmarked for SNF reprocessing, which also includes preparational and transportational expenditures. At the same time, when submitting their project for consideration to the Government of the Russian Federation, the developers of the draft version of the subprogramme "Industrial Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships"—the All-Russian Scientific Research Institute of Interindustrial Information of the Russian Ministry of Industry, Science and Technology, and the 46 Central Scientific Research Institute of the Ministry of Defence—only provided for the allocation of 514.2 million roubles to be spent to this end, or mere 3.2 percent of the whole funding planned to be earmarked from the federal budget for the purpose of comprehensive submarine decommissioning.

Another 24.8 percent of budget funds is allocated to maintaining safety and security at radioactively hazardous sites for temporary storage of SNF, LRW, and SRW generated during nuclear submarine decommissioning, including maintenance expenses at federal state unitary enterprises—the Northern Enterprise for Radioactive Waste Treatment, in Murmansk, and Far Eastern Enterprise for Radioactive Waste Treatment, in Vladivostok—storage of three-compartment blocs of submarine reactor compartments, and salaries for civil crews.

Approximately 100 million roubles alone are earmarked yearly for the maintenance of laid-up submarines by civil crews.

In contradiction with requirements specified in Item 7.5 of GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy. Main principles," which determines the responsibility of the Russian Navy prior to transferring a vessel according to a transfer and reception act to the executor-facility—and, consequently, into Minatom’s disposal, all the funding required for the development of transportation projects, production of necessary equipment, purchase of fuel needed for the transportation, was provided by Minatom, which then attributed these expenditures to maintaining works within the scope of nuclear submarine decommissioning.

Without taking into account the requirements of GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy. Main principles," Item 1.6 of the regulation "On organisation of transfers to the point of decommissioning of nuclear submarines withdrawn from operation by the Russian Navy" stipulates that funding for the towing operations of these submarines is provided by the head contractee. This regulation was approved by a decision "On the introduction of regulatory and technical documents serving as the basis for transfer of nuclear submarines from the Russian Navy to executor facilities, as well as for decommissioning and service" made jointly by Minatom, the Russian Ministry of Economic Development and the Ministry of Defence in September 1999.

At the same time, the Ministry of Defence covered from its own pocket the costs of unloading SNF from nuclear submarines already received into the jurisdiction of executor facilities—facilities that performed works that should have been financed at the expense of the funding allocated to Minatom from the federal budget.

The facts mentioned above testify that Minatom, as the state contractee and coordinator of comprehensive submarine decommissioning, did not completely perform the functions of control and coordination with respect to the proper use of budget funds allocated for the purpose of submarine decommissioning, while the total sum allocated to Minatom for the purpose of comprehensive submarine decommissioning does not reflect all the expenditures from the federal budget on submarine decommissioning.

4. Violations and shortcomings revealed during the audit
The audit has established a lack of due accounting of nuclear submarines—which are federal property—transferred from the Russian Navy into the jurisdiction of executor facilities. During transfers of submarines to executor facilities, accompanied with acts of transfer and acceptance, the levels of underequipment of the submarines reach up to 15 percent of their designed weight in non-ferrous and ferrous metals, and up to 50 percent in precious metals.

Representatives of Minatom do not take part in the procedures of transfer of submarines from the Russian Navy, while representatives of local branches of the Ministry of Property Relations authorise the acts of transfer and acceptance—which are drawn up with violations of established order—of underequipped submarines with no objections.

The results of the audit showed that Minatom does not maintain an account of decommissioning products as they leave salvage facilities. In violation of requirements specified in Item 4.2 of GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy," decommissioning products are sold not in accordance with contracts signed between the contractee and the contractor, but on contracts signed between the contractors and buyers of the products, with no participation of Minatom.

It should also be taken into account that, according to estimations by the All-Russian Scientific Research Institute of Interindustrial Information of the Ministry Industry, Science and Technology, and the 46 Central Scientific Research Institute of the Russian Ministry of Defence planned to put to use decommissioning products from 92 dismantled nuclear submarines in various fields of the country’s economy in the years of 2002 to 2005, including 330,000 tonnes of scrap non-ferrous and ferrous metals, more than 21 tonnes of precious metals, rare earth elements and alloys.

In violation of requirements specified in Item 4.2 of GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy," decommissioning products are sold not in accordance with contracts signed between the contractee and the contractor, but on contracts signed between the contractors and buyers of the products, with no participation of Minatom.

In a number of cases, executor facilities sell decommissioning products for export using middleman-type structures, as was established by the audit at FSUE Shipyard Nerpa and FSUE Far Eastern Plant Zvezda.

Minatom does not analyse sufficiently pricing policies and their correlation with the level of reprocessing of decommissioning products, and NIKIET’s established practice of putting minimal prices on decommissioning products is inefficient. In a number of cases, this leads to transfer of subsidiary income from sale of scrap and waste of non-ferrous and ferrous metals, which are sold at higher prices than recommended by Minatom, between facilities and intermediary organisations. Minatom maintains no account of secondary resources and equipment involved in the economic transactions with respect to their weight, range and value. Executor facilities do not report with acts on works performed in submarine decommissioning or on the sale of decommissioning products. State contracts signed between Minatom and facilities executing works in submarine decommissioning do not specify deadlines for completion of works in accordance with the orders—which correspond to factory numbers of submarines under decommissioning—nor any deadlines for sale of decommissioning products or deadlines for entering the salvage value into the federal budget are included into these contracts. As a result, at FSUE Far Eastern Plant Zvezda, for instance, more than 30 percent of scrap and waste of non-ferrous and ferrous metals was not sold for over a year after the dismantlement works had been completed.

Bookkeepers do not maintain an account of scrap and waste of non-ferrous and ferrous metals, or do that with serious violations of regulatory acts. For instance, at FSUE Machine Works Zvyozdochka, according to figures from the accounting department and the production facility of this enterprise, the fluctuations in decommissioning product output were as high as 10,000 tonnes in the years 2001 and 2002.

State contracts do not regulate issues of ownership with regard to products of submarine dismantlement. As a result, there are certain contradictions between the Ministry of Property Relations’ Decree No 1493-r of November 23d 1998, entitled "The order of transfer of nuclear submarines and nuclear-powered surface ships," and Article 220 of the Civil Code of the Russian Federation, wherein these documents determine the rights of a facility to the decommissioning products generated independently through the facility’s own funds and with no expenditure of budget funds.

Decree No 738 of the Government of the Russian Federation, issued on September 30th 2000 and entitled "On approving the Regulation on the use of funds entering the federal budget as revenues from sale of products generated by decommissioning of arms and military equipment," (according to the version of Decree No 760 of November 1st 2001 of the Government of the Russian Federation), which stipulated the order of assessing salvage value subject to transfer to the federal budget, expired on January 1st 2002.

In violation of the federal law "On the federal budget for the year 2002," and of Item 9 of Decree No 125-10 "On the state defence order for the year 2002," issued by the Government of the Russian Federation on February 21st 2002, funds received by executor facilities through sale of decommissioning products did not enter the federal budget in 2002.

Altogether, in the period from 1998 to 2001, the federal budget received only 3.6 million roubles in funds earned from the sale of products generated during decommissioning of several dozens of nuclear submarines and surface ships. As of the beginning of the year 2003, executor facilities owed to the federal budget 102.8 million roubles, which, according to the summary schedule approved by Minatom, are to be entered into the budget in 2003 and 2004.

The established order of calculation of funds received through sale of decommissioning products, which are subject to transfer to the federal budget, does not take into account the allocation and spending of financial aid provided to Russia for submarine decommissioning, which exceed by two times the expenditures of the federal budget for the same amount of work in submarine decommissioning. An analysis of information obtained during the audit shows that in the case where a submarine was dismantled through the help of international funding, there are the economic foundations for transferring all the funds received through the sale of products generated during the dismantlement to the federal budget in order to enable additional funding for priority tasks of submarine decommissioning.

In order to provide safety and security at radioactively hazardous sites of temporary storage of liquid and solid radioactive waste generated during submarine decommissioning, as well as safety and security of environmental remediation efforts undertaken at these sites in Russia’s North, and in accordance with Decree No 220-r of February 9th 2000, of the Government of the Russian Federation, FSUE SevRAO was created within Minatom’s structure. When Minatom and FSUE SevRAO accepted from the Ministry of Defence and into their jurisdiction the federal property of two onshore technological bases of the Northern Fleet, this property was in extremely unsatisfactory condition and did not meet any nuclear, environmental or fire safety requirements specified by corresponding regulatory documents.

The main constructions of the site were built in the period from 1960 to 1965. Due to the influence of climate and chemical factors, and because no heating had been provided during winter periods, most of the constructions at the time of the transfer were in an unsatisfactory condition, and in certain cases, in a condition that ruled out their further operation. At the time of transfer, up to 90 percent of technical and other documentation accompanying the buildings and constructions being transferred did not exist. Some of the buildings and constructions located on the territory of the site being transferred, the technical condition of which did not allow for their further use on the site, did not enter the accounting balance of FSUE SevRAO.

No information pertaining to the accounting and control over the site’s spent nuclear fuel and radioactive waste, or verifiable information about their categories, quantity, physical or chemical characteristics, was ever received from the Ministry of Defence.

Only after a check conducted by FSUE SevRAO was it established that the site accommodated around 21,800 spent nuclear fuel assemblies, around 2,500 cubic metres of liquid radioactive waste and approximately 7,800 cubic metres of solid radioactive waste.

The physical safety of sites does not meet existing norms established by Decree No 264 of the Government of the Russian Federation of March 7th 1997, "On the establishment of Rules of physical safety of nuclear materials, nuclear installations and sites of storage of nuclear materials."

In Gremikha, a site for temporary storage of solid radioactive waste accommodates 112 containers with spent nuclear fuel, though the license allowing their storage expired in 1997. Also in storage are six irradiated removable reactor components with liquid metal heat carrier.

Furthermore, the condition of the system of physical safety of sites does not correspond to the principal sanitary regulations of providing radiation safety SP 2.6.1.799-99 (OSPORB-99) of the Russian Ministry of Health. The above-mentioned violations of requirements outlined in regulatory documents may lead to serious consequences that do not rule out the possibility of large-scale radiation accidents capable of spreading over vast regions and groups of population.

The audit revealed a number of cases of improper use of budget funds allocated to solving tasks of comprehensive decommissioning of nuclear submarines. For instance:

—the framework of a state contract between Minatom and FSUE Machine Works Zvyozdochka for the construction of the site "Infrastructure for unloading of spent nuclear fuel from reactors of PLARB " envisioned the construction of an industrial-type annex with the combined floor space of 10,700 square metres for the accommodation of the staff of FSUE Scientific Research and Technological Design Bureau Onega. While implementing this contract in 2002, FSUE Machine Works Zvyozdochka spent 31 million roubles in budget funds, with only 4,500 square metres of the annex to be used by the mentioned organisation. Thus, only 13 million roubles needed to be provided for this purpose from the federal budget, while the calculated improper use of funds totalled 18 million roubles;

—the state contract for dismantlement of the nuclear submarine bearing factory number 324, signed between Minatom and FSUE Machine Works Zvyozdochka, where it establishes the costs of dismantlement works at 67.9 million roubles, did not take into account the fact that part of the works in dismantling those components of the submarine that do not include the reactor compartments would be carried out on the terms of self-financing, or without payment from the federal budget, and as a result, the same works were paid for twice. The damage inflicted by this on the federal budget totalled 10.8 million roubles;

—income from sale of submarine decommissioning products, which is subject to be entered into the federal budget, was used for other purposes, and as a result, the federal budget was owed for the year 2002 the following debts: 43 million roubles from FSUE Far Eastern Plant Zvezda, 21.6 million roubles from FSUE Machine Works Zvyozdochka, and 25.3 million roubles from FSUE Shipyard Nerpa;

In total, the audit revealed improper use of federal budget funds equal to 118.7 million roubles.

In addition, the following cases of inefficient use of budget funds were revealed during the audit:

—at the expense of funds allocated for comprehensive submarine decommissioning and in the framework of the state defence order, the production plant of the Moscow-based Minatom-run FSUE NIKIET underwent technical re-equipment works that are not among priority works and that cost the total of 18 million roubles;

—premature transfer of 36 submarines from the bases of the Russian Navy to executor facilities and their maintenance by 27-man civil crews is costing the federal budget approximately twice (5.1 million roubles a year for each submarine) the expenses of the maintenance of submarines by 16-man military crews (2.6 million roubles a year for each submarine). Additional expenses for submarine maintenance come to approximately 90 million roubles per year.

Insufficient funding provided by Minatom to scientific research, design and experiments in the field of developing decommissioning technologies for surface ships and vessels powered by nuclear energy installations—1.5 million roubles were allocated by Minatom for these purposes in 2002—does not allow the issue of decommissioning of the heavy nuclear-powered cruiser Admiral Ushakov, which is docked at FSUE Machine Works Zvyozdochka with spent nuclear fuel still in its reactors, to be solved before 2005 or 2006. Meanwhile, its maintenance by the Ministry of Defence is costing the federal budget approximately 20 million roubles a year.

In total, the audit revealed inefficient use of federal budget funds equal to 117.9 million roubles.

The audit established that, in violation of Item 16 of Decree No 1046 of the Government of the Russian Federation, issued on September 17th 1999 and entitled "On the establishment of the Order of registration of projects and programmes of technical aid (assistance), of issuing of certificates confirming affiliation of means, wares, works and services to technical aid (assistance), and of maintaining control over its proper application," Minatom and Rossudostroyeniye did not sustain control over the proper use of funds granted in non-repayable aid funding at the stage of project implementation. For instance, FSUE Machine Works Zvyozdochka spent part of international financial aid valued at approximately 75 million roubles allocated for the construction of an onshore defuelling facility on tasks unrelated to the construction of the given site.

—the onshore defuelling facility built at FSUE Far Eastern Plant Zvezda in Bolshoi Kamen with funds provided by the US Department of Defence can not be operated at its full capacity due to the lack of a 29-kilometre railway section between Bolshoi Kamen and Smolyaninovo used to transport spent nuclear fuel from the site;

—the floating radioactive waste treatment facility Landysh, also built with the help of international funding, operates only at 30 percent of its capacity. Due to its economic inefficiency, 22 million roubles are slated to be allocated from the federal budget for its maintenance in 2003.

Conclusions:

1. In the period from 1986 to 2003, the Russian Navy withdrew from military service 194 nuclear submarines, of which 81 submarines, or 42 percent, were dismantled through the temporary scheme, with their reactor compartments cut out. Another 100 submarines are awaiting decommissioning, 13 submarines have been under decommissioning in 2003.

2. In 2002, the process of building necessary industrial capacities and infrastructure to provide the dismantlement of 18 to 20 submarines per year was, for the most part, completed at shipyards run by the Ministry of Defence and facilities operating under Rossudostroyeniye.

3. The task of replacing the temporary scheme of decommissioning and storage of submarine reactor blocs with a long-term storage approach has not been implemented.

4. Regulatory and legal acts lack a firm and clear definition of comprehensive submarine decommissioning and tasks to be solved in the scope of submarine decommissioning, which leads to inefficient and improper use of budget funds.

5. Improper use of budget funds totalled 118.7 million roubles, inefficient use of budget funds equalled 117.9 million roubles.

6. The "elaborated system of views and approaches," introduced by Minatom into the Concept of Comprehensive Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships, and above all, the principle of the "closed" cycle of treatment of SNF from submarines under decommissioning with their reprocessing at FSUE Production Plant Mayak, predetermined the existing transportational and technological scheme of submarine decommissioning, with around 30 percent of budget funds allocated for comprehensive submarine decommissioning being diverted to the purposes of SNF reprocessing.

7. During transfers of submarines from the Russian Navy to facilities executing submarine decommissioning works, the levels of underequipment of the submarines reach up to 15 percent of their designed weight in non-ferrous and ferrous metals, and up to 50 percent in precious metals. Representatives of Minatom do not take part in the procedures of acceptance of submarines from the Russian Navy, while representatives of local branches of the Ministry of Property Relations authorise the acts of transfer and acceptance—which are drawn up with violations of established order—of underequipped submarines with no objections. Minatom keeps no account of decommissioning products. The mechanisms of accounting for, and sale of, submarine decommissioning products at executor facilities are not transparent.

8. State contracts signed between Minatom and executor facilities do not specify deadlines for sale of decommissioning products or deadlines for the entering of salvage value into the federal budget, nor do they stipulate any conditions for drawing up acts on the completion of decommissioning works with the precise account of the quantity of products generated during the dismantlement.

9. In violation of the federal law "On the federal budget for the year 2002," and of Item 9 of Decree No 125-10 "On the state defence order for the year 2002," issued by the Government of the Russian Federation on February 21st 2002, funds received by executor facilities through sale of decommissioning products did not enter the federal budget in 2002. The order of calculation of salvage value subject to transfer to the federal budget was not in 2002 stipulated by any regulatory documents by the Government of the Russian Federation.

As of January 1st 2003, facilities executing works in submarine decommissioning owed the federal budget 102.8 million roubles.

10. No consideration is made with regard to the economically sound possibility of entering into the federal budget of all revenues received from sale of decommissioning products in the case where submarines are dismantled with the help of funds provided by international financial aid.

11. Minatom as the state decommissioning contractee and coordinator does not fully perform its functions of control and coordination with regard to the application of budget funds as part of the funds allocated to works in the scope of comprehensive submarine decommissioning is provided through the Russian Ministry of Defence.

Suggestions:

1. To present the Government of the Russian Federation with a report containing the following demands:

—to examine the issue of the state Concept of Comprehensive Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships, to determine the principles of, and approaches to, solving tasks of comprehensive submarine decommissioning that would allow for the achievement of priority goals and efficient spending of budget funds;

—to ensure, with the state concept of comprehensive submarine decommissioning taken into account, the establishment of the Federal target programme "Industrial Decommissioning of Arms and Military Equipment" with the subprogramme "Industrial Decommissioning of Nuclear Submarines and Nuclear-Powered Surface Ships," and to give proper weight while finalising the subprogramme to the experience accumulated in decommissioning and storage of nuclear submarines and reactor compartments, as well as to advanced scientific, technical and technological developments in the field;

—to introduce amendments into the regulatory and legal acts currently in force, above all, into GOST RV 50811-95 "Decommissioning of ships and vessels of the Russian Navy. Main principles," wherein it elaborates on the definition, status and functions of the state contractee, on the definition of comprehensive submarine decommissioning and tasks to be solved in the scope of comprehensive submarine decommissioning;

—to examine the issue of implementation of Decree No 518 of May 28th 1998 of the Government of the Russian Federation "On the measures of expediting the process of decommissioning of nuclear submarines and nuclear-powered surface ships retired by the Russian Navy and of environmental remediation of radioactively hazardous sites of the Russian Navy," with special regard to the transfer of revenues received from sale of decommissioning products to providing additional funding for submarine decommissioning, to the fulfilment of the functions of head executor by the State Russian Centre of Nuclear-Powered Shipbuilding, to the role performed by the financial and industrial group Vtormetinvest, and to the clarification of the list of executor facilities;

—to establish the order of entering of revenues received from sale of decommissioning products and provide for the entering of these revenues in full into the federal budget in the cases where submarines are decommissioned with funds allocated through international financial aid;

—to undertake urgent measures in order to rule out cases of unfounded loss of scrap and waste of non-ferrous, ferrous and precious metals from submarines withdrawn from service by the Russian Navy and subject to decommissioning; to conduct an evaluation of revenues received from sale of submarine decommissioning products, to ensure the application of these revenues as an additional source of funding for comprehensive submarine decommissioning;

—to ensure control over the proper use of international financial aid by facilities executing works in submarine decommissioning;

—to ensure the return to the federal budget of funds used in contradiction to the purposes for which they were allocated, totalling 118.7 million roubles;

—in accordance with Article 4 of the federal law "On the non-repayable aid (assistance) granted to the Russian Federation and on the introduction of amendments and additions into certain legislative acts of the Russian Federation on taxes and on the establishment of benefits with respect to payments into the state off-budget funds in connection with the implementation of non-repayable aid (assistance) granted to the Russian Federation," to undertake measures to exact into the federal budget taxes and penalties charged from the amount of funds in international aid used by FSUE Machine Works Zvyozdochka in contradiction to the purposes for which they were allocated.

2. To present the Ministry of Atomic Energy of the Russian Federation with a report containing the following demands:

—to undertake urgent measures in order to rule out cases of unfounded loss of metals from submarines subject to decommissioning, which are federal property, to introduce order into the process of accounting for decommissioning products; to conduct an evaluation of revenues received from sale of submarine decommissioning products, to ensure the application of these revenues as an additional source of funding for comprehensive submarine decommissioning;

—to ensure control over the proper use of international (non-repayable) aid by facilities executing works in submarine decommissioning.

3. To present the Ministry of Finances of the Russian Federation with a report containing a demand to ensure the return to the federal budget of funds used in contradiction to the purposes for which they were allocated.
4. To present a report to the Ministry of Property Relations of the Russian Federation.
5. To present information letters to the President of the Russian Federation, to the Federation Council of the Federal Assembly of the Russian Federation, to the State Duma of the Federal Assembly of the Russian Federation, to the Security Council of the Russian Federation, to the plenipotentiary representatives of the President of the Russian Federation in the Northwestern and Far Eastern Districts, to the Russian Shipbuilding Agency.

Auditor of the Audit Chamber
of the Russian Federation

N. I. Loktionov

October 31, 2003