Alcatel’s Soviet Joint Venture: A Sale The West Cannot Afford To Make

Alcatel N.V., a French computer and telecommunications giant, intends to provide the Soviet Union with a 20-30 year leap forward in its telephone switching capabilities. The technology involved cost over $1 billion to develop and is extremely sophisticated; were the Soviets to obtain the associated manufacturing techniques — as envisioned in the Alcatel deal — the USSR’s military capabilities could be radically improved. For these reasons, the current rules governing technology transfers by Western nations to the Soviet Union prohibit such a transaction.

Unfortunately, the proposed Alcatel deal is but one example of the growing pressure to eviscerate sensible existing controls on technologies with dual (i.e., military and civilian) applications transferred to the Soviet bloc. Such pressure is the more ironic coming, as it does, on the heels of three major technology diversions which seriously damaged Western security interests — Toshiba’s illegal transfer to the USSR of manufacturing technology for producing substantially quieter submarine propellers; Imhausen’s sale of chemical weapons production equipment to Libya; and the continuing revelations unfolding over the sale by another French firm, Machines Francaises Lourdes, to the Soviet Union of advanced machine tools suitable for mass production of sophisticated military aircraft. All argue for greater — not less rigorous — controls on technology transfers.

As an upcoming issue, the Alcatel venture raises especially troubling questions:

• Is such a wholesale upgrading of the technology base available to the Soviet Union in the West’s security and commercial interests?

 

• Is this proposed venture representative of the approach our allies will take in the event the present controls on technology transfer to the Eastern bloc are relaxed?

 

• Did Lawrence S. Eagleburger, until recently a member of the supervisory board of Alcatel, encourage this venture? Does he believe that such transactions are without consequence for Western security? Will he, as Deputy Secretary of State, recuse himself from future decision-making on this and similar East-West technology transfer cases as well as export control policy issues?

Recent Disasters Argue for Strong Export Controls

Time and again, the West has been shown the real dangers associated with undisciplined technology transfers to the Soviets and their clients. Three specific examples warrant mention:

Toshiba illegally exported to the Soviet Union sophisticated machine tools needed to manufacture advanced submarine propellers. This sale enabled the USSR to reduce dramatically the noise signatures associated with its undersea forces, making vastly more difficult the anti-submarine warfare missions of allied navies. The cost to the West of restoring the status quo ante is estimated to be in the tens of billions of dollars.

Prior to the exposure of this case, Japan’s Ministry of Trade and Industry routinely accepted at face value the documentation provided to them from industry. As a consequence, Japanese export licenses were regularly approved with little, if any, scrutiny. Adequate investigatory capabilities and enforcement measures were also sorely lacking. Despite the implementation of a host of measures to improve this situation, Japan is still without serious anti-espionage laws.

In West Germany, Imhausen transferred equipment associated with the manufacture of chemical weapons to Libya. While the security implications of this sale can only be surmised at this point, providing a state long associated with international terrorism and external aggression with such capabilities will surely prove inimical to Western interests. West Germany is getting good notices from the Administration for its belated willingness to tighten some export controls; it appears, however, that this will affect only trade in chemical and biological weapons-related materials — not the larger category of militarily critical goods and technologies. Others, including some members of Congress, are appropriately skeptical; they believe the accelerating pursuit of exports by West German industry to the Soviet bloc suggests that the FRG’s export control regime continues to lack credibility.

In a still-unfolding investigation, Machines Francaises Lourdes (MLF) of France (formerly Forest-Line) evidently transferred highly sophisticated machine tools to the USSR. These devices are compatible with extremely sophisticated manufacturing techniques for production of modern aircraft — particularly military aircraft.

Four of MLF’s principals have already been apprehended in connection with this probe; the four were identified as Soviet agents by the company’s former Moscow representative, Jean Paul Karcz. More alarming still is the fact that a fifth man, Michel Leger, has now been charged with espionage by French authorities. As an employee of France’s Federation of Electric and Electronic Industries, Leger was a key consultant with the Ministry of Foreign Affairs.

What is more, Leger participated directly as a French representative in meetings of COCOM(1). He reportedly was also involved in the official governmental reviews of items on the list of controlled goods and technologies. The potential repercussions are staggering should this espionage case confirm the compromise of sensitive COCOM procedures, deliberations and plans.

These episodes underscore the enormous security risks and costs to taxpayers involved in inadequate international and domestic controls on the transfer of militarily relevant technologies. They suggest that, if anything, the COCOM regime should be strengthened and complemented by redoubled efforts on the part of member countries to prevent dangerous technology transfers. Unfortunately, as the proposed Alcatel venture suggests, significant pressure is mounting to weaken rather than enhance such controls.

The Alcatel Deal

Europe’s largest telecommunications equipment manufacturer, Alcatel N.V., has recently announced plans to form a joint venture with a Soviet enterprise, Krashna Zarayato, to provide the Soviet Union with unprecedented digital switching capabilities. The deal envisions the direct sale of some of Alcatel’s most sophisticated computerized equipment used to route telephone calls — its top-of-the-line "System 12" digital exchanges. This technology cost one of Alcatel’s parent companies, ITT, more than $1 billion to develop.

Under the proposed transaction, the Soviet Union will procure outright sufficient System 12 machinery to handle the switching requirements of 250,000 telephone lines. Still more ominous is Alcatel’s intention to construct an assembly facility for System 12 equipment near Leningrad. It is estimated that this facility will be capable of producing switching systems capable of handling between 1-1.5 million telephone lines annually. This compares with Alcatel’s 1987 worldwide sales of System 12 capacity of 2.7 million lines.

In 1984, on the grounds that the USSR would shortly develop an indigenous capability to manufacture computerized telephone exchanges, the United States reluctantly agreed in COCOM to decontrol on September 15, 1988, the outright sale of certain computerized telephone exchanges to the Soviet bloc. Under this arrangement, however, the transfer of related manufacturing technology that would in any way facilitate the emergence of a domestic Soviet production capability for such switching equipment remains explicitly embargoed. Accordingly, assembly in the USSR of Western computerized telephone exchanges is currently proscribed by COCOM.

The reasons for COCOM’s unease about Soviet acquisition of this technology are not hard to appreciate. Even an improved civil telecommunications system has obvious dual-use potential. What is more, telephone switches have numerous applications in dedicated military command, control and communications equipment. The acquisition of related manufacturing processes can, moreover, be of enormous value to Soviet production of such hardware as missile subassemblies, fire-control systems, radar systems, and computers. This would be particularly true of the Soviets’ access under the Alcatel deal to component insertion equipment, instrumentation and testing devices and techniques. Moreover, if the Alcatel joint venture were approved, the precedent set in authorizing the transfer of key manufacturing processes to the Soviet bloc would unleash a flood of similar transfer requests.

Interestingly, it became clear in 1988 that the Soviets had failed to develop the anticipated indigenous capability to manufacture advanced telephone switching equipment. In light of the foregoing concerns, an effort was made to reverse the earlier COCOM decision to decontrol sales of such equipment. Regrettably, some member nations objected and the 15 September 1988 decontrol date was observed. Since the prohibition on sales of some switching equipment was lifted six months ago, however, only a handful of small deals have occurred, involving the export of computerized exchanges to Eastern Europe. All of these sales are dwarfed by the transactions envisioned by Alcatel.

Will Anyone Stand Up to Alcatel?

Alcatel N.V. is now the world’s second largest manufacturer of telecommunication equipment. It was created in early 1987 when ITT Corporation and France’s Compagnie General d’Electricite (CGE) merged their European telecommunications entities. Today, ITT holds a 37 percent stake in Alcatel, while CGE’s controlling interest is 61.5 percent. The firm is comprised of more than 250 companies in 80 nations; 90 percent of its 150,000 employees work in Europe, however, with roughly half of the total concentrated in France and West Germany.

Alcatel’s nine-member supervisory board includes such political heavyweights as former Secretary of State Alexander Haig, former Common Market Commissioner Etienne Davignon, France’s former Post and Telecommunications Director Jacques Dondoux, and former West German Economics Minister Otto von Lamsdorff. Until his recent Senate confirmation, Deputy Secretary of State Lawrence S. Eagleburger also served on the Alcatel board.(2) (It is noteworthy that, following the ITT-CGE merger, responsibility for Alcatel’s export marketing of the System 12 switching equipment was given to Helmut Lohr, chairman of the company’s German affiliate, Standard Elektrik Lorenz. In January of this year — two days after he was named Alcatel’s senior vice president for development — Lohr was arrested on charges of embezzlement and tax evasion.)

Naturally, Alcatel has enormous political influence in many COCOM member nations. What is more, the potential value of the Alcatel transaction (estimated to be worth $1 billion over ten years) will ensure that powerful constituencies are mobilized to overcome (or circumvent) present COCOM prohibitions governing this sort of technology transfer. Specifically, proponents of the Alcatel joint venture will assail one of the most important COCOM agreements limiting such transfers, the so-called "no exceptions" policy adopted in 1980.

In fact, many U.S. allies have been restive under this policy since it was adopted in the early 1980s, at a time when the United States government began to strengthen technology security measures both at home and abroad. The policy provided that no exceptions would be made among the COCOM member countries to export to the Soviet Union technologies above a certain strategic level.

Some have mistakenly tied the adoption of the policy to the Soviet invasion of Afghanistan and have consequently pushed for a departure from the "no exceptions" policy in light of Soviet troop withdrawals from that country. While Soviet actions undoubtedly provided a political catalyst for COCOM’s action, it was — and remains — fully justified on the basis of prudent technology security policy.

Previous practices of "case-by-case" reviews of technology transfers have repeatedly proven to be utterly inadequate constraints on the hemorrhage of Western technology to the Soviet bloc.but the first, if one of the most brazen, of many coming assaults on COCOM’s present, sensible "no exceptions" policy. The Alcatel proposal, consequently, is probably

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The substantial military significance of the Alcatel deal –like the appalling transactions that preceded it — argues strongly for a more robust COCOM regime, not a weaker one. In the face of the erosion taking place in allied commitment to technology security in general and, in particular, in the face of the mounting assault on the "no exceptions" policy, the United States should immediately undertake the following steps:

• President Bush, like Ronald Reagan before him, should call for a ministerial meeting involving all COCOM nations to review the current state and future direction of Western technology security policy. Such meetings should become an annual event.

 

• This meeting should be attended, however, not only by trade and economics ministers but also by those ministers responsible for national security (i.e., defense ministers). This step would symbolize the vital need to integrate security specialists into every level of decision-making about technology transfers to the Soviet bloc.

Incredible as it may seem, such integration occurs regularly today only in the United States and the United Kingdom, and occasionally in France.

 

• In preparation for such a meeting, the Bush Administration’s strategic reassessment should squarely address the role played by COCOM and the steps needed to make it more effective.

Part of this assessment must address the legislative, administrative and regulatory measures that are required at home and in other COCOM nations to reinforce existing procedures governing strategic trade.

It is also essential that the Administration quantify more precisely the multibillion dollar annual costs to both U.S. and Western taxpayers associated with lapses in COCOM discipline, circumvention of COCOM rules, and inadequate funding for export control mechanisms.

 

• In the latter regard, Congress must become engaged.

To the extent that Congress has been outspoken in its criticism of the actions of Toshiba, Imhausen and others whose technology transfers have added new security burdens to those already borne by Western taxpayers, the legislative branch should prove a forceful ally in bringing about such corrective actions.

 

• In the meantime, there should be no further deterioration permitted in the existing COCOM regime. In particular, there should be no modification of the "no exceptions" policy until this comprehensive review and ministerial-level, multilateral consultations have occurred.

 

• Finally, the Alcatel case should be viewed as a key litmus test of the commitment that the Bush Administration — particularly Secretaries Baker, Mosbacher, and Cheney — will accord Western technology security and other aspects of the economic and financial security portfolio.

1. "COCOM" stands for the Coordinating Committee on Multilateral Export Controls. This organization serves on a voluntary basis to harmonize Western countries’ technology transfer policies. Member nations are: Belgium, Canada, Denmark, France, the Federal Republic of Germany, Greece, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Turkey, the United Kingdom and the United States.

2. In his Senate confirmation hearings held March 14-16, Eagleburger acknowledged receiving $30,000 in director’s fees from Alcatel in 1988. Although he denied any role by Kissinger Associates in promoting the sale, the client relationship Eagleburger maintained with Bell Manufacturing Company of Belgium (an Alcatel subsidiary) through Kent Associates was not explored in questioning. Eagleburger stated that as a future policy-maker, he would not approve the transfer of high-speed communications equipment to the Soviet Union.

*See Center director Frank Gaffney’s remarks on U.S.-Soviet Joint Ventures before the Technology Transfer Caucus of the House Republican Study Committee, 28 February, 1989.