Are you helping us or are we helping you?

Official of Russian Agency for Cooperation and Development, 1993

U.S. firms will seek 2 percent ownership of Russian companies for access to commercial information, but few will make large investments since the likelihood of profits is very low.

U.S. Chamber of Commerce, 1999

For more than five years, the U.S. Department of Energy (DOE) has been funding civilian-oriented projects that draw on the technical capabilities of Russian weapons scientists and engineers while providing them with new income streams. But, in addition to participating in these projects, some Russian specialists continue to work on the development of weapons of mass destruction in Russia's military program. Indeed, DOE doesn't know even the names, let alone the backgrounds, of many scientists involved in their projects. Is the United States financing the Russian weapons program under the mistaken belief that weaponeers are being directed to new careers? Also, the principal beneficiaries of DOE funding have not been the Russians carrying out the projects but U.S. collaborating laboratories, which have received over two-thirds of the funds. Of the remaining one-third sent to Russia for their researchers, most has ended up in the accounts of tax collectors, a corrupt Russian pension fund, and creditors of the institutes where the scientists work. These findings of the General Accounting Office (GAO) in February 1999 dealt a tempo-

rary setback to U.S. government programs designed to prevent proliferation of Russian technologies to rogue states and terrorist groups while at the same time promoting commercialization of Russian technologies for the civilian market.¹

Does the GAO report mean that this DOE program and related efforts financed by the U.S. government should be abolished, an implied threat of Senator Jesse Helms (R-NC) who ordered the GAO audit? Absolutely not. The programs are of vital interest to the United States. We have seen signs of leakage of Russian weapons know-how to Middle Eastern and Asian states that can cause trouble for not only their neighbors but for large regions of the world. At the same time, there are examples of successful redirection of Russian technologies to civilian applications that should eventually help buttress an economic revival and bring greater stability to a country in turmoil.

Why doesn't the Russian government itself assume responsibility for preventing this leakage of Russian technology? The government is seized with many financial needs and will not give priority to preventing the flow across its borders of expertise and technologies that might end up in irresponsible hands. In the absence of aggressive U.S.-financed programs to provide civilian-oriented employment and economic opportunities for Russian weaponeers and defense-oriented institutes, the likelihood of diffusion of dangerous know-how would be much higher than at present.

As to developing technologies for peaceful purposes, the Russian government endorses such efforts. However, the payoff is long term, and the immediate demands for Russia's limited financial resources for other purposes are overwhelming. Therefore, technology-oriented programs by the U.S. government, often in partnership with the American private sector, can be timely and helpful.

Can the problems uncovered by GAO be fixed? Absolutely, and steps are already under way to retrofit the DOE program that was under attack. Russian specialists working on civilian programs at U.S. expense should not be involved in defense programs. DOE should insist on a list of participants for each project and an accounting of their activities during the course of their contractual commitments. Such information is provided by the same Russian institutes for other

U.S.-sponsored programs. The initial naivete of DOE officials—that they did not want to offend key Russian scientific leaders by asking for sensitive personnel information—should by now be dispelled.

As to how U.S. government funds are distributed, DOE is changing its past ways. A much larger share of the funds is now used in Russia in preference to New Mexico, the site of two DOE laboratories. As has been shown, fewer funds are diverted to Russian taxes and overhead, and more accurate accounting of expenditures is taking place.

While imperfections still cover some aspects of the program, projects are becoming more sharply focused, with greater promise of tangible results both in keeping weaponeers in place and in providing marketable goods and services. Most importantly, DOE recognizes that individual projects will be meaningful only if they lead to sustained activities over many years. While achieving sustainability will be difficult —and in many cases not possible—the establishment of this goal is changing the unrealistic short-term orientation of earlier efforts.

DOE's activities in Russia are far-reaching, but other U.S. government programs have a comparable if not greater impact on the use of advanced Russian technologies. They too redirect Russian expertise to peaceful purposes. And they help set the stage for more effective use of technologies in a market-oriented economy.

Specifically, the U.S. Department of Defense (DOD) implements the Nunn-Lugar program and has also sponsored a wide variety of other technology programs at Russian institutes and enterprises. The Nunn-Lugar program facilitates the downsizing of the Russian complex that supported the development and deployment of weapons of mass destruction. It draws on many Russian research, engineering, and construction organizations to destroy missile silos, dismantle nuclear weapons, and safeguard nuclear material. Other DOD programs are directed primarily at obtaining Russian technologies that can be helpful to U.S. military programs, and to this end hundreds of technology contracts have been signed between several dozen DOD organizations and many more Russian research institutes.

NASA manages a large array of U.S.-Russia technology programs. The centerpiece of NASA's activities is support of Russian participa-

tion in the International Space Station (ISS) which calls on Russian design bureaus and enterprises to provide modules for the ISS. The Russian enterprises involved have in turn successfully engaged western firms in joint efforts to produce engines for space launches and components for satellite communications systems.

The U.S. government supports a number of activities that directly promote the commercial interests of American firms. These include grants for feasibility studies of commercial opportunities, political risk insurance for private sector investments, and fast-track financing for American companies attempting to use Russian technologies for products that will sell either in Russia or in international markets. Also, almost all of the more than 500 American companies involved in Russia look to the U.S. government for support in pressuring the Russian government to reduce administrative hassles, legal uncertainties, and criminal threats that confront businesses. Figure 9.1 provides an historical background as to how private alliances have evolved in a high-risk environment.

FIGURE 9.1 192 Strategic Alliances (Russian and Foreign Firms, 1988-1995). SOURCE: J. Hagedoorm and J. Sedaitis, Research Note on Partnerships in Transition Economies: International Strategic Technology Alliances in Russia. Center for Economic Policy Research: Stanford University. Nov. 1997.

Vice President Al Gore, in his interactions with counterparts on a long-standing Binational Commission, regularly intervenes on behalf of U.S. companies that run into roadblocks to their efforts to expand activities in Russia. In March 1998, for example, the vice president placed his imprimatur on several business ventures in Russia. These included a multibillion dollar oil production sharing project in the northern area of Russia involving Conoco and Lukoil; joint efforts of AGCO and the Chelyabinsk (region) to assemble agricultural equipment in Russia valued at $62.5 million; delivery of road construction equipment costing $55.5 million to the Federal Road Service by eight American companies; and a $1.3 million commitment by Corning to work with Samara Cable Company to produce fiber optic cable for the country 's telecommunications infrastructure.2;

Lessons learned from experiences in implementing U.S. government-financed technology programs and related commercial activities can help improve future approaches to bilateral cooperation.

The nonproliferation objective of the DOE program that came under GAO scrutiny—the Initiatives for Proliferation Prevention (IPP)—was certainly not the problem. Civilian employment opportunities for former weaponeers are critical. Unfortunately, the DOE specialists who set up the program had little background in Russian history, language, or culture and they had limited experience in carrying out projects in Russia. They did not understand Russian accounting systems, tax requirements, or labor and salary practices. They were insensitive to corrupt practices that date back decades, even centuries. They did not take time to learn from other U.S. programs that had been well managed. Therefore, blunders were inevitable. The GAO quickly found the mistakes.3;

While GAO highlighted administrative problems, the program approach of DOE is critical. From the outset of the program, DOE officials underscored the importance of an “exit strategy” for each project—e.g., within three years of U.S. government funding someone else would take over, with the U.S. private sector being the primary

candidate to make the projects self-sustaining. To that end, a combination of American advisers and U.S. private investment was to be the formula for success.⁴

Thus, much of the funding has supported advisers from DOE laboratories who in turn were to stimulate interest among American firms to become involved in projects, using U.S. government cost-sharing as an incentive. Such reliance on private firms that are reluctant to risk their own funds in Russia without supplemental U.S. government contributions should have raised warning flags as to the commitment of those firms and the long-term viability of projects. But DOE was under Congressional pressure to start projects as soon as possible, even if they involved firms with marginal interests in Russia.

Many American participants in IPP projects believe U.S. experience in doing business in a market economy provides a good model for Russia. They respect Russian technical competence but question Russian business acumen. Also, they believe that American investors should play a key role in designing project details.

Russian counterparts have a different perspective. Most importantly, they want to design projects their own way. They recognize that funders will review and perhaps modify their proposals. But Russian organizations are seldom enthusiastic about American specialists who proscribe detailed work plans. If access to the international market is the contribution of western partners, the Russians are delighted. But they are also aware of the Russian market, and they are suspicious of motivations of American advisers who overlook this market as a low payoff arena. They are impatient with seemingly endless consultations involving Americans not attuned to the Russian scene. Finally, they have been numbed by endless delays in Washington that may or may not lead to promised projects. Their priority is financial support for immediate action, not never-ending advisory services.⁵

Both DOE officials and Russian counterparts are correct. United States experience can be helpful. Foreign investment can be important. But local initiatives and impatience must be respected. U.S. officials should listen carefully to Russian experts. Also, they should recognize that, at present, there are limited foreign investment

opportunities and that Russian institutions can make progress using their own resources.

In mid-1999, DOE reported it had supported 80 IPP projects that attracted the interest of U.S. industry. The private sector's matching contributions to the projects, including the direct and indirect costs incurred by the companies, were twice the size of DOE's contributions. Examples of projects included recovery of tungsten carbide from metal scrap, production of medical isotopes, manufacture of photovoltaic solar panels, and development of oil eating microbes.⁶A few months later, the U.S. Industry Coalition, set up to assist DOE, reported 18 projects were approaching market realization (see Appendix D).

Private sector interest in a project does not equate with market success. Not a single one of 79 projects that were examined by GAO in 1997 had resulted in sustained commercial activity. The outlook for the current list of 18 looks better. The matching contributions of the private sector reported in 1999 and an emphasis on sales as the measure of success suggest that DOE may now be on a more promising track.

As we have seen, considerable progress can be reported. The emphasis remains on supporting projects that have the dual objectives of assisting with nonproliferation and also contributing to an industrial base in Russia for energizing economic development. The concept of an exit strategy is alive, but with a more realistic perspective of the time needed to interest investors in new innovations and the difficulty in bringing products to market.

However, the cohort of former weapons scientists likely to undertake projects are set in many of their ways and lack business talent. Projects should also include, when necessary, innovative Russian entrepreneurs who were either too young to participate in Soviet defense programs or had little interest in such programs. An important criteria for selecting at least some of the key Russian participants in cooperative projects should be their capability to minimize costs while ensuring quality so that products will sell. Cost consciousness is not a trait of weaponeers.

Other DOE programs can also be important in stimulating tech-

nology efforts among Russian institutes and firms. For example, in its cooperative efforts to help safeguard uranium and plutonium in Russia, DOE is gradually switching from purchasing American equipment —physical barriers, detection sensors, and alarm systems—to purchasing comparable Russian products. An important objective of this procurement policy is to encourage evolution of stronger local manufacturing capabilities for such items so the Russians will be in a better position to sustain the effort after U.S. support ends. With a guaranteed DOE-financed start-up market for production of security-oriented technologies to be installed in nuclear facilities, the Russian firms that have won contracts are also looking more broadly at the demand by banks and industrial companies for security devices. This market demand is expanding dramatically in response to the growth in crime and threats of terrorism.⁷

Yet another DOE program, the Nuclear Cities Initiative, is intended to support a partial transformation of the 10 closed nuclear cities, including Snezhinsk which was a centerpiece of the previous chapter, to centers for the development of civilian technologies. The interrelated objectives are civilian jobs for weaponeers and new small firms in the cities.⁸In early 1998, DOE bannered the headline, “We're off to a fast start.”⁹

But a key Russian official responsible for organizing field activities described progress during 1998 and 1999 as “a cold shower.” He reported many unfulfilled promises regarding foreign investments that were supposed to be on the way.¹⁰DOE's rejoinder was that the U.S. Congress was the culprit in cutting back funding for the program. This carried little weight with Russians uninterested in Washington budget negotiations but concerned about yet new waves of American advisers.

What is different about this program? Job creation has long been the objective of other programs. The new dimension is the consideration of the needs of entire cities rather than the focus only on individual technology projects.¹¹ Of course, technology projects have been the lifeblood of the cities and will continue to play an important role in the search for new income streams. But, in the absence of reliable city services, social safety nets for displaced workers, and recreational and other activities for youth, continued tranquility in the cities is in seri-

ous question. These human requirements demand greater tax revenues for the cities—revenues primarily the result of new economic ventures, whether the businesses are high- or low-tech.

The initial activities supported by DOE—training in business skills, preparation of business plans, and establishment of business centers—are considered by some Russians well-worn approaches that have produced few new businesses in open cities, let alone in cities behind fences. Others think they are just what is needed. One past problem with such programs has been the emphasis on concepts rather than on actual business plans for projects and products.

A welcome recent addition to the financial aspects of training programs has been supplemental incomes provided by the U.S. program for workers displaced during downsizing of the Russian nuclear weapons complex. The workers can then undertake retraining activities to develop new skills without cutting classes to scrounge for funds simply to survive. ¹²

Can the Nuclear Cities Initiative succeed with fences still inhibiting access by foreigners or Russians into them? More fundamentally, what is the measure of success? DOE plans to gauge success, at least for the initial $30 million expenditure, by the number of jobs created, with the target being a total of 500 in three cities. Since the layoff of 50,000-75,000 weaponeers is anticipated in the 10 cities during the next several years, 500 new jobs will be an important start only if they have a large multiplier effect.¹³The key is the types of new jobs.

Some will be short-term. Others will be long-term. Some jobs will benefit an entire city, such as jobs that upgrade telecommunication networks, while other jobs will have little impact on the lives of people other than the participants. Professional opportunities involving software development will attract former weaponeers. Other work will attract personnel who have had no direct connection with military programs owing to their age or recent arrival. Some jobs will have no multiplier effect. Other jobs can stimulate downstream employment, including development of technologies for use in a radioelectronics plant. In short, jobs should be weighted as well as counted.

Further complicating measurement of success is the fact that some new job holders would probably find jobs without the program. On

the other hand, some may spin off from newly created jobs and form their own companies. They would thereby create additional workplaces.

In any event, DOE should dig into the details of how the program influences not only the lives of the direct participants but also impacts on the social and economic viability of the cities, the regions, and indeed the country. If a proposed project to find new ways to treat prostate cancer succeeds, the benefits from this single project could dwarf the costs of the entire program. If a project to develop affordable optical fiber technology results in new communication links with remote areas of Russia, the payoff to the country could be substantial. If the program demonstrates even on a small scale that commercial profit can result from greater openness of closed cities, the program could be a pacesetter for new directions in how closed cities are governed.

In all of these DOE efforts, the metric for measuring progress cannot be sharp and crisp. Success should not be assessed simply on the basis of numbers of new jobs. On the other hand, if unemployment is not significantly reduced, the programs are probably not very helpful.¹⁴

Under the Nunn-Lugar program initiated in 1991, DOD provides financial support for a variety of activities that draw on engineering skills of both American and Russian contractors in downsizing the Russian military complex. The largest component of the program is directed at destroying missile silos, missiles, and bombers in accordance with international arms control agreements. Other activities include storing and protecting fissile material removed from nuclear warheads, converting nuclear reactor cores from reliance on weapons-usable nuclear material to use of other types of uranium, and destroying Russia's large chemical weapon inventory.¹⁵

Major engineering projects are required in all of these areas. For example, three Russian shipyards have received contracts to destroy over 500 submarine-based missile launchers during the next several years. This requires using heavy-duty cranes, metal cutting equipment,

other industrial tools, and scrap handling equipment. Destroying almost 100 land based silos also requires heavy industrial equipment, while the destruction of several hundred missiles will be carried out in new oxidizer conversion facilities. As to the conversion of nuclear reactor cores, extensive design work is needed in order to modify existing facilities to meet new nuclear reactor specifications. ¹⁶

While Russian engineers had the technical wherewithal to carry out these projects, the shipyards and other organizations involved needed to revamp their procedures for contracting so as to comply with American requirements. They worked on the basis of fixed price contracts, adjusting internal accounting procedures to accommodate new requirements for accountability. This experience has been a useful introduction to western ways of operating in a market economy, and the enterprises are now in much-improved positions to enter into contractual arrangements with other western organizations as opportunities arise.

Innovation has become the byword in the chemical destruction arena. After many months of attempting to convince Russia to use high-temperature destruction techniques developed in the United States, DOD finally agreed to Russia's use of innovative chemical detoxification techniques, at least at one major facility. Unfortunately, difficulties arose with environmental groups near the facility opposing the planned destruction. The program was further delayed due to backtracking by Russia on its matching contributions. Finally an impatient U.S. Congress withheld funding for the proposed Russian effort.¹⁷

As to DOD's non-Nunn-Lugar programs, two types of efforts stand out. First, many Pentagon units have simply purchased Russian know-how of interest. The two most widely publicized deals were the purchase of the Soviet SV 300 missile and the commissioning of 200 Russian weapons scientists to prepare technical histories of Russian nuclear weaponry. Also, hundreds of agreements have been inked for cooperation between Russian research institutes and about 40 DOD components ranging from the Cold Regions Research and Engineering Laboratory (Army) to the Arnold Engineering Development Center (Air Force) to the Undersea Warfare Center (Navy).¹⁸

Appendix E identifies many technology challenges confronting the

Russian government as a result of arms control agreements and developments related to downsizing the defense complex.

For more than two decades, American and Russian astronauts and cosmonauts have flown together on missions directed at opening the frontiers of space. Since the mid-1990s, the Russian government has committed about one-half of its entire civilian research and development to the International Space Station (ISS). NASA, determined to meet an internationally agreed schedule, has also devoted considerable resources to help ensure that Russia is able to meet its commitments in a timely manner. NASA's total involvement with the Russian space program has required expenditures of more than $1 billion, with a significant portion for programs that reinforce Russia's funding commitment to the ISS.¹⁹

In order to concentrate a huge portion of Russia's skimpy budget on a single project, the Russian government has significantly reduced support for other areas of science and technology. Nevertheless, in upholding its committment to the ISS, Russia can point to one area where its technological capabilities are surviving. Of course, the driving force for such a hefty commitment has been the political consequences at home and abroad if Russia were not to participate in this global endeavor. The expenditures have supported use of the Mir space station as a test bed for procedures to be employed in the ISS support, support that continued until Mir was abandoned in 1999 and construction began on two of the first ISS components, to be deployed in space at the end of 1999.

In the late 1980s, the Soviet government entered into several international agreements that provided the legal framework for the international effort. Then, with the founding of the new Russia, the government was faced with the decision of whether to participate with 15 other countries in the 15-year ISS program or whether to have a parallel Russian effort. Russia still had the option of taking another tack, since the project was not under way. Despite political sentiment in

Moscow for Russia to go it alone and apprehensions in the West over the reliability of Russian participation, financial reasons overwhelmed political considerations concerning Russia's role. The West would save billions of dollars, and Russia had no other choice but to sign on if it wanted to remain a serious participant in space exploration.

Russia committed its unmatched experience in manned space flight to the international effort. It was to spend $300 million annually to support the effort and would eventually own 38 percent of the station's facilities. Russian specialists assumed such a commitment would keep them on the forefront of international space technology efforts.

But, because the United States will shoulder the largest share of the total costs of the $90 billion project, Russia will not be a pivotal player in technology decisions. Indeed, Russia's participation could eventually be limited to “taxi driver” services. Under this scenario, Russia would transport crews and replacement vehicles into space, they would be responsible for rescue efforts during emergencies, and they would handle many repair services.²⁰

It will be a day of mourning for the Russian space industry if Russia is relegated to support services rather than cutting-edge activities. But every time Russian financial shortfalls raise international doubts about Russian ability to meet its commitments, other participants press to remove Russia from the mainstream of the program. Then the taxi driver scenario approaches reality. What's more, Russia is selling some of its rights to use the station to other interested governments. ²¹

The direct technological payoff for the Russian economy from this international effort will be limited. Several thousand Russian engineers and technicians will have jobs, assuming that the Russian government continues to finance the effort or, if not, that NASA somehow convinces the U.S. Congress to provide more supplemental funds for Russia.

Of course, Russian firms that are participating in the ISS program will also reap spinoff financial and technical benefits. Of special relevance is the participation of the Energia, Energomash, and Khrunichev firms. They participate both in the ISS program and in

joint ventures to launch communication satellites and manufacture upgraded rocket engines for American space launches.²²

One example of a U.S. company's efforts to use the wherewithal of such firms is Lockheed Martin 's agreement to purchase in Russia up to 101 new RD-180 rocket engines valued at about $1 billion. The first 18 engines are to be delivered by 2001. For this undertaking, Lockheed Martin has teamed with AMROSS, a joint venture involving Energomash and Pratt & Whitney. The engines are being built in Khimky, Russia, for use on one of the U.S. Air Force's family of rockets (Evolved Expendable Launch Vehicle). RD-180 engines should reduce assembly time and improve operational capability while cutting costs.²³ Lockheed Martin may also use the same rocket technology for commercial launches, a step that might result in an additional $2 billion in orders for Energomash.²⁴

The ISS and related commercial deals help keep the Russian space industry alive. Some Russian critics, however, feel that such deals could harm Russian interests by giving away technology at unrealistically low prices. The more common response has been, “We had a choice: either sell the engines to someone who will use them or let them rust in the factory while the technology goes to waste. We chose the first option.”²⁵

Since 1991, the U.S. government has provided financial incentives, advisory services, and political support for U.S. companies interested in trade and investment opportunities in Russia, including many aerospace and other engineering-based companies. An early emphasis was on encouraging U.S. investments in conversion activities within the Soviet defense industry, both to uncover marketable technologies and to facilitate the downsizing of the military-industrial complex. Since 1994, this orientation has broadened considerably to include American private sector interests in natural resources and many industrial fields. Vice President Gore, together with his appropriate Russian counterpart, has co-chaired almost a dozen meetings of a Binational Commission that encourages greater involvement of American firms in Russia.

In the early 1990s, the U.S. government established the Defense Enterprise Fund (DEF) to identify advanced technology opportunities and to link Russian enterprises with American partners. To that end, DEF took equity positions in a few Russian technology companies, including a manufacturer of submarine components that was shifting to producing excavation equipment, an enterprise seeking new applications of satellite tracking technology in the telecommunications industry, and a company installing fiber optic networks in remote areas of Russia. Buoyed by success in these efforts, DEF had planned to establish a related fund involving American private investors. When the Russian economy took a nosedive in August 1998, however, private investors lost interest at least temporarily, and the plan was shelved.²⁶

Also, since 1995 the U.S.-Russia Investment Fund—which receded $440 million in capitalization from the U.S. Agency for International Development—has invested in more than 30 Russian companies, including firms involved in telecommunications, pharmaceuticals, and forestry. It is the only investor offering long-term loan financing for working capital and equipment to Russia's small business sector. Despite concerns over corporate governance issues that have not been adequately addressed by the Russian government, it continues to consider new projects, holding a belief that crisis survivors can use capital efficiently.²⁷

From the outset, the U.S. Department of Commerce was a focal point for promoting American private sector initiatives. The department tried to target privatized Russian firms, although such a classification is often misleading. Some privatized companies are simply appendages of state enterprises. Some are stand-alone companies that seem on the right track toward independence. But few large companies have been privatized to the extent that they are no longer responsive to governmental directives. Thus, in practice, the department became less concerned about the roots of Russian participants in its programs than in their potential to contribute to a market economy that would create a favorable environment for achieving U.S. trade and investment objectives.

The Department of Commerce has several programs. With American firms, it cost-shares business internships for Russians at those firms'

U.S. facilities. It also assesses changes in legal and regulatory frameworks and identifies opportunities for American firms to work with specific Russian enterprises and research institutes. A recent initiative supports health-industry partnerships with two-way trade missions on medical equipment, pharmaceuticals, and health services. ²⁸

The U.S. Trade and Development Agency (TDA), an independent U.S. agency, encourages investments in Russia by providing grants to American firms on the order of $300,000-500,000 for feasibility studies of potential projects. These studies often employ Russian specialists as consultants to the firms. Should a feasibility study lead to a project, the consultants are then well positioned to participate in the project. TDA has supported more than 150 studies at a cost of about $50 million. Priority areas of interest have included oil and gas, power plants and electrical networks, transportation infrastructure, health care, and electronics.²⁹

Yet another U.S. agency, the Overseas Private Investment Corporation (OPIC), operates as an investment bank customizing complete financial packages for projects. It insures projects against loss owing to expropriation, political violence, or problems in converting rubles to dollars. It also sponsors trade missions. As one example, OPIC has supported a joint venture of Lockheed Martin with the Krunichev and Energia firms to build a sea-based launch platform for communication satellites.³⁰

The U.S. government also supports projects of the World Bank and the European Bank for Reconstruction and Development. Of special interest in advancing Russia's innovative capabilities is the possibility for Russian firms to bid on contracts of these organizations for goods and services tied to specific large projects. However, Russian firms frequently have technical difficulties in the competitions. A request for bids may specify early delivery of items whereas the interested Russian enterprise may have dormant production lines that cannot be quickly re-started. Also, conformance to western technical specifications may be required, but Russian firms may have a legacy of conformance to outdated specifications of the Soviet era. Nevertheless, Russian firms often win the competitions for contracts.³¹

Thus, there are many private sector activities with U.S. govern-

ment support. But the volume of foreign investment in Russia is small in comparison with investments in other transition countries, such as Hungary, and U.S.-Russian trade is limited.³²Western analysts repeatedly underscore the lack—not of money to finance proposed projects—but of bankable business plans coming from Russian organizations, alone or in partnership with western firms, as a constraint to more rapid development of alliances involving western partners.³³ The weakness of many business plans is a direct reflection of the gap between the capabilities of Russian institutions to develop technologies and their wherewithal to take technologies to market and sustain that market. This follow-through capability is precisely what lending institutions are searching for to ensure they will be repaid.

Despite the focus of U.S. government policies on facilitating activities of American firms, the private sector view of government efforts is at times negative. For example, the U.S. Chamber of Commerce notes that the expansion of U.S. government programs in Russia may be giving the Russians a lesson in inefficiency and bureaucratic imposition. The Chamber of Commerce has been rightly concerned about U.S. nonproliferation programs that often target the same commercial opportunities as traditional trade and development activities funded by U.S. agencies.³⁴

In 1996, the Binational Commission co-chaired by Vice President Gore, recognizing that the step from the laboratory to the market was large and that new thinking was needed in Russia, decided to supplement the traditional routes of cooperation with special attention to commercialization of technology as a generic topic. A special working group was assigned to see how American experience might help improve the process in Russia. Russian government officials pointed to a few successes among small entrepreneurs in finding Russian customers for their products and hoped to replicate this experience many times over.³⁵

On the positive side, the Russian Ministry of Science and Technology has concluded that Russian government funds are stimulating technology commercialization on a limited but important scale. The ministry points to progress in linking hundreds of research institutes to the Internet. Also, Russian government showcasing of technologies at in-

ternational exhibitions has paid off with lucrative contracts. And the ministry's expert advisory services on the intellectual property rights aspects of international deals have helped Russian firms, according to the ministry. Still, in comparison with commercialization efforts in the United States, Russian activities are minuscule.

The U.S. motivation for supporting the work group in finding new ways to improve on Russian processes to commercialize technology was twofold. First, a number of U.S.-financed nonproliferation programs had generated research products that were languishing in Russian laboratories with no buyers in sight. Second, there might be new opportunities for American firms to benefit from improving Russian capabilities of taking products successfully to the marketplace.

The well known impediments to commercialization were quickly cataloged (e.g., high taxes, murky intellectual property rights, shortage of management skills, lack of marketing experience, hesitancy of venture capitalists to provide funds). Agreement was reached to promote an Internet-based Russian-American information system. Case studies of Russian-American business alliances in the high-tech area were undertaken. Training programs for Russian legal specialists in relevant fields were expanded.³⁶

In response to the high-level interest in both countries in this topic, several additional U.S. programs have targeted technology commercialization. The U.S. Civilian Research and Development Foundation supports several small projects believed to be on the road to the marketplace with funds for scaling-up activities.³⁷ (See Appendix F for the foundations's expanded program.) The Eurasia Foundation supports projects to provide advisory services to Russian entrepreneurs searching for a market niche.³⁸The Peace Corps has deployed volunteers with business skills in the heavily industrialized region near Samara on the Volga River.³⁹And the U.S. Agency for International Development has sponsored small projects to familiarize Russian specialists with American approaches to linking research and development activities with the realities of the marketplace.⁴⁰

The studies of the Binational Commission highlighted an impressive example of an American company contributing to both economic and security objectives. United Technologies Corporation (UTC) has

been a pioneer in drawing on the military and nonmilitary strengths of the former Soviet Union. It has built a strong customer base in Russia. The company's Russian workforce now numbers 9,000 UTC employees, with the majority employed by Otis Elevator (a UTC company).⁴¹

The company first became involved in Russia in the 1970s, simply selling parts and equipment to the Soviet Union. Otis Elevator sold elevators, and Pratt & Whitney (a UTC company) provided commercial engines for western-made aircraft the Soviets had purchased. However, as recently as 1993, UTC sales were limited and that year earned only $8.7 million in revenues.⁴²

The company's second-stage strategy combined American and Russian technological capabilities, with a good example being a joint effort with the Ilyushin airplane manufacturer to supply engines for the IL-96M, Russia's intercontinental 350-passenger aircraft. Eventually the Russian government purchased 20 commercial aircraft for $850 million, with a substantial portion of the payments going for the engines. Meanwhile, Carrier (a UTC company) introduced air conditioning units in response to the demand for cool Moscow apartments in the winter—the only way to lower the high temperatures caused by central heating is to either open windows or turn on air conditioners.⁴³

UTC's third stage is to manufacture new products in Russia, with an example being heating and air-conditioning systems for Russian and western aircraft. In this case, Hamilton Standard (a UTC company) provided funds, equipment, and manufacturing expertise; while the Russian firm, Nauka Scientific, provided design expertise, an existing facility, and entry into the Russian market. Also under this strategy, Pratt & Whitney has teamed with Perm Motors to improve Perm's PS-90A jet engine and to develop a related industrial gas turbine engine.

U.S. government-initiated programs usually support development of technologies to be followed by searches for markets. In contrast, American companies define the markets and then undertake searches for the best ways to provide relevant technologies. In both cases, Russian workforces that supported the Soviet military-industrial complex—whether located in Perm or in nuclear cities—may play important roles. But the job longevity associated with the private sector

approach usually surpasses that resulting from government-designed programs, which are less likely to result in commercial products.

In 1999, the prospects in Russia for many American companies rebounded as demand revived for foreign equipment and services in the energy, telecommunications, mining, and construction sectors. Investment opportunities for import substitution became more attractive in food processing and consumer goods enterprises as the ruble's slippage in the value increased the costs of imports. But American firms considering investment have considerable difficulty judging the market. Russians themselves are uncertain as to whether to cling to national pride in opting for Russian products or to concede that the quality of domestic products often lags behind the quality of foreign imports. ⁴⁴

The importance of continued support for U.S. programs to help downsize the Russian military complex, to shore up containment of dangerous materials and technologies within Russia, and to encourage redirection of weapon scientists and engineers to peaceful pursuits should be obvious for Congress and the American public. When the programs encounter difficulties, they should be fixed, not abandoned. The near-term costs of heading off international security crises in distant parts of the world, crises that could have Russian roots, dwarf the longer-term costs of responding to such crises. We should be prepared to stay the course with these programs for at least a decade. Longer if necessary. If the United States does not lead in this nonproliferation effort, no one will.

Very few cooperative programs are designed explicitly to strengthen Russian capabilities to commercialize promising technologies. For the nonproliferation programs, bringing products to the marketplace is an important secondary objective, however. If former weaponeers are able to profit from their civilian achievements, they should no longer need support from nonproliferation programs.

Also, many projects of American firms depend on the commercial success of Russian-made products. But, the American companies will

retain interest in an activity only as long as it derives a profit. As has been shown, in the aerospace arena, with the appropriate support from the two governments, some technology programs can prosper, even with relatively long lead times from inception to market profitability.

On a broader basis, U.S. policy has been designed to support the evolution of a healthy Russian economy, including an appropriate business and regulatory environment. Programs to that end should enhance the likelihood for commercial success of innovative technologies. Sustaining and enhancing Russian technological capabilities, however, have not been at the center of cooperative programs.

The new focus on technology commercialization at the Binational Commission 's level is important. The emphasis should be on current and future marketplace demands and not simply on the use of available technology. The integration of consumer interests and research and development planning must begin early and continue until sales patterns are established. Such a long-term approach to innovating for profit may be beyond the scope of bilateral projects, but officials of the two governments should repeatedly emphasize this important point.⁴⁵

That said, the two governments should articulate an overarching strategy for bilateral technology cooperation, taking into account that many relevant programs currently are under way. Such a strategy could help sharpen the focus of individual projects, even if their primary purpose is not commercial success for Russian participants. Of course, when a U.S. government agency identifies an opportunity to enhance its mission by involvement in a program in Russia, it will shape the program to meet its own needs. When a U.S. company sees a chance to turn a profit—either long-term or short-term—it will continue to make the necessary investment to maximize the likelihood of commercial success, drawing on U.S. government programs for both financial and political support when appropriate. At the same time, greater U.S. sensitivity from both government agencies and private sectors to how important Russia' s innovation capacity is to its future is in the interest of both countries and should be encouraged.

Now that thousands of U.S.-Russia projects have been undertaken, a few lessons learned should be considered in future programs.

1. Give priority to the details of implementation. Many aspects of projects cannot be anticipated until they are in progress, and skill in handling details is no less important than skill in developing an overall approach. For short-term projects involving modest sums of money, official endorsements by both governments are usually not worth the effort if they can be avoided. But, for lengthier efforts, such approvals are valuable and often essential, even if they delay implementation for many months or even years. Also, while trust between Russian and American colleagues has increased in recent years, a signed document is more reliable than a handshake in confirming mutual agreements.

2. Train managers for specific jobs. Management training for Russians should be tailored to specific responsibilities the trainee will assume upon a course's conclusion. General management training for employment in mythical positions is seldom cost-effective. American managers also need training. Many fall short in carrying out their responsibilities in Russia simply because they do not take time to consider how Russian management practices and American approaches can be most usefully combined.

3. Don't ignore the Russian infrastructure.U.S. organizations balk at paying for heat, electricity, or equipment upgrades in Russian laboratories. They should therefore anticipate disruptions resulting from breakdowns in the research infrastructure. New joint efforts are needed to upgrade the infrastructure for projects of particular interest to both sides.

4. Rely on Russian ability to develop proposals.If given general guidelines and financial incentives, Russian specialists can develop well-framed proposals that are more appropriate to the Russian setting than those that can be developed by consultants or scientists from abroad. American participants should, of course, carefully review proposals and be sure there is full agreement on the details finally adopted.

An overarching principle is to have realistic expectations. For example, there are only a limited number of fields, such as space propulsion, nuclear transmutation, machine tools, and light-weight alloys, in which Russian technology is superior to technology in other coun-

tries.⁴⁶ Of course, superior technology is not needed for every project, but often it is.

Strategic alliances based on the overall business of the U.S. company, and particularly global marketing considerations, are often preferred to efforts linked exclusively to Russia. For example, joint efforts may be directed at producing components or subsystems in Russia that can be incorporated into existing products, rather than to developing new products. Also, an emphasis on software rather than hardware may be less expensive and less risky with faster entry to the international market.⁴⁷

United States agencies and companies operating in Russia know that crime and corruption are omnipresent. Also, the legal and commercial infrastructure is incomplete—a reliable commercial banking system, appropriate rights of minority shareholders, and ownership of land and property, for example, are works in progress. Uncertainties are rampant in all of these areas.⁴⁸

What is certain, however, is that U.S. departments and agencies, private firms, and research laboratories now have in place an unprecedented network of organizational and administrative arrangements for cooperation involving large cadres of specialists in both countries. There is unfinished business in Russia from both the public and private vantage points. Fine tuning of U.S. policies and programs is needed, but it would make no sense to reduce engagement with Russia in the research and development and commercial arenas.

1. Nonproliferation, Concerns with DOE's Efforts To Reduce the Risks Posed by Russia's Unemployed Weapons Scientists (Washington, D.C.: U.S. General Accounting Office, GAO/RCED-99-54, February 1999).

2. U.S. Secretary Daley Witnesses Signings Between U.S. and Russian Companies,” Fact Sheet, Department of Commerce, March 11, 1998.

3. Discussion in Washington D.C. with DOE officials, November 1998.

4. Ibid., January 1999.

5. Discussions in Moscow and St. Petersburg with Russian recipients of U.S. government grants, October and November 1998.

6. “Initiatives for Proliferation Prevention Fact Sheet,” distributed by DOE, May 1999.

7. Discussions in Washington, D.C., with DOE specialists, November 1998 and April 1999. For a review of this program see National Research Council, Protecting Nuclear Weapons Materials in Russia (Washington, D.C.: National Academy Press, 1999).

8. Discussion in Moscow with DOE representatives, October 1998.

9. Briefing in Washington, D.C., by DOE representatives, April 1998.

10. Personal communication with Russian project leader for NCI program in one of the target cities, October 1999.

11. For a more comprehensive discussion of the NCI program see Sig Heckert, Mark Mullen, and Jim Toevs, “Nuclear Cities Initiative,” unpublished manuscript, Los Alamos National Laboratory, March 30, 1998.

12. “Frequently Asked Questions, Nuclear Cities Initiative,” Fact Sheet, DOE, October 1998.

13. For background on the NCI program see Briefing at Public Meeting at DOE Headquarters, Washington, D.C., November 1998.

14. Ibid.

15. Remarks by General Thomas Kuenning, Monterey Institute for International Studies, Monterey, California, December 1999.

16. Ibid.

17. Discussion with U.S. expert on Russian chemical destruction techniques, May 1998; Kuenning, Remarks.

18. Glenn E. Schweitzer, Experiments in Cooperation, Assessing U.S. Programs in Science and Technology, The Twentieth Century Fund, New York, 1997, p. 31.

19. Ibid., pp. 30-31.

20. “Will Russia's Role in Space Project Alpha Become Eclipsed?” The Russia Journal, April 19-25, 1999, p. 11.

21. Ibid.

22. For an expanded discussion of the activities of key Russian firms in joint aerospace programs see David Bernstein, Commercialization of Russian Technology in Cooperation with American Companies, Center for International Security and Cooperation, Stanford University, June 1999.

23. “Lockheed Martin To Buy 101 RD-180 Rocket Engines from Russian-American Joint Venture,” Lockheed Martin Press Release, June 17, 1997.

24. Sujato Rao, “Rocket Exports,” Russia Review, August 25, 1997, p. 27.

25. Ibid.

26. U.S. Government Assistance to and Cooperative Activities with the New Independent States of the Former Soviet Union, FY 1998 Annual Report, January 1999, available from the U.S. Department of State, p. 101; Discussion in Richmond, Virginia, with DEF official, June 1999.

27. Olga Ananina, “U.S.-Russia Investment Fund/Delta Capital Management,” BISNIS, U.S. Foreiegn Commercial Service, Moscow, March 2000.

28. “Commercial Overview of Russia,” BISNIS, U.S. Department of Commerce, June 1998.

29. “TDA in the New Independent States,” U.S. Trade and Development Administration, June 1998.

30. “OPIC Highlights, New Opportunities and a Growing OPIC Portfolio in Europe and the NIS,” Overseas Private Investment Corporation, June 1998.

31. Interviews in Moscow with deputy directors of two Russian enterprises, April 1997.

32. For a review of U.S. government-funded activities see U.S. Department of State, U.S. Government Assistance .

33. Discussions in Washington, D.C., with representatives of western financial institutions interested in financing projects in Russia, World Bank symposium, March 1997.

34. “U.S. Commercial Relations with the Russian Federation,” U.S. Chamber of Commerce, originally issued 1996 but re-issued May 1999, p. 1; Discussion in Washington, D.C., with representatives of the U.S. Chamber of Commerce, May 1999.

35. “Report of the Meeting of the U.S.-Russian Technology Commercialization Working Group,” Fact Sheet, U.S. Department of Commerce, distributed in October 1997.

36. “Russian Technology Commercialization,” Fact Sheet, U.S. Department of Commerce, distributed in March 1998; “Russian Ministry of Science and Technology Activities in Technology Commercialization,” Fact Sheet, distributed in April 1998; “Joint Statement on Priority Directions of American-Russian Cooperation in the Area of Technology Commercialization,” Gore-Chernomyrdin Commission X, March 10-11, 1998, Washington, D.C., press release from the Office of the Vice President of the United States.

37. “CRDF Support of Research and Development Collaborations Involving Industry,” Fact Sheet, U.S. Civilian Research and Development Foundation, Arlington, Virginia, released October 1998.

38. Discussions in Washington, D.C., with Eurasia Foundation specialists, February 1999.

39. Discussions in Moscow with U.S. Embassy officials, October 1998.

40. Discussions in Moscow with USAID officials, October 1998.

41. Ruth R. Harkin, Vice President of United Technologies Corporation, “Being There First,” symposium presentation manuscript, U.S.-Russia Business Council, April 1, 1998.

42. Ibid.

43. Ibid.

44. “Doing Business in Russia—An Overview, U.S. and Foreign Commercial Service,” U.S. Embassy Moscow, October 1, 1999.

45. National Research Council/Russian Academy of Sciences, Technology Commerciailization, Russian Challenges, American Lessons (Washington, D.C.: National Academy Press, 1998). See the presentation by A. MacLachlan, “An Industrial Perspective on Technology Commercialization in the 1990s and Beyond,” pp. 24-32.

46. David Bernstein (editor), “Executive Summary,” Cooperative Business Ventures between U.S. Companies and Russian Defense Enterprises, Center for International Security and Arms Control, Stanford University, April 1997, p. x.

47. Ibid.

48. See for example Eugene K. Lawson, Russia Business Watch, U.S.-Russia Business Council, Washington, D.C., Summer 1999, p. 3.