Weapons, Culture, and Self-Interest

Kimberly Marten Zisk

Columbia University Press, New York

1997

4. Spin-offs and Start-ups

 

Most U.S. analysts view the appearance of spin-off and start-up companies from the old Soviet defense enterprises as a positive trend. ¹ Small, private, high-technology firms are an integral element of U.S. capitalism, and U.S. observers thus see them as a sign of Russian entrepreneurs' increasing efforts at market competitiveness. Russian spin-offs usually have much lower overhead costs than do their mother enterprises (because they receive preferential tax treatment and because their revenues do not go to support unprofitable subdivisions), and their managers have more freedom to set differential salary levels within job grades. Small firms are thus judged more likely to operate at a profit than are their mother enterprises. Western investors are also attracted by the fact that these firms are legally separate from their mother companies, which eases the ability of outsiders to monitor the uses to which their investments are put. ² Hence defense enterprise spin-offs and start-ups are usually cited as evidence of the success of market reforms and of the rational responsiveness of former Soviet managers to capitalist opportunities.

As the analysis below will demonstrate, however, this new competitiveness and market responsiveness has been achieved only at significant social cost. In many cases, the formation of independent spin-off companies from old Soviet defense enterprises has been met with suspicion and hostility by those workers who remain behind at the old enterprises and has thus led to conflict between STKs (the Labor Collective Councils) and the owner-managers of the newly formed companies. These owner-managers are often also mid- or upper-level managers at the mother enterprise, and many spin-off employees work simultaneously in mother enterprise shops. As a result, such conflicts often erupt as management/labor disputes on the shopfloors of the mother enterprises. In at least one case, that of the nuclear weapons research institute in the closed city of Arzamas-16, conflict has led to accusations that the spin-offs are insufficiently regulated and may therefore leak classified information or materials to the outside world. Simultaneously, the owner-managers of spin-offs and start-ups often feel threatened or smothered by the mother enterprises, on whom they depend for floorspace, supply contracts, and other resources.

I begin this chapter by showing that labor-management conflicts regarding spin-off activities have been common in Russian defense enterprises during the initial transition era. I then turn to the rational self-interest explanation for such behavior. These conflicts are clearly propelled by individuals fighting over wealth and property rights under conditions of resource scarcity and uneven power distribution, a classic self-interest scenario. Yet including the arguments of the socialization perspective in the analysis allows us to add important information to our understanding of these conflicts. These arguments make it clear that the specific characteristics of these spin-off conflicts have a basis in cultural patterns dating from Soviet times. Thus, while the rational self-interest explanation may be sufficient to explain the existence of these conflicts, their intensity is probably magnified by the fact that core social groups dating from Soviet times are involved in fighting them. Finally, I close with a discussion of how these management/labor conflicts within Russian defense enterprises may affect both Russian domestic stability and the likelihood of weapons and nuclear materials proliferation across Russian borders.

Evidence of the Problem

Virtually every Russian defense enterprise during the initial transition period created a number of small, often relatively independent new firms, usually on the basis of existing enterprise subdivisions and shops. ³ (Managers at the TsAGI enterprise in Zhukovskii say that the new firms located on their floorspace do not all have connections to the old TsAGI workforce, but this situation appears to be unusual.) ⁴ As noted above, the owner-managers of these new firms have tended to be current or former mid- to upper-level managers from the old enterprises, often scientists or engineers who supervised research and development or end-product subdivisions in Soviet times. Many of the spin-offs operate under a dual-employment system, where managers and workers retain their positions in mother enterprises while simultaneously working for the new independent companies.

The new firms have been engaged in a variety of activities. Some have continued to fill the social asset functions formerly performed by the mother enterprise, for example, food service to the factory, car and truck repair, or local housing construction. These firms tend to be highly valued by their mother enterprises, because they can operate more efficiently and with better quality than the mother enterprises could manage with their declining budgets. Others have explicitly used patents and production knowledge garnered by their mother enterprises over their decades of experience. Some in this second group began producing variations of the consumer goods that Soviet defense industrial factories had been ordered to make along with their military output. ⁵ Others have made high-technology civilian or dual-use equipment or components related to their mother enterprises' former major production profile. ⁶ Some have become sales offices for merchandise resulting from the parent enterprises' past production; reportedly, profits from these sales are not always shared (for example, through a licensing arrangement) with those whose intellectual property was used to create the merchandise. ⁷ In other words, those who by happenstance had possession of finished goods as the old economy disintegrated could resell or remanufacture them without worrying about patent rights. At least a few of these spin-offs are themselves engaged in defense production, either for Russia or for export abroad. ⁸

The economic incentives for creating these small firms were overwhelmingly strong, beginning with the cost-accounting planning reforms of the Gorbachev era. While the actual effect of the Gorbachev reforms was muddy, ⁹ many enterprises chose in the late 1980s to adopt a planning model that made employee bonuses dependent on the profitability of the enterprise as a whole and of their individual shops and subdivisions within the enterprise. ¹⁰ That is, the old focus on meeting plan targets regardless of cost was replaced by a new focus on cost effectiveness. In 1988 new small businesses called "cooperatives" were allowed to form for the first time, and many arose inside existing state enterprises. These were not really privately owned, but their employee collectives could keep the profits they made on the open market. As Simon Johnson and Heidi Kroll make clear in their investigative report on what they call "spontaneous privatization," these cooperatives received both tax privileges and exemption from state wage ceilings, making profitability easier. They tended to be constructed on the basis of existing enterprise shops and subdivisions. ¹¹ This meant that as cost accounting became more prevalent, it was to the advantage of managers to parcel out their existing orders to the new bodies springing up under their roofs within existing shops.

The wages paid by these cooperatives depended on productivity, and higher productivity levels provided both better bonuses for state employees and new opportunities for independent sales of output to customers other than the state. The cooperatives, made up mostly of people who worked simultaneously in the shops at the large state enterprises whose areas they occupied, were allowed to use the floorspace and equipment of "low-profit or loss-making enterprises, production divisions, shops, or sectors," ¹² renting it from the supervising ministries at minimal cost to perform essentially the same work as the mother enterprise did and gaining access to the state supply system. ¹³ Cooperatives did attract new market orders on their own, but they also worked on state orders that previously would have gone directly to the mother enterprise. ¹⁴ The mother enterprise's ministry got better plan results by subsidizing the spin-offs, granting them low-cost access to space, tools, and supplies and encouraging the cooperatives to share in the enterprise's business.

In this era, intellectual property rights did not matter. Defense enterprise directors could not have expected in the late 1980s that within a few years their firms would be privatized and forced to face the market. The cooperatives provided a way for managers to lower the overall production costs of the large factory while using state property and resources to make a profit for themselves on the side. Legislation in 1990 and 1991 gave further tax privileges to cooperatives that reregistered as "small enterprises" that were legally subordinate to the mother enterprise but financially independent. ¹⁵

When the first stage of the privatization program went into effect in Russia in 1992, workers and managers in these small enterprises were some of the earliest beneficiaries. ¹⁶ In many cases, spin-off and start-up companies have been allowed to privatize even within those defense enterprises that remain on the state's not-for-privatization list because of the strategic nature of their production. ¹⁷ Not all spin-offs are privatized; some remain wholly state-owned "daughter companies" of state enterprises. Of those that have privatized, sometimes the mother enterprise retains a controlling packet of the spin-off or start-up shares; at other times, the founders of the start-up have taken control of all the shares on their own. Regardless of the ownership structure chosen, the symbiosis between mother enterprises and these small spin-offs seemed to be continuing universally through 1995. The vast majority of spin-offs and start-ups remained dependent on their mother enterprises' largesse for profitable operation; many were still heavily subsidized by their mother enterprises. It is from this set of circumstances that worker/manager conflict arose.

In each case, the conflict was over the question of who had the right to share in the profits of these spin-offs--for example, through licensing fees, increased wages, or other benefits--and who bore the obligation for their production costs, including such things as water and power usage, floorspace rental, and raw materials and components. Because current or former mid- or upper-level managers of the mother enterprises have usually been the managers of the spin-offs and because the spin-offs continued to operate on floorspace owned by the mother enterprises, often employing workers from the mother enterprise in their "spare time," the question naturally translated into one of equitable wage distribution in the mother enterprises during times of economic hardship. (I use examples to detail the exact nature of the conflicts below.)

It is hard to find reliable evidence concerning the frequency of labor/management conflicts over the structure and activities of spin-offs from Russian defense industry. The central Russian press covers such conflicts only occasionally and never in much depth. When questioned directly, the managers of mother enterprises tend merely to speak vaguely of such things as internal misunderstandings on the tactics of restructuring and do not wish to go into details about labor council disputes.

One sign that such conflict may be endemic to defense industry was a stunning April 1994 article written by Arkadii Vol'skii, head of the Russian Union of Industrialists and Entrepreneurs and a man known to be a passionate advocate for the interests of defense industrial managers. Vol'skii said that he had visited enterprises in eleven regions of Russia and was dismayed at the level of conflict between STKs and directors everywhere. Most striking, he confirmed that directors were using state property to run small enterprises for enormous personal profit at a time when many of their workers were not receiving their wages, ¹⁸ an unusual statement from one who proudly bills himself as a political advocate of the military-industrial complex. Another sign that managers may be engaged in opportunistic activities is the response of many enterprise directors to threats by the state to declare them bankrupt. By mid-1994 Russian federal bankruptcy laws began to be enforced against enterprises with significant state ownership, including defense enterprises. It was reported then that many directors faced with the threat of enterprise liquidation were able to find new cash resources that they had "mislaid," ¹⁹ at least some of which had reportedly been laundered through daughter companies for the personal benefit of managers. According to one Russian observer, "No one who is in the know doubts that two-thirds of nonpayments are caused by these machinations. . . . Any firm has from one to two to tens of daughter firms, in which sit either close relatives or schoolfellows of the leaders." ²⁰

Clear evidence of the duration and severity of management/labor conflicts over property rights and wage equity in the spin-offs emerges from local newspaper reports in defense-heavy cities, as well as from Western researchers' interviews of the managers of spin-off companies. Particularly useful are the newspapers of such small defense-dominated cities as Zelenograd (a formerly closed defense electronics city just northwest of Moscow) and Arzamas-16 (the still-closed flagship city of Soviet nuclear warhead construction in the Nizhnii Novgorod region). ²¹ These newspapers tend to allocate a lot of column space to the internal politics of defense enterprises and seem less concerned than Russian big-city newspapers are to paint a happy picture of their cities for outside investors. Such reports, as well as occasional references in more major newspapers and evidence uncovered by Western interviewers reveal that there have been disputes regarding spin-offs at a variety of enterprises, including Zelenograd's ELAS Scientific-Production Company, which made electronic equipment for satellite communication and data transmission; ²² the Angstrem enterprise (which works on large integrated systems) ²³ and the Kvant enterprise (which produced personal computers under one of the defense industrial ministries), ²⁴ both also in Zelenograd; the All-Russian Scientific Institute for Experimental Physics (VNIIEF), the defense nuclear institute in Arzamas-16; ²⁵ Moscow's Institute of Precision Mechanics and Computer Technology; ²⁶ St. Petersburg's Svetlana defense radio electronics enterprise; ²⁷ and St. Petersburg's Izhorskie Zavody enterprise, where nuclear submarine reactors are produced. ²⁸ An internal institute newspaper also indicates that G. I. Zagainov, the general director of TsAGI (Russia's major aerodynamics testing and design institute), was so concerned about the unregulated activities of spin-offs and start-ups within his enterprise that in February 1994 he instituted a temporary ban on the conclusion of contracts by spin-offs using TsAGI technology. ²⁹ (His primary concern was the uncontrolled loss of TsAGI's intellectual property.) At another huge Moscow-area aerospace enterprise, I was told by the deputy director for financing in September 1994 that I could not see issues of the factory's internal newspaper because it revealed "family quarrels" and the enterprise did not wish to air its dirty laundry in public.

Given the geographical and profile diversity of these enterprises, it is a good bet that such conflicts are widespread. Across the board, the conflict can be viewed from two perspectives: that of the owner-managers of the spin-offs and start-ups, who wanted the freedom to avoid enterprise-imposed conditions on their profits, and that of the mother enterprise STKs, whose workers wanted the collective to be reimbursed for the subsidies the spin-offs received. The director's corps of the mother enterprise could fall into either camp, depending on the degree that the managers' interests coincided with spin-off interests. Sometimes the mother enterprise director and his cohort received shares or other economic benefits from the spin-offs, while at other times they struggled desperately to reassert control over spin-offs that had successfully escaped their purview in the preprivatization era, when property rights and factory profitability did not matter.

Rational Self-Interest: The Perspective of Spin-off Managers

From the viewpoint of frustrated spin-off and start-up owner-managers, eager to make a go of it in the market, the cause of these conflicts was greedy labor councils and the mother enterprise managers who supported them. The labor council leaders were perceived as socialist holdovers who wanted to keep control over independently generated profits in order to spread the wealth among the less able workers left behind.

The major structural problem that the freedom-seeking spin-off owners faced was their inability to obtain independent floorspace. Rental space is scarce in Russia, and the laws allowing new construction are very complicated and heavily favor existing large enterprises. ³⁰ It is thus usually inconceivable for a private spin-off carved out of a mother enterprise subdivision to obtain floorspace for operation without the mother enterprise's help.

Sometimes, this meant that potential new businesses were quashed at inception. For example, as of early 1993 there were reportedly two thousand small enterprises in Zelenograd that wanted to begin business operations but lacked the space to do it. ³¹ The chairman of the Society of Scientists of Zelenograd, B. Sedunov (an obviously passionate defender of the rights of spin-off managers), reported to the society in 1992 how different the situation was in California's Silicon Valley. Having visited the defense-heavy U.S. electronics region, he "was struck by the enormous reserve they have of production space. There, someone wishing to found a business doesn't have to solicit space or build it from scratch. In Zelenograd, out of 800,000 square meters [of unused industrial space], small businesses rent out no more than 10,000 [square meters of it]." ³² The large enterprises have the power to decide who may engage in business and who will be left out in the cold.

Large enterprises thus have a disproportionate control over the shape of local economies in defense-heavy regions. When mother enterprise managers have a stake in the spin-off firm, the spin-off finds itself rewarded; if the mother enterprise managers are excluded from the firm's profits, the spin-off suffers. For example, one Zelenograd spin-off that was still state-owned, SIC ELVIS, wanted to privatize and as of late 1994 was continuing to pursue privatization options. The SIC ELVIS manager reported, however, that after learning that their facilities (owned by the old Soviet enterprise called ELAS) could not be "privatized" or purchased, the new company's interest in privatization waned. ³³ Presumably, denied the option of buying their space, privatization would have left the new firm vulnerable to whatever rental costs ELAS wanted to impose; retention of their status as an independent state-owned enterprise under the ELAS umbrella, on the other hand, gave them preferential operating conditions. David Bernstein reports that another Moscow defense enterprise spin-off, which did privatize in a parallel situation, has complained of the "excessive" rent charged by its mother company for the property it uses. ³⁴

It is not merely rental costs that are at issue. The dependency relationship set up by the floorspace problem goes much deeper. Aleksandr Galitskii, the general director of an ELAS spin-off that did privatize, ELVIS+, points out that more than simple square meters are involved. Conducting world-class, high-technology business demands that a firm invest in items of physical infrastructure, including such things as specialized cables and precision-quality telephone systems. ³⁵ Such items, always expensive to rip out and re-create, were especially so in the Russia of the early 1990s, where such equipment was not yet standard and the quality of trunk systems was variable and often poor. Thus as time went on the fact that spin-offs had become established in space owned by the mother company made the prospect of relocation more and more costly. Because spin-offs began to form in the late 1980s, when a space crunch did exist and land ownership laws didn't, the mother enterprises won long-term advantages in their ability to control the activities of spin-off managers.

Control of facilities also meant control over the flow of resources, such as heat, electricity, and water, that spin-off firms use. Mother enterprises also controlled the building's security services, ³⁶ a vital resource in a time of heavy organized crime activity. When mother enterprises didn't pay their utility bills on time, spin-offs also suffered from the ensuing cut-offs.

The director of one Russian defense industry spin-off was proud that he managed to get independent control over the provision of part of his firm's electricity. When the lights went out in the building as a whole because of the mother enterprise's failure to pay the power bill, his company was still able to operate, because it paid part of its electricity bill directly to the power company. ³⁷ One of this man's coworkers later revealed that this arrangement was possible only because some sort of special deal had been made directly with the mother enterprise employee who controlled the building's power usage. ³⁸ Apparently, attempts by the mother enterprise as a whole to maintain control over spin-off resource provision can be circumvented by the judicious inclusion of certain employees in the spin-off's profit-sharing calculations.

Beyond control over space and production resource flows, the mother enterprise often also has the power to control access to suppliers and customers that the spin-offs need. This becomes an issue when the managers of the mother enterprises are not supportive of spin-off activities (obviously, when mother enterprise managers are engaged in spin-off activities, these old contacts work to the spin-off's advantage). Because the spin-offs are often engaged in a business that somehow relates to the mother enterprise's past business, unsupportive enterprise managers can use their networks of contacts to try to shut a wayward spin-off out of the market. As I noted in the previous chapter, these old Soviet business circles are probably becoming less important levers with time. They may have been significant in shutting out fledgling businesses early in the reform era, however, when managers turned to their established connections for advice on whom to trust in the new market.

Sometimes, the mother enterprise itself has refused to accept the spin-off's output. For example, the Institute of Precision Technology and Design, formerly Shop No. 2 of the Angstrem enterprise in Zelenograd, wanted to sell its designs to Angstrem, keeping the proceeds of these sales for itself so that the mother enterprise could not gobble up all the value it generated. Angstrem leaders, however, believed that the Institute was unfairly using the mother enterprise's intellectual property in its work. As a result, the Institute had difficulty getting its designs accepted at Angstrem for serial production, even though many of the patterns it had developed were specifically designed for Angstrem activities and had no market elsewhere. ³⁹ In another case reported by Petra Opitz, one plant of the Almaz Shipyard in St. Petersburg tried to privatize on its own but was forced to return to the fold of the mother enterprise because the second major plant of the enterprise refused to share contracts with it. ⁴⁰ In other words, spin-offs have sometimes had to learn the hard way about monopsony power (that is, the power wielded by a single buyer when there are no other buyers in the market).

In many cases, perhaps the majority, the mother enterprise's control over spin-off activities is even stronger than these examples indicate, because the mother enterprise often owns a significant share of the spin-off's stock. ⁴¹ As in the case of enterprise privatization involving outside share purchases (discussed in chapter 2), directors who have lost control over spin-offs have often tried to regain ownership of them. An example is provided by the ELAS enterprise in Zelenograd, whose general director, Gennady Guskov, saw a dozen spin-offs privatize independently in the early 1990s. It is not clear how these spin-offs managed to gain their freedom; ELAS managers must either have been slow to understand the consequences of such privatization or insufficiently powerful to stop it. At least one of the start-ups, ELVIS+, privatized in order to begin a business relationship with the U.S. company Sun Microsystems. ⁴² Guskov tried both to woo these firms back into a closed joint-stock company, using a press campaign, ⁴³ and to annul the previous building usage contracts reached through an aggressive appeal to the Russian State Property Committee. ⁴⁴ As of mid-1995 he had not yet succeeded.

Rational Self-Interest:
The Perspective of the Former Collectives

On the other side of the conflict over spin-offs, the labor collectives of many mother enterprises have understandable reasons to resent the good fortune of the new small firms. As I noted earlier, there is evidence that a large number of spin-offs have been using the intellectual property of their mother enterprises without compensating them adequately. There is also evidence that when mother enterprise managers have owned spin-off stock, the spin-offs have obtained access to floorspace and other physical resources at below-market cost, thereby increasing the expenses of the mother enterprise without contributing to its revenues. Obviously, such costs limit the amount of money that can be spent on wages.

It has only been in the past few years that Soviet-era defense industrial enterprises have begun to recognize the costs involved in losing control over the use of intellectual property. In the past, ownership of patents was not an issue of particular concern, and exactly who owned a particular patent was not always clear. According to one report from the closed defense nuclear city of Arzamas-16, "in past years, many designs and even inventions were not patented." ⁴⁵ It is thus not surprising that when cooperatives began to form in the late 1980s, control over intellectual property was not a major concern for the mother enterprises, especially since privatization and tight budgets were not yet on the agenda. By the time the mother enterprises realized that their control over the spin-offs was evaporating, an important source of potential income was gone.

Small spin-off enterprises have freely admitted (and even boasted) to local newspaper reporters that one of their major advantages in dealing with the market was the specific technical and design knowledge (i.e., intellectual property) that they gained through their work with defense enterprises. ⁴⁶ This phenomenon would be unheard of in countries with developed intellectual property laws. In the United States, for example, it is not uncommon for designers and engineers to be asked to sign an employment contract prohibiting them from working for a competitor in similar product areas using related methods for a certain number of years after termination. In Russia, by contrast, defense directors encouraged their employees to go out and found what would later become competing firms, employing not only the identical technology but the identical equipment, floorspace, and workers used by the mother enterprise.

It may be useful here to compare the property rights situation in one subfield of U.S. defense technology that remains state-owned: the national nuclear weapons laboratories. Back when a generous U.S. government budget for the work of such labs was assured, patents, as in Soviet defense enterprises, were not a major concern of the labs. New technologies were either "kept hidden for security reasons or released to the public for anyone to use," and the fact of public release meant that private companies were reluctant to invest in developing the technologies, because they could not keep their processes commercial secrets under the Freedom of Information Act. ⁴⁷ Thus no one reaped exclusive private benefit from public research expenditure. Under federal legislation passed in the late 1980s, however, the government labs have recently been able to issue proprietary rights and licenses to private firms using Cooperative Research and Development Agreements (CRADAs), under which the costs and risks of new technology development are shared. ⁴⁸ This arrangement is attractive to the labs, which are able to profit from the royalties that these patents bring in and to keep valuable employees whose limited salaries might otherwise tempt them to leave. In the case of the Lawrence Livermore lab, for example, the California Board of Regents (which operates the lab as a U.S. Department of Energy contractor) often receives at least a portion of the royalties, ⁴⁹ and the federal employees responsible for the invention get a share as well. ⁵⁰ In some cases, federal lab employees are granted leave to pursue private joint projects; for example, the Sandia lab helped the McDonald's hamburger chain to develop a better glue for its recyclable paper bags. ⁵¹ There have been numerous complaints about the inefficiencies of utilizing CRADA property rights in practice. ⁵² Yet it is clear that in the U.S. case (to use terms from the Russian example) the mother enterprise managers that encourage spin-offs' use of lab intellectual property have both legal support and economic incentives for seeing that the proceeds benefit those in the collective responsible for developing them. In the U.S. case, independent spin-off efforts are cooperating with the labs, not feeding off them. Furthermore, conversations with several Lawrence Livermore employees make clear the fact that private enterprise is strictly separated from lab business and that any employee found using lab facilities for private business will be fired.

Recently, directors of at least some Russian defense industrial mother enterprises seem to have become wiser about the money-making potential of intellectual property and have implemented rule changes to try to curb its loss. For example, VNIIEF, the defense nuclear institute in Arzamas-16, faced complaints from employees about the "random selling-off [razbazarivaniia] of intellectual property created over many years by an enormous collective." ⁵³ Later, a U.S. delegation was told that VNIIEF now charges a licensing fee of 12 percent on all profits made by any spin-offs using VNIIEF intellectual property. ⁵⁴ Using another set of tactics, by September 1994 TsAGI, which, as reported above, was so concerned about the loss of intellectual property that it temporarily banned spin-offs from making contracts early in 1994, had begun to solve the problem by ending the right of individuals to hold shares in spin-offs that relied on TsAGI core technology. ⁵⁵ TsAGI's managers believed that if ownership was required to be corporate, this would allow them more control over intellectual property use, although the exact mechanism allowing such control was not made specific. In a similar vein, the Mashinostroenie enterprise in Reutov assured a U.S. delegation in September 1994 that the plant had "learned from [its] past mistakes" and now had a special subdivision whose duty was to oversee intellectual property rights and defend patents. ⁵⁶ And Guskov, the unfortunate general director of ELAS in Zelenograd, was trying to entice privatized spin-offs back into his closed joint-stock company explicitly in order to forestall "the practice of 'free' transfer of scientific and technological results obtained by NIIMP [the subsidiary scientific institute] to other subdivisions and even completely different organizations," which he believed was "in wide practice." ⁵⁷ As time goes by, then, the "borrowing" by spin-offs of mother enterprise intellectual property may decline, and licensing control may be reestablished.

Another form of "borrowing" has continued to cause shop-floor conflicts, however. As I mentioned earlier, managers of mother enterprises who own significant stock in spin-offs have had a tendency to charge those spin-offs exceedingly low rent and resource usage rates. This is the flip side of the dependency of spin-offs on mother enterprise floorspace: while those attempting to break free from the mother enterprise are punished, those that have provided side income to mother enterprise managers have received special privileges.

Accusations that defense enterprise managers are engaged in such behavior appear frequently in small defense-city newspapers. For example, a deputy of the Zelenograd city council wrote in 1991 that "in many contracts it is stipulated that NIIME and Mikron [a defense electronics factory and its associated research institute] are obligated to provide the small enterprises with free equipment, space, raw materials, and energy. The result is that the small enterprises are acting as parasites." ⁵⁸ He blamed this arrangement on the association's former director, Aleksandr Nesterov, claiming in particular that Shop no. 5 of the association, which housed a cooperative called Star, "experienced a deficit in its finished goods, leading to a dearth of full-time work for the workers of the shop," while Star simultaneously achieved smashing success on the market. The head and deputy head of the shop were, coincidentally, the head and deputy head of the cooperative. ⁵⁹ The managers, then, benefited personally from expenditures borne by mother enterprise employees. They did not identify the interests of the collective with their own interests but instead put their individual material interests first.

More recently, in Zelenograd, in a shop at the ELION defense electronics enterprise, the STK complained that a spin-off was using the enterprise kiln during normal working hours, presumably with the enterprise paying the power bill. ⁶⁰ Yet again, an enterprise was bearing costs that detracted from its ability to pay wages, while simultaneously the spin-off was gaining what economists would call a monopolistic market advantage (that is, the ability to set an artificially low price for a product and drive competitors out of the market) because of its free access to the kiln. A city council deputy explained that most STKs "considered and continue to consider the newly born cooperatives and small joint-stock companies their most evil enemy. The conviction exists [among the STKs] that they [the spin-offs] are all stealing everything and that unscrupulous administrators are giving material and monetary resources to them. To deny this is useless; sufficient facts exist." ⁶¹ He argued, however, that such arrangements constitute a "crime" and an exception and that rather than attributing such activities to all small enterprises, the affected STKs should bring legal suit against those responsible for such theft. ⁶² (This suggestion was rather naive, given the undeveloped state of the Russian corporate legal system.) There are other reports that in Zelenograd spin-off arrangements constituting "theft of state property" continued through 1994. ⁶³ Similar accusations have appeared in the press concerning enterprises in St. Petersburg. ⁶⁴

There do seem to be some examples where spin-offs have reached contractual accommodation regarding these costs with the workers of the mother enterprises. For instance, managers of the ELAS state enterprise, home to ELVIS+ and SIC ELVIS, apparently chose to include the rental and energy bill arrangements for the small enterprises in its yearly labor contract with the STK. They also chose to charge the small enterprises a contribution fee to the enterprise social defense fund. ⁶⁵ The ELAS labor force has thus avoided turmoil over the issue. Yet this is probably because ELAS managers, who lacked personal access to the income of many of these spin-offs, were using the STK to limit spin-off independence.

VNIIEF

A clear example of shopfloor conflict over spin-off activity occurred in Arzamas-16 (now called Sarov), where in March 1994 a dispute was reported between the administration and the STK at the VNIIEF defense nuclear institute. The labor contract for the year was under negotiation. In its contract meeting, the STK complained that it was being wrongly excluded from decisions about the pay that institute managers received.

These managers, constituting about 5 percent of the institute workforce (or 1,000 individuals), were said to be profiting as individuals from spin-offs that were essentially funded by the institute. There was anger that as a result these managers' take-home pay was much higher than their official salaries and they were thus compensated at a stupendous level compared to the wages of those still working only on VNIIEF business. Around 4,000 VNIIEF employees, or 20 percent of the institute's total workforce, were said to hold spin-off jobs as of June 1993. ⁶⁶ While this meant that a large proportion of workers were engaged in private market activities, it also left 80 percent of the workforce excluded from the benefits that spin-off employees received.

The STK demanded "an extraordinary confidential report concerning the leaders of the institute (beginning at the level of chiefs of independent laboratories), whose pay in the small enterprises is higher than their pay at VNIIEF." ⁶⁷ The STK chairman said, "We have an evident situation where in the divisions a significant fraction of the workers are not kept fully occupied or are idle, but this is not reflected in the pay of division leaders." ⁶⁸ A report of the STK meeting continued, "The administration of VNIIEF continues to accept the commercial structures, granting them a roof and other unmeasured internal resources: after all, most of the leaders are numbered among the appointments in such firms. [To put it] simply, who will hack off the bough on which he likes to sit?" ⁶⁹ Earlier reports had indicated that spin-offs were operating with institute resources on institute time, even though this was against regulations, ⁷⁰ and that the rents charged for spin-off floorspace were far below market prices. ⁷¹

The STK proposed that the yearly contract be amended to include a provision that managers "not occupy themselves during the [institute] workday with entrepreneurial activities that are not connected with the programs, themes, orders, or contracts of VNIIEF." ⁷² In the end, however, the STK and the director apparently agreed to disagree about the role the STK should play in pay-grade negotiations, and the contract was approved without resolution of some key points. ⁷³ Still, STK pressure did lead the institute's director, Vladimir Belugin, to order an internal audit of spin-off activity. This audit recommended (without much reported commentary) that the institute cease its support for nine of its forty-four spin-offs but found that the rest of them "work for the benefit of the institute." ⁷⁴

In 1996 a member of the VNIIEF financial management team confirmed in a private interview that "many" of the STK accusations, which were reported in the local Arzamas-16 newspaper, were accurate: state intellectual property was sometimes used by private entrepreneurs without proper compensation to the institute, and private businesses did use VNIIEF equipment and floorspace (such as computers and labs) on VNIIEF time. But this manager explained that VNIIEF leaders lacked the time, resources, and skills to ensure that restructuring was being done by the book and expressed a belief that the necessity of restructuring, and of providing profitable opportunities for people whose skills would otherwise be wasted, justified the actions taken. Said the manager, "The STK must understand our situation." ⁷⁵

The interpretation one puts on this series of events obviously depends on one's perspective. The STK had earlier accused Belugin of a "confrontational, rude style of relations" and in mid-1993 had asked the Ministry of Atomic Energy to replace him. ⁷⁶ (The financial manager I interviewed in 1996 said that Belugin was a fine person with whom to work and that while the STK as a whole was also polite and cordial, some of the STK leaders were rude.) From the STK's perspective, then, the collective was working to root out managerial corruption, and neither the word of the director nor an internal audit done under his supervision would indicate a good-faith effort by managers to uphold the collective's interests. Instead, because the workforce was located in a closed city with no alternative opportunities nearby and because the ministry appeared to support the director, the STK was bereft of any real control.

On the other hand, from the perspective of the institute and spin-off managers, the majority of the spin-offs have been run well and fairly, providing licensing fees to the institute, and were one of the only avenues available to residents in the closed city to make a profit through hard work. The director repeatedly stressed that the primary reason for establishing the small enterprises was to "retain the collective," ⁷⁷ a function that may very well be necessary for proper maintenance of the sensitive materials housed at the installation. In this view, the STK leaders are old thinkers mired in expectations of socialist leveling and are unable to adapt to market-based salary differentials. The STK has too much power, not too little, and that is why Belugin decided in 1993 to ban its unsanctioned meetings during working hours. ⁷⁸

From the outside, it is impossible to know which side's arguments have the most truth behind them. Given that similar perceptions on both sides are frequently found throughout Russian defense industry, it is likely that both are at least partially correct in their perceptions.

The Sociological Explanation: Added Value

As I have shown, there are clear underlying structural reasons for the disputes that seem endemic in Russian defense industrial enterprises at the moment. Managers exercise a great deal of power within their enterprises, and they can use this power both to restrict the activities of uncooperative competitor spin-offs and to subsidize the activities of spin-offs that bring them personal income. The fact that the old Soviet enterprises continue to endure and that spin-off assets are specific and tied to those enterprises means that managers have a great deal of control over the spin-off economy.

The activities of spin-offs themselves also have clear structural explanations. Some spin-offs--those not controlled by mother enterprises--are acting in accordance with the expectations of transaction-costs market economists. Having detached themselves from their mother enterprises, they protect their resources from "raids" by centralized authorities within parent organizations. ⁷⁹ Such spin-offs provide genuine market income opportunities for their members, opportunities that would otherwise be swallowed up by the cumbersome overhead and tax structure of the mother enterprises. Simultaneously, many spin-offs (particularly those favored by current mother enterprise managers) have for all practical purposes stolen the intellectual property of their mother enterprises and have gained enormous exclusive competitive advantages (in economic terms, quasi-rents) by using the facilities and contacts of those mother enterprises at below-market cost.

I could stop here and say that the rational self-interest explanation is sufficient for understanding this case: spin-off managers have clearly not sacrificed individual gain for the sake of the collective. However, this would leave us with an incomplete understanding of the important variables that affect the choices managers make in these situations. Despite the strength of structural explanations for spin-off activity and conflict, historically ingrained cultural patterns have insinuated themselves here and there within the story.

For example, directors see the benefits of spin-offs as part and parcel of retaining the collective, since spin-offs provide market opportunities for workers while keeping them within the factory fold. This clearly harks back to the discussion in chapter 2 about the endurance of behavior patterns appropriate to a scarce labor market, under conditions of overemployment. It is particularly poignant in the case of the closed nuclear cities, because the very viability of these enclaves in a market economy is questionable, even though most of the residents of these cities do not want to leave and do not want to open them to outsiders. ⁸⁰

Furthermore, as previously noted, the root of the conflict over spin-offs is often attributed by spin-off managers to a cultural factor: the "psychology of leveling" that is thought still to permeate the labor collectives of defense industrial enterprises. In Soviet days, both floor and ceiling salaries for each job grade were set by the state, and individual innovation and entrepreneurship were not rewarded. Many spin-off owner-managers believe that it is primarily their own willingness to work hard in order to achieve higher salaries that has alienated them from their former coworkers today. They object to what they see as the perseverance of an old collectivist mindset that no longer fits the new market realities. A certain amount of the tension between the spin-offs and mother enterprises may be attributable, then, to the paternalistic expectations of both directors and workers: the notion that the factory will take care of everyone, even those who are not productive.

Further indication that socialization may be at work in this relationship is the simple fact, noted above in the case of Zelenograd, that at least some directors would rather leave floorspace unused rather than renting it out to any private firm that can pay for it. These defense directors apparently prefer to exercise power at the expense of making money. A sociological study of managers in defense-heavy Cheliabinsk found that Russian managers valued having power over the lives of others much more than U.S. managers did, ⁸¹ and perhaps this is part of the ingrained paternalism they practice. While there is no evidence on this point (except for journalistic claims about spin-off firms employing friends and family), it is reasonable to speculate that managers are probably renting out floorspace to their friends sooner than to strangers, thus maintaining the links of the old krugovaia poruka .

One would think that if rents and utility rates were set at high enough levels, leasing space to outsiders would meet one of two self-interested managerial goals: either lining the personal pockets of those who make the rental arrangements or providing income to keep the mother enterprise afloat for as long as possible so that the managers keep their jobs. Of course, the accusation that floorspace is arbitrarily controlled is made by those involved in spin-off activities; it is possible that in fact managers have acted in their own economic self-interest to stop those rogue or criminal firms who have been eager to take unfair advantage of enterprise resources (or who at least have appeared unwilling to give managers their cut). It is also possible in theory that directors are holding on to unused space now to keep it available for their own projects later, although that would indicate a faith in the future of both their enterprises and their own jobs that is probably unwarranted.

Despite these cultural overtones, when we look at the situation of the spin-offs overall, what has been most striking is the apparent willingness by many managers, especially midlevel managers, to sacrifice the good of the collective for the private individual gain of themselves and their closest associates from within the old factories. While this would at first glance appear to undercut the arguments of the sociological school, it can in fact be used to support them, once the specifics of the Soviet case are understood.

Loyalty within Subdivisions of the Soviet Enterprise

Joseph Berliner, in his classic book on Soviet managerial behavior, noted that central planning dictates focused on the productivity of shops within the enterprise rather than on the productivity of the enterprise as a whole. Shops were encouraged to be in competition against each other, instead of being given incentives to cooperate together for the good of the enterprise. This often meant that overall enterprise goals were sacrificed so that shop goals could be pursued. Shop stewards focused their attention on the ability of the shop to overfulfill its plan, not on the ability of the enterprise to do so. This could be done, for example, by overproducing large components that received big bonuses because of their size but were not needed by the enterprise, while failing to produce smaller but more necessary components. If the shop overfulfilled its part of the plan, the shop manager could receive a premium on top of his or her regular salary, regardless of what happened to the enterprise. ⁸²

To get this premium, the shop manager would have to motivate shop employees to work for the common good of the shop. Because any worker in a Soviet factory had the right to take any concern to the top of the factory hierarchy--remember from chapter 2 that the director set aside a certain number of office hours to listen to employee complaints--this probably meant that the shop steward could not get away with demanding output that was above the standard set in the factory as a whole. To get their premiums, then, shop managers had to treat their employees well, and the social bargain made within the shop would thus mimic, writ small, the bargain struck between enterprise director and workforce. (Although, as Berliner notes, shop stewards did not have distribution rights over the housing and other social benefits that enterprise directors controlled.)

In a 1990 study, a joint task force of researchers from the Harvard Business School and Soviet management institutes in fact revealed that Soviet workers' identification with the shop superseded  their identification with the enterprise and that their identification with the smaller work brigade within the shop was even higher. According to the Soviet participants in the study, the core unit in every enterprise was the "structural task unit" or subdivision (podrazdelenie ), the small group charged with completing a specific, limited task for the enterprise. At various levels in the enterprise, as subdivisions were joined together to form larger units further up the hierarchical structure (from brigade to shop to plant to enterprise), group identification became progressively weaker. ⁸³

This study's assessment of how the subgroup affected enterprise sociology is striking and worth reproducing here:

Members of STUs [structural task units] refer to themselves as "we," and show an astounding cohesion, solidarity, camaraderie, and loyalty to one another and to their leader. These characteristics of the STU often lead to excessive compartmentalization of the affairs of organizations. In cases of weak leadership at the top, they can diminish the unity of the enterprise and enhance the tendency of an STU to give priority to its own interests over those of the enterprise. STU members are bound to one another by total confidentiality as to the inner workings of the group. In fact, divulging information to outsiders, even on trivial matters, needs the leaders' clear approval. STUs function as a collective entity that is practically impossible for outsiders to penetrate. ⁸⁴

In other words, the krugovaia poruka  of Soviet economic life exerted the strongest magnetic pull among immediate coworkers, and social networks became more and more secondary to people's core identities as the distance from the immediate work group increased.

This institutionalized identification with the subgroup is reflected in the fact that most of the start-ups and spin-offs operating within Russian defense industrial enterprises seem to be delineated by the personnel makeup of the old shop boundaries. This gives Russian spin-offs unique structural characteristics in the market. For example, while many spin-offs in the United States are also former subdivisions of larger corporations, such breakaways do not necessarily maintain old employment links.

In the United States, divestiture of a subdivision--the sale of one part of the business to a different set of owners (much like the newly privatized small enterprises formed from divisions of Soviet enterprises)--most often occurs when the parent corporation considers the subdivision unprofitable and wants to free up cash for other uses. Divestiture is seen primarily as a response to overdiversification; it is a means for a firm facing pressure (from stockholders, for example, or from the threat of an outside takeover) to return to its core competencies, which makes it better able to stake out a market niche. ⁸⁵ In the words of one observer, "divestiture is essentially an admission that an inappropriate project choice was made initially." ⁸⁶ (This may parallel the spinning-off of privatized consumer service shops from Soviet defense enterprises, where the activities pursued are only indirectly related to the enterprise's high-tech core competency. It is not what one would expected to happen to high-technology subdivisions with high profit potential.) In the U.S. case, divestiture to new owners means that there is no expectation that the management staff or other personnel of the division will retain their jobs. In fact, divestiture is often interpreted by workers as a code word for downsizing and layoffs, as new owners come in and clean house.

True spin-offs in the United States, where the parent corporation retains ownership of a newly independent subdivision (much like the daughter companies in which Russian defense enterprises retain significant stock holdings), tend to occur when the parent firm wants to explore a potentially risky new market niche or when government regulation affecting the output of only one subdivision imposes significant costs on a parent firm that would otherwise not be subject to them; spin-offs are also useful when centralized management has become an inefficient mechanism to oversee the variety of activities undertaken. ⁸⁷

In a regulation-avoiding spin-off, one would expect the same basic personnel policies to be followed in the new company that were followed when it was a subdivision, much as occurs in Russia. But when new market niches or new managerial independence are being explored, there is no reason to expect that a unified set of employees will necessarily move from the old to the new business. Instead, a subset of employees from the parent firm may be encouraged to create a new small business from scratch, ⁸⁸ or a new set of corporate overseers with different expectations may be appointed. ⁸⁹ In U.S. high-tech start-ups, not only new employees but often new cofounders are sought to contribute new expertise to the business and to participate in the financial risk involved. According to a U.S. consultant who specializes in providing assistance to start-ups, "Most start-ups search for their founders and key personnel in the following areas: (a) parallel companies which manufacture similar products, (b) competitive companies . . . , (c) college and night-school campuses, (d) consultants . . . , (e) associations and societies, (f) referrals from bankers, lawyers, accountants, venture capitalists, management associations, friends, and contacts, (g) recruitment agencies . . . , and (h) advertisements." ⁹⁰ In Russia, in stark contrast, the desire to explore new market niches and increase managerial independence at a lower level seems to be associated not with the search for new employees but instead with new job opportunities for old work groups.

If these innovative companies were truly trying to maximize their market performance, one would assume that they would not replicate the old subdivision employee structure but instead try to hire the best individuals available, as many foreign joint ventures in Russia have done. The fact that résumés and letters of recommendation tend not to be reliable indicators of ability in the uncertainty of reform-era Russia means that alternative personnel selection mechanisms must be used, such as standardized psychological and aptitude tests. But open job searches do tend to be held by foreign joint-venture firms (for example, Moscow-McDonald's gives out tray liners that are advertisements for new employees).

Even in the innovative Russian defense industry spin-offs, however, open job searches do not seem to be common. Instead, work groups from the old enterprise continue to form the core of the new endeavor. It is true that the individuals who formed enterprise work groups do not correspond perfectly to the employees of spin-off companies; many spin-offs now employ a significant number of "outsiders," ⁹¹ especially in the areas of finance and marketing. Yet the management core of the old shop remains, and most new employees seem to be the personal friends of those who make up this core. In the words of Aleksandr Sokolov, executive vice president of the ELVIS+ spin-off, "everyone knows everyone else," and new employees are hired because of their personal connections to existing employees. Sokolov argues that placing an employment ad tends only to "jam up the phone lines," without turning up "good specialists." ⁹² In less entrepreneurial spin-offs and daughter companies, the workforce appears to bear an even closer resemblance to the makeup of previous personnel.

As in the case of business-to-business relationships, discussed in chapter 3, an argument can be made that prior acquaintance provides a means for establishing the trust necessary for business dealings in an uncertain environment (and even the typical U.S. hiring search described above cites "referrals from . . . friends" as a potential resource). Furthermore, in the case of those who worked side by side for years within a subdivision, the information provided by the history of the relationship is indeed relevant to the formation of self-interested capitalist business relationships. Once cost accounting became a real concern for the subdivisions in the late 1980s, those who worked together in research and engineering groups would have been able to judge who among them was a hard worker or a slacker, who was skillful and ingenious or slow and clumsy, and to what extent each member worked for the good of the group or took advantage of it. An argument could thus be made from the rational self-interest perspective that keeping old work groups together made good business sense.

Yet the experience of at least one spin-off company (whose representative did not wish to go on the record) supports the argument made in chapter 1 that in an environment where the temptation to cheat is everywhere, even a long history of personal acquaintance provides an insufficient basis for making rational business judgments. A representative of this company ruefully told a U.S. audience in September 1994 that one of the original founders of his company (someone from his work group within the Soviet enterprise), "a Ph.D. engineer with a Mercedes and a bodyguard," was "forced into criminal activity." The subdivision circle, then, does not actually provide the self-interested actor with adequate information for making wise business choices. Friends may be more trustworthy than outsiders, but old friendships often crack under the pressure of new temptations and new threats.

It is also possible that old work groups are kept together because they provide a synergy that leads to higher productivity. Those who are familiar with each other's habits and thought patterns save resources because they need to gather less information about each other's preferences and intentions in order to work together, and so the sum can become more than the parts in terms of creativity. There is no means to distinguish whether synergistic efficiency or the intrinsic emotional value of maintaining old networks is responsible for keeping existing work groups together. However, synergy would not explain the tendency of spin-offs to hire old, but outside, acquaintances of their personnel to new positions when they need to expand. It makes sense to put somewhat more trust in existing network contacts than in outsiders during a period of systemic upheaval, but the habit of hiring acquaintances probably also reflects the intrinsic value placed by the society on helping out fellow members of the circle when hard times hit.

In the end, the apparent dominance of subdivision personnel in spin-off and start-up companies from Russian defense industry probably reflects the importance that managers attach to retaining the social networks with which they have traditionally had the strongest links at least as much as it reflects cold economic calculation. The emotional and moral pull of the broken interenterprise supply networks, discussed in chapter 3, undoubtedly waned in comparison to that of the krugovaia poruka  of the immediate work group. This means that while the rational self-interest explanation may be sufficient to explain conflicts between the old collectives and the new spin-offs in Russia, the socialization perspective contributes to our understanding of the institutional lines such conflicts have followed. It is not unexpected that the good of the collective would be sacrificed for the good of the shop or that the good of the shop would be sacrificed for the good of the work group. Further supporting the notion that it is not mere individualistic materialism that is operating in spin-off activities is the fact that many spin-offs seem to be replicating the social service functions provided by Soviet mother enterprises.

Paternalism in Spin-offs

Binar, a privatized high-tech spin-off from VNIIEF that has made (among other items) computerized equipment to control natural gas extraction compressors, has provided its employees with a family doctor and subsidized medicines, loans for large household appliance purchases, credit to allow them to buy their apartments, and maternity benefits. It has also thrown, on average, one employee birthday party per week ⁹³ --a long-standing Soviet workplace tradition. TOFIS, a privatized conglomerate of twenty-one consumer-goods suppliers and retail outlets that used to be run by the Ministry of Atomic Energy for the convenience of Arzamas-16 employees, has continued to pay its employees' health insurance and nursery school costs, provided a doctor on contract for employees to visit, given interest-free loans to employees to buy furniture and television sets, and sold its products to employees at wholesale prices. ⁹⁴ SIC ELVIS in Zelenograd lacks the resources to build housing for its employees but has sometimes paid for repairs to their apartments and has also paid for their children's summer vacations, for their right to use a free polyclinic, and for medical treatments of handicapped family members. ⁹⁵ Another privatized defense enterprise spin-off, the Moscow Center for SPARC Technology, has provided a corporate membership for its employees to use at the American Medical Center in Moscow (using funds provided by its U.S. partner, Sun Microsystems) ⁹⁶ and in 1994 was considering investing in housing for its employees to spare them commuting on crime-ridden intercity trains. ⁹⁷

The behavior of each of these spin-offs contrasts sharply with the practice of those forming start-up companies in the United States. While well-established companies in the United States that have large and certain markets often provide noncash perks to their employees, new firms tend not to do so. According to a standard legal manual used by many such firms, "Since most start-up companies are unprofitable in the early years, equity and profit participation replace the more generous salary and [fringe benefit] compensation arrangements of seasoned concerns." ⁹⁸ In U.S. start-ups, in other words, employee stock equity (and its associated risk) replaces both cash and social services that employers might otherwise provide. This helps a new business ensure the likelihood of both profit and employee loyalty, especially where there is a temptation to walk away with a new and struggling firm's hard-earned innovations. ⁹⁹

Not all Russian spin-offs are so paternalistic. The privatized ELVIS+, for example, has not provided medical services for its workers, explicitly preferring to give them the higher pay that would allow them to buy their own. ¹⁰⁰ Clifford Gaddy has suggested that the transition economy of Russia is separating those individuals who prefer paternalistic treatment by their employers from those who prefer cash benefits. ¹⁰¹

But the fact that so many spin-offs are providing social services of one kind or another--and note that many of those mentioned above go beyond the standard expectations of access to housing and subsidized health care--indicates that even the young and worldly former employees of Russian defense industrial enterprises seem to prefer a measure of paternalism over pure cash. Whether or not spin-off managers themselves receive intrinsic emotional value from such paternalism, this pattern indicates that the society of the Russian defense sector as a whole continues to see at least limited paternalism as a moral good, owed by employers to their workers. Otherwise, all spin-offs would look more like ELVIS+. It seems clear that managers still feel responsible for the well-being of their "in-groups" and that the drive for profits and high salaries does not always translate into a cash-centered market ethic.

Implications for Russian Stability and International Security

Why should the outside world care about the labor/management conflicts generated by Russian defense industrial spin-offs or about the loyalty that subdivision employees feel toward each other? What practical political effects can spin-off activities have, above and beyond the impact made by the old enterprises themselves?

One important economic effect that spin-off activities can have is to intensify large enterprises' struggle for survival and the resulting battle over how to carve up the shrinking Russian federal budget pie. When a spin-off siphons away resources from the mother enterprise, for example by using power and water supplies for free, then that enterprise loses money and becomes even more dependent on government largesse for its continued existence (and even more vulnerable to real bankruptcy). When enterprise managers fail to receive licensing fees for intellectual property use or to rent out at fair cost space that is clearly in demand by private firms (witness the Zelenograd complaints about enterprises' hoarding of empty space), they also lose money that could help to balance their books. Any unused or underutilized asset counts as a loss. These lost profits translate into lower and later-paid wages, which along with the threat of bankruptcy serve to aggravate the likelihood of enterprise-based strike and protest activity (discussed in chapter 2).

Furthermore, when managers benefit in underhanded or inequitable ways from spin-off activities, as many STKs charge, they have strong incentives to hide those personal benefits from enterprise workers, who might otherwise go to the authorities or to outside shareholders with demands for their dismissal. ¹⁰² To conceal the truth about their activities, managers must operate without the benefit of public documentation, which by definition further exacerbates the current trend of tax evasion in Russia. Such behavior in spin-offs thereby not only directly fans the flames of enterprise-based protests by undercutting the solvency of the enterprise; it also deprives the government of the means for performing the bailouts these protests demand, making competition over dwindling funds more and more acute.

Spin-offs that do not plunder the mother enterprise or engender labor conflicts can have either stabilizing or destabilizing political effects, depending on how successful they are. Those that provide long-term profitable job alternatives to people who have talent and initiative will reinforce societal belief in the efficacy of the market and thus serve as agents for reform in Russia. As their numbers grow, presumably Russian integration with other market economies will grow as well. But spin-offs that fail are likely to drive former enterprise employees back into the arms of the old enterprises.

As one analyst notes, Russian defense enterprise spin-offs are unlikely to receive state protection from bankruptcy, because they employ a small number of workers and thus have minimal political and economic impact as firms. ¹⁰³ Given the poor track record of small businesses in the United States (even the most optimistic reports indicate that only "about half of all small businesses survive their first five years"), ¹⁰⁴ where most entrepreneurs have at least grown up in a market economy, we should not expect that the majority of defense enterprise spin-offs in Russia will survive. Those dependent on foreign investment may be hurt by Western skittishness. (For example, IBM decided to end its production of personal computers at a spin-off of the Kvant enterprise in Zelenograd when the Russian federal government revoked a tax exemption it had earlier allowed on component parts imports.) ¹⁰⁵

In defense-heavy regions, those whose spin-offs fail may lack job opportunities, unless they return to their old enterprises. Once again, lack of employment mobility is a vital factor in understanding the political economy of the defense sector. In fact, many enterprises seem to be extending their social safety nets to those who work in their associated spin-offs. Some enterprises, such as Mashinostroenie in Reutov, tell those who leave to work in daughter companies that they are guaranteed their old jobs back if they want them. ¹⁰⁶ Other enterprises, such as TsAGI, provide a significant fraction of spin-off employees with some type of minimal backup employment at the enterprise so that those willing to pursue riskier market opportunities have "a guarantee behind the risk." ¹⁰⁷ As enterprise budgets continue to tighten and layoffs accelerate, such guarantees are likely to become more tenuous, however. In the absence of a state-supported social safety net and opportunities for geographic relocation of workers, spin-off failures are thus likely to heighten local and regional unemployment problems and the resulting centripetal pressure of cities and oblasts on the federal budget.

Beyond their domestic political-economic impact, spin-offs from Russian defense enterprises may pose new international threats in the area of arms proliferation. One of the more frightening examples of such a possibility is the case of spin-offs in Arzamas-16. A local newspaper report from August 1993 claimed that most small enterprises from the defense nuclear institute there had not properly registered their rental agreements with the regional representatives of the State Property Committee and that "there has been no list [made] of the economic control rights on property attached to VNIIEF [and other parts of the nuclear installation]." The report went on to state that there were ten "secret [small] enterprises" founded by VNIIEF, whose contract specifics were closed to outside auditors. ¹⁰⁸ A January 1994 follow-up report claimed that some of the contracts signed by the nuclear installation were highly unusual: they stipulated that small enterprises that rented state property for a certain number of years would then be granted outright ownership of that property (the period given was five years for movable property, and fifteen for fixed property). The colorful article stated: "To speak simply, the guys from these associations, those who are the most brazen, in five years can say, on a legal basis, 'Excuse me, friends, but these machines and equipment are mine.' And after another ten years, they can say it about the buildings of the shop or laboratory." Perhaps most disturbing, the report quoted an investigator from the state prosecutor's office as saying: "There is no legislation whatsoever on nuclear security. Correspondingly, there are no violations of it." ¹⁰⁹

While no publicly available evidence confirms that any spin-offs in Arzamas-16 are responsible for instances of nuclear materials proliferation (and even though the representative of VNIIEF's financial management team interviewed in January 1996 insisted that no rental contracts with private firms had been signed for lab space or other work areas actually located inside the highly secured fence of the main installation) ¹¹⁰ , the fact that outside investigators are prevented from seeing the property rental contracts of some spin-offs means that nuclear security depends completely on the honesty and wisdom of the managers involved.

Regardless of whether the rental contracts are suspect, it is an accepted fact--admitted by managers--that spin-off personnel here, as elsewhere, are engaged in private business on enterprise time and using enterprise equipment (including computers and labs inside the secured installation). This means that the transfer of classified information and materials to private sources may be difficult to control. ¹¹¹ The Los Alamos National Laboratory in the United States has worked with Arzamas-16 to develop a sophisticated computer and video monitoring system for use in areas where nuclear materials are present. Reportedly, however, by May 1995 that system had only been was installed at a demonstration site. According to a Russian source, until such systems go into effect, "the specialist working with nuclear materials carries personal responsibility for their security. And, in order to prevent loss, [the specialist] personally controls the presence of uranium and plutonium in locations with highly radioactive background levels." ¹¹² If that specialist is working for an unregistered private company, the problem of control is magnified, especially when the predominant security system is one of human guards with guns and Geiger counters rather than computerized gates, cameras, and sensors.

Employees of the closed nuclear installations have always had the reputation of being some of the most moral and disciplined members of Soviet society. They take extremely seriously their responsibility for the safekeeping of nuclear materials. ¹¹³ However, as elsewhere in Russia's defense complex, economic hardship has spiraled upward in Arzamas-16 in recent years. ¹¹⁴ When such hardship means that access to food and medicine for one's family is imperiled, there is no assurance that morality and discipline will prevail in the face of criminal opportunity. Since December 1992 institute employees--one publicly identified as a janitor--have made at least three failed attempts to steal nonweapons-grade uranium-238 from Arzamas-16, ¹¹⁵ proving that insiders who need money are willing to engage in the illegal trafficking of radioactive state property. When managers approve of employees engaging in private business on company time, control over these illegal activities becomes that much more difficult, as managers can no longer be certain who is legitimately using lab facilities when.

The experience of Arzamas-16 is hardly unique. Members of a spin-off from the Elektropribor enterprise under the Ministry of Atomic Energy's control in the Sverdlovsk region were found in 1995 to have stolen 48 billion rubles worth of stable isotopes (not militarily related) from their mother enterprise, exporting them to unsuspecting industrial customers in the West. ¹¹⁶ The existence of poorly regulated, potentially parasitic spin-offs is thus cause for grave concern, especially until sophisticated monitoring systems are installed in all enterprises (including those in Russia's other nine closed nuclear cities) that work with weapons-grade plutonium.

The problem extends beyond nuclear materials, as well. There have been many reports that machine guns and other small weapons are being made illegally in factory shops and smuggled out on factory planes throughout Russia. ¹¹⁷ A defense plant in Izhevsk, Udmurtiia, apparently sold 7,000 machine guns to Chechen rebels in Russia, and a second plant in the Russian Far East is reported to have sold them sixteen artillery pieces. ¹¹⁸ The Russian Federal Counterintelligence Service claimed that spin-off companies from the Hydrofoil Central Design Bureau in Nizhnii Novgorod divulged to foreigners classified information about the design of Russian military wing-in-ground aircraft. ¹¹⁹ Virtually the entire defense complex in Russia may thus be fertile hunting ground for rogue states or terrorist groups looking for ways to purchase military equipment to which they would otherwise be denied access. When managers have incentives to hide spin-off financial activities from the general public, the rogues' job is made much easier.

Organized crime groups have also begun to infiltrate the Russian defense complex, which is hardly surprising, given the mafia influence in the Russian economy in general. For example, there were reportedly two mafia contract killings inside the closed gates of Arzamas-16 in 1995, ¹²⁰ and inside the P'ezo defense electronics enterprise in Moscow in March 1995 a bomb exploded prematurely as it was being laid at night by an intruder. ¹²¹ In early 1996 the head of the Novator military enterprise in Yekaterinburg was gunned down in an apparent contract killing, and a Russian television commentary noted that "a number of other prominent figures in the military-industrial complex have been murdered over the past 18 months." ¹²² The possibility that organized crime groups interested in illegal weapons or technology purchases can find connections to private businesses being run from defense enterprises is thus not far-fetched.

Beyond worry about theft of classified information or materials, the existence of labor conflicts at sensitive enterprises is in itself alarming. As I noted in chapter 2, some labor disputes at Russian defense industrial enterprises have already involved the threat or use of violence. Occasionally one hears in an interview an ominous reminder from those associated with the Russian defense complex that unhappy defense enterprise workers have access to weapons. (Recall from chapter 2 the tank-plant worker who commandeered one of his plant's own vehicles.) Directors themselves sometimes use the specter of hazardous materials accidents at defense plants as a bargaining chip for more funds. For example, in the summer of 1993 work in Arzamas-16 involving the disassembly of a particular type of nuclear warhead was temporarily halted when wages were delayed, because authorities "fear[ed] the consequences of possible carelessness in the work of employees who haven't received their salaries for two months." ¹²³ Similar measures were recommended by institute authorities in June 1995. ¹²⁴

It is easy to dismiss such threats as mere fear mongering, designed to pressure the state into bailing out troubled defense factories. However, when economic conflicts are not merely between enterprise and state but between long-term coworkers who now feel slighted by former comrades, the danger that passions will boil over is greater. The element of paternalistic in-group identification contained within these disputes makes their possible ultimate consequences even more unpredictable.

Conflicts within Russian defense industrial enterprises thus contain the seeds of real danger, both for domestic stability in Russia and for international security. Unregulated spin-off borrowing of intellectual property can lead to the unregistered dissemination of classified information and controlled materials. Financial conflicts between spin-offs and mother enterprises, and an associated desire on both sides to keep various expenditures off the public record, can contribute to the inability of state authorities to control illegal weapons proliferation. Desperate personal anger within enterprises manufacturing weapons and explosive materials can lead to rash threats or acts of violence. Once again, these problems are exacerbated by the lack of alternative employment and relocation opportunities and by the fact that enterprises, not the state, control the disbursal of social safety-net benefits.

Thus the continued structural and social importance in Russian defense industry of all three of the institutions examined in this book--the paternalistic enterprise, which limits labor mobility; the linkage of enterprises and elites at a regional level, which foments independence from Moscow's financial and foreign policies; and the formation of spin-offs based on in-groups, with incentives to conceal their activities from the inspections of outsiders--contributes to the potentially lethal mix of political instability and weapons proliferation in Russia's defense complex. Both structure and culture matter for policy outcomes.

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Endnotes

Note 1: U.S. business literature defines the term spin-off  as a divestiture having a particular ownership structure, distinct from equity carve-outs, split-offs, and split-ups; see J. Fred Weston, Kwang S. Chung, and Susan E. Hoag, Mergers, Restructuring, and Corporate Control  (Englewood Cliffs, N.J.: Prentice Hall, 1990), pp. 224-25. The ownership structures of the small Russian enterprises I am analyzing here vary. The terms spin-off  and start-up  are accessible to a wide audience, and I use them to identify any small company arising out of a Russian defense industrial enterprise, not to imply that all these firms are controlled subsidiaries with pro rata share distributions matching that of the mother enterprise. Back.

Note 2: Russian defense industrial managers themselves have recognized the necessity to spin off subdivisions to attract foreign investment. See "Aleksandrovskii radiozavod stanovitsia kholdingom" (The Aleksandrovskii Radio Factory is becoming a holding company), Segodnia , Nov. 11, 1994; " 'Permskie motory' preobrazuiutsia v kholding" (The Perm' Engine enterprise is transforming itself into a holding company), Segodnia , Dec. 15, 1994; and Arkadii Sosnov, interview with Il'ia Klebanov, general director of the LOMO enterprise, "Nash investor stoit u poroga" (Our investor is standing at the threshold), Nevskoe Vremia  (St. Petersburg), Jan. 10, 1994. The point was also raised by Aleksandr Grigor'ev in an interview with the Stanford CISAC group, including the author, in September 1994. Back.

Note 3: For examples, see Nikolai Labutin, "Elektronnye igry Aleksandra Yemil'evicha--na blago komu?" (The electronic games of Aleksandr Yemil'evich--who benefits?), Sorok Odin  (Zelenograd), no. 35/36 (1991); P. Alekseev, "Otpochkovalis' ot 'Angstrema' " (Propagated from Angstrem), Sorok Odin , no. 46 (Oct. 11-17, 1993); Mikhail Ul'iashchenko, "Chtoby sokhranit' umy" (In order to retain minds), Inzhenernaia Gazeta , no. 8 (Jan. 1992); and Sosnov, "Nash investor stoit u poroga." Back.

Note 4: Interview conducted by the CISAC group, including the author, at TsAGI, Sept. 1994. Back.

Note 5: For a thorough discussion of the history of consumer goods production by Soviet defense industries, see Julian Cooper, "The Civilian Production of the Soviet Defence Industry," in Technical Progress and Soviet Economic Development , ed. Ronald Amann and Julian Cooper (New York: Basil Blackwell, 1986). An example is the Arton joint-stock company in St. Petersburg; as a shop in its mother enterprise, the Arsenal Factory, Arton produced toy copies of Arsenal's military weapons. That line proved unprofitable, but Arton is now using the same equipment to produce gas pistols for civilian use. See Dmitrii Satsenko, interview with V. A. Sychev, director of AO Arton, "Gazovyi revol'ver: Rodom iz Peterburga" (The gas revolver: Born in St. Petersburg), Nevskoe Vremia , Feb. 13, 1993. Back.

Note 6: The Binar firm in Arzamas-16 reportedly makes an essential component for natural gas extraction that is based on technology developed by its mother enterprise, the nuclear weapons institute. See S. Mikhailova, "Formula Binara: Liudi + Tekhnika = Tovar Litsom" (The binar formula: People + technology = an advantage), Gorodskoi Kur'er , Dec. 2, 1993. Back.

Note 7: An example here is the Almaz Foreign Trade Company, which sells the satellite images it obtains using the equipment of its mother enterprise, Mashinostroenie, in Reutov. See Tova Perlmutter, Michael McFaul, and Jeffrey Lehrer, "The Mashinostroenie Enterprise," in Defense Industry Restructuring in Russia: Case Studies and Analysis , ed. David Bernstein (Stanford, Calif.: Stanford University Center for International Security and Arms Control, 1994), p. 70. Back.

Note 8: For example, the local newspaper reported that in Arzamas-16, ten of the new small enterprises are "secret," which prevents authorities from the State Property Committee from examining the points of their founding agreements; another issue of the newspaper reports that two of the small enterprises are engaged in competitions to produce weapons for foreign customers. See "S gosudarstvennym imushchestvom, kak so svoim" (Treating state property as if it were their own), Gorodskoi Kur'er , Aug. 5, 1993; and Dmitrii Sladkov, "V teni bol'shogo utesa: O rabote malykh predpriiatii VNIIEF" (In the shadow of a great cliff: On the work of the small enterprises of VNIIEF), Gorodskoi Kur'er , Sept. 4, 1993. The manager of the ELVIS+ spin-off in Zelenograd, whose own firm is completely civilian, noted that a couple of the other spin-offs from the ELAS enterprise are engaged in defense orders for the Russian state (interview conducted by the Stanford CISAC group, including the author, Sept. 1994). Back.

Note 9: See Anders Aslund, Gorbachev's Struggle for Economic Reform  (Ithaca, N.Y.: Cornell University Press, 1989). Back.

Note 10: Paul R. Lawrence and Charalambo A. Vlachoutsicos, eds., Behind the Factory Walls: Decision Making in U.S. and Soviet Enterprises  (Boston: Harvard Business School Press, 1990), pp. 131-33. Back.

Note 11: For a detailed description of these incentives, see Simon Johnson and Heidi Kroll, "Managerial Strategies for Spontaneous Privatization," Soviet Economy  7, no. 4 (Oct.-Dec. 1991): 281-316. Back.

Note 12: Yu. A. Filimonov, "Kooperativy v mashinostroenii" (Cooperatives in machine building), Mashinostroitel ', no. 11 (Nov. 1990). Back.

Note 13: Johnson and Kroll, "Managerial Strategies," p. 287. Back.

Note 14: For an excellent on-site description of how this worked in a nondefense Russian enterprise in 1991, see Michael Burawoy and Kathryn Hendley, "Between Perestroika and Privatisation: Divided Strategies and Political Crisis in a Soviet Enterprise," Soviet Studies  44, no. 3 (1992): 371-402. Back.

Note 15: Johnson and Kroll, "Managerial Strategies," pp. 288-89. Back.

Note 16: See Maxim Boycko, Andrei Shleifer, and Robert W. Vishny, "Privatizing Russia," Brookings Papers on Economic Activity 2 (1993): 148-49. Back.

Note 17: For an example, see A. Vaganov, interview with Nikolai Vasil'evich Mikhailov, president of the Vympel interstate corporation, "Shans dlia novoi ekonomiki" (Chance for a new economy), Inzhenernaia Gazeta , no. 132/133 (Nov. 1992). Back.

Note 18: Arkadii Vol'skii, "Tendentsii" (Tendencies), Moskovskie Novosti , no. 14 (April 3-10, 1994). B. Sedunov commented on this article in "Proryv v direktorskom korpuse" (A breach in the directors' corps), Sorok Odin , Apr. 12, 1994. Back.

Note 19: See Aleksandr Privalov, interview with Sergei Beliaev, general director of the Federal Bankruptcy Administration, "Na to i federal'naia shchuka v more" (For that, and a federal pickerel in the sea), Kommersant , no. 36 (Sept. 6, 1994): 6-9; and Peter Graff, reporting on economic adviser Peter Oppenheimer, in "Non-Payments Crisis Caused by 'Lawlessness,' " Moscow Tribune , Oct. 5, 1994. Back.

Note 20: V. Vladimirov, "Neplatezhni: Yesli oni narastaiut, znachit, eto komu-nibud' nuzhno?" (Insolvency: If it is growing, does this mean that someone needs it?), Sankt-Peterburgskie Vedomosti , Sept. 2, 1994. Back.

Note 21: These newspapers (Sorok Odin  and Gorodskoi Kur'er ) are now available at the Russian State Library Newspaper Reading Room in Khimki, just outside of Moscow. Back.

Note 22: Aleksandr Maliutin, "Ob'edinenie mozhet stat' kholdingom ili tekhnoparkom" (The association may become a holding company or a technopark), Kommersant-Daily , Sept. 21, 1994. Back.

Note 23: Alekseev, "Otpochkovalis' ot 'Angstrema.' " Back.

Note 24: V. Shishkin, "Budet li tret'em direktor Kvanta?" (Will there be a third director of Kvant?), Sorok Odin , no. 47 (Oct. 18-24, 1993). Back.

Note 25: I. Kataeva, "Krytoe pastbishche dlia Kommersant ov" (Sheltered pasture for businessmen), Gorodskoi Kur'er , Mar. 12, 1994. Back.

Note 26: David Bernstein and Elaine Naugle, "ELVIS+ and the Moscow Center for SPARC Technology (MCST)," in Defense Industry Restructuring in Russia , pp. 29-44. Back.

Note 27: O. Steshenko, "Poka . . . nedoverie direktoru" (Still . . . they have no confidence in the director), Sankt-Peterburgskie Vedomosti , June 1, 1994. Back.

Note 28: Mikhail Vasil'ev, "Investor ne vydast--Inflatsiia ne s'est" (The investor will not pay out--The inflation rate is not known), Nevskoe Vremia , Sept. 10, 1993. Back.

Note 29: "Griadut ser'eznye izmeneniia" (Serious changes are coming), Novosti TsAGI , no. 33 (1994). Zagainov's radio address on this theme took place on February 21, 1994. Back.

Note 30: See Tova Perlmutter, "Reorganization of Social Services," in Defense Industry Restructuring in Russia , p. 189. Back.

Note 31: Ye. Perekalin, "Bezrabotitsa, kotoroi ne dolzhno byt' " (Unemployment that shouldn't exist)," Sorok Odin , no. 15 (Mar. 29-Apr. 4, 1993). Back.

Note 32: Ye. Zubatov, "Direktora neispravimy; polozhenie nado ispravliat!" (The directors are irredeemable; the situation must be redeemed!), Sorok Odin , no. 29 (Aug. 1992). Back.

Note 33: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 34: David Bernstein, "Organizational Restructuring," in Defense Industry Restructuring in Russia , p. 159. Back.

Note 35: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 36: This was pointed out during one interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 37: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 38: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 39: Alekseev, "Otpochkovalis' ot 'Angstrema.' " Back.

Note 40: Petra Opitz, "Institutional Aspects of Conversion--A Look at St. Petersburg," in The Post-Soviet Military-Industrial Complex: Proceedings of a Symposium , ed. Lars B. Wallin (Stockholm: Swedish National Defense Research Establishment, 1994), p. 93. Back.

Note 41: Some examples: The Permskie Motory aircraft engine plant turned itself into a holding company for fifteen independent enterprises, where it will hold 100 percent of the capital; see " 'Permskie motory' preobrazuiutsia v kholding" (Permskie Motory is transforming itself into a holding company), Segodnia , Dec. 15, 1994. TsAGI has split thirty subsidiaries into three categories; in the two most closely related to its core technology, it retains controlling ownership. See David Bernstein and Jeffrey Lehrer, "The Central Aerohydrodynamic Research Institute (TsAGI)," in Defense Industry Restructuring in Russia , pp. 9-28. The Mashinostroenie enterprise in Reutov owns between 45 and 100 percent of the shares of each of its privatized spinoffs (interview conducted by the Stanford CISAC group, including the author, Sept. 1994). The Arsenal company in St. Petersburg owns 20 percent of the stocks of each of its nine privatized divisions; see Sergei Tachaev, "Chto dast nam trast" (What will give us a trust), Nevskoe Vremia , Oct. 2, 1993. Back.

Note 42: Bernstein and Naugle, "ELVIS+ and the Moscow Center," p. 34. Back.

Note 43: "NIIMP ili NII Malykh Predpriiatii?" (NIIMP or the Scientific Institute of Small Enterprises?), Sorok Odin , no. 3 (Jan. 1993); and Maliutin, "Ob'edinenie mozhet stat' kholdingom ili tekhnoparkom." Back.

Note 44: Aleksandr Galitskii, interviewed by the Stanford CISAC group including the author, Sept. 1994. Back.

Note 45: Sladkov, "V teni bol'shogo utesa." Back.

Note 46: For examples, see Alekseev, "Otpochkovalis' ot 'Angstrema,' "; and Mikhailova, "Formula Binara." Back.

Note 47: Lynne Bennett, "Kings of Know-How: Transferring Technology from Research Laboratories to Business," California Business  28, no. 3 (Apr. 1993): 33. Back.

Note 48: Ibid. Back.

Note 49: Daniel J. McConville, "Intellectual Property Gains Respect," Industry Week , Mar. 7, 1994. Back.

Note 50: Bennett, "Kings of Know-How." Back.

Note 51: William B. Scott, "Tech Transfer Impact Remains Elusive," Aviation Week and Space Technology  141, no. 19 (Nov. 7, 1994): 42. Back.

Note 52: For example, see Michael A. Dornheim, "Public, Private Interests Vie in Cooperative Research," Aviation Week and Space Technology  139, no. 19 (Nov. 8, 1993): 49; and Christopher Anderson, "Rocky Road for Federal Research Inc.," Science  262, no. 5133 (Oct. 22, 1993): 496. Back.

Note 53: Sladkov, "V teni bol'shogo utesa." Back.

Note 54: Private communication, June 1995. Back.

Note 55: Bernstein and Lehrer, "The Central Aerohydrodynamic Research Institute," p. 20. Back.

Note 56: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 57: Maliutin, "Ob'edinenie mozhet stat' kholdingom." Back.

Note 58: Labutin, "Elektronnye igry Aleksandra Yemil'evicha." Back.

Note 59: Ibid. Back.

Note 60: Ye. Perekalin, "Bezrabotitsa, kotoroi ne dolzhno byt' " (Unemployment that should not exist), Sorok Odin , no. 15 (Mar. 29-Apr. 4, 1993). Back.

Note 61: Ibid. Back.

Note 62: Ibid. Back.

Note 63: From an interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 64: ee Vladimirov, "Neplatezhni"; and Vadim Nesvizhskii, "Nalogovaia politsiia trebuet povysheniia statusa i polnomochii" (The tax police demand higher status and more authority), Segodnia , Nov. 26, 1994. Back.

Note 65: A. Lavrent'ev, "Ser'eznykh konfliktov s administratsei u nas net" (Serious conflicts with the administration are something we don't have)," Sorok Odin , no. 37 (May 17, 1994). Back.

Note 66: Dmitrii Sladkov, "Zadacha na delenie s neizvestnym otvetom: VNIIEF Ö 3 =?" (A division problem with an unknown answer: VNIIEF Ö 3 =?)," Gorodskoi Kur'er , June 12, 1993. Back.

Note 67: P. Gal'chenko, "Dogovor dorozhe deneg" (The contract is dearer than money), Gorodskoi Kur'er , Mar. 19, 1994. The front page of this issue is incorrectly dated November 11, 1993, apparently a printing error. The content of articles makes it clear that the events described took place in March 1994, not November 1993, and the correct date is printed on the inside pages of the issue. Back.

Note 68: S. Kholin, "Mnenie predsedatelia STKI" (The opinion of the STKI chairman), Gorodskoi Kur'er , Mar. 10, 1994. Back.

Note 69: Kataeva, "Krytoe pastbishche dlia Kommersant ov." Back.

Note 70: Sladkov, "V teni bol'shogo utesa." Back.

Note 71: "S gosudarstvennym imushchestvom, kak so svoim." Back.

Note 72: S. Kholin, "Kommertsiia--Privarok dlia rukovoditelei?" (Commerce--A food ration for the leaders?), Gorodskoi Kur'er , Mar. 12, 1994. Back.

Note 73: Petr Gal'chenko, "Zakliuchen kollektivnyi dogovor" (The collective contract is concluded), Gorodskoi Kur'er , Apr. 21, 1994. Back.

Note 74: V. Belugin, "VNIIEF finansiruetsia na 69%" (VNIIEF is 69% financed), Gorodskoi Kur'er , Apr. 21, 1994. Back.

Note 75: Interview conducted by the author in 1996. Back.

Note 76: "Printsipal'nye zamechaniia" (Principal remarks), a memo that apparently received the unanimous approval of the STK on June 29, reprinted in Gorodskoi Kur'er , July 31, 1993. Back.

Note 77: See the précis of a presentation by V. Belugin, in Dmitrii Sladkov, "VNIIEF ozhidaet perekhod na tematicheskoe finansirovanie" (VNIIEF awaits the switch to thematic financing), Gorodskoi Kur'er , Dec. 23, 1993; idem, interview with V. Belugin, "My budem rabotat' nesmotria na trudnosti" (We will work despite difficulties), Gorodskoi Kur'er , Jan. 13, 1994. Back.

Note 78: P. Khven', "Komandovat' paradom budu ya" (I will command the parade), Gorodskoi Kur'er , May 20, 1993. Back.

Note 79: Paul Milgrom and John Roberts, "Bargaining Costs, Influence Costs, and the Organization of Economic Activity," in Perspectives on Positive Political Economy , ed. James E. Alt and Kenneth A. Shepsle (New York: Cambridge University Press, 1990), esp. pp. 79-83. Back.

Note 80: For a discussion of the problems the closed cities face at present, including monopoly retail trade outlets, see Kimberly Marten Zisk, "Arzamas-16: Economics and Security in a Closed Nuclear City," Post-Soviet Affairs  11 (Jan.-Mar. 1995): 57-79. Back.

Note 81: See David N. Holt, David A. Ralston, and Robert H. Terpstra, "Constraints on Capitalism in Russia: The Management Psyche, Social Infrastructure, and Ideology," California Management Review  36, no. 3 (Mar. 22, 1994): 124. Back.

Note 82: Joseph S. Berliner, Factory and Manager in the USSR  (Cambridge: Harvard University Press, 1957), pp. 40, 43. Back.

Note 83: Paul R. Laurence and Charalambo A. Vlachoutsicos, eds., Behind the Factory Walls: Decision Making in Soviet and U.S. Enterprises  (Boston: Harvard Business School Press, 1990), pp. 70, 72. Back.

Note 84: Ibid., p. 72. Back.

Note 85: See, for example, Emily S. Plishner, "1993 Brings Bigger, Bolder Financial Moves," Chemical Week , Oct. 6, 1993, which focuses on divestiture by chemical manufacturers; and Evelyn Heitman and Shaker A. Zahra, "Examining the U.S. Experience to Discover Successful Corporate Restructuring," Industrial Management  35, no. 1 (Jan. 1993): 7, which cites the example of divestiture by the Burlington Industries textile company. Back.

Note 86: Arnoud W. A. Boot, "Why Hang on to Losers? Divestitures and Takeovers," Journal of Finance  47, no. 4 (Sept. 1992): 1401. Back.

Note 87: J. Fred Watson, Kwang S. Chung, and Susan E. Hoag, Mergers, Restructuring, and Corporate Control  (Englewood Cliffs, N.J.: Prentice Hall, 1990), pp. 224-39. Back.

Note 88: An example of this is the policy followed by the Hyatt Hotel Corporation, which encourages its employees to pursue new business lines, such as catering, that are outside its own core business. Employees receive start-up capital and advisory assistance but no equity. See D. Keith Denton, "Entrepreneurial Spirit: Employee Empowerment," Business Horizons  36, no. 3 (May 1993): 79. Back.

Note 89: An example is the Eastman Chemical Co. spin-off from Eastman-Kodak, where a new board of directors from outside was appointed. See Joe D. Goodwin, "Building an All-New Board," Corporate Board  15, no. 89 (Nov. 1994): 15. Back.

Note 90: Richard M. White Jr., The Entrepreneur's Manual: Business Start-ups, Spin-offs, and Innovative Management  (Radnor, Pa.: Chilton Book Co., 1977), p. 84. Back.

Note 91: For example, according to Aleksandr V. Sokolov, executive vice president of ELVIS+, one-third of the firm's current employees were not part of the work group in the past (interview conducted by the Stanford CISAC group, including the author, Sept. 1994). Back.

Note 92: Interview conducted by the Stanford CISAC group. Back.

Note 93: Mikhailova, "Formula Binara." Back.

Note 94: I. Kataeva, interview with Stanislav S. Bochkanov and Tat'iana A. Fadeeva, "TOFIS: Ot zhvachki k supermarkety" (TOFIS: From chewing gum to a supermarket), Gorodskoi Kur'er , June 3, 1993. Back.

Note 95: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 96: Tova Perlmutter, "Reorganization of Social Services," in Defense Industry Restructuring in Russia , p. 192. Back.

Note 97: Bernstein and Naugle, "ELVIS+ and the Moscow Center," p. 40. Back.

Note 98: Richard D. Harroch, Start-up Companies: Planning, Financing, and Operating the Successful Business  (New York: Law Journal Seminars-Press, 1990), II-10. Back.

Note 99: Ibid.Back.

Note 100: Bernstein and Naugle, "ELVIS+ and the Moscow Center," p. 35. Back.

Note 101: Clifford G. Gaddy, "Notes for a Theory of the Paternalistic Russian Enterprise," unpublished paper prepared for the annual conference of the American Association for the Advancement of Slavic Studies, Nov. 1994, Philadelphia, Pa. Back.

Note 102: For example, when workers at the Polet aerospace enterprise in Omsk discovered that their director was making huge personal profit from the daughter companies he had created, with a salary level exceeding that of many of the workers by a factor of a thousand, they staged a "coup" against him while he was on a business trip to Moscow and convinced both Goskomoboronprom and the Omsk oblast administration to support his firing. See "Direktor 'Poleta' 'sletel' po vole trudiashchikhsia" (The director of Polet "flew away" by will of the workers), Kommersant-Daily , Apr. 15, 1995. Back.

Note 103: David Ellerman, "Spin-offs as a Restructuring Strategy for Post-Socialist Enterprises," in Commercializing High Technology: East and West , ed. Judith B. Sedaitis (Stanford, Calif.: Stanford University Center for International Security and Arms Control, 1996), p. 253. Back.

Note 104: Norman D. Williams, reporting data from the National Federation of Independent Businesses, in "Experts Offer Tips for New Ventures," Sacramento Bee , June 6, 1994. Back.

Note 105: Peter Rutland, "U.S. Computer Maker Halts Russian Production," OMRI Daily Digest , no. 42 (Feb. 28, 1996). Back.

Note 106: Interview with Mashinostroenie's deputy general director for personnel, Vitalii M. Chekh, conducted by the author, with the Stanford CISAC group, Sept. 1994. Back.

Note 107: Interview conducted by the Stanford CISAC group, including the author, Sept. 1994. Back.

Note 108: "S gosudarstvennym imushchestvom, kak so svoim." Back.

Note 109: Petr Khven', "Zakon surov . . . A surov li?" (The law is strict . . . Or is it?), Gorodskoi Kur'er , Jan. 29, 1994. Back.

Note 110: Author's interview, 1996. Back.

Note 111: Sladkov, "V teni bol'shogo utesa." Back.

Note 112: Veronika Romanenkova, "Uchenye Arzamasa-16 i Los Alamosa sozdali 'nedremliushchee oko' " (Scientists from Arzamas-16 and Los Alamos have created a "sleepless eye"), Segodnia , May 11, 1995. Back.

Note 113: Pavel Felgengauer, "To Live and Die in a Special Zone--Closed Russia," Megapolis-Express, July 22, 1992, as reported in Current Digest of the Soviet Press  44, no. 30 (1992): 12-13. Back.

Note 114: Zisk, "Arzamas-16." Back.

Note 115: A. Pokhil'ko, interview with Aleksandr K. Borodin, chief of the local bureau of the Russian Federal Counterintelligence Service, "Unikal'nost' ob'ekta i obilie sekretov opredeliaiut nashu rabotu" (The uniqueness of the installation and the abundance of secrets defines our work), Gorodskoi Kur'er , Apr. 21, 1994. Back.

Note 116: "Uchenye-atomshchiki navorovali izotopov na 48 milliardov rublei" (Nuclear scientists have stolen isotopes worth 48 billion rubles), Moskovskii Komsomolets , June 6, 1995. Back.

Note 117: See, for example, Vasilii Fatigarov and Aleksandr Mukomolov, "Submachine Guns Made by Crooks," Krasnaia Zvezda, June 22, 1994, as reported in Foreign Broadcast Information Service Daily Reports--Central Eurasia [FBIS-SOV] , June 23, 1994, pp. 26-27; and Interfax, "Arms Manufacturing Ring Uncovered in Kazan," July 30, 1994, as reported in FBIS-SOV , Aug. 1, 1994, p. 31. Back.

Note 118: The report comes from Russian television investigative journalist Yurii Shchekochikhin, as reported in "Journalist: Russian Generals Sold Guns to Dudaev," Jamestown Foundation Monitor  1, no. 50 (July 12, 1995). Back.

Note 119: Anatolii Yershov and Igor Andreev, " 'Caspian Monster' Has Appealed to Spies for a Long Time," Izvestiia , Aug. 16, 1994, as reported in FBIS-SOV , Aug. 16, 1994, pp. 26-27. Back.

Note 120: Interview with a member of VNIIEF's financial management team, conducted by the author in 1996. Back.

Note 121: Sergei Serafimov, "Terrorist podorvalsia na sobstvennoi bombe" (A terrorist blows up with his own bomb), Kommersant-Daily , Mar. 28, 1995. Back.

Note 122: Quoted in Penny Morvant, "Leading Arms Designer Murdered," OMRI Daily Digest  2, no. 58 (Mar. 21, 1996). Back.

Note 123: Sergei A. Kholin, interviewed by ITAR-TASS, "Priostanovit' osobo opasnye raboty" (Especially dangerous work will be stopped), Gorodskoi Kur'er , July 29, 1993. Back.

Note 124: "Provintsial'naia khronika [Provincial Chronicle]," Segodnia , June 16, 1995. Back.