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defense conversion projects
(Excerpted from a 1997 U.S. Government Accounting Office report; this excerpt covers deals with five projects in Russia)

As part of the Cooperative Threat Reduction program, (commonly known as Nunn-Lugar) the Defense Special Weapons Agency undertook five defense conversion projects in Russia, with a budget of $38 million. Four of these projects are between U.S. firms and Russian defense-related entities--GOSNIIAS, Istok, Leninets, and Mashinostroyenia. One project is to provide housing to de-mobilized Strategic Rocket Force personnel and establish joint ventures with three defense-related entities--Kompozit, Mashinostroyenia, and Soyuz.

Fifteen similar projects are underway in Belarus, Ukraine, and Kazakhstan, all formerly part of the Soviet Union.


Gosniias

  • Contract amount and date: $4.1 million in July 1994.

  • Former defense capability: GOSNIIAS is a state-controlled enterprise that designs and tests military avionics and carries out avionics and weapons integration.

  • Purpose of joint venture: While no joint venture was established, the project was intended to build prototypes for air traffic control hardware and software based on the Global Positioning System and GLONASS, the Russian counterpart.

  • Joint venture production: Developed a business plan and built prototypes for air traffic control hardware and software.

  • Joint venture employment: This project began with a staff of 10 defense workers and employed as many as 60 defense workers at one time.

  • Obstacles: While the partnership has developed a business plan and built prototype hardware and software, a market has yet to develop. GOSNIIAS and the U.S. contractor tell us that they plan to work together in competing for a future Russian government contract for an air traffic control system. However, the contract has yet to be tendered. This contract could result in 200 jobs for GOSNIIAS and be worth $80 million to $100 million.

  • Status of project: Work on the DSWA contract is nearly complete, and closeout on the contract is pending. Rockwell intends to create a long-term relationship with GOSNIIAS and is planning on awarding subcontracts to GOSNIIAS for a variety of efforts.


    Istok

  • Contract amount and date: $5.7 million awarded in July 1994.

  • Former defense capability: Producer of magnetrons, klystrons, high-powered vacuum tubes, carbon dioxide lasers, electro-optical devices, batteries, microwave devices, and solid-state electronic components.

  • Purpose of joint venture: To manufacture and distribute hearing aids.

  • Joint venture production: By early summer 1995, production had begun on a hearing aid that was useful for the moderately hearing impaired--about 50 to 60 percent of the hearing impaired population in Russia. The joint venture is capable of producing 250,000 hearing aids annually and initially produced about 25,000 hearing aids. The venture purchased parts for 40,000 hearing aids, but some of the components were in poor condition.

  • Joint venture employment: 160 former defense workers. According to Istok officials, 80 percent of the staff are engineers, but we did not determine if they had worked on WMD-related projects.

  • Obstacles: The joint venture suffered a major setback in distributing its hearing aids. It had planned to sell the hearing aids via the Russian government's medical technology supply agency, which would have distributed them to more than 200 hearing clinics around Russia. However, the lack of government funds prompted the supply agency to only purchase hearing aids for the severely hearing impaired--a small population for which Istok's hearing aid was not well suited. At that time, the venture had no other products. The joint venture needs additional financing to establish new production lines.

  • Status of project: Istok is now planning to produce another hearing aid and focus attention on selling it on the export market (mostly in third world countries) as well as on the Russian market. Istok also hopes to begin production on a hearing aid aimed at severely hearing impaired individuals. The joint venture has asked DSWA to provide additional funding to help move the venture forward.


    Leninets

  • Contract amount and date: $2 million in June 1994.

  • Former defense capability: Manufacturer of airborne radars and other radio electronic equipment. Leninets officials claimed that they also made specialized equipment, such as chips for high-frequency radars used in MIG and Sukoi aircraft. Leninets consists of 16 factories, 10 research organizations, and 50 small enterprises.

  • Purpose of joint venture: To remanufacture dental chairs, distribute new dental equipment, and bottle solutions for oral infection control

  • Joint venture production: As of October 1996, the project had sold 187 remanufactured dental chairs, earning the venture about $35,000 a month . The distribution of new dental equipment earns the project about $80,000 a month.

  • Joint venture employment: About 22 people, some of which have manufacturing skills associated with computers and other equipment and others are being used in accounting and marketing roles.

  • Obstacles: The project has had considerable difficulty in setting up its bottling operation, which it sees as more lucrative than the other ventures. The bottling operation has been delayed for over 1 year due to setbacks at the U.S. manufacturer of the bottling equipment and problems with Russian customs. Project officials also underestimated the cost of purchasing the equipment and refurbishing the space that they are to occupy. As a result, the project had run out of funds at the end of 1996.

  • Status of project: The project is seeking at least $250,000 to $500,000 in new capital to start up the bottling line.


    Mashinostroyenia

  • Contract amount and date: $5.1 million awarded in June 1994.

  • Former defense capability: Producer of cruise missiles, intercontinental ballistic missiles, and maneuverable satellites.

  • Purpose of joint venture: To establish a cola bottling facility.

  • Joint venture production: The joint venture was never established, so it never reached production.

  • Joint venture employment: None.

  • Obstacles: According to Mashinostroyenia officials, DOD selected the project without their input, and they were not happy to have a low-skilled project at their high-technology firm.

  • Status of project: The American partner and Mashinostroyenia were not able to work out differences, and the U.S. partner asked to be released from the contract. DSWA agreed in April 1996 to cancel the contract and disbursed $195,000 of the $5.1 million contract.


    Housing

  • Contract amount and date: $20 million awarded in June 1995.

  • Former defense capability: The Russian partners for this project include Soyuz, a firm that built turbofans for cruise missiles; Kompozit, a producer of heat shields for missiles and space systems; and Mashinostroyenia.

  • Purpose of joint venture: To construct a housing industry in Russia and build homes for Strategic Rocket Force personnel.

  • Joint venture production: Unknown at this time because the joint venture has not been established.

  • Joint venture employment: Unknown at this time because the joint venture has not been established.

  • Obstacles: Until January 1997, DOD and the Russian government were not able to reach agreement on the scope of this project.

  • Status of project: In January 1997, the Russian government and DOD officials agreed that Russian WMD enterprises would work with an American partner to establish five production lines. These production lines are a modular housing assembly facility, a window and door manufacturing facility, a low-pressure brass casting production line, an asphalt shingle production line, and a lumber mill capable of supplying the lumber suitable for housing construction. Remaining funds will be used to provide housing to de-mobilized Strategic Rocket Force personnel.

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