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Nuclear Cities Initiative: Interests of the Program

George D.Pomeroy

Nuclear Cities Initiative U.S. Department of Energy

It is my great pleasure to be here with you today in Obninsk. The Nuclear Cities Initiative (NCI) is proud to be the sponsor of this important workshop, which addresses the successes and challenges facing small innovative firms in Russian nuclear cities. Each of you has considerable experience to share, which can increase the effectiveness of defense conversion activities in the Russian nuclear weapons complex. As a group, there is even greater potential for insight through the synergy created through dialogue and exchange. During the next three days, I look forward to sharing with you lessons learned in the development of business opportunities in the five nuclear cities of Sarov, Zheleznogorsk, Snezhinsk, Obninsk, and Zarechny. I am especially interested in discussions on

  • successes and failures in creating or expanding commercial businesses

  • marketing strategies for domestic or foreign markets

  • components that enable success and, on the other hand, obstacles to success

  • sources of external financing

  • other strategies for increasing the effectiveness of business development

I would like to take a few minutes to discuss the broad outlines of NCI and share with you some of our experience to date.

RUSSIAN NUCLEAR WEAPONS COMPLEX

The five nuclear cities we are addressing in this workshop are only a part of the Russian nuclear weapons complex. The Ministry of Atomic



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Page 1 Nuclear Cities Initiative: Interests of the Program George D.Pomeroy Nuclear Cities Initiative U.S. Department of Energy It is my great pleasure to be here with you today in Obninsk. The Nuclear Cities Initiative (NCI) is proud to be the sponsor of this important workshop, which addresses the successes and challenges facing small innovative firms in Russian nuclear cities. Each of you has considerable experience to share, which can increase the effectiveness of defense conversion activities in the Russian nuclear weapons complex. As a group, there is even greater potential for insight through the synergy created through dialogue and exchange. During the next three days, I look forward to sharing with you lessons learned in the development of business opportunities in the five nuclear cities of Sarov, Zheleznogorsk, Snezhinsk, Obninsk, and Zarechny. I am especially interested in discussions on successes and failures in creating or expanding commercial businesses marketing strategies for domestic or foreign markets components that enable success and, on the other hand, obstacles to success sources of external financing other strategies for increasing the effectiveness of business development I would like to take a few minutes to discuss the broad outlines of NCI and share with you some of our experience to date. RUSSIAN NUCLEAR WEAPONS COMPLEX The five nuclear cities we are addressing in this workshop are only a part of the Russian nuclear weapons complex. The Ministry of Atomic

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Page 2 Energy of the Russian Federation (Minatom) has expressed intent to downsize this large complex over the coming years. The reasons for this planned downsizing include the sharp reduction in warhead needs a decade after the end of the “cold war,” the sharp corresponding downsizing of the U.S. nuclear weapons complex, the high cost of maintaining the Russian complex at its current size, and the world security interest in nonproliferation efforts. The Russian nuclear weapons complex has the largest quantity of weapons-usable material in the world. It also has the largest concentration of weapons of mass destruction in the world. The nuclear cities as a group have more than 700,000 residents. Alternative employment will be needed for up to 40,000 workers over the near term, since they will no longer be needed to support the Russian defense mission. There are 10 closed nuclear cities in the weapons complex, including the NCI pilot cities of Sarov, Zheleznogorsk, and Snezhinsk. A number of additional cities that have supported the weapons complex are open, including Obninsk, or semirestricted, including Zarechny. These cities have populations of up to 100,000. Sarov includes a weapons design institute, VNIIEF (the All-Russian Scientific-Research Institute of Experimental Physics); a weapons assembly/disassembly plant, Avangard; and plutonium storage facilities. Minatom has announced plans to end weapons assembly/disassembly activities at Avangard over the next few years. Zheleznogorsk is a plutonium production, reprocessing, and storage site, with one remaining reactor that serves to provide heat and electricity to the city. Minatom has plans to shut down the last reactor in a few years, once a replacement utility plant has been built to supply steam and electricity to the city. Snezhinsk is home to a weapons design institute, VNIITF (the All-Russian Scientific-Research Institute of Technical Physics), as well as plutonium and highly enriched uranium storage facilities, and may have a reduced defense mission compared with earlier years. THE NCI PROGRAM The Nuclear Cities Initiative is a nonproliferation program within the National Nuclear Security Administration of the U.S. Department of Energy. The purpose of NCI is to enhance U.S. and global security by supporting weapons complex reduction in Russian nuclear cities. NCI works in cooperation with Minatom to redirect functions and equipment in the weapons complex; reduce the physical footprint; and create sustainable, alternative nonweapons work within a functioning city economy. Strategies to accomplish these goals include creating jointly developed city plans for accelerated downsizing of the Russian nuclear weapons complex

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Page 3 creating infrastructure to support economic diversification and job creation in the cities facilitating a transition from weapons-related research to non-military funded business and commercial projects conducting targeted business training and exchanges to improve marketing and management of businesses and projects leveraging funding and encouraging outside investment At present, these strategies are being implemented at the three NCI pilot cities—Sarov, Zheleznogorsk, and Snezhinsk. In the future, NCI may expand its nonproliferation activities to include additional nuclear cities, working jointly with Minatom on defense conversion implementation activities. NCI IS PRODUCING RESULTS In fiscal year 2001, NCI cofunded 37 projects. The projects established commercial businesses as well as the infrastructure needed to encourage and support the development and growth of commercial enterprises. Products and technologies represented by NCI projects have included medical technologies, software services, automotive technologies, physical security systems, and light manufacturing. Examples of commercial enterprises that are on the road to self-sustainability include: two open computing centers (Sarov and Snezhinsk); a Software Development Center (Zheleznogorsk); ITEC physical security systems manufacturing (Snezhinsk); kidney dialysis equipment production (Avangard); and biological materials production (Zheleznogorsk). Commercial infrastructure supported by NCI in each city includes staffed and resourced business centers, telecommunications infrastructure, technoparks, business training modules and facilities, and loan centers that provide easier credit access. There are more than 35 potential commercial partners for projects in the NCI cities, and 10 are already in place. These potential or actual partners include such names as Fresenius Medical Care, Credit Suisse, Novosoft Software, Adapco, Gazprom, Luxoft Software, Eurasia Software, Motorola, Delphi Automotive, and General Electric. Along the road to commercial sustainability and economic diversification of the cities, NCI projects have received more than $21 million in leveraged funding from sources outside the program. FROM PLANNING TO IMPLEMENTATION As NCI begins program activities in each city, it implements several stages of operations. These stages are often overlapping.

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Page 4 First, an assessment is made of city capabilities, existing technologies, personnel resources, and the like. Small evaluation teams assess site conditions and meet with local representatives in a collaborative environment. Second, strategic plans for implementation are jointly developed based on the assessments. NCI facilitates the creation of a vision and plan for implementation by principal interested parties in the community, including government and business entities. Projects are evaluated for commercial viability, and business plans are developed for promising proposals. Strategies are developed to create commercial businesses and infrastructure. Third, sources of external financing and partners to participate in the projects are sought. NCI's role in commercialization is to be a facilitator rather than a primary funding source for projects. Substantial economic development requires partners and financing from internal and external sources. Fourth, for projects that can be implemented with available U.S., Russian, and other resources, the projects are managed using contracts, project management methods, and financial controls. Fifth, NCI provides continuous mentoring for project plans and implementation. This includes exchange visits to the U.S. for city and institute managers, training in business techniques for managers and staff, and evaluation of project proposals using Western business practices. Finally, NCI has an exit strategy. The objective is to place each nuclear city on the path to economic diversification and sustained commercial development, to support our joint nonproliferation goals of weapons complex downsizing and alternative employment for displaced workers. The NCI exit strategy is to complete program activities and move on to new cities once these program goals are met. DEVELOPING LOCAL INFRASTRUCTURE, BUSINESS TRAINING, AND EXCHANGES A key strategy of NCI is to develop local infrastructure to support economic diversification and job creation. One example of this is the International Development Centers (IDCs) created in Zheleznogorsk and Snezhinsk. The Zheleznogorsk IDC was opened in November 1999. It currently serves more than 200 clients each month, with 1,350 customers in the last six months. It provided project analyses to the City Investment Commission, which received $17 million from the Russian government for 14 projects. It serves as coordinator and contractor for the city administration on NCI activities. It served as the model for development of a second IDC in Snezhinsk, which opened in June 2000. Plans are under way to use the experience of these first two IDCs to develop a business center in Sarov in the near future. Telecommunications is another area in which NCI has been instrumental in building commercial infrastructure. In each city an expanded

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Page 5 internet bandwidth was required to meet the crucial need for business communications. In the West, business moves at the speed of the Internet, and adequate telecommunications facilities are needed in order to be competitive. As a first step in each city, NCI purchased satellite bandwidth and replaced antiquated equipment. Next, fiber optic cable was installed, as needed, to the nearest hub to provide good speed at lower cost, avoiding the future use of expensive satellite services. Finally, Internet service provider (ISP) businesses were created or expanded to provide continued support of the telecommunications infrastructure. NCI also creates intangible infrastructure in the form of business train-ing and exchanges. These important ingredients of commercial success are needed to improve marketing and management of businesses and projects. Training has included sessions on business plan development, managerial leadership, project management, marketing, and English language instruction. Related to this, there have been numerous exchanges bringing Russian managers to the United States to visit commercial firms of many types and learn first-hand the reasons for their success. These exchanges have also focused on the technology spin-off experience of the U.S. weapons complex in its downsizing efforts. CREATING COMMERCIAL BUSINESSES A number of promising proposals were received during initial assessments of city resources. As noted, in FY01 alone, 37 projects were funded by NCI. An example of this is the work to develop software development businesses in each city. Open Computing Centers (OCCs) were established in Sarov and Snezhinsk to use the considerable software talents of displaced workers in the weapons design institutes. NCI funded construction of the OCCs, as well as staff training and salaries, to demonstrate their capabilities to potential Western clients. Today, most of this demonstration work has been completed, and several commercial contracts are in place. More recently, a different model is being used in Zheleznogorsk to develop a software center, similar to the approach used by Obninsk. Under the Zheleznogorsk approach, a competitive solicitation identifies a successful software development firm, which is then invited to the city as a partner. The firm supplies its experience and marketing resources in setting up a new business. In Zheleznogorsk the software partner, Novosoft, is supported by NCI and the city administration through funding of start-up facilities and equipment, as well as support in making Western customer contacts. The partner brings its marketing and technical skill, as well as its track record, to make a successful business at the new location. Over time, the new business will employ an increasing number of displaced weapons workers as it expands. Other businesses supported by NCI that are on the way to commer-

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Page 6 cial self-sustainability include those in medical technologies, security equipment production, and other light manufacturing. LEVERAGED FUNDING The plans of Minatom for downsizing the Russian weapons complex will require a large resource commitment over several years. The role of NCI is to facilitate conversion and economic diversification activities in the nuclear cities but not to fully fund them with its own resources. Substantial additional funding and effort will be needed from other sources. Minatom is contributing almost $4.8 million on projects supported by NCI, in addition to other Russian government funds in support of defense conversion efforts in nuclear cities. NCI has also brought private partner resources to the cities. Private industry commercial contracts and contributions supporting NCI activities are valued at more than $1 million thus far, and are increasing. The European Bank for Reconstruction and Development (EBRD) provides support to the nuclear cities through easier access to loans from its $300 million Russia Small Business Fund. NCI signed an agreement with EBRD to set up loan offices in each city. This initial investment has already resulted in more than $1.5 million in loans for small businesses, with the promise of many more loans to come. In the United States, access to capital, often in the form of small business loans, is essential for economic development. By investing in the commercial infrastructure needed to set up these local EBRD loan offices, NCI was able to leverage its funding with a much larger pool of resources. CONVERSION AT AVANGARD Sarov has the highest funding priority among the three NCI cities, in line with Minatom's expressed priority to accelerate conversion and shut down the Avangard weapons assembly/disassembly plant. More than ten acres of production space was carved out of the Avangard facility to form a technopark. Six buildings with a total of 20,000 square meters of space were converted to commercial use. This first required moving sensitive defense materials and equipment from the facilities, and then moving the fence from the high-security area to form a commercial area that only requires an industrial level of security. All of this work was conducted by Avangard under contract to NCI. Facilities for nuclear weapons work were converted to facilities for the production of kidney dialysis equipment, in cooperation with the Western partner Fresenius. The project was also leveraged with funds from the International Science and Technology Center (ISTC) and the DOE nonproliferation program Initiatives for Proliferation Prevention (IPP).

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Page 7 Additional commercial possibilities have been identified for other buildings in the Avangard Technopark, and plans are under way to move another portion of the fence to permit additional commercial work. Production space is currently being developed for automotive parts; electrical switch gear; materials protection, control, and accounting (MPC&A) equipment; oil and gas instruments; and other commercial production. FUTURE NCI ACTIVITIES Having just completed its second full year of operations, NCI is planning for future program activities. The closure of Avangard is of the highest priority, and significant resources will be applied to further develop the Avangard Technopark. In all three cities, additional support will be provided to current projects that are poised for commercialization, completing project implementation activities and adding additional resources where needed. New projects to accelerate facility downsizing and provide alternative employment opportunities for displaced weapons workers will be identified, evaluated, and funded. Although much commercial infrastructure has been built, NCI will continue to support business infrastructure where needed. This will include continued funding for the IDCs and additional business training and exchange trips for Russian managers to gain experience in the United States. Finally, depending upon continued budget support from the U.S. Congress and Russia's downsizing priorities, NCI will likely apply the strategies developed in the three pilot cities to additional cities in the future.