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Steps Taken by the Sarov City Administration and Most Important Organizations in Support of Small Innovative Businesses

Aleksandr V.Belugin, Yelena S.Dyakova, Vladimir I.Zhigalov, P.G.Smirnov, and Olga N.Arkhipkina *

All-Russian Scientific-Research Institute of Experimental Physics

INTRODUCTION

The city of Sarov is one of the leading defense centers of Russia, with its economy being largely based on the Russian Federal Nuclear Center All-Russian Scientific-Research Center of Experimental Physics (VNIIEF) and the Avangard Electromechanical Plant. For more than half a century, the city has accumulated the research and production potential needed to handle the most challenging scientific-technical tasks involved in developing, manufacturing, and testing various types of nuclear weapons.

Cutbacks in defense-related work at VNIIEF and Avangard over the past decade have brought about a need to intensify civilian-oriented activities. However, growth in this area has not been as fast as expected. This has occurred for two reasons: (1) the insufficient funding of defense conversion from the federal budget and (2) the continuing low number of solvent customers for high-tech products in Russia. As a result, the accumulated scientific-technical potential of local collectives is not being used to its full capacity, and there is a constant threat of layoffs. This is a point of concern for the population because of the limited opportunities for finding alternative jobs for a large number of specialists.

* Translated from the Russian by Kelly Robbins.



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Page 157 Steps Taken by the Sarov City Administration and Most Important Organizations in Support of Small Innovative Businesses Aleksandr V.Belugin, Yelena S.Dyakova, Vladimir I.Zhigalov, P.G.Smirnov, and Olga N.Arkhipkina * All-Russian Scientific-Research Institute of Experimental Physics INTRODUCTION The city of Sarov is one of the leading defense centers of Russia, with its economy being largely based on the Russian Federal Nuclear Center All-Russian Scientific-Research Center of Experimental Physics (VNIIEF) and the Avangard Electromechanical Plant. For more than half a century, the city has accumulated the research and production potential needed to handle the most challenging scientific-technical tasks involved in developing, manufacturing, and testing various types of nuclear weapons. Cutbacks in defense-related work at VNIIEF and Avangard over the past decade have brought about a need to intensify civilian-oriented activities. However, growth in this area has not been as fast as expected. This has occurred for two reasons: (1) the insufficient funding of defense conversion from the federal budget and (2) the continuing low number of solvent customers for high-tech products in Russia. As a result, the accumulated scientific-technical potential of local collectives is not being used to its full capacity, and there is a constant threat of layoffs. This is a point of concern for the population because of the limited opportunities for finding alternative jobs for a large number of specialists. * Translated from the Russian by Kelly Robbins.

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Page 158 Solving these problems requires attracting investments to new conversion-oriented production enterprises. The Sarov City Administration and the management of the city-forming enterprises—VNIIEF and Avangard—are working to support conversion enterprises by means of several targeted programs. The measures included in these programs are aimed at achieving a number of goals, namely, creating and developing conversion-oriented production facilities increasing output volumes for high-tech and science-intensive civilian products and commercializing technological developments expanding job opportunities for employees displaced from the defense sector creating a favorable business climate to aid in attracting investments To achieve these goals, the following objectives should be addressed: stabilizing and creating conditions for the city's economic development modernizing existing production facilities and creating new ones in the civilian sector ensuring employment for the population and creating new jobs improving and developing the production and innovation infrastructure preserving and developing the social infrastructure This report covers the activities of the Sarov City Administration and the management of the city-forming enterprises in support of small innovative businesses and conversion-oriented production facilities. It cites data on investments and describes the concept of the Innovative Technology Center being established in the city as a key element in the innovation infrastructure. TAXPRIVILEGES GRANTED BY THE CITY ADMINISTRATION TO SMALL INNOVATIVE FIRMS The Sarov City Duma grants certain taxation privileges to enterprises and other institutional taxpayers having community development-oriented investment projects and owing no tax debts as of the date of filing their tax declarations. This action is taken to provide incentives for business activity, attract additional funds on the revenue side of the Sarov city budget, preserve existing jobs and create new ones, and implement welfare programs in the Sarov closed administrative zone. The privileges are granted in accordance with the provisions of Articles 1 and 56 of the

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Page 159 Russian Federation Tax Code; Paragraph 3, Article 64 of the Budget Code; Paragraph 3, Part 1, Article 5 of Russian Federation Law 3297–1 On Closed Administrative-Territorial Zones, dated July 14, 1992 (revised version, Law 67-FZ, dated April 2, 1999); Article 52 of Law 150-FZ On the Federal Budget for 2001, dated December 27, 2000; and Articles 2, 5, and 6 of Law 2116–1 On Profits Taxes for Enterprises and Organizations, dated December 27, 1991 (revised version, Law 118-FZ, dated August 5, 2000). The privileges granted are the following: Profits taxes are reduced by 90 percent of the rate normally paid to the city of Sarov. Property taxes are reduced by 100 percent of the rate normally paid to the city of Sarov. ATTRACTING INVESTMENTS FOR SMALL INNOVATIVE FIRMS FROM THE CITY, MINATOM, AND INTERNATIONAL FOUNDATIONS Defense conversion projects are typically funded from several sources. Funding sources and amounts are shown in Table 1. Following are brief descriptions of the projects being implemented that have managed to attract investments. Pilot Projects of the Innovative Technology Center Project goal: developing design documentation and test samples of high-tech equipment under several pilot projects and seeking orders and potentially promising contracts. Basic products include functional models and test samples of original machines and devices for widely varied applications design and technology development work in response to technical specifications provided by outside customers refinement of manufacturing technologies and production of test samples of high-tech equipment using customer-provided design documentation Potential customers: domestic and foreign manufacturing enterprises, design organizations, and tuning companies. Economic and social indicators: planned annual turnover, $500,000 to $3 million, depending on type of orders; expected number of jobs, 10–15 full-time with the possibility of hiring additional personnel (up to 200 individuals) for work on each specific order; total project financing, $430,000; payback time: four years.

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Page 160 TABLE 1 Projects Financed (in millions of rubles) Project title Total Investments Minatom Federal Budget Fund for Development of Conversion Companies NCI programs Pilot projects of Innovative Technology Center 12.0 — — 6.0 6.0 Design and start-up of serial production of high-voltage switches with SF6 insulation 140.0 90.0 — 20.0 30.0 Development, testing, and production of sensors, devices, and systems for automated control of technological processes at fuel and energy enterprises 27.0 10.83 — 10.17 6.0 Development of a diamond processing facility 72.0 51.5 10 10.5 — Start-up of small serial production of high-voltage formation devices 2.8 1.4 — 1.4 — Production of depleted zinc oxide isotopes 185.6 178.1 — 7.5 — Establishment of Energy Conservation Center 2.16 — — 2.16 — Start-up of serial production of super-light and light aircraft 4.04 — — 4.04 — Production of special tanks for highly pure substances 0.98 — — 0.98 — Establishment of shop to produce current conductors 2.4 — — 2.4 — Production of intrusion indicator devices ( *) 0.45 — — 0.45 — Start-up of serial production of movable units for ultrasonic rail defect detectors ( *) 1.04 — — 1.04 — Development of an industrial model of a 238Pu-based heat source for remote space applications ( *) 1.6 — — 1.6 — Start-up of production of disposable dishes ( *) 1.24 — — 1.24 — Start-up of serial production of force gear controls for city passenger transport vehicles ( *) 18.4 17.5 — 0.9 — NOTE: Projects marked with (*) are carried out at the Avangard plant.

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Page 161 Start-up of Serial Production of High-Voltage Switches with SF6 Insulation Project goal: organizing a conversion enterprise to develop and manufacture high-voltage electrical devices with SF6 insulation. The project proposes to create the following products and services: scientific-technical documentation on high-voltage switches with SF6 insulation 110-kW circuit breaker switches with SF6 insulation 6(10)-kW switches with SF6 insulation autonomous hydraulic lines for self-compressing 110-, 220-, 330-, and 550-kW switches with SF6 insulation distributor device with SF6 insulation mobile gas equipment for manufacturing and assembly work on switches with SF6 insulation Potential customers: Unified Energy Systems of Russia, Rosenergoatom, Tsentrenergo, Mosenergo, Dalenergo, Kolenergo, and others. Economic and social indicators: total number of jobs to be created over the course of the project, 2,700 (100 in Year 1, 400 in Year 2, 700 in Year 3, 750 in Year 4, and another 750 in Year 5). Project implementation period: 2001–2003. Start-up of Production of Mechanical Vibration Sensors forUse in Compressor Station Gas-Pumping Units and Other Equipmentfor the Energy Industry Project goal: organizing serial production of technological vibration sensors and units for fuel and energy industry enterprises according to designs created by the VNIIEF-VolgoGaz Research and Production Association. Potential customers: Gazprom. Economic and social indicators: total project cost, 10,174,000 rubles; new jobs to be created during project implementation, 20. Project implementation period: 1998–2001. Diamond Processing Factory Project goal: creating a diamond-cutting and jewelry manufacturing factory based on effective processing of natural raw diamonds for applications in jewelry, medicine, electronics, and precision devices. Potential customers: 80–90 percent for export and 10–20 percent for the domestic market.

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Page 162 Economic and social indicators: output of diamonds in 2000, 5,000 carats, or 111.2 million rubles; expected output in 2002, 24,500 thousand carats, or 565.95 million rubles; expected output in 2005, 59,000 carats, or 1.3629 billion rubles. Anticipated number of employees once full capacity is reached, 320. Project implementation period: 1999–2004. Start-up of Small-Scale Production of High-Voltage Forming Devices Project goal: organizing a facility to produce high-voltage forming devices for ignition systems of ZMZ 406 series motors. Potential customers: ZMZ plant, retail trade network. Economic and social indicators: total project cost, 2.8 million rubles; new jobs created, 90. Project implementation period: 1998–2002. Creation of a Plant to Produce Depleted Zinc Oxide Isotopes Project goal: expanding existing VNIIEF centrifuge production capabilities to make depleted zinc oxide isotopes for applications at nuclear power plants. Potential customers: nuclear power plants with boiling water reactors. The potential market is concentrated in several highly developed countries, primarily the United States, Japan, Sweden, and Germany. Economic and social indicators: total project cost, $6.4 million. Project implementation period: 1998–2003. Establishment of Energy Conservation Center Project goal: implementing energy efficiency projects, creating automated power consumption monitoring systems, and rendering services related to energy audits and electrical system changes. Project description: The Energy Conservation Center will make it possible to provide the industrial enterprises of Sarov with modern energy-saving tools and then expand these practices to other regions. Automated systems for the accounting, control, and management of energy use in the public utilities sphere can be introduced in the operations of management agencies of the city administration. This will give city and regional management agencies and enterprise managers access to reliable analytical information on efficient energy consumption (energy audit). Potential customers: Ministry of Fuel and Energy, oblast and city governments. Economic and social indicators: total project cost, 2.16 million rubles; jobs created, 16.

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Page 163 Project implementation period: 1998–2000. Start-up of Serial Production of Super-Light and Light Aircraft Project goal: producing and marketing super-light and light aircraft for professional applications. Potential customers: airlines from Commonwealth of Independent States (CIS) and other foreign countries, excursion and tourism organizations, agricultural enterprises, Ministry of Health, Ministry of Emergency Situations, Ministry of Defense, Ministry of Internal Affairs, Unified Power Systems of Russia, Gazprom, research organizations, flight training schools, amateur flying clubs. Economic and social indicators: total project cost, 4.04 million rubles; jobs created, 16. Project implementation period: 1999–2004. Production of Special Tanks for Very Pure Substances Project goal: developing a unified technological process from the purchase of precursor materials to the production of tanks to the sales of the end product to the consumer. Project description: During 1999–2000, VNIIEF worked in a focused manner to create special tanks and accessories (valves, gas reducing gears, etc.) to be made from stainless steel intended for such purposes. As a result, the technology for manufacturing tanks with a capacity of up to 40 liters was developed and refined. The tanks have a working pressure of up to 300 bars with high-quality internal surfaces that contact the substances stored. The design features that were developed make it possible to eliminate the main problems typically found in tanks manufactured with traditional technologies both domestically and abroad. Potential customers: microelectronics industry enterprises, fiber optics manufacturers, producers of very pure substances, including Minatom enterprises, metrology organizations, and Gazprom. Economic and social indicators: total project cost, 975,000 rubles; jobs created, 19. Project implementation period: 2000–2003. Creation of a Shop to Produce Current Conductors Project goal: launching serial production of current conductors. Project description: Plans call for using explosive welding to join all types of metals and alloys along entire contact surfaces regardless of the configuration and size of the parts involved.

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Page 164 Potential customers: nonferrous metallurgical enterprises, a number of foreign firms (Finland, Chile, Canada, Kazakhstan). Economic and social indicators: total project cost, 2.4 million rubles; jobs created, 18. Project implementation period: 2000–2005. Production of Tampering and Intrusion Indicator Devices Project goal: launching production of originally designed tampering and intrusion indicator devices using the production capabilities of the Avangard plant. Project description: Activities and consultations at Minatom enterprises have shown the need to improve the current system for sealing containers and the like. The main aspect of the new sealing program at Minatom enterprises will be the introduction of new seal types with improved characteristics. Potential customers: According to a market analysis conducted by specialists from Rosenergoatom and VNIIEF, it can be confidently expected that Minatom enterprises and other organizations would purchase the indicator devices to be produced by the new TechnoControl firm. In particular the Ministry for Railway Communications, banks, and law enforcement agencies have also expressed interest. Economic and social indicators: total project cost, 450,000 rubles; jobs created, 12. Project implementation period: 1999–2002. Start-up of Serial Production of Mobile Units for Ultrasonic Detection of Rail Defects Project goal: modernizing the serially produced POISK-10E rail defect detector and developing computer-aided tools for rail defect detection in order to upgrade the reliability of railway diagnostics and facilitate long-term forecasting of rail conditions. Potential customers: Russian Federation Ministry for Railway Communications. Economic and social indicators: total project cost, 1.04 million rubles; jobs created, about 50. Project implementation period: 1999–2001. Development of an Industrial Sample of a 238Pu Heat Source for Remote Space Applications Project goal: developing an industrial sample of a 238Pu radionuclide heat source for remote spacecraft applications.

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Page 165 Potential customers: S.A.Lavochkin Research and Production Association, Russian Academy of Sciences Institute of Space Research. Economic and social indicators: total project cost, 1.6 million rubles; jobs preserved, about 23. Project implementation period: 1998–2001. Start-up of Production of Disposable Dishware Project goal: establishing the production of disposable dishware (tea and coffee spoons, forks, knives, coffee cups, other plastic cups). Potential customers: wholesale and retail traders. Economic and social indicators: total project cost, 1.24 million rubles; jobs created, 49. Project implementation period: 1999–2001. Start-up of Serial Production of Force Gear Controls for City Passenger Transport Project goal: launching production of electronic devices providing for enhanced reliability of the electrical components of subway cars. Potential customers: Dinamo (Moscow), MetroVagonMash Plant (Mytyshi), subway systems. Economic and social indicators: total project cost, 890,000 rubles; jobs created, 60. Project implementation period: 1998–2001. ESTABLISHMENT OF THE INNOVATIVE TECHNOLOGY CENTER: A STEP IN AIDING SMALL INNOVATIVE FIRMS Several years ago, VNIIEF, Minatom, and the Sarov City Administration jointly founded the open joint-stock company VNIIEF-Conversion. The goal of creating this subsidiary was to set up a holding company that would manage defense conversion projects that had matured enough to operate as independent legal entities. At present the holding company manages 10 broadly diversified affiliated companies and monitors the implementation of other conversion projects that have received loans from the Fund for the Development of Conversion Companies. In cooperation with the VNIIEF Investments Department, VNIIEF-Conversion is involved in developing an information-analytical system that will facilitate monitoring of the financial condition of the various projects. The creation of the Innovative Technology Center (ITC) marks a new stage in the development of VNIIEF-Conversion. Relying on technologies available at VNIIEF, the ITC will have a specialized infrastructure designed for facilitating the creation, growth, and development of newly

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Page 166 emerging companies. It will also stimulate innovation activity in the city of Sarov, facilitate cooperation between researchers and industry, provide services to science-intensive companies in information support and management training, and accelerate real economic development based on creating regional and international networks for information exchange and cooperation among firms. Much is already being done in this regard. VNIIEF-Conversion in involved in the Russian Marketing Network and is a coauthor of a Tacis project proposal on establishing a connection to the European information network. The economic and legal departments of VNIIEF-Conversion also provide consulting services, and the company collaborates with the Sarov Branch of the LINK International Institute of Management, which provides training in management and innovation. In 2000 LINK provided professional training on the commercialization of research results for 25 VNIIEF and Avangard employees involved in International Science and Technology Center (ISTC) projects. In 2001 the Sarov Branch of LINK is working with the University of South Carolina to fulfill a contract funded by the Nuclear Cities Initiative (NCI) to train 40 managers and specialists involved in conversion projects at VNIIEF and the Avangard plant. At present the ITC is still in the process of being established under the auspices of VNIIEF-Conversion. The ITC concept has not yet been fully refined, and the technical audit of small innovative firms is not yet complete. Another Tacis project developed in cooperation with the Lahti Regional Educational Consortium (Finland) is devoted to accomplishing these tasks. The expected outcome of this project will be a development plan for ITC that will allow it to offer a comprehensive package of services to the small innovative firms that will be its clients. A very widespread problem in the first stage of ITC's development has been the very limited range of services that is offered, that is, secretarial services, reception and mailing of postal correspondence, word processing, and telephone answering services, among others. The goal of the Tacis project will be to provide a rather full range of services from the moment that ITC's building is ready for full operation, as well as to create a positive public image for the ITC by ensuring that expectations are met. We hope the ITC will avoid the destiny of a company that trades unrealistic ideas.