The failure of the IMF, the U.S. Department of Treasury, the news media, and Russia experts to foresee the current economic crisis should chasten anyone bold enough to hazard a prediction as to the future of Russia.

The International Herald Tribune, 1999

The most promising firms are small, high-tech companies with products successful in Russia, potentially successful in world markets, and with access to capital and practical management training.

U.S. Embassy, Moscow, 1998

Why waste time with problems in Russia where the likelihood of indigenous technology benefiting the United States or contributing to economic development is low? Globalization of modern technology is taking place in Europe and Asia, and that is where we should concentrate attention. Even other ‘transition' countries, such as Poland and Hungary, offer more promise than Russia as technology partners for the United States.

This was the view of a panel of “experts” on international cooperation in science and technology assembled in Washington, D.C., in the spring of 1999.¹

The rejoinder is simple and persuasive. Russia is too important to ignore. The country is a vast repository of natural resources. It has more trained scientists and engineers than any other country in the world, and they have fulfilled some of the most difficult tasks to confront any nation. They conquered barren wastelands and harsh arctic

regions, and they overcame logistical nightmares in building a modern industrial nation that covers one-seventh of the Earth's surface.

On the ominous side, Russia is home to 20,000 nuclear-laden missiles and bombs at the ready and to hundreds of tons of weapons-grade plutonium and uranium located in storage areas throughout the country. As the Chernobyl accident demonstrated, the Soviet-rooted environmental side effects of Russia's industrial growth are of concern to the entire world. In the absence of adequate health care programs, tuberculosis, hepatitis, AIDS, and other diseases threaten to move toward Russia 's borders and beyond. Finally, international criminal groups with roots in Russia and access to modern armaments—from plastic explosives to rocket launchers—must be held in check around the world.

Despite Russia's long history of technical achievements, technology development is now in the doldrums. But the country has an uncanny knack of surprising even the best experts. We cannot rule out the likes of the technology pioneers who designed the first commercial nuclear power plant, launched the first space satellite, invented the hydrofoil, developed laser eye surgery, and built machine tools purchased by countries around the world. The experts responsible for these accomplishments have passed on much of their prowess to younger generations of specialists, who are still in place despite the brain drain. Nor can we forget the efforts of Stalin, Khrushchev, and their successors to use nuclear, space, and other advanced technologies in ways that changed the course of history for the entire world.

Many Russians are visionaries. Some Russian schemes, such as those mentioned above, seemed unrealistic at one time. But they have proved achievable. Now we ask whether the highly talented team of electrical engineers who, in near isolation from world science and technology, designed and built the early Soviet computers can really fulfill their ambition to produce a microchip that will compete with Intel 's most advanced product?² Will efforts of the Ministry of Atomic Energy to privatize nuclear power plants and attract foreign investors lead to a new generation of large, fail-safe reactors that are affordable, efficient, and secure?³ Can a new gas pipeline follow the deep contours of the Black Sea 's bed and dramatically increase Russia's export

earnings without posing environmental problems?⁴And, at the local level, will the plans of city administrators to ensure that Moscow has the most modern crematorium with the latest computer-driven technologies save enough energy to offset the costs? ⁵

That said, it is far better for the United States to have its laboratories and companies involved in cooperative programs aimed at the revival of Russian technology for peaceful pursuits, however slow, than to be on the sidelines constantly guessing whether developments dangerous for Russia or for the world are just around the corner. Besides, the potential benefit of an improved Russian economy—with a huge untapped market—is in itself worth some degree of effort. We not only need to understand technological advances in this large country, but we should draw on widely respected American know-how in influencing transformations within the Russian industrial complex. Such transformations are taking place every day with immediate security and longer term economic implications for the United States.

If the politicians who control purse strings in Washington don't recognize the importance of aggressive U.S. engagement to influence Russian technological developments, they should reflect on the predictions of the U.S. National Intelligence Council about Russia's ambitious military research program. In the near term this particular program will upgrade a range of conventional weapons systems, and it will turn out new generations of sophisticated armaments by 2010. In general, arms exports will continue to be one of Russia's financial mainstays. Most worrisome, upgrading missile and nuclear capabilities, to be more accurate and more destructive, will continue apace.⁶ The United States cannot afford to be only a spectator to these developments.

At the same time, foreigners will not play decisive roles in shaping the future of Russian technologies that are so dependent on the economic environment. Historians already underscore that the United States missed a one-time window of opportunity to influence Russian economic developments in a positive and sustained direction in the early 1990s. Russia reformers who put their faith in American textbook models are now bearing the brunt of the responsibility for Russia's economic mess—a 73 percent inflation rate in 1998, a 40 per-

cent drop in gross domestic product from 1991 through 1998, and a loss of real money income of 40 percent from 1991 through 1998.⁷ Against this perception that foreign advisers share much of the blame for the prolonged “transition depression,” policies will only be effective if the Russian government and the public have a sense of ownership of the ideas and the approaches—a conviction that the policies are conceived in Russia for the benefit of Russians.

Foreign investments and collaborative programs promoted by western organizations can be important, particularly in the short term. However, unless these efforts are also viewed in Moscow, St. Petersburg, Novosibirsk, Vladivostok, and elsewhere as programs that have been shaped by Russians and that support Russian objectives, in the long term they will not be significant. They may even collapse in the short term.

Russian politicians regret the government's mistakes in turning over to western bargain hunters much technology that, in their view, should have secured the nation's economic future. They are frustrated that financially there was little choice, but they are still determined in their efforts to recover their lost leadership in the high-tech arena. In the words of the president of the Russian Academy of Sciences, echoing a doctrine that has repeatedly paid off in the United States and other western countries, “Technology must again become our engine of economic growth.”⁸

Some western economists dismiss such statements as unrealistic bravado, arguing that Russia should forget about re-emerging as an industrial power. Russia should exploit its comparative advantage in raw materials while turning its highly skilled work force into a labor pool for foreign entrepreneurs. But this will not be the Russian way. Such a view is rightly considered in Moscow as western arrogance, and Russian leaders will not accept the notion that the country should become a repository of cheap labor while other countries derive the profits from processing energy, mineral, and timber resources extracted in Russia. They want Russia to be involved in many aspects of the value chain, from extraction to sales of finished products.

Thus, however bleak the economic horizon, leaders in Moscow and elsewhere will cling to their goal of Russia again becoming an in-

dustrial powerhouse, as the Russian people continue to believe in themselves, however bleak the economic horizon. One 1999 poll showed that 72 percent of the population wants foreign debts to be repaid using Russia's scarce internal resources rather than seeking more loans to reschedule the debts. To these responders, money is of course important, but national pride also means a lot.⁹

Despite the hopes of Russian leaders for stability and better times, shifting political and economic policies will continue to shackle technological progress. Innovation requires a long-term commitment. And, the more the uncertainty, the less the interest of potential investors. Even if there are consistent financial ground rules, industrial technologies that can become competitive on a large scale will only appear if the government jump starts the innovation process that extends from invention through modern manufacturing to marketing.

During the transition period, both greater protection of the Russian market from foreign competition and government assumption of some of the risk of innovation are needed. These measures can encourage skeptical domestic industries and individual consumers to turn to Russian products in their efforts to make ends meet. Then manufacturers will have to gradually show them that “made-in-Russia” guarantees both on-time delivery and acceptable quality.

Of course, corruption throughout the government and a decline in the health of Russian youth could be showstoppers to progress on any front. Researchers may devise better surveillance systems for monitoring bank transactions and develop more nutritious food offerings, but they will hardly solve the critical problems of rampant dishonesty and dietary deprivation aggravated by the rise of poverty. Only by joining forces with other forward-looking citizens and legislators who are appalled by corruption, the neglect of children, and other social ills will they be able to help force government into taking more responsible action on these crucial issues.

Western-sponsored programs will remain of considerable importance, especially in the national security arena. But international cooperation and foreign investment on the limited scale of the past will have but a minor impact on the Russian economy. More ambitious efforts, commensurate with the importance of Russia to the world and

carefully designed to protect financial investments, can help move the country in directions that are truly rewarding for the Russian people and for other countries as well.

Several trends and underlying currents in Russia have pivotal impacts on the future prospects for technological development.¹⁰For the first time in modern Russian history, there is no political ideology guiding the country. No one knows what is politically correct. Most adopt the philosophy, “We will do what we want if we can get away with it.” Central planning, market economy, and regional autonomy have all become nebulous phrases interpreted in many different ways. Even the meaning of democracy lacks a consensus, and new political parties stir little interest outside Moscow. Intellectual disarray is the order of the day—a disarray that hardly provides confidence that long-term investments in research and technology will be secure.

Thus, the continuing turmoil over ownership of technological assets —past, present, and future—of the state is to be expected. Soviet-era facilities have been transferred to private parties in favored positions. They have taken them legally or illegally and are prepared to protect their acquisitions with guns and personal connections that—in the absence of a worthy legal framework—are more important than constitutional arguments.

Having seen this diversion of state assets, a large portion of the Russian population believe they too have a right to share in Soviet assets, even if this means taking property now belonging to the Russian state. Stealing from the state has never been considered real theft. During the Soviet era, the population felt like soldiers in an all-encompassing army; and in armies the world over, borrowing items from supply lockers or motor pools is seldom considered a real crime.

This attitude has fostered economic crime that is so pervasive it is more or less accepted as a way of life. Supported by a growing legion of participants in unseemly activities and genuinely abhorred by only a few of the particularly aggrieved, crime is considered a great nuisance but an inevitable daily occurrence. As if Russia 's homegrown thieves

were not enough, a worldwide criminal network has positioned itself to share in the spoils of a vulnerable Russian state. Russia's once-sealed borders have been thrown open, with controls on imports and exports of goods widely circumvented. Consequently, business transactions must include the costs of placating criminals and must be absorbed on company balance sheets—at least in the short term—before resources can be freed up for exploring new ways to make better technology-based products.

Obviously, for the foreseeable future the Russian economy will not mirror economies that function well in the West, and there is not even a pretense of equal opportunity for all investors. To be sure, the country has been cleansed of a communist-brand economy. The Russian version of capitalists, however, represents central control of a new type. They will resist by force, if necessary, the threat of losing their cash cows.

The cost of transition from communist to capitalist economics has been tremendous in terms of capital flight, evasion of taxes, lost production capabilities, and human suffering and disillusionment. In the end, misguided efforts have led to a total failure to achieve the widely sought objective of economic prosperity for the general population. Thus, policies are desperately needed that have economic prosperity as their primary objective. This means an improved standard of living, not just for a handful but throughout the country.

A market economy that provides this improved standard of living should continue to be the ultimate goal. If Russia is to be a significant participant in the global economy—and it should be—it must play by the international rules calling for economies driven by market forces. As demonstrated during the past decade, however, progress along the road to free markets will continue to be sporadic. With that reality in mind, the Russian government should make a stronger effort to ensure that social benefits flow to those who are not yet part of the new economy as well as those who don't need safety nets. Obviously, overall progress will be at a much slower pace than hoped for in the past.¹¹

Indeed, an even more severe economic crisis may be waiting in the wings. A dark cloud hangs over near-term economic forecasts. Some experts warn of hyperinflation just over the horizon accompanied by a

deepening recession that may cause the collapse of the government installed in 2000. If such a prediction comes true, they see a replacement regime that takes a firmer hold on the economy to restore disintegrating law and order, while raising the specter of violent confrontations and a return to repression.¹²

Another, more likely scenario in view of recent history is a slow but steady “Russification” of the concepts of a market economy, with an emphasis on avoiding violence. This new economy will also require more effective measures for law and order and more central control of economic assets and economic transactions. While there undoubtedly will continue to be suspicious incidents of instant wealth and expanding pockets of abject poverty, somehow the country will muddle through without resort to a political revolution.

Central to the functioning of a market economy is the flow of money among government agencies, enterprises, institutes, and individual consumers, with commercial banks being critical nodes of the system. After the Russian banking scandals of 1998 and 1999, barter and counter trade seemed more attractive; but they can take firms only so far. Serious efforts toward technological revival require safe and efficient mechanisms for money transactions. Western banks with expanded charters for operating in Russia offer the only way to restore confidence during the next few years among the large number of potential customers of the banking system who should be key participants in economic revitalization (see Box 10.1).

At the same time, the Russian government harbors a fundamental dislike for western banks operating in Russia, perhaps because so many officials have cozy relationships with Russian banks of their own choosing. Nevertheless, creditors in Russia and abroad should press hard for greater authority for the western banks. If given such authority, responsible financial institutions will likely expand their operations.

Returning to the clarion call of Russian leaders for technology to spur economic growth, the new market economy should be technology-friendly. Governmental measures must compensate for the handicaps of being located in Russia: the geography of Russia, the country's management traditions, and the experiences of the workforce reinforce separation of research, production, and marketing.

The inadequacies of the physical, legal, and financial infrastructures to support technology development also contrast sharply with the favorable business environments in other countries where technology has thrived. Without new policies and programs, few Russian organizations will be able to cross the bar and succeed in the global marketplace. If Russian organizations do not become players in the global economy, they will have an increasingly difficult time competing for sales of goods and services in Russia.

Thus, if the economy is to grow technology must be nourished. While western economists cringe at the words “protectionism,” “subsidies,” and “monopolies,” these concepts are not necessarily bad if applied in moderation. If carefully limited, they can be crucial for technological revival. Defining and enforcing the limitations is the key and will require months of debate, years of false starts, and a decade or more of experience until a satisfactory approach is in place.

The Russian Ministry of Science and Technology often has analyzed the problems confronting Russian economic growth based on modern technologies. The ministry, with roots that date back four decades, has an understandable bias toward central control of technological assets. Also, the ministry emphasizes the supply side of technology rather than market demand. As a result, ministry leadership pushes the programs of the government institutes under its patronage that generate technologies. Nevertheless, ministry analysts do highlight key problems to be resolved and offer sensible suggestions for Russia to eventually regain its position as a prosperous industrial nation. ¹³

In February 1998, the ministry developed an important framework for a technology policy. Surprisingly, other concerned ministries concurred with the proposed approach. These ministries are often reluctant to endorse policies developed by other organizations, particularly policies that overlap their responsibilities. The ministry's principles are bold and, if supported with modest financial resources, could be far-reaching.

• Higher tariffs should be levied during the transition period on imports of advanced technology items in order to give Russian firms a better chance at establishing themselves on the domestic market.

• Regional governments should increase their support for programs within the science cities and should assume greater responsibility for better telecommunication networks within the regions. Federal research institutes in the science cities and elsewhere that are oriented toward local problems should be transferred to the jurisdiction of the regional governments.

• Inventors should have greater shares of ownership in their discoveries and better protection of their rights. Also, the ownership of equipment made available by the government to research institutions should not be dictated by the government but should be decided by mutual agreement.

• Important research and development projects with potential commercial applications should, when necessary, be financed by the

government as well as by funding provided by the private sector. Government support for such research and development projects should be transparent to all stakeholders in the future of Russia.

• The government should provide repayment guarantees for bank loans to entrepreneurs for commercializing potentially important inventions and, when appropriate, should cover the interest charges for such loans. But the government should not directly finance commercialization activities. To further lower the risks inherent in innovation, the government should guarantee that well-conceived high-tech investments by entrepreneurs will be at least partially recovered even in cases of failures to penetrate the market.¹⁴

Some of these ideas have been around for a long time. However, the formal embrace of this sensible suite of proposals by the government is significant. If put into practice, the long-term prospects for technology commercialization would be much brighter than at present.

But what will be the source of the government funds for a significant program of cost-sharing of research and development and of covering costs of failed modernization and innovation efforts, as proposed in the last two principles of the ministry? The Ministry of Finance has so many demands on so few resources that it is an unlikely source. The private sector, both in Russia and abroad, might consider cost-sharing on specific projects but surely will not provide funds to cover the government's part of the bargain. Existing foreign assistance programs are already so committed to specific target areas that reorienting their efforts seems a remote possibility. Thus, the only realistic source is a new program of funds provided by foreign governments and international agencies, a program that is free of historical baggage and can be shaped with a view to the future not to the past.

For almost a decade, some experts in the West have called for a Marshall Plan for Russia.¹⁵At several summits of the heads of state of western countries, it seemed that assistance packages in the tens of billions of dollars might be forthcoming and constitute a new version of the highly successful program to revitalize Europe after World War II. However, most of the billions of dollars that became available soon came under the control of the IMF and other international financial

organizations most concerned with promoting their version of economic reform while keeping the Russian debt at a manageable level.

At the same time, proposals for a Russian Marshall Plan always encounter a series of valid concerns from western Russia experts. The mafia would steal the money. The macro-economic framework is not in place to encourage the private sector to sustain the program when funding runs out. Russian management of large programs is always inept. There would not be many bankable business plans to consider.

In short, a Russian Marshall Plan is not realistic nor is it appropriate. The current situation in Russia is different from the military, political, and economic situation in western Europe 50 years ago. Still, the concept of a program to help jump start self-sustaining industries that was important for Europe then is important for Russia now.

Given financial and political realities, rebuilding Russian industries in a short period of time is not feasible. Rather, the dual focus for financing a technological revival suggested by the Ministry of Science and Technology—namely, government-industry funding of research and development projects and government assumption of some of the risks of innovation—is sound, recognizing that the payoff will be long term. But it also will take years for Russia to have an economic and legal framework in place for any program to have large-scale and sustained impact.

Thus, the objective of the first few years should not be to revitalize the economy on a major scale. The objective should be to put in place a few technology modules that successfully penetrate the marketplace and that could be replicated month-by-month and year-by-year. In parallel, the improvements needed in the banking sector, in tax collection, and in other critical areas that have been identified throughout this book must go forward.

As to deeply embedded western concerns over not wasting money in Russia, funds from abroad could be protected if the management of all financial transactions of say $1,000 or more were vested in a western accounting organization with strong integrity. With regard to skepticism over development of solid proposals, when provided financial incentives Russian specialists can develop the essential elements of proper proposals for research and development grants and business

plans for commercial loans. As seen in smaller western-financed programs, they would rise quickly on the learning curve and soon convince skeptics that Russians can respond to market requirements.

Small Russian companies or semi-autonomous units within or outside the walls of enterprises and institutes should serve as research centers or profit centers for individual projects. They are rewarded for each success; and when failures mount, they are abandoned. Realistic rent and energy payments by the centers should be included in proposals, despite Russian tendencies to undervalue these services. Also, the proposals should reflect the need to pay for protective services against the mafia. But approved proposals should not call for funds to be spread over entire institutes or entire enterprises simply to keep workers employed. To this end, overhead rates should not exceed 50 percent, in contrast to the 500 percent that is often charged in order to keep oversized institutions alive.

How large should the projects be? What would be the criteria for selection? Who should decide which projects are supported? Russian and western organizations already have accumulated considerable experience in all of these areas during their activities in Russia.

First, with regard to research and development matching grants, the projects might range from $100,000 to $3,000,000 over periods of 1-3 years. One-quarter to one-half of the funds would be provided by the Russian company that intends to use the research results in a new or improved product or process. A provision could call for repayment of a grant if the research and development project leads to a commercial success.

Turning to loan guarantees for projects that introduce innovations into the marketplace and to the scheme for partial compensation of unsuccessful entrepreneurs for taking risks in innovation, the projects might range from $1,000,000 to $20,000,000. These projects would target major innovative activities requiring considerable start-up costs. Some projects might be scaled down to service small entrepreneurs, although there are already small programs in place for this purpose (as shown in Chapter 2).

The primary criterion for selecting research and development projects for funding should be long-term marketability potential. For

projects to introduce new industrial and consumer products and manufacturing processes, the criterion should also be marketability, but in the short term. The cost-sharing between researchers and industry and the relations between manufacturers and potential customers are important marketing catalysts.

The selection of projects must be Russian decisions that are documented in a clear way for the general public. For large projects, there should be project assessments prepared by reputable western consulting firms. The review and selection procedure should inspire confidence in the program.

What would be the cost of such a program? The initial financial commitment by foreign governments and international agencies should be on the order of $100 million dollars per year climbing in five years to an annual level of about one billion dollars. This level is large enough to command attention and support at the highest levels of government but not so large as to exceed the absorptive capacity of Russia nor the limits of western financing capabilities.

The amount seems trivial in comparison with the trillions of dollars of investment required to modernize all Russian industries. But all industries should not be modernized. Those areas where Russia has either a comparative cost or quality advantage or at least near-parity with the West probably deserve support. Also, in some areas lower-quality, lower-cost goods might be appropriate for the Russian market during the transition period.

A little money can go a long way if it targets technologies with multiplier effects and is carefully guarded en route to its intended purpose. Perhaps 50 percent of the funds would be returned to the government in loan payments that could then be recycled. The other 50 percent may be eventually lost on projects that did not meet expectations. This would be an excellent record given all the risks in any program of innovating for profit.

The proposal, of course, conforms to the principles enunciated by the Ministry of Science and Technology; and as long as it is funded by the West the likelihood that the Russian government would embrace the approach is high. Of special importance to the Russian government, the new resources would be focused on Russian institutes and

companies. The companies could involve western partners as suppliers, subcontractors, or marketing consultants if they so desired. But the use of all funds would be the responsibility of Russian research and profit centers operating under the watchful eye of the western accounting firm hired to monitor the flow of money.

A related initiative should be the adoption by the central government and by regional and local governments of a “Buy Russia” policy directly challenging the incestuous relationships that have developed between government procurement officials and foreign suppliers of goods and services. This policy would require that for any project involving Russian government funds—federal, regional, or local—a Russian company would receive the contract. Only if a Russian company were not available to produce acceptable goods or services in a timely manner could procurement from a foreign source be undertaken.

In time, such a policy would be a major change in the current way of doing business in Russia. It could provide a stimulus to the revival of technology-based production focused on the needs of specific Russian customers. In the near term, there would be fierce resistance by both politicians and bureaucrats to giving up their foreign connections. For example, during a trip to Russia in 1999, I encountered three German businessmen. One was selling computer software to the news agency, TASS. Another installed water pumps for the Moscow city government. The third had a contract for electrical connectors needed by Moscow housing authorities. The businessmen each readily acknowledged that Russian firms could easily underbid them with goods of comparable quality, but such firms could not offer business trips to the Bavarian Alps. Thus, establishing and enforcing ground rules concerning the definition of “local availability” of goods and services would not be easy, but would be crucial to having a useful program.

There are not many shortcuts to reviving Russia's slumping industry—an industry with much outdated equipment, with few reliable suppliers, and with even fewer dependable customers. Most enterprises and institutes are saddled with long-standing debts and oversized workforces. Still, Russians are skilled at finding technical solutions to problems, and they should be at home with new technological efforts. Such efforts, if targeting customers with access to funding, may be the

only hope of Russian organizations moving from the red to the black column during the working days of much of the current labor force.

Adding to Russia's difficulties, the products resulting from some of the country's greatest technological strengths are on the security warning lists of the international community. Electronic control devices, high-strength plastics, chemical mixtures, and nuclear materials are becoming ever more entwined with both military applications and economic development around the world, and the uncertainties between appropriate and inappropriate markets are increasing. International cooperation both at the governmental level and through private sector alliances can help illuminate these growing ambiguities. Such clarification is an important first step in heading off diplomatic clashes that further complicate technology development in Russia.

Few Russians believe that corruption will ever disappear from the scene. “From time immemorial people have been bribing.” “Corruption is in our nature. It's in us, in our mentality.” “The rich do it because they always want more.” “It's so big that it may lead to an uproar one day.” These were interview responses of Russians to the question, “Is it possible to fight corruption?”¹⁶ Foreigners are well aware that personal profit is a primary interest of policemen who flag down cars for minor traffic transgressions and bureaucrats who issue permits of all types. Table 10.1 estimates payoffs from certain types of services in Russia.

Thus, corruption takes many forms. In 1997, the Russian criminal code for the first time called for the punishment of bribery involving commercial organizations. Many other proposals to combat corruption have been offered by Russian and foreign experts. Of critical importance is a commitment, including action agendas, at the highest levels of government to fighting corruption; and the public must be convinced that the leaders of the nation are not diverting state resources to their own overseas bank accounts. High visibility prosecu-

tions of corrupt officials, particularly those in high positions, are important to show that the commitment is real.¹⁷

Other steps can be taken. Of central concern is the handling of government funds, and an emphasis on transparency of public transactions is the key. Appointing “inspectors general” within government agencies has been suggested, although they would certainly need bodyguards when they began investigating details of financial scandals. More aggressive reporting of corruption by the media and establishing nongovernmental anti-corruption advocacy groups have also been proposed.¹⁸

Westerners should become more sensitive to the boundary between personal favors, legitimate business dealings, and corruption. For example, to many Russians trips abroad are highly cherished, whatever the sponsors' motivation. If the trips are for Russian children searching for foreign scholarships, the sponsors will be long remembered and usually rewarded back in Russia. Western governments and

foreign businesses seldom consider international visits that grease the skids for political dialogues or business deals in Russia as contributing to corruption. I am not suggesting cutting back on appropriate cultural exchanges or normal business dealings. I am suggesting greater diligence by western firms and governments in examining the real reasons for proposed trips.

Checking corruption is crucial if technology is to make a significant impact on the Russian economy. The amount of money that must be funneled to technological development is substantial. When financial stakes become large, corruption becomes the order of the day. What can the researchers do to help? The ethos of science—transparency, objectivity, merit-based review, competition among all comers—is in principle an antidote to corruption. Researchers should, by example, help spread these traits throughout society. While the impact will be indirect and slow in coming, it can nevertheless complement the more direct and more immediate action by the government to clean up its act.

A second barrier to developing a strong Russian economy is the declining health of the population, and particularly the endangered health of Russian youth. Recent reports suggest that 75 percent of pregnant women have a serious pathology during pregnancy due to malnutrition, endometriosis, or sexually transmitted diseases. The implications for newborns are ominous. Malnutrition during early childhood may also account for reduced height and weight as children develop.¹⁹

Persuasive evidence of the decline in the health of Russian youth is provided by the Russian army, which must reject large numbers of potential recruits due to health problems. Whether the disqualified recruits are mentally disturbed, infected with syphilis, or have smaller than normal chest measurements, the poor condition of the labor pool is causing alarm throughout the country. When the increased use of tobacco, alcohol, and narcotics are taken into account, the outlook for future generations is not bright.

The health of Russian children speaks directly to the future health of Russia. Regardless of the technologies that may be uncovered in the next decade, a sick nation will not be able to sustain economic viability. The Russian scientific community should be outraged by the situa-

tion. Modern drugs should be widely available in Russia, and the importance of good nutrition should not be a mystery. As for the U.S. foreign assistance program in Russia, a much stronger commitment than the current $9 million per year for the health sector is in order. A demonstrated concern over the well-being of ordinary people should resonate well with Congressional and other political leaders in Washington who want to be helpful but are reluctant to become entangled with the Russian government on more controversial issues.

Against a background of economic stagnation and industrial decay, do the following hypotheses foretell the role of technology in Russia 's future?

• Because Russia's research and development expenditures are between 5 and 7 percent of U.S. expenditures, we should not expect competitive Russian products to find their way to the international marketplace.

• Because the contribution of Russia's small innovative firms to the gross domestic product is less than 1 percent, these incubators of new technologies will have little impact on the economic condition of the country.

• Given the pessimistic job outlook for talented young Russians, growing numbers of the best students will seek education and positions abroad.

If these assertions hold up over the long term, then Russia will surely remain in dire straits. But, while they seem appropriate for 2000, they do not have to be the predictors of Russia's future. Russia has both the economic incentive and the technical wherewithal to stop the downhill slide of its technology. And with unwavering political will and strong international support, within 10 years Russia can again be in a position to effectively use its large bank of technical talent as a basis for providing a decent standard of living for its population.

In particular, four approaches can make a difference between

treading water in a shrinking pool of resources and making forward progress that benefits the Russian people.

• Build an economic framework that stimulates industrial activity, resting in large measure on the use of Russian technologies, and that distributes the benefits of industrial growth in a fair and equitable manner.

• Facilitate partnerships between Russian industry and universities that convince students innovation is intellectually challenging and can be financially rewarding.

• Establish export policies for sensitive items that provide western trading partners with confidence that Russia is living up to its international commitments and that a responsible government is in charge of the country.

• Encourage recognition by western governments of the importance of long-term stability in Russia, a recognition that receives comparable weight with traditional concerns over near-term avoidance of a hard-line coup, a civil war, or a nuclear accident.

In 1999 there were hopeful signs. Russian firms were penetrating the Russian consumer market, as the devaluation of the ruble made the costs of imports prohibitively expensive for many Russians. The Duma finally adopted legislation that enables foreign companies to participate, at least in a limited way, in developing Russia's oil reserves (production sharing agreements). Thirteen million Russians traveled abroad that year, suggesting that wealth is spreading more broadly than had been assumed.

Finally, no other country can profit more from the information revolution than Russia. Given its vast geography, its lack of worker mobility, and its many countrywide pockets of technical expertise, information technologies open all types of time-saving and money-saving opportunities. With millions of kilometers of decaying Soviet-era telephone lines, poor communications have repeatedly inhibited business deals both within Russia and with foreign customers. Electronic messages, while still heavily dependent on telephone lines, circumvent many trouble points, and internal and external communications have

improved enormously in recent years. Meanwhile, in cities throughout the country, small shops increasingly customize computer equipment and programs to satisfy customer demands ranging from security systems to storing data files.

In addition to upgrading internal information capabilities, Russian computer scientists and programmers have for more than a decade been working on joint projects with western firms. In recent years, a handful of Russian software firms have successfully entered the international market without the necessity of strong ties to western partners. For example, the firm ABBYY Software House is known for its optical character recognition, ParaGraph is known for its handwriting recognition, Elvis for its encryption capabilities, and Dialog Nauka for its anti-virus programs.²⁰

As in all things Russian, however, criminal elements have entered the Internet arena. In 1996, Russian hacker Vladimir Levin stole $2.8 million from Citibank's main computer, and in 1997 and 1998 America Online and CompuServ shut down their direct access numbers in Russia in response to cases of credit card fraud. Because of the phenomenal skills of Russians hackers, Russia will continue to be a locus of ingenious cyber scams.

International cooperation in a number of fields will remain important when payoff for the Russian economy is clear—in areas such as fisheries, aerospace, and computer software. There are a few technical areas in which Russia lags but could learn quickly from western experience, such as biotechnology.²¹ Russia could also learn from central European approaches in integrating technological achievements into commercial activities, from efforts in South Korea and Singapore to catch up with world leaders in high-tech areas, and from success of Russian emigrees in setting up incubators in Israel linked to western European partners.²²

The importance of the U.S.-Russian relationship, which spans many areas of technology, should not be underestimated. Few officials on either side are aware of the full extent of this relationship, which has involved thousands of attempts to focus Russian technological resources directly on market opportunities. Why have some projects

worked while others have disappeared without leaving a footprint? Some answers have been provided in this book.

Now, Russian officials from the president, the leaders of the Duma, and the governors on down must recognize that technology is indeed a key to the future of the country. They must activate the political and economic switches to energize dormant Russian know-how and to stimulate new experts in solving problems facing the nation. Then, technology will command market shares that help ensure stability while promoting peace in Russia and throughout the world.

1. Meeting in Washington, D.C. at the National Research Council, March 1999.

2. Vladimir Merkushev, “Putting Its Chips on the Table,” The Russia Journal, September 6-12, 1999, p. 14.

3. Matthew L. Wald, “Russian Nuclear Power Company Looks West for Bailout,” The New York Times, April 12, 1999, p. A10.

4. Discussion in Moscow with Russian specialists involved in design of gas pipelines, October 1999.

5. “Computer for Cremation of Muscovites,” Moskovskiy Komsomolyets, April 4, 1999, p. 1.

6. Global Trends 2010, National Intelligence Council, Washington, D.C., undated but released for the second time in December 1998.

7. “By the Numbers,” Russia Review, January 1999, p. 9.

8. Yu.S. Osipov, “On the Basic Priorities of Scientific-Technical Development of Russia, ” unpublished manuscript, provided by Russian Academy of Sciences, Moscow, October 1998, and discussions with Osipov, June 1999.

9. “What They Are Saying,” Russia Review, January 1999, p. 10.

10. For an elaboration on the political setting, see Rene Nyberg, Ministry of Foreign Affairs of Finland, “Russia and Europe,” presentation to European Commission Representation, Bonn, January 20, 1999.

11. Ibid.

12. Michael R. Gordon, “Russia's Options: Muddle Through or Collapse,” International Herald Tribune, January 5, 1999, p. 13.

13. “Russian Science Reform 1997-2000, The Concept,” Ministry of Science and Technology, Moscow, November 1997, summarized by U.S. Embassy, Moscow, February 1998.

14. Ibid.

15. Among the most vocal advocates of a Marshall Plan for Russia at conferences and on television during 1998 was Professor Charles Weiss, School of Foreign Service, Georgetown University, Washington, D.C.

16. “RJ Street Poll: Is It Possible to Fight Corruption in Russia?” The Russia Journal, September 13-19, 1999, p. 24.

17. “An Anti-Corruption and Good Governance Strategy for the Twenty-first Century,” presented at International Conference on Corruption at the U.S. Department of State, February 24, 1999. See also the Primakov anti-corruption plan in Judith Matloff, “Showing Russians Who's Boss,” The Christian Science Monitor, February 11, 1998, p. 1.

18. Ibid.

19. Murray Feshbach, “A Sick and Shrinking Nation,” The Washington Post, October 24, 1999, p. B07.

20. Karl Emerick Hanuska, “What's the Net Effect as Russia Gets Wired?” Russia Review, June 19, 1998, pp. 30-1.

21. Kirsten Vance, “Programming Success,” Russia Review, June 19, 1998, pp. 32-4.

22. V.A. Vasin, L.E. Mindeli, The Strategy of Competitiveness and Problems of Russia Science and Technology Policy, Center for Science Research and Statistics, Moscow, 1994, pp. 40-55. See also the World Bank seminar on business incubators, World Bank, Washington, April 12, 1999.