ALSO BY GLENN E. SCHWEITZER

Experiments in Cooperation:

Assessing U.S.-Russian Programs in Science and Technology

Moscow DMZ: The Story of the International Effort to Convert

Russian Weapons Science to Peaceful Purposes

Superterrorism:

Assassins, Mobsters, and Weapons of Mass Destruction

Techno-Diplomacy:

U.S.-Soviet Confrontations in Science and Technology

Borrowed Earth, Barrowed Time:

Healing America's Chemical Wounds

Most of the factual information and many of the ideas presented in this book were provided by Russian colleagues too numerous to name. Leaders of the Russian Academy of Sciences and officials of the Ministry of Atomic Energy and the Ministry of Science and Technology have been particularly patient in responding to my inquiries over many years. Managers of Russian and international science and technology programs, directors of Russian enterprises and institutes, and entrepreneurs of all stripes have almost always been willing to provide insights about the practical problems they are confronting during a difficult period of political and economic transition. And Russian and American analysts have generously shared their data and findings with me.

A research and writing grant from The John D. and Catherine T. MacArthur Foundation provided the financial resources that allowed me to explore activities in depth in several atomic cities, and the Villa Serbelloni of the Rockefeller Foundation provided an ideal setting in Bellagio, Italy, for interactions with Russian and American colleagues interested in technological innovation.

Sandra Hackman was indispensable in turning a tortured text into a document with sign posts that should help the reader follow logical pathways to end points. Chris Findlay provided an important final

checkpoint in ensuring that the rules of composition and grammar were not forgotten. Through it all, my friend and wife, Carole Schweitzer, offered words of encouragement and, when needed, pitched in with her magic pencil to put the final touches on the manuscript.

Every business participates in technological change as an originator, user, or victim of technological invention and innovation.

U.S. National Academy of Engineering, 1992

“We are very careful in selecting advanced technologies that we support since unlike other Russian entrepreneurs, we are using our own money. And we do not have much money.”1

With these introductory words, a group of four Russian physicists sitting in their dusty penthouse office atop one of the towers of Moscow State University related to me in 1998 their experiences in mobilizing Russian scientific talent to develop new high-tech products. They were convinced that the care they exercised in shepherding Russian inventions along uncertain paths could lead to viable commodities in western markets that would bring them handsome returns. New automobiles, three-room apartments, and even a jointly-owned dacha would finally be within their reach.

The group had spent five years as technology hunters. Such entrepreneurs exact a price from western firms for putting foreign specialists in touch with hidden Russian scientific talent. But this Russian “gang of four” had tired of working in three-month spurts as short-term agents for western firms only to be relegated to driving gypsy taxicabs until the next contracts materialized. They had shifted course.

The four physicists now concentrated on obtaining legal ownership of promising technical ideas that originated in Russia and on transforming those ideas into commercial successes. They began with a market analysis to identify promising products that could be based on

Russian technologies, to identify western companies that might incorporate the technologies into products, and to figure out ways to reach these companies. When they satisfied themselves that a technology would have a reasonable chance of finding a paying customer, they made sure it had no existing intellectual property claims. Then they organized a group of Russian scientists to perfect it. Since the four provided financing for the work, with the researchers contributing their time and energy, they insisted that the researchers terminate their ties to previous employers so that any breakthrough would be the intellectual property of the four physicists.

Their scheme called for early patent protection within Russia for each technical innovation. Patent filings in other countries might eventually follow. In the interim, the filing for a Russian patent would provide worldwide protection for 22 months, according to their interpretation of recent international conventions.

The goal was to enter into licensing arrangements with western firms which would incorporate the innovations into salable products, with paybacks to the physicists—and cuts for the researchers—for up to 15 years. Techniques for manufacturing a new medical probe for diagnosing chemical changes in the body was their initial breakthrough. They were confident other technologies in the pipeline would also lead to financial bonanzas—sufficient to eliminate their need for second jobs.

Since every expenditure meant dipping into their own pockets, a rare practice in Russia, the physicists had adopted several important operating principles. They handled all overhead operations themselves. No need for an accountant when they could learn how to set up the books, pay taxes and social fund contributions, and generally keep bill collectors at bay. No need for a patent specialist when they could read the patent laws and regulations and figure out the twists and turns in this uncertain terrain. No need for personal security guards to fend off the mafia, at least for the time being, since they would be operating on deferred income. Cash would materialize only in future years when crime and corruption would, they reasoned, be less of a concern. And, as has been noted, no wasting time with technologies which enterprises, institutes, or individual inventors could later lay claim to. With this

orientation, they spent most of their energy making contacts with western businessmen, since marketing efforts were the key to success. But they protected all technology secrets until a deal was in hand.

The four readily acknowledged that there were only a limited number of unencumbered technologies in Russia simply waiting to be linked to western customers. Few existing technologies are free of claims of ownership by some Russian entity or individual. Even fewer are ready for market.

However, they quickly pointed to the extensive brain power in Russia to develop new, marketable technologies. Whether developing new types of coatings to protect metal products from corrosion or inventing acoustic devices for finding defects in construction material, the talent is there. An essential step is to provide the physical facilities for teams of Russians to shape items that will be of high enough quality and low enough prices to attract buyers. When given a sense of direction toward the marketplace, Russian scientists can produce new items in record time at bargain costs. So argued the physicists.

I sought their views on the future of the large Russian enterprises that had given birth to the world's most powerful rockets, largest nuclear arsenal, and most far-flung airline system. They still produce cars, refrigerators, and television sets; and the trains run on time, I noted. But the technology gurus argued that these oversized facilities had already lost the race.

They pointed to the ever increasing array of imported products. Aeroflot purchases Boeing and not Tupelov airplanes. Russian banks and hotels hire Turkish construction companies that outperform Russian firms. Russian electronics enterprises and institutes hardly participated in the introduction of computers into the economy. Less than 5 percent of the computers used in Russia are even assembled in the country. In short, the physicists added, the technological achievements that had been the basis for the modern Soviet state were quickly forgotten when customers learned they could obtain more suitable products from abroad.

Then I asked the crucial question of the four entrepreneurs: During the next few years will technological innovation in Russia have a discernible impact on the overall economy? “No,” was the reply. They

were convinced that they themselves would have a few successes and that other small-scale entrepreneurs would also find customers for new products. They agreed that several large enterprises probably would succeed in building modules for the International Space Station and that two or three Russian oil companies would provide support for the geophysics community to help assess potential production fields.

But they contended that in the larger scheme of a Russian economy in turmoil and political governance in disarray, new Russian technologies will have limited impact on the future of the country. The four physicists would simply figure out ways to make comfortable livings for themselves within a broken economic system without abandoning their passion for scientific discovery; but they did not expect to participate in a technological transformation of Russia.

Few Russians are as bold and confident as these physicists in searching for new ways to continue their scientific careers amidst a crumbled industrial base and prolonged inflation. The economic model taken from western textbooks in the early 1990s didn't work, and a new model is now being born. Will the new model lead to an efficient and equitable economy? Will it provide a framework for nurturing technology that can help Russia reclaim its position as a leading industrial nation? These questions are of key concern to both friends and adversaries of Russia.

Most analysts within Russia and in the West agree that such a model —efficient, equitable, market-driven, and technology-friendly—should be the goal for Russia. But there is great uncertainty as to the exact shape of the economic model that should emerge in one or two decades as well as to the near-term steps needed to move toward the still-to-be-defined model. Some argue that the best course in the foreseeable future is for Russia to rely on its exports of oil, gas, minerals, and timber while continuing to import manufactured items. Others contend that only foreign investments will save the day. Still others suggest that Russia unilaterally disarm, thus freeing up resources for

economic development. Russian officials obviously reject such subservience to the West.

The purpose of this book is to explore other opportunities for technology-driven progress toward a viable market economy that might be pursued during the next decade. Modern technologies must play a stronger role than at present if Russian products are to move onto the global stage or even compete successfully with imported items. Strategies for expanding technological capabilities so Russia can add value to natural resources prior to export and can reduce reliance on imports are possible approaches. At the same time, some technologies must also be contained within Russia lest their military potential fall into the hands of parties with malevolent intentions.

The next decade of transition will undoubtedly be characterized by advances and retreats toward western concepts of a market economy. As to the technology dimension of the economic model, Russia must work out for itself policies that will strengthen the research and development infrastructure of the country and will encourage innovating for profit. In this effort, western experience can help avoid mistakes.

The United States has a strong vested interest in continuing to be actively engaged in Russia's economic transition process. We have seen that science and technology channels can be among the most informative and influential routes of engagement. Sustained financing of cooperative programs in science and technology that encourage more effective use of Russian technological capabilities on civilian problems deserves high priority, however distasteful Russian actions in Chechnya or elsewhere might be. The alternative is to sit on the sidelines worrying about a possible coup, the next nuclear accident, or the appearance of Russian missile technology in distant lands.

Neither Russia nor the West should allow the pessimism of the four physicists to become an accurate prediction of the importance of technological development for Russia. They are correct, of course, if policies to support an updating of the nation's industrial base are not adopted. In that case, few Russian firms stand a chance of having a major impact on the economy. Deprivation could continue to deepen, leading to greater internal turmoil and perhaps violence in the streets.

The outlook for the rest of the world could be foreboding, as a hungry bear with only a weapons arsenal to barter for honey and other sustenance searches for markets in countries on our blacklist. However, even in the most difficult times innovating for profit has been possible; and throughout this book I encourage steps that will facilitate the expansion and replication of proven innovation efforts.

To help understand the technology dimensions of an economic model that will work in Russia, this book draws heavily on over 200 visits to Russian institutes and enterprises, presentations by Russian and foreign experts at several dozen conferences and workshops throughout Russia, and private discussions with many Russian colleagues within and outside government. These observations and interactions began in 1985, and their frequency increased in the 1990s. Also, I have relied on the writings of dozens of other western and Russian analysts to help fill in the knowledge gaps as I studied the frustrations and aspirations of the Russian science and technology community and sought to understand complex policy considerations of government officials and the more pragmatic concerns of the Russian people.

Walking through both lighted and unlit laboratories and listening to both disgruntled and optimistic colleagues have provided most of my insights concerning the interactions of technology, economic, and security concerns in the new Russia. A large number of case studies highlight common problems and opportunities facing the science and technology community but also point out many different types of challenges in a variety of settings throughout the country. My impressions and conclusions are clustered under the following topics:

• The economic environment. The policies of the International Monetary Fund, the different economies in different regions of Russia, the emergence of barter and other non-cash forms of payments, and the aspirations of small business provide a range of perspectives on the economic setting for innovation. Of special interest is the relevance to

Russia of the economic model that propelled Japan from the ruins of World War II to the status of technological giant.

• The research and development infrastructure. Government funding for research and development has dropped 20-fold in a decade, with little sign of recovery despite the importance of government support for innovation efforts. Meanwhile, the highly targeted marketing approaches of individual entrepreneurs housed in innovation incubators and technoparks contrast sharply with the broad search for customers of many profiles by Russia's 57 large State Scientific Centers (sometimes referred to as State Research Centers).

• Exports of armaments and dual-use technologies. International sales of lethal items raise a steady stream of security issues. In a related area, the experience to date in converting military industrial capabilities to civilian applications on a large scale has been discouraging; nevertheless, defense-related technologies in selected areas can be important for economic revival.

• Controlling the finances. Finding customers with cash for goods and services, avoiding bureaucratic garnishments of promised funds, and protecting money from criminals are large challenges for Russian research and development organizations. At the national level, capital flight deprives Russia of potential investment capital—the lifeblood of innovation—and a corrupt banking system complicates financing of research and development efforts.

• Patents and taxes. Enforcement of the laws and regulations governing intellectual property rights and taxation are lightning rods for complaints from both Russian and foreign entrepreneurs. The importance of long-term protection of innovations too often takes a back seat, while immediate tax policies are a constant source of concern.

• The brain drain. While international attention focuses on possible proliferation of weapons knowledge by underpaid scientists and engineers, the technical workforce including both weaponeers and non-weaponeers has downsized by 50 percent, with many of the losses being outstanding young specialists attracted by business careers. The technical universities must provide work-study and other programs to help convince students that research and development careers offer both technical challenges and financial rewards.

• The Science Cities. The 65 science cities of Russia, with a population of three million, possess 20 percent of the technological prowess of the country. Developing customers for their high-tech products on a regional basis and easing access to the cities by interested business partners could help develop desperately needed new income streams.

• U.S.-Russian cooperation. Cooperative programs have a major impact on the containment of dangerous materials and technologies in Russia and on redirection of Russian weapons expertise to civilian problems. As to commercialization of technologies, U.S. government efforts have been less effective; and the U.S. private sector, with a few exceptions, has been reluctant to invest in Russia, preferring to wait until better times when Russian customers have cash to pay for goods and services.

• Russia's technological future. A variant of the Marshall Plan concept that would jump-start innovation efforts on a broad scale deserves careful consideration. At the same time, corruption must be held in check, and the health of the Russian youth must be restored if they are to be scientific entrepreneurs in the future.

This book considers innovation in the broad sense, encompassing not only new products that incorporate technical novelty but also new ways to manage technologies developed many years ago. What is novel in Russia may not be novel in other countries. For example, in many regions of Russia, ATM machines, internet connections, and even reliable elevators are innovations.²

Also, developing and upgrading production processes are at the core of innovation efforts. Russian tinkering to keep obsolete machinery running is often quite innovative and frequently the only route to achieving a payoff of three, four, or even one ruble for every ruble invested. Such supporting services are in high demand in Russia and sometimes provide income for engineers who otherwise would leave their profession out of financial desperation.

This book does not analyze the role of basic research, the environmental impacts of industrial development, nor the frequent industrial accidents in Russia. These topics are important, but they are not pivotal determinants of near-term steps that could be taken to enhance

the role of technology in Russia's future. Such analyses would expand the manuscript significantly and are left for other writers.

The entire Russian population remembers when technology sustained an economy that fed, clothed, and educated the vast Soviet population even after the government had skimmed off the best products to build and operate the world's largest military machine. Politicians rightfully ask why the achievements of decades past cannot be replicated. The Russian resource base remains huge, the population is highly educated and resourceful, and there is now no need to divert such a large portion of production to military purposes.

Russia is different from the Soviet Union. The Soviet economy in many ways resembled a huge technology company, but now USSR, Inc., has been replaced by tens of thousands of independent production units that were not intended to be profitable in the first place. And the world is different. State-owned and private firms from dozens of countries are competing for the same consumer and industrial markets around the globe, including markets in Russia and in the other former Soviet republics.

Russia tried to adjust to these realities, but Russian leaders have learned that the western model of reform that was to facilitate this adjustment has brought them only economic grief.¹ They now hope for a better, Russian model, a model that must correct large levels of inequality among the population and must overcome widespread disillusionment with market economics. A model that enables the country to realize the “economic multiplier” by drawing both on past investments in Soviet technology and on new investments in Russian technology is essential. Progress toward such a model, however, will be apparent not in a few months but in a few years.

The four physicists have demonstrated four principles that, in combination, have overcome even the handicaps of the broken model. Give priority to marketing. Ensure the quality of the product. Protect the right for exclusive use of a successful innovation. Minimize overhead charges. A model that also provides access to investment capital would

dramatically increase the interest and capability of many other Russian innovators to follow in their wake.

Such a model, one that responds to technological opportunities and also to social needs, will have been successfully implanted only when “made-in-Russia” no longer engenders fear that military weaponry is on the way to a rogue state nor skepticism that a nuclear plant will function properly. Rather, the label will signify that a new biological preparation will cure and not threaten people and that a television set will receive a clear and uninterrupted signal.

1. Visit in Moscow to the company Tetra, June 1998.

2. For a thorough discussion of modern concepts of innovation, see William G. Howard and Bruce R. Guile (editors), Profitting from Innovation (New York: The Free Press, 1992).

3. For a summary of an important view of the economic debate, see Joseph Stiglitz, “For Economists, No Time to Party,” Newsweek, Special Issue, November 1999, p. 58.