Swords into Market Shares: Technology, Economics, and Security in the New Russia (2000)

The SU-27 fighter aircraft, based on five generations of advanced technologies, has become a global best seller.

Air Fleet magazine, Moscow, 1999

Titanium is not like other metals—the added value on rolled products is huge. If you can get $10,000 a ton for a titanium ingot from Russia, you'll get $15,000 a ton for rolled products.

Russia Review, 1998

As a Chinese delegation negotiated with officials of the Sukhoi aircraft company over purchase of Sukhoi SU-30 fighter bombers at the 1998 air show in Zhuhai, China, Americans attending the show worried about possible consequences in Taiwan. Americans and Chinese alike recognized that China's military technology effort was in such an underdeveloped state that there was no chance the country would soon threaten U.S. military power in Asia. But Taiwanese sensitivities are razor sharp when it comes to Chinese military capabilities. Such sales also reverberate in Japan, Korea, and India, with government leaders challenged by their opponents to respond politically and militarily.¹

China provides the second most lucrative market after India for exports of Russian armaments. For decades the Soviet Union and now Russia have been apprehensive that the expanding Chinese population might spill over China's northern border in a quest for additional territory. Moscow's strategic doctrine has always included military re-

sponses to repel such a northern surge. But today, immediate opportunities for sales of Russian products take precedence over more distant threats to the sanctity of the border. Among the top sellers to China are:

• Sukhoi SU-27 fighters: long-range and capable of carrying 10 air-to-air missiles.

• S-300 air defense missiles: launched from the ground and capable of shooting down both aircraft and missile warheads.

• KILO-Class submarines: diesel powered with sophisticated search and attack sonars.

• T-72/T-80/T-90 battle tanks: reliable, maneuverable, and heavily armored.²

• Sunburn anti-ship missiles: speed of twice the velocity of sound skimming along the ocean's surface.³

Russia is not, however, transferring its most advanced military technologies to China. What's more, in 1997 Russian trade with Beijing was only 7 percent of U.S.-China trade, and just one-fourth of Russia's total trade with China, or $1 billion per year, involved sales of military hardware. Nevertheless, for Russia—and particularly for its defense enterprises—this modest income is important. For the West, such sales raise anxieties over Russian-Chinese military alliances.⁴

The transactions meet a short-term economic need in Russia. But related transfers to China of manufacturing technologies to produce modern weapons threaten the long-term viability of Russia's arms exports. In particular, under a licensing agreement concluded in 1995, China is scheduled to begin production of SU-27 jet fighters by the year 2000. Russian analysts have called this arrangement “an act of outrageous stupidity,” since the deal will reduce China's purchases of aircraft from Russia. Also, China may be able to avoid licensing restrictions by introducing its own technological modifications and then competing with Russia for future sales on the Asian market.⁵

Given the size of the Russian military complex and the enormous investment in science and technology that it represents, Russia will undoubtedly continue to press for arms sales throughout the world.

While the importance of these sales to provide immediate economic relief and also help sustain a modern industrial base in Russia is clear, western governments focus on security implications and seek to constrain Russia's exports. Western exports of armaments far exceed Russia's sales, but the U.S. and European governments do not acknowledge unfairness in their opposition to any Russian sales. For its part, Russia does not agree that its arms transfers cause security unrest in distant parts of the world.

Closely related to Russia's arms transfers are international sales of military-related technologies that can be adapted to serve civilian purposes—nuclear power plants, rockets for launching satellites, jet engines, electronic control systems, ship propulsion systems, and laser targeting devices, for example. This is the dual-use issue. Analogous to exports of weapons, Russia has a responsibility to show constraint in selecting its customers while western governments need to recognize Russia's right to compete in the growing civilian markets for dual-use technologies.

In both the military technology and dual-use technology areas, Russia has joined with the leading western nations in adhering to a number of international agreements that set forth ground rules for international trade in dangerous items. But these ground rules give individual governments considerable discretion in selling specific items that are on international watch lists of sensitive technologies. This discretionary uncertainty often leads to diplomatic disputes over the appropriateness of Russian transfers of military technologies.

Another aspect of Russia's effort to capitalize on Soviet defense investments is its widely publicized industrial conversion programs. Most of these programs were established in 1991 and 1992 to help redirect military production lines to civilian activities. Few successes stand out among the many frustrating failures, and the concept of conversion as an easily achievable key to economic revival is fading fast. Converting a factory, together with its existing workforce, from production of hardware that meets military specifications regardless of cost to a plant producing equipment that is cost-competitive as well as quality-competitive is not an easy task. Still, the Russian mindset to

preserve all assets of perceived value seldom permits abandonment of any facility, however inappropriate in the new business environment.

Russia ranks third in the world in arms exports after the United States and England. Russia, like its competitors, justifies these exports as meeting both strategic and economic needs. But the government is reluctant to release detailed data on sales of military equipment. Perhaps they want to avoid international criticism of specific items. Also, it is difficult for any single office to obtain reliable and detailed information for incorporation in reports on just what the various ministries, trade organizations, and enterprises are doing.

In rationalizing Russia's dramatic loss of customers for its armaments, Russian politicians point out that worldwide annual arms sales by all countries slipped from $46 billion in 1992 to $21 billion in 1998. As indicated in Figure 3.1, the decline of Soviet/Russian exports was very sudden as the Warsaw Pact collapsed and Soviet armament lost popularity in Eastern Europe. Beginning in 1992, sales became relatively stable at 10 percent of the level of sales during the late 1980s. While acknowledging that Russian revenues for arms exports slipped even further to $2.3 billion in 1998, ever optimistic politicians predict increased annual sales up to $7 billion in a few years. They foresee a revival of demand from important customers in countries that were ravaged by the 1998 Asian financial crisis.⁶

During the late 1990s, Russia sold military hardware to more than 50 countries, with the principal big ticket items being jet aircraft, combat infantry vehicles, multiple rocket launch systems, helicopters, and air defense systems. The relatively new market of China and the long-standing Indian market absorbed two-thirds of the exports. In the Middle East, Syria is the most reliable customer, although Russian equipment can be seen in a number of other military inventories of the region as well. Russia has achieved some success in selling equipment in Latin America and other Asian countries. Also, Greek Cypriots are a potential customer, infuriating Turkey, which has reconsidered plans to purchase helicopters from Russia.⁷

FIGURE 3.1 Exports of Soviet/Russian military equipment (in billions of dollars). SOURCE: Igor Khripunov, “Russia's Weapons Trade,” Problems of Post-Communism. Vol 46, No. 2. Mar/Apr 1999, pp. 39-48. Data for 1998 from “Stable Arms Sales Seen,” Moscow Times, April 1, 1999, p. 11.

At the 1999 arms bazaar in Abu Dabai in the Persian Gulf region, potential buyers from nearby states, Africa, and Southeast Asia were prepared to spend tens of billions of dollars in modernizing their armaments. The extent to which they will empty their pocketbooks is not clear as negotiations initiated at Abu Dabai continue around the world. At the bazaar, Russian manufacturers displayed a well-laden tray of offerings of possible interest to both rich and poor states, as indicated in Box 3.1.⁸

A small but important aspect of the Russian arms trade is the emergence of weapons-for-cocaine deals in Latin America that have been arranged through organized crime groups. The extent to which Russian small arms and even hand-held rocket launchers are finding their

way into this trade remains clouded in secrecy. But from time to time, traders are caught. Recent trials in Miami document that such trade is a work in progress. This trade has serious repercussions in Washington on U.S. relations with Russia, where linkages between government officials and organized crime are a constant worry.⁹

For many years, the Soviet and then Russian military trading firm, Rosvooruzhenye, was the sole organization authorized to export military equipment. By 1999, however, the primary authority for foreign sales had been divided among three organizations: Rosvooruzhenye continues to sell modern weapons systems, Promexport handles older equipment and spare parts, and Russian Technologies handles exports of technologies, particularly dual-use technologies, while recruiting experts needed to demonstrate equipment. A deputy prime minister oversees all military-related exports.¹⁰

In combination, these steps were intended to dilute the monopolistic powers of Rosvooruzhenye. The firm never divulges the details of how it uses its annual profits, estimated at $50 million. Also, it was cordoned off from penetration by the tax authorities and other government agencies as it became a government within a government. ¹¹

Of even more importance, by 1999 the government had given 16 manufacturers quasi-independent status to make their own export deals, further cutting into the previous power of Rosvooruzheniye. While these manufacturers are required to comply with government regulations concerning exports of armaments and dual-use technologies, the devolution of export authority has led to sales that have triggered international controversy over appropriate recipients of sophisticated weapons. Enterprise directors, desperate for income, arrange their own export deals, assuring customers that they comply with all government regulations, regulations which they may not understand or may choose to ignore. The details of one famous case attributed to overzealous directors were uncovered in 1998.

During the mid-1990s, as the process of devolution of export authority to enterprises was under way, Iraq went shopping for missile components and technologies in Russia. Iraq's initial interest was to upgrade the performance of their notoriously inaccurate Scud missiles with ranges of 150 to 500 miles and then to develop the technological

base for a new longer-range missile with a flight path of 4,000 miles. In 1998, aggressive Russian journalists reported that Iraqi buyers enticed officials at the Research and Testing Institute of Chemical and Construction Equipment, at a missile dismantlement facility, and at yet another defense facility to sell them guidance instruments. On the list were gyroscopes, potentiometers, and tachometers that could be modified for use on the Scuds the Iraqis already possessed. A limited number of these items were shipped to Baghdad.12

A second deal was far more ambitious, involving at least eight Russian design and manufacturing organizations. The extent to which the Russian government was a party to this deal is clouded. The firms undoubtedly pushed any uncertainties as to their authority to the limit—and perhaps beyond. Negotiations were conducted at production facilities, in offices, and in apartments, underscoring the secretive nature of the dealings. According to press accounts, Russian institutions would supply missile engines, designs, training, and technology. Also, they would provide manufacturing and testing equipment for engines, airframes, and guidance systems.

One particularly significant deal was for the Mars Rotor company, a Russian machine building complex, to provide equipment for manufacturing guidance systems along with Russian experts to certify the operation of the equipment and to supervise training. The space technology giant, Energomash, was to provide a complete rocket engine of four-ton thrust, as well as design calculations, final design, and five complete samples of a propulsion system for a “communication satellite.” The size of the satellite was said to match the payload specifications for an intermediate range Scud-type missile.13

The third, and most ambitious, deal provided for Iraqi purchases of gyroscopes and accelerometers from submarine-based missiles being dismantled in accordance with international arms control agreements. The first batch of gyroscopes and accelerometers was sent to Baghdad via Jordan. Shortly thereafter, Saddam Hussein's son-in-law defected to Jordan and revealed the plot. The Iraqis immediately dumped the loot into the Tigris River, where it was subsequently discovered by United Nations inspectors. A second batch of similar items

was then intercepted in Jordan en route to Iraq, and the entire nefarious network was exposed.¹⁴

These particular shipments probably had little impact on Iraqi capabilities. But they may have paved the way for more meaningful deals that have not yet come to light.

On the domestic front, the Russian armed forces have had few funds in recent years to modernize their weapons inventories. They have a difficult time making the case that they need new weapons in Chechnya and elsewhere when their warehouses and marshalling yards are full of excess rockets, tanks, guns, and support equipment of all varieties. Still, an ambitious plan of the Ministry of Defense picked up support in the Duma in 1999, calling for production of a new class of long-range land-based missiles, the Topol-M missiles. Russian military leaders justify such expenditures, even during the dreariest of economic times, as follows:

• The most advanced rocketry is essential if Russia is to retain its seat at the table of powerful nations.

• Arms control agreements in various stages of development limit the number of warheads on a missile, thus requiring destruction of existing multi-warhead missiles. A newly designed single-warhead missile must be introduced into the Russian strategic arsenal.

• There will eventually be an important international market for weapons with the capability of the Topol-M missile.

A misfiring during one of the tests of the Topol-M raised questions over reliability, but the Ministry of Defense seems determined to meet a deployment target of between 10 and 20 well-functioning missiles per year beginning in 2002. Of course, they would like to have double that level but will probably be satisfied with the reduced number. The manufacturing plants will gladly accept whatever orders—large or small—they are able to attract.¹⁵

From the end of World War II until the disintegration of the USSR, the development and production of weapons were the core of the nation 's technological effort. While this effort has stagnated in recent years, the accomplishments of past decades remain the primary reason

the world still considers Russia an advanced industrial nation. As Russia seeks to derive profit from its inheritance of all types of military technologies, other countries envisage scenarios that lead to explosive conflicts in some of the most sensitive regions of the world. The effort of Russia to gain lucrative shares of international technology markets without endangering the security of other countries is one of the most daunting challenges facing not only Russia but the entire world.

Around the globe, dual-use technologies have become indispensable for modern economies—from computers, to new metal alloys and plastics, to electronic control systems. Broad dissemination of these and hundreds of other technologies that could be misused for military purposes, even though they may be intended for peaceful uses, is not only inevitable but is often desirable. From the perspective of advisers to the U.S. Congress,

The dissemination of technologies that have at least some relevance to producing weapons of mass destruction needs to be encouraged if populations in developing nations are to improve their health, environment, and standard of living. ¹⁶

This report means that chemical, biological, nuclear, and aerospace technologies with civilian applications should find their way into many areas of the world. Therefore, even countries that the U.S. government considers highly unreliable and potential threats to international security are legitimate claimants to dangerous technologies that will help in their respective development efforts. Of particular interest in developing countries are biotechnologies that support agriculture and public health programs, chemicals that control pests in the cities and the countryside, and aircraft systems that bring remote areas closer to the mainstream of a nation's development.

As a principal repository of dual-use technologies, Russia searches for markets for its high-tech products, raising never-ending international concerns. In some cases, Russia competes with western countries in capturing customers. Moscow often views efforts by the West to constrain its international deals simply as attempts to reduce inter-

national competition. It only grudgingly accepts the notion that there are legitimate security concerns over dissemination of dual-use technologies that might contribute to a spread of weapons of mass destruction. Of course, Russia has its greatest competitive advantage for marketing its products in precisely those countries that the United States considers the least reliable nations—Cuba, North Korea, and Syria, for example.

A major focal point of contention is Iran. For years Iran has been searching for ways to upgrade its nuclear capabilities. Western analysts are convinced that one of their motivations is development of nuclear weapons. Thus, when Russia announces its intention to expand its cooperation in peaceful nuclear activities with Iran, intelligence officials in Washington raise objections.

Beginning in 1995, the U.S. government tried repeatedly to prevent Russia from selling components for a nuclear power plant to Iran. Despite Russian pronouncements that only civilian nuclear power would be supported and that the specific items and expertise being provided had little relevance to the production of highly enriched uranium or plutonium that could be used in nuclear weapons, the United States has been dead set against this transaction. Iranian assurances that the reactor will be open for inspection by the International Atomic Energy Agency and Russian reminders that, in the 1970s, the United States had been involved in supporting the evolution of a nuclear power capability in Iran have little impact. The U.S. government simply has not wavered in its opposition.¹⁷

The essence of the U.S. argument is as follows. Even if the Russian Ministry of Atomic Energy supports only a civilian program in Iran, that program can mask a hidden weapons program in the background. Also, training of an Iranian cadre of nuclear engineers who help install and operate the power plant is not a good idea since these same engineers can adapt their skills to support a weapons program. Adding to U.S. suspicions about the deal, the written agreement between Russia and Iran calls for Russian assistance in developing a uranium mining capability and in installing a centrifuge with capability of enriching natural uranium to the point that the uranium could be used in a nuclear explosive device. This specter of a growing Iranian capability

that extends well beyond nuclear power helps buttress the American case.¹⁸

As of 1999, the Russians had succumbed to western pressure and had agreed to cancel the sale of the centrifuge. They were, however, moving ahead full steam in supporting the civilian nuclear reactor complex. Then, when Iranian scientists and engineers began visiting Russian facilities as part of the reactor arrangement, suspicious American officials hypothesized that side conversations were undoubtedly being directed to military applications of Russia's nuclear capabilities. ¹⁹

Even when Russian nuclear scientists from civilian institutions show up in countries such as Brazil or Mexico to attend conferences or to participate in academic exchange programs, some American officials suspect nefarious purposes.²⁰ It is surely true that there are overlaps between civilian and military nuclear technologies. It is also true that not everything nuclear poses a military threat.

Even more challenging overlaps of military and civilian technologies exist in programs for use of outer space. Some components of missile systems also have direct civilian applications. Russian enterprises are attempting to expand space-based navigation, communication, and remote sensing systems that may be intended for civilian uses but can be adapted for military purposes. As Iraq and other countries seek to upgrade their military capabilities with advanced rocketry and improved guidance capabilities, western governments increase diplomatic pressure on Russia to curtail proliferation of aerospace as well as nuclear technologies to countries that pose a threat to neighbors.

As one example, such pressure to check Russia's cooperation with North Korea in the development of space technology capabilities played out in 1994. Russian rocket designers who had been cooperating with North Korean counterparts, allegedly to develop satellite communication systems, appeared in my office in Moscow in search of funds for civilian projects at their home institute in the Urals. At that particular time, the Russian Foreign Ministry was responding to western approaches to stay away from Korean military-related developments and had cancelled the scheduled trip to Korea by those specialists even as they waited to board their airplane to Pyongyang. This group thereupon decided to shift interests in international coopera-

tion to a western civilian program which would also provide guaranteed paychecks. They succeeded in attracting the interest of a U.S. aerospace firm and began work on improving navigation systems for commercial airplanes.

The Korean technology that was eventually employed in rocket flight tests in 1998 was undoubtedly a spinoff from many years of close technical cooperation with Russia. The Russian scientists who were re-routed in 1994 could have been helpful, and the western pressures to keep them home worked. At the same time, they were not critical to continued progress, as the North Korean program demonstrated. ²¹

The seriousness of protection of critical information leaking from Russia's aerospace complex to rogue states should not be underestimated. The complex has huge underemployment problems, involving many tens of thousands of highly trained scientists and engineers. They remain on the payrolls of enterprises, although they receive little pay and have almost nothing to do. A few Russian enterprises are participating in international space activities, including construction of the International Space Station and building rocket systems for launching satellites that link the world's telecommunications networks. But the scope of these international alliances is far short of the overall challenge of finding alternative outlets for the innovation capacity of specialists accustomed to responding to military requirements.

Dual-use issues often surround research projects in Russian laboratories. For example, nuclear bomb designers are interested in many aspects of physics research, but it is the military applications that raise near-term anxieties. What is the boundary between fundamental research that advances the frontiers of science for the benefit of all societies and applied military research that directs brainpower and resources to bomb making?

One test of the civilian legitimacy of research has been whether the results will be published in the open scientific literature. However, this test is controversial. Much research in the United States and elsewhere, with no military applications, remains cloaked in industrial secrecy since it may eventually lead to commercial products. Russian authorities in turn argue that they will not release research information which compromises their intellectual property rights even though

it is distant from military interests. In short, there is no easy definition of the boundary of defense-related research that should be carefully controlled.

Russian laboratories and enterprises will continue to attempt to capitalize on past investments in some of the most sophisticated and dangerous dual-use technologies that have been developed anywhere. They frequently are uncertain as to the eventual market for the items incorporating these technologies. They know that the military products work, they have seen related civilian items for sale by other countries, and they are convinced that commercial markets will emerge for their products. Financial support from the West can encourage the pursuit of civilian applications of such technologies. But regardless of intentions as to applications, the technologies will retain their inherent military usefulness.

Most of the 2,000 plants and 1,000 research institutes that comprised the heart of the Soviet military-industrial complex have attempted to adapt cutting edge technologies—totaling in the thousands—to the civilian marketplace at home and abroad. Laser techniques that guided missile intercepts now improve medical diagnostic capabilities, and infrared-enhanced night vision has become popular with deer hunters, for example. Older military technologies, such as powerful diesel-driven engines, while not at the forefront of technical achievements, also are relevant to needs of countries on the path to modernization. However, after a decade of effort, the success rate in finding large civilian markets for products of the former Soviet military-industrial complex has not been high.

This is not to say that some military enterprises and institutes have not found new customers. A visit to the Institute for Light Weight Alloys (VILS) in 1995 was particularly memorable. At the time, the institute was negotiating with a Japanese firm over the production of titanium golf clubs. With only one under-used golf course in Moscow, the institute's management was skeptical that such an idea made much

sense but was willing to transfer technology to golf-mad Japan if the Japanese paid the bill—which they did.

Titanium technology was shared by a number of Soviet enterprises, and the story of titanium golf clubs did not originate at VILS. Already in 1992, the Russian firm, Metal Park—a spinoff company of ten metallurgists from the Strela aviation plant just north of Moscow—was in business in an empty vocational school. First, the company rejected proposals to produce titanium bicyles as too expensive. Then, Metal Park responded to an approach by a South Korean businessman and began making golf clubs for sale in Seoul. Next, Metal Park landed contracts in the United States with Taylor Made (subsequently a unit of Adidas) and the Callaway golf company. Finally, in 1995, after investing its limited earnings in new manufacturing and testing equipment worth $250,000 that would ensure quality of the clubs, Metal Park renewed these contracts. Monthly sales approached $2 million in 1998. Metal Park has been quick to point out that there are 25 million golfers who spend $1 billion annually on golf clubs.²² Indeed, by 1999 “titanium shaft” became a phrase that signalled to golfing pros and hackers around the world that the club is lighter and stronger than older brands.

Another dimension of the titanium prowess of the former Soviet Union has been playing out in the Urals where, on the site of an old aircraft plant, the Verkhne Saldinsky Manufacturing Production Organization (VSMPO) is again producing titanium ingots, but this time for export. Previously a supplier of titanium panels for MIG 25 and Ilyushin 76 military aircraft, VSMPO lost its Russian supplier of titanium sponge when the Soviet Union disintegrated, since the supplier obtained the raw material, ilmenite concentrate, from Ukrainian sources that disappeared. In 1998, with a stable alliance with reliable suppliers who have access to international sources of sponge, the company is clawing its way back into titanium production. It has plans to emphasize production of rolled products, which command a significant markup (50 percent) over low-tech ingots. With 14,000 people on the payroll, VSMPO is betting on predictions that worldwide demand for titanium metal will continue to rapidly increase.²³

There are other success stories. But for every commercial success there are failures. As noted previously, Russian scientists and engineers often perceive success to mean development of interesting technologies —not sustained sales. For example, in Perm, a city that was largely committed to the Soviet military effort, unique technologies were developed with potential applications in glass-plastic pipes for water filtration and borehole casings, in bullet proof vests and windows, and in light and strong stretchers and crutches. But producing these items is a far cry from selling them. Few are selling, and former military plants of the city have difficulty finding income for their employees.²⁴

A brief flashback to the early 1990s, when conversion became a popular theme in Russia, helps explain current skepticism over future economic contributions of military facilities. From the beginning, considerable confusion has surrounded the term “conversion.” In 1992, the Russian government defined conversion as “the creation of high technologies for products which are competitive on foreign markets,” and made a commitment to provide financial support to achieve this goal. This commitment was initially fulfilled in a very modest way. More recently, special funds to facilitate conversion have been scarce; and simply finding new markets for old weapons is, in the view of many Russians, the fastest road to profit.

The emphasis of early Russian conversion efforts was clearly on exports. Russian officials were convinced that Russian technologies could compete internationally with little difficulty. But they were wrong.

They should have kept in mind the types of civilian production lines that punctuated Soviet military plants. Military enterprises produced 86 percent of Soviet streets cars, 60 percent of the cranes, 32 percent of oil and gas equipment, and 86 percent of the freight cars. These plants also produced almost 100 percent of Soviet TVs, radios, VCRs, tape recorders, cameras, and sewing machines.²⁵ One particularly pessimistic conversion expert went to the extreme in describing non-military goods that were produced in large quantities as “...compressors and pumps using 1930s technology, harrows and cultivators that had not changed since Russia's collectivization of agriculture, and

obsolete electric winches and cranes.”²⁶Were these really the types of high-tech exports the government had in mind?

Secondly, the enterprises and institutes had neither the marketing nor business skills to penetrate international markets in the face of stiff competition from foreign competitors more attuned to the latest worldwide technological developments. While a few Russian organizations have been able to develop international alliances with western companies to this end, most have not. Had the Russian government emphasized conversion to products that would sell on the internal Russian market, Russian dependence on all types of imported products from Germany, Japan, Poland, Turkey, China, and other countries might not have developed so quickly. Still, a few dormant technologies should be able to penetrate foreign markets with appropriate management savvy, and a larger number have potential under a more aggressive import substitution strategy.

From a different perspective, western governments considering steps to facilitate downsizing of the Russian military establishment have argued that conversion should mean abandoning military activities at a given facility in favor of civilian production lest there be re-conversion back to mothballed production lines. To these governments, producing civilian products without closing adjacent military production lines is simply diversification, a legitimate business practice but not one that should be supported by western funds lest they help sustain a military capability. Neither the Russian government nor plant managers have accepted the concept that they should totally destroy military production lines. They prefer to use as their working definition of conversion “finding new sources of income to meet payrolls and cover expenses—exporting arms, selling high-tech or low-tech products to anyone that is interested, renting space, providing services, and doing whatever is needed to raise money.”²⁷

Westerners have difficulty comprehending the practical difficulties in producing marketable industrial or consumer items in enterprises that supported the Soviet armed forces. For example, the extraordinarily large plants often have on-site facilities for component manufacturing that in the West would be subcontracted to smaller companies. These facilities and workforces need some level of finan-

cial support whether or not they are operating. Also, while defense enterprises have gradually shed responsibilities for supporting schools, transportation systems, and cultural activities, costs persist as incumbent staffs from the enterprises refuse to leave. Finally, most defense conglomerates have limited experience fending for themselves. And, with financial patrons in Moscow having disappeared, they have neither the administrative infrastructure nor the experience for developing new income streams. The following comment from an aircraft plant manager sums up the attitude of many Russian engineers:

Making fighters is what we know how to do. We can make a lot of them and make them well. Making civilian planes means scrounging around for money and dealing with foreign inspectors and certification requirements —it's a bit alien to us.²⁸

Reflecting this outlook, six leading engineers who had designed the MIG 29 and MIG 31 fighters resigned from their enterprise in 1999 in protest over having been reassigned to work on the design of a new civilian airliner.²⁹

That said, is it any wonder that more than one-half of the defense enterprises—with huge bank debts, atrophied sources of raw materials, and few customers—are barely surviving?³⁰ In more concrete terms, a microeconomics study of Soviet defense firms highlighted contrasting adjustment strategies of two electronics firms located on the Finnish border, each employing about 5,000 workers.

One enterprise director chose to engage in transactions that would produce liquid assets so top management could maintain high salaries and employees could receive at least minimal wages. No effort was made to invest in enterprise restructuring. The enterprise established shell firms to organize rental of company real estate to wealthy foreign and domestic customers and to trade in ferrous metals. As to manufacturing activities, the director concentrated on electronic games and other simple consumer items to justify credit from the government. After paying wages, the enterprise invested all proceeds in financial markets which, at the time, promised high returns. In effect, the interest of the firm's management was focused on activities outside the manufacturing facility, and equipment quickly deteriorated and skilled labor departed due to low wages.

The director of the other enterprise set the target of eventually exporting low-cost microscopes with electronic control systems for certain market niches, such as educational institutions. He too focused on generating liquid assets through rental of property and sales of items that were on hand so as to buy breathing time to adapt technologies to the new market. In order to stem labor separations that could lead to instability within the remaining workforce, the management acquired sewing machines, and many female employees made intermediate items for Finnish clothing firms. Others found odd jobs at the factory while others simply left. In time, the company concentrated on manufacturing electrical components for automobiles, emphasizing quality despite high costs since the key was to develop satisfied customers. By investing any funds that could be corralled in processes that would ensure quality, the firm convinced foreign investors it could operate effectively despite economic chaos in Russia. A Swiss partner then joined in the production and export of microscopes, which eventually accounted for more than one-half of the company's revenues.

Both directors took advantage of opportunities to develop new income streams. The difference was in how the managers searched for income opportunities. With the collapse of Russian financial institutions in 1998, it is not clear which strategy will pay off in the long run. Perhaps reinvesting funds in a company's assets simply postpones the day of reckoning when such oversized firms must permanently shut their doors. Perhaps a longer-term approach will allow the innovative electronics firm to be a pacesetter on Russia's northern border.³¹

As already suggested, the Russian government is committed to compliance with international norms when considering sales of sensitive technologies abroad. Contraints on exports in fulfilling this commitment are important if western governments are to embrace Russia as a trading partner. To be effective, however, the commitment must extend beyond the government and be shared by enterprises seeking markets for either armaments or dual-use technologies.

Of course, the Soviet Union transferred enormous stocks of mili-

tary equipment to allies in Europe, Asia, Africa, and Cuba. The government kept close tabs on every transfer of militarily significant items, designs, and technical information. Also, with few exceptions, the most advanced achievements were kept behind closed doors in Russia and denied even to other Soviet republics, which were considered unreliable by leaders of Russian ethnic lineage.

Unauthorized shipments and leakages of designs and operating characteristics of sensitive items were seldom a problem. Those privvy to technological secrets were well paid and highly respected in Soviet society. They had little to gain from risking violations of government restrictions on military technologies.

Then, with economic survival an abiding concern throughout the population, the scramble to profit from past technological achievements became an obsession of the government and of many individuals during the early 1990s. One way to reward personal contributions toward developing military technology was to sell sophisticated weapon systems and dual-use items and then distribute the proceeds to managers and designers, with a few rubles left over for the workforce. However, Soviet-era regulations concerning exports were still in place. While far from perfect for a more open economy, requirements for government approval of exports were a deterrent to many unwise transactions.

At the same time, western countries became more concerned about proliferation of sensitive technologies from north to south than transfers of advanced technologies from west to east, as had been the orientation during the cold war. They strengthened international legal regimes to limit the flow of militarily relevant technologies to “rogue states”—Iran, Iraq, North Korea, and Libya, in particular—and to other countries and organizations that might have hostile intentions. An array of international regimes is in place which in some instances requires and in other cases encourages industrialized countries to show restraint in exporting military hardware and nuclear, biological, chemical, and missile technologies. Russia is a member of most of the international agreements establishing these regimes. It also has agreed to abide by international guidelines limiting exports of chemical and biological substances and equipment to produce those substances.

Domestically, a law establishing a new export control system was enacted in 1992 with subsequent elaborations. The central idea of Soviet times remains intact: all proposals for exports of items on specified lists must be reviewed by appropriate government authorities. The law and implementing regulations call for a system similar to interagency review and approval procedures of western countries. ³²

Some powerful Russian managers view export control as preventing profitable sales. Regulatory entities—export control officials, the customs service, and the procurator's office—are not always sufficiently committed to their responsibilities to enforce complete compliance with regulations when confronted by these managers, thereby adding to the potential for illicit leakage of sensitive items from Russia.

In 1994, Russia began cooperating with U.S. government agencies with experience in operating export control systems in a market economy. This program helped familiarize Russian officials with the requirements of international export control regimes and with electronic-based approaches to expeditious but thorough processing of applications for exports. This cooperation probably has assisted the Russian government in keeping entrepreneurial zealots in check.

As to motivating enterprise directors and their key personnel to comply with export regulations, there is no better signal that end runs around export controls will not be tolerated than several high-profile prosecutions of offenders who ignore regulations.³³ Occasionally, public revelations about seizures by Russian security forces of illegal exports remind the directors to be careful. For example, in April 1999 Russian border guards in Central Asia uncovered 40 tons of tank components hidden among scrap metal on a train headed for China. Whether anyone was punished for attempting to evade regulations may never be publicly known.³⁴

In sum, the international regimes prescribe the process for reaching export decisions and placing limitations on exports. In many sensitive cases, however, each government decides for itself whether an export should be permitted. The Russian government can approve exports the U.S. government would not approve, such as a nuclear reactor for Iran.

The recourse in such cases is for the United States to apply diplo-

matic pressure or, in extreme cases, unilateral sanctions that restrict cooperative programs or limit trade. During 1999, sanctions were applied on three occasions on Russian institutions in response to exports of missile-related technologies to Iran, exports of nuclear technology to Iran, and exports of advanced conventional arms to Syria.³⁵ But such measures may jeopardize U.S. security interests by terminating U.S. involvement among Russian institutions, where cooperation in peaceful endeavors introduces transparency as to previously cloaked activities and encourages movement away from dangerous military activities.

The technological base that made the Soviet Union a military superpower will not bring the country the status of an economic superpower. On the other hand, unless appropriately controlled, this technological capability will bestow on Russia the status of an international renegade to be penalized politically and economically by the West. However unfair it may seem, the U.S. and other governments will apply a double standard—defending the legitimacy of all their exports of armaments and dual-use technologies while attacking some of Russia's offerings, even though such offerings do not violate international agreeements.

At the same time, Russia's technology base is a good starting point for achieving profitable businesses in some high-tech areas. As has been mentioned, prime examples are machine tools, aerospace, and computer software. It is also important in areas requiring modern low-tech technologies, such as oil drilling equipment, electrical systems, communication networks, and even household appliances.

Finally, many myths about the defense industry—such as those cited below—have been debunked; and efforts can be directed to more realistic approaches to replace unfounded hopes of the past.³⁶

• Russia can continue to be a major international supplier of armaments. Russia may sweeten its deals by facilitating recruitment of Russian mercenaries to fly advanced aircraft or operate sophisticated

ground systems in combat zones. But competitors for international contracts almost always have substantial political clout and better systems of warranties and spare parts to ensure proper functioning of their systems. Russian arms sales are more likely to decrease than increase during the next decade.

• Military technologies can easily be adapted to civilian needs. This might be true if cost is not a consideration; but why pay $10,000 for a welder's face shield using military technology when a satisfactory device using western technology can be purchased for $500? ³⁷ And there are hundreds of other examples of how scientists from the defense complex have priced themselves out of the market, at least for the time being.

• Defense plants are ready for international competition if only provided with capital and marketing expertise. Many plants are far from ready for such competition—poorly maintained, equipped with obsolete technologies, and endowed with skill levels and work ethics of aging workforces that have gone downhill. Some have come back, given incentives of potential sales; and a few others could follow.

• Large-scale conversion programs have been under way throughout the country. Despite a few highly visible activities that have turned a profit, most assets of the defense industry have been simply standing idle.

The era of defense conversion is over. New approaches are needed. Only determined efforts—perhaps draconian—from the Russian government will salvage a significant portion of past investments in military technology. Those technologies that have a realistic chance in civilian markets must be given priority and other technologies that simply occupy space and time must be jettisoned. Hundreds of thousands of workers may be displaced, but most will have already lost the bulk of their incomes. Obviously social safety nets and public works employment will be essential. Western governments may well be prepared to provide relief for a few years in exchange for permanent abandonment of military production facilities.

As each defense enterprise and institute tries to find its own way, a few will on their own uncover new opportunities for their workforces

and facilities. Some will have small programs with western organizations more interested in downsizing the defense complex and in preventing the outflow of technological secrets than in contributing to economic revival. The challenge for the Russian government is to buttress such efforts with targeted programs of financial support that draw on inherent strengths well suited to market opportunities, primarily in Russia and gradually on the international marketplace.

1. John Pomfret, “Weapons Sales Rekindle China-Russia Relations,” International Herald Tribune, November 21-22, 1998, p. 1. For additional background on aircraft sales see the Russian magazine Air Fleet, No. 6, 1999, Moscow, pp. 4-27.

2. Jane's International Defense Markets, Jane's Information Group, 1996; World Military Expenditures and Arms Transfers, U.S. Arms Control and Disarmament Agency, 1996.

3. Pomfret, “Weapons Sales Rekindle China-Russia Relations,” p. 1.

4. Jane's Information Group, International Defense Markets; U.S. Arms Control and Disarmament Agency, World Military Expenditures.

5. Igor Khripunov, “Have Guns, Will Travel,” Bulletin of the Atomic Scientists, May/June 1997, pp. 47-51.

6. Ibid.; Leonid Bershidsky, “Maslyukov Happy Being New Top Arms Exporter,” St. Petersburg Times, October 30, 1998, p. 5.

7. Dmitry Polikarpov, “Russia To Decrease Arms Exports,” The Moscow Tribune, November 4, 1998, p. 6.

8. “Russia Shows Off Arms at Abu Dabai Expo,” The Russia Journal, March 29-April 4, 1999, p. 11.

9. Glenn E. Schweitzer, Superterrorism: Assassins, Mobsters, and Weapons of Mass Destruction (New York: Plenum Press, 1998), p. 41.

10. Bershidsky, “Maslyukov Happy Being New Top Arms Exporter,” p. 5; Khripunov, “Have Guns, Will Travel,” pp. 47-51.

11. Bershidsky, “Maslyukov Happy Being New Top Arms Exporter,” p. 5.

12. Vladimir Orlov and William C. Potter, “The Mystery of the Sunken Gyros,” Bulletin of the Atomic Scientists, November/December 1998; CNN Special Report, December 10, 1998.

13. Ibid.

14. Ibid.

15. “Why a New Topol-M System,” Argumenti i Fakti, November 6-12, p. 3; David Hoffman, “Russia Set to Deploy Topol-M Missile,” The Washington Post, December 27, 1998, p. A23.

16. Glenn E. Schweitzer, Moscow DMZ: The Story of the International Effort to Convert Russian Weapon Science to Peaceful Purposes (Armonk, NY: M.E.

Sharpe, 1996), p. 69. See also Gregory L. Vistica and Melinda Liu, “The Showdown Ahead,” Newsweek, September 28, 1998, p. 50.

17. For the text of the 1995 Protocol between the Russian Ministry of Atomic Energy and the Iranian Atomic Energy Authority see Rensselaer W. Lee, III, Smuggling Armageddon: The Nuclear Black Market in the Former Soviet Union and Europe (New York: St. Martin's Press, 1998), pp. 155-157. The Protocol includes, inter alia, provisions for the nuclear power reactor at Bushehr, a light water 30-50 megawatt research reactor, uranium mining assistance by Russia, natural uranium from Russia, a centrifuge from Russia, and training of Iranian specialists in Russia.

18. Ibid.

19. “U.S. Warns Russia To Halt Nuclear Aid to Iran,” The New York Times, December 17, 1998, p. A-21.

20. Discussions in Moscow at the U.S. Embassy, June 1998.

21. Schweitzer, Moscow DMZ, p. 132.

22. Patricia Kranz, “How Do You Say Fore in Russian?” Business Week, October 6, 1997, p. 162.

23. “Betting on Titanium as the Metal of Choice,” Russia Review, February 13, 1998, p. 44.

24. N.I. Pshelkovsky, “The Commercialization of the Military Industrial Complex,” Technology Development and Commercialization: Russian and Global Experience, TechnoCon 97, Proceedings, St. Petersburg, July 7-10, 1997, Ministry of Science and Technology, pp. 83-87.

25. Andrei Kokoshin, “Defense Industry Conversion in the Russian Federation,” Russian Security After the Cold War (Washington, D.C.: Brassey's, 1994), pp. 43-74.

26. Viktor Rassadin, “Myths about Defense Industry Hinder Conversion,” Business World Weekly, Moscow, No. 44/89, 1994, p. 10.

27. Provided by a cynical official of the Ministry of Science and Technology in Moscow, April 1999.

28. Brian Humphrey, “Converting the Weapons of War,” Russia Review, February 13, 1998, p. 15.

29. “MIG Maker: Walkout Won't Affect Work,” The Russia Journal, December 6-12, 1999, p. 20.

30. Franklin J. Carvalho (editor), Russian Defense Business Directory (St. Petersburg and Leningrad Oblast: Department of Commerce, 1996), pp. 4-1 to 4-10.

31. Yevgeny Kuznetsov, “Learning To Learn: Emerging Patterns of Enterprise Behavior in the Russian Defense Sector,” unpublished manuscript (Washington, D.C.: Brookings Institution, 1996).

32. For a comprehensive discussion of Russian export control procedures see Gary K. Bertsch and Suzette R. Grillot (editors), Arms on the Market (New York, London: Routledge, 1998).

33. Proliferation Concerns: Assessing U.S. Efforts To Help Contain Nuclear and Other Dangerous Materials and Technologies in the Former Soviet Union (Washington, D.C.: National Academy Press, 1997), pp. 85-117.

34. “Tanks Held at Border,” The Moscow Times, April 2, 1999, p. 4.

35. Proliferation Concerns, pp. 85-117.

36. For a discussion of myths see Rassadin, “Myths about Defense Industry Hinder Conversion,” p. 10. See also Kevin Whitelow and Richard J. Newman, “The Russians Are Coming,” U.S. News and World Report, March 15, 1999, p. 40.

37. Schweitzer, Moscow DMZ, p. 218.