Russia's Arms Makers Squirm In Their Civvies

Three years ago, mechanical engineers at the huge Kirov Factory in St. Petersburg found themselves in a bind. With the cold war winding to a close, the Soviet military no longer needed the plant's late-model T-80 tanks. So they designed an energy-efficient jeep with a plastic body for the consumer market. Good idea. But production hopes for the jeeps were blown away by imports of Chevrolet Blazers, Grand Cherokees, and Land Cruisers favored by Russia's newly rich biznezmen.

Setbacks such as Kirov's are common as thousands of defense plants struggle to find new niches in Russia's chaotic market economy. Many conversion projects, especially those pushing consumer goods, find they have little chance competing against powerful Asian and Western brands. Yet a number of Russian companies are learning some important lessons. They are figuring out how to tailor existing industrial products and technologies to new markets and lining up financial allies to back their efforts.

FAST CLIMBER. Russia's aerospace companies are proving to be the most adept in the new environment. One research institute that provided satellite reconnaissance to the military now collects weather data that is sold to the government and news organizations. Western oil companies can buy Russian spy satellite photos for commercial use. And the world's record for fast climbs in small aircraft is held by the Aviatica 819, a lightweight sports plane made at a plant outside Moscow that still makes Sukhoi-27 jet fighters. Aviatica sells one-seat versions of the planes for $18,000 and two-seaters for $27,000 to thrill-seeking pilots worldwide.

Also learning the ropes are vehicle and equipment makers. UralAz, a factory in the Ural Mountains that has traditionally churned out heavy vehicles for the military, has modified assembly lines to make extra-long trucks to carry gas pipelines and timber. All-terrain heavy trucks that used to carry mobile SS-20 nukes are being sold to resource companies exploring the Russian wilds.

Making conversion all the more difficult has been a collapse in industrial production that has caused corporate funding to disappear. To finance factory overhauls and new research, many companies are latching on to sugar daddies. The Kirov plant, for example, is now getting up to $10 million from deep-pocketed state gas monopoly Gazprom to develop gas-powered turbines. "Most companies can't afford to buy new equipment or retrain workers," says Mikhail N. Bazanov, former head of the State Committee on Conversion.

Another Kirov tactic is to line up prepaid orders from smaller customers, since most banks aren't financing conversion. That has allowed Kirov to build up a business selling front-end loaders, bulldozers, and other equipment. Still, finding customers with cash in hand is difficult for most of Russia's defense plants.

BETTER IMPORTS. But the biggest disappointment for many defense enterprises has been their inability to turn sophisticated electronics gear into relatively simple consumer gadgets. The problem is usually low quality. The Tantal defense electronics factory in Saratov started designing video recorders in 1986. But they shut down the VCR assembly line in July, unable to compete with spiffier Asian imports. "Russian VCRs and TVs are more expensive and of lesser quality than the Japanese," says Bazanov. His solution: more protection "to help out local electronics producers."

A few Russian products have managed to find a measure of consumer acceptance. On Moscow's central Tverskaya Street, vendors sell ice cream from metal kiosks that were once nose cones of ballistic missiles. And Electron, a former antenna maker in the Urals city of Chelyabinsk, is now making microwave ovens in partnership with a nearby secret missile factory.

Keeping some of the conversion activity going is crucial. Russia's economy is strongly tied to defense plants, which account for 85% of the jobs in some cities. Saving at least some of those jobs could stave off social unrest.

As companies gain more experience in the conversion game, analysts say, they should turn away from hawking military equipment. Instead, companies should focus on technology from military labs that could be sold in rapidly growing markets such as environmental cleanup. An example: Military surveillance gear that can be used to detect pipeline leaks or monitor air quality.

"Brainpower is one of Russia's greatest resources," says Robert Colangelo, president of Environmental Planning Group Inc., a Barrington (Ill.) consulting group. Tapping that creativity will determine whether Russia can keep its factory doors open.

Before it's here, it's on the Bloomberg Terminal.