Commercialization of Russian Technology in Cooperation with American Companies

Stanford University CISAC Center for International Security and Cooperation The Center for International Security and Cooperation, part of Stanford University’s Institute for International Studies, is a multidisciplinary community dedicated to research and train- ing in the field of international security. The Center brings together scholars, policymakers, scientists, area specialists, members of the business community, and other experts to examine a wide range of international security issues. Center for International Security and Cooperation Stanford University Encina Hall Stanford, California 94305-6165 (415) 723-9625 http://www.stanford.edu/group/CISAC/ Commercialization of Russian Technology in Cooperation with American Companies David Bernstein June 1999 David Bernstein, an engineering research associate at Stanford University’s Center for Inter- national Security and Cooperation, participates in the Center’s Project on Industrial Restruc- turing and the Political Economy in Russia. The opinions expressed here are those of the author and do not represent positions of the Center, its supporters, or Stanford University. © 1999 by the Board of Trustees of the Leland Stanford Junior University ISBN 0-935371-53-2 i ii Contents I. Introduction 1 II. Background 5 III. Case Studies Introduction to Case Studies 17 Air Products & Chemicals, Incorporated 19 Boeing 21 Corning, Incorporated 27 Energia, Ltd. 29 NPO Energomash 33 FMC 37 General Electric 41 The State Scientific Research Institute of Aviation Systems (GosNIIAS) 43 Karpov Institute of Physical Chemistry 47 Moscow Center for SPARC Technology 51 NPO Mashinostroenia 55 Pratt & Whitney 63 Central Aerohydrodynamic Research Institute (TsAGI) 69 Typhoon Software and Santa Barbara Ltd. 75 IV. Analysis 79 V. Conclusions and Recommendations 93 iii iv Acknowledgments My thanks go to Carnegie Corporation of New York for its long-term support of CISAC’s Project on Industrial Restructuring and the Political Economy in Russia, and to the United States Department of Commerce, Technology Administration, Office of Technology Policy, for adding its support to Carnegie’s for this particular study. Many people have contributed to this research and report in many different ways. The principal contributors were the representatives of the Russian enterprises and American companies who were willing to be interviewed for this study and to answer follow-up communi- cations to help get the facts as correct as possible. These were all busy people who were striving to build successful ventures under difficult circumstances, and yet they gave gener- ously of their time. Without their patient cooperation this project would have been impos- sible. In many cases it became clear that they did this largely because they believed in the value of sharing information that could be of benefit to all working on the economic transition in Russia. Ksenia Gonchar and Petra Opitz conducted many of the interviews in Russia. They also shared their insight on the subject from their own research and made many valuable sugges- tions during the project. David Binns and Cathleen Campbell also made several helpful sug- gestions in reviewing the draft. Richard Brody’s advice on the structure and objectives of the project was incisive. I also wish to acknowledge the help of Elaine Wai, Sarah Lenti, and Nina Olman in gath- ering research materials, helping prepare the text, and coping with my disorganized habits. Finally, CISAC’s editor, Megan Hendershott, brought it all together. To whatever extent the report is readable, she deserves the credit. The errors are all my own. v vi I. Introduction The Soviet Union placed a high priority on science and technology and built a huge assembly of research institutes, educational programs, design bureaus, and production enterprises embodying some measure of science and/or technology. This assembly concentrated over- whelmingly on military applications. Approximately three-quarters of this complex was located in Russia, but essential elements of many programs were located in other republics. The nature, structure, size, and operation of this military-industrial complex (MIC) as well as its decline and change during the Gorbachev and post-Soviet periods of economic transition have been documented in the literature.1 Starting in the Gorbachev regime there was a recognition that the economy was deteriorat- ing and that it was necessary to reduce military expenditures and increase the civilian economy. A major element of this has been the attempt to direct a much greater effort toward the development of commercial products and services based upon technologies and skills developed in the MIC. This commercialization of Soviet and Russian military technology has been attempted by the Russians both independently, through conversion programs, and in cooperation with foreign partners. The conversion programs have had very limited success. The success of attempts at cooperative commercialization by U.S. companies and Russian enterprises have also been modest, but they illustrate workable models that could be utilized by other cooperative ventures. These cooperative commercialization ventures are the primary subject of this report.2 1 Julian Cooper, “Military Cuts and Conversion in the Defense Industry,” Soviet Economy 7, no. 2 (1991): 121–142; Julian Cooper, The Soviet Defense Industry: Conversion and Economic Reform (New York: The Royal Institute of International Affairs and Council on Foreign Relations, 1991); Clifford Gaddy, The Price of the Past: Russia’s Struggle with the Legacy of a Militarized Economy (Washington, DC: Brookings Institution Press, 1996); David Holloway, The Soviet Union and the Arms Race (New Haven: Yale University Press, 1984); Sharon Leiter, Prospects for Russian Military R&D (Santa Monica, CA: RAND, 1996); Kevin O’Prey, A Farewell to Arms? Russia’s Struggle with Defense Conversion (New York: The Twentieth Century Fund Press, 1995); Glenn Schweitzer, Experi- ments in Cooperation: Assessing U.S.-Russian Programs in Science and Technology (New York: The Twentieth Century Fund Press, 1997). 2 This research was sponsored by Carnegie Corporation of New York and the United States Depart- ment of Commerce. 1 Almost all technology in the Soviet Union resided in the military industrial and research enterprises, and these enterprises designed and produced almost all civilian products with a technological content such as civilian aircraft, consumer electronics, and household appli- ances. This was a commercialization of technology in the sense that the products came into being for commercial applications, but it was not commercialization of technology in the Western sense of attempting to use advanced technology to make products more competitive in cost or quality. In general these products were not competitive with Western ones, and the only exports of consequence were to satellite or client states. Most importantly, there was virtually no technology developed specifically and initially for civilian applications as there is in the United States, where civilian technology leads military technology in most areas both quantitatively and qualitatively. Hence there was virtually no interest in responding to a market. The advance of science and technology was not reflected in commensurate advances in civilian products. The United States also has problems with the commercialization of some advanced technologies from the military sphere, but many of the problems are very different than in Russia. In the United States commercialization is an ongoing process in a strong market economy that is based heavily on civilian technology. Many of the fundamental scientific or technological advances are made in response to demand from the civilian economy, which is often far more active in utilizing them than is the military. In Russia technology commercialization is one element of a broad spectrum of economic reforms that are being attempted to stimu- late a severely depressed economy.3 It is often driven by state policies to enable enterprises to stay in business, although they are de facto bankrupt, rather than by market demand. This subsidized technology push often makes it difficult to assess whether a project is a success or a failure. There can be various definitions of success in technology commercialization. One could be the establishment of a sustainable business in Russia. This is difficult to assess at this time because of the aforementioned uncertainty of the financial condition of a business, especially when it is imbedded in a larger enterprise that may be subsidized and/or de facto bankrupt. Another definition could be the acquisition of Russian technology by an American company with a resultant improvement in products or processes followed by increased exports of American products.4 This is more straightforward to assess but of less interest from the stand- point of the rebuilding of the Russian economy. A third definition could be conversion away from military activities, especially relating to weapons of mass destruction (WMD) and the potential proliferation of such technologies and/or personnel. This is also hard to assess because of the inability to determine what would have happened in the absence of conversion. A venture can be successful by one definition while simultaneously a failure by the others. This also complicates the task of understanding the process itself, but it is possible to study a few cases of technology commercialization in enough detail

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