Is Russia Y2 K Ready? Don't Bet On It

It's short on plans--and money--to battle the bug

When the clock strikes midnight on Jan. 1, 2000, the Defense Ministry, which oversees Russia's nuclear arsenal, says it will be ready. So does the Atomic Energy Ministry, in charge of the country's nine nuclear power stations. The giant gas monopoly, Gazprom, and the electrical utility, Unified Energy System (UES), both pledge that heat and lights in homes and businesses will continue to work. And gas and oil exports to Europe will flow without a hitch, officials add. To hear these bureaucrats tell it, no Y2K problems will erupt to plague Russia's vital industries.

Yet from the Central Intelligence Agency to European utility companies, experts are increasingly concerned that Russia isn't ready at all. Although Russia has reassured the West that an accidental nuclear launch is out of the question, many experts fear nuclear power-plant shutdowns and other millennium near-disasters.

ENERGY SHORTAGE. If Russia's pipelines stop working, energy could run short in Europe, which depends on Russia for one-third of its natural gas. Russians could freeze as heating systems fail. Factories could fall silent as generators stop. And from Vladivostok to St. Petersburg, the phones could go dead. Gartner Group Inc., an information technology consultant based in Stamford, Conn., predicts that for the first few months of 2000, 80% of Russia's transport systems could face delays, while 40% of its heating and electricity could shut off.

What bothers analysts is that Russia seems to be in denial about the whole thing. A new government committee created by Prime Minister Yevgeny Primakov says that fixing any remaining Y2K computer problems will cost $3 billion. But it hasn't revealed how it aims to do the job. "This talk-and-no-action is a particular disease of Russia," frets Andrei Terekhov, a computer consultant in St. Petersburg. At Sberbank, the national savings bank, he recently checked part of the computer system and found several problems, even though Sberbank had declared its system "error free."

Meanwhile, Honeywell Europe has informed the government that before 1991 it sold the Soviet Union microchips now known to be Y2K vulnerable. Depending on where the chips are located, "the situation could be critical," says Sanjay Razdan, Honeywell's general manager for Eastern Europe.

Russia's financial distress is a key reason neither the government nor companies will likely be ready. No one knows where the government can find funds for Y2K repairs, given that it's deep in debt. "Even if someone says a breakdown in his computer will cause an atomic energy station to explode, we won't be given money from the government to fix our systems," says UES Deputy Chief Engineer Vladimir Ornov.

Faced with such concerns, multinational companies in Russia are scrambling to come up with contingency plans to protect their investments come Jan. 1. Some are buying diesel generators. Consumer product makers are boosting production this year to stockpile inventory to sell early next year. But such efforts are unlikely to protect them from a hit to earnings, says Mitchell Krasny, chief financial officer of Indian-owned SUN Brewing Ltd., which controls close to 14% of the Russian beer market. Krasny argues that Y2K will hurt businesses in Russia as much as last August's ruble devaluation. Then, SUN's sales plunged 75% in September alone.

Meanwhile, tensions between Russia and NATO over the war in Yugoslavia could jeopardize efforts on a joint early-warning program in case of a glitch in either U.S. or Russian defense systems. The U.S. is worried that Russia could interpret harmless military data as an attack--a mistake that could trigger a counterattack. Pentagon managers have also been meeting with Russian Defense Ministry officials to explain how the U.S. has made its systems Y2K compliant. "But in the current political climate, even this [cooperation] may not last," says a U.S. official.

Russian officials insist that no one can guarantee a risk-free kickoff to the New Year--not even companies in the U.S. and Europe that claim they are prepared. In any case, even if Russia miraculously finds the money it needs, it's too late to fix everything. Both Russians and Westerners doing business in Russia are counting on their ability to survive a temporary crash of the country's infrastructure. But this is one extra crisis Russia is ill-equipped to handle.