Defense by Other Means

Remarks by Secretary of Defense William J. Perry to U.S./Russian Business Council, Washington, March 29, 1995.

This meeting was very timely for me, the opportunity to speak to this group, because tomorrow night I'm leaving on a trip to the former Soviet Union, where I will visit Russia, Ukraine, Kazakhstan and Uzbekistan. The primary goal of this trip is to pursue our ongoing security dialogues with Russia, to emphasize the importance of her ties with Ukraine and to strengthen our relationships in Central Asia.

This trip relates to one of our primary security interests today. That is, to take every action we can reasonably take to keep Russia on the path to political, economic and military reform.

I fully understand that we in the United States cannot control, and have no right to control, events in Russia. But we can influence events there, and we must try.

To further this objective the administration is pursuing a program which we call a pragmatic partnership with Russia, a partnership which serves the interest of both nations. It is in our interest, and it is in Russia's interest, for the United States to help Russia build a democracy, to build a free market economy and to reduce its Cold War nuclear arsenal. The private sector can help us advance these interests by pursuing business opportunities in Russia and the region.

By investing in this region you can not only open new markets for your products, but you will also be part of history making, because your investment will help to privatize these economies and to build trade and economic relations.

I realize that doing business in Russia, Ukraine [and] Kazakhstan is risky and it's not easy. The region is still, as we say, a work in progress. Indeed, the Russian government is trying to carry out a transformation that is unprecedented in history. When you consider the magnitude of what they're trying to do, we should not be sitting back and being critics of the problem, we should be amazed at the success they have had to date.

But as Russia's tactics in Chechnya illustrate, political stability is not assured. The only thing that is assured in Russia is that reform will be uncertain and uneven.

Recognizing that fact, though, we understand that this means that we should not cut off our relations or throttle our relations any time something happens that we don't like. But it also means that we should not ignore our differences. Indeed, part of supporting Russia's reform is registering our concerns clearly and emphatically any time Russia takes a backward step from this path of reform that they are now on.

But as Secretary [of State Warren] Christopher has said, our relations should not be held hostage to any single issue. That would prevent us from working with Russia, and we want to work with them in two very different cases. Those in which we have common interests -- obviously, it's important for us to work together -- but it's just as important for us to work together in that other case, ... where we have divergent interests and we consider that Russia may pose a threat to our interests. It's equally important to work together in those two cases.

We must remain steady through the ups and downs, and there are going to be plenty of them, and continue to support Russia's transition to a stable nation, a nation we can work with rather than a nation we have to defend against. That is why the administration is continuing to promote American business investment in Russia and the other nations of the former Soviet Union.

There are three ways, as I see it, that our government can truly help business open new markets in Russia and in related countries: First, we can identify the potential benefit opportunities and partners; second, we can reduce the barriers to trade and investment; third, we can stimulate and coordinate the flow of resources to viable investments. In other words, we can find, facilitate and help the financing of investments in that region.

This administration is doing all three of those in the former Soviet republics through a special commission that was set up by Vice President [Al] Gore and Prime Minister [Viktor] Chernomyrden in 1993. It is called the U.S.-Russian Commission on Economic and Technological Cooperation. It is developing ways in which the United States and Russia can pursue our economic interests together. This commission is working in all three of the fronts which I have described to you.

It has moved forward several investment opportunities for American businesses. Last June, for example, it led a consortium of U.S. and other Western oil companies to sign a $10 billion contract to develop the oil fields on Sakhalin Island. Secondly, a committee that was chaired by Commerce Secretary Ron Brown is working with the Russians to reduce trade and investment barriers. Thanks to this committee, the United States and Russia are beginning high-level talks on Russian commercial taxes, which hinder and deter U.S. trade and investment in Russia.

Finally, the commission is stimulating and coordinating the flow of resources to viable investments in Russia. We are making available what venture capitalists call seed capital, namely grants, loans and project-finance insurance designed to act like a magnet to attract much larger amounts of private capital.

One of the largest sources of this project financing is coming through the Overseas Private Investment Corp. -- OPIC. OPIC is taking a leading role in using private investment to nurture democracy and market economy in the former Soviet Union. Only last summer OPIC signed agreements to back $500 million worth of investment funds for private sector ventures in the region -- funds that are expected to leverage up to $5 billion in private investment.

There's a larger benefit also to this commission's activities. It has built a rapport and working camaraderie, and personal relationships, between our government officials up and down the line.

Before I praise this commission any more, I should make it clear that I am a part of it. For the past two years I have co-chaired the Defense Conversion Committee of this commission. My Russian counterparts, the Russian co-chairs, are the Deputy Defense Minister Andre Kokoshin and the chairman of the Russian Government Committee on Defense Industry, Valri Mikhailov.

Our goal has been to help the U.S. private sector find and invest in projects where the objective of the project is to convert former Soviet weapon factories to commercial production. A concomitive part of this goal is that these projects give U.S. companies access to potential markets in the region, so this is a win-win proposition as we see it.

It's really interesting to me that these defense conversion projects have been criticized both in the United States and in Russia. In the United States the critics call it a naive pursuit. They claim it sustains the Russian defense industry. In Russia the critics call it an imperialistic move by the United States to destroy the Russian defense industry. Quite obviously, both of these arguments cannot be right. Indeed, neither of them is right.

To the contrary, helping Russia put excess weapon plants to commercial use is a classic example of win-win. It's a win for Russia, it's a win for the United States -- one of the best examples of our pragmatic partnership at work.

It certainly is in Russia's interest to find productive uses for this industrial base, without question the strongest, the best -- the best capitalized, the best people -- of all of the industrial bases in Russia today and to find productive uses for the bases and its workers and to demilitarize and commercialize and privatize its economy. And it's certainly in America's interest to help Russia build a free market economy and to open new markets for our companies.

The serious skeptics of Russian defense conversion say that while it may be a good idea, it cannot be done. This quite valid concern, valid from a historical point of view -- there have been very few successes in defense conversion either in the United States or in Russia -- ... is beginning to crumble precisely because we are having successes, precisely because the defense conversion program in Russia has begun to take off. The reason it has taken off, in my judgment, is because the investment decisions in this program, instead of being made by either the Russian government or the United States government are being made by the private sector.

The government -- our government -- does, however, have a very important role at stake. We are doing these three things which I talked about before to help the private investments overseas. Identifying the potential conversion projects. We have prepared a detailed description of 82 weapons factories in Russia that both of our governments consider excellent candidates for conversion to commercial production.

Secondly, we are working to reduce the barriers to doing conversion projects. For example, we are bringing U.S. technical assistance to conversion projects in Russia. The Commerce Department is going to bring 50 Russian defense industry executives and local officials to visit and learn from U.S. companies that have gone through their own defense readjustments.

Finally, we are providing seed money to attract private capital, specifically to defense conversion projects. The seed money comes largely through two conduits. OPIC has set aside $500 million in loan guarantees for financial assistance for these projects. The $500 million in OPIC money that I've mentioned is targeted to defense conversion in Russia and other countries of the former Soviet Union. The reason that OPIC is making such a commitment to defense conversion is because it believes that given the skilled people and the skilled technology in this area, this is where U.S. business can reap some of its greatest rewards.

OPIC is not doing this for the reason that our Defense Department is doing it. Our Defense Department is doing it because we want to assist in the conversion. We want to facilitate the move of breaking away from, particularly, the nuclear weapon and the missile weapon production. OPIC is doing it because they simply believe that's where the best investments in Russia are to be found, because that's where the best technology, the best people are to be found.

The other major source of seed money comes from a congressional authorization set up in 1991 by Sens. Sam Nunn and Richard Lugar, therefore called the Nunn-Lugar program. This program provides about $400 million a year from the defense budget, primarily to help dismantle Soviet nuclear weapons. So the Nunn-Lugar program is helping to remove a potential nuclear threat to the United States from our point of view. From the Russian point of view it's assisting them in bringing down this nuclear arsenal, which they had intended to bring down anyway.

This is a wise investment of defense dollars. By spending money to reduce these weapons and their infrastructure we save billions which we might otherwise have to spend to defend against them.

We've already received some dividends: To date the Nunn-Lugar program has helped remove 2,600 warheads and missiles from bomber bases, take 750 missiles from their launchers and destroyed about 600 launchers and bombers. All of these missiles, all of these warheads, all of these bombers were directed, at one time, at targets in the United States. So this is what we call defense by other means.

But the risk of this Soviet nuclear arsenal is not only in the weapons and the weapons material. These are only the tip of the nuclear iceberg. Under the surface there are hundreds of facilities such as missile bases, weapons factories and nuclear research facilities, and thousands of people -- the strategic rocket force officers, the nuclear research scientists and the skilled workers. We don't want them, and the Russian government does not want them, turning up in places like Iran and Iraq. So a small portion of the funds of the Nunn-Lugar, about 20 percent, are devoted to reorienting the people and the facilities to nonmilitary work.

But again, just as I've described, in these commercial ventures, instead of financing government projects, Nunn-Lugar funds are used to set up joint business ventures between U.S. businesses and defense enterprises in the former Soviet republics.

For example, I'm going to be visiting just two days from now a prefabricated housing facility being built in Pervomaysk [Ukraine]. Pervomaysk is where has been located, and still to this day is located, one of the largest ICBM operational launch sites in the world. At one time there were 800 warheads at that site, all pointed at the United States. All of those warheads are in the process of being removed and dismantled. In fact, within a year from now they will all be gone.

A residual problem from the point of view of the Ukrainian government is what to do with these strategic rocket officers who managed that. They had no jobs to go to, no homes to go to, and they posed an enormous problem and a deterrent to moving ahead with this dismantlement.

So we used $10 million in Nunn-Lugar funds to help the Ukrainians set up a factory that formerly had built components for nuclear weapons, to convert that factory to building prefabricated housing and then to use that prefabricated housing to house the officers who were being decommissioned from the strategic rocket forces.

To the extent that's successful, it's a fairly small investment to get a fairly positive benefit to the United States. It also provides an important benefit for Russia because this will begin to establish a prefabricated housing industry first in Ukraine, then we have a comparable project going on in Russia.

To get the whole Russian defense conversion effort off the ground, last year we invested about $20 million in Nunn-Lugar to set up four U.S.-Russian business partnerships chosen by the Department of Defense, chosen based on a competition of many dozens of American companies that had formed partnerships and then applied to the Department of Defense for grants to get those partnerships going. In each case the grant made by the United States was matched -- or even more than matched -- by the investment by the American company.

We linked up Rockwell, International American Products, Hearing Age International and (Double Cola) with four Russian defense-related industries. Together, these joint ventures will convert defense-related factories into making air traffic control equipment, dental equipment, hearing aids and bottling soda -- a wide diversity of different projects, none of which have anything to do with manufacturing nuclear weapons or rockets.

Now the Defense Department is redirecting its role more towards stimulating private sector investments. We're doing this by providing this Nunn-Lugar grant money -- not making individual investments, but by supporting something which we call the Defense Enterprise Fund. This is a private, not-for-profit venture capital fund set up specifically to finance joint defense conversion ventures. Since it began its operations last fall the enterprise fund has committed to invest about $6 million in two major joint ventures in Russia. The first of these will convert a plant that made nuclear submarine propulsion systems into a maker of earth-moving equipment.

The second is a project right outside of Moscow, and I witnessed the birth of this second project in my last visit to Moscow in December. In this deal Hamilton Standard, which is a subsidiary of United Technology, and the Russian firm Nauka agreed to convert a Nauka plant from making MiG fighter and bomber systems into making air conditioners for civilian aircraft.

These are all good projects, but the real test of our investment of Nunn-Lugar dollars in the Defense Enterprise Fund is how much private investment we can attract to defense conversion. This is a good test, because the private sector truly is not interested in betting on losing propositions.

The two deals that have been accepted by the Defense Enterprise Fund have passed that test so far. The $6 million invested by Nunn-Lugar have attracted $24 million in private capital. That's four dollars for every Nunn-Lugar dollar. That's what we mean by seed capital or magnets for attracting funds from the private industry.

These projects, I believe, represent a great symbolic step forward, but they barely scratch the surface. There are billions of dollars worth of defense conversion projects waiting to happen in the former Soviet republics. The onus is on the private sector, but this administration is committed to helping out. That is precisely what I plan to do on my trip next week.

In particular I will be using this trip to promote American investment in Russian defense conversion. I told you that there are three ways that the government can help U.S. businesses seize investment opportunities overseas: Find them, facilitate them and help to finance them.

To help find them, on this trip I'm taking along 10 CEOs [chief executive officers] of U.S. companies to look at a number of potential joint defense conversion projects that have already been identified. The decision on whether to invest or not invest will be their decision, not ours. So this is a facilitating activity.

To facilitate that facilitation, I'm taking along Barry Carter, deputy undersecretary in the Commerce Department, who is an expert in finding ways to improve the investment climate in Russia, to help provide an additional incentive to the companies involved to make these investments and to have somebody on the spot who can help with the financing -- the second round financing, for example -- of these investments. I'm taking along Ruth Harkin, who is the president of OPIC, the Overseas Private Investment Corp.

This joint mission is intended to help the private sector support our security interest in building U.S.-Russia trade and economic relations. We can point the way, but the rest of it is up to you. The pioneers of this new market and the engineers of economic reform in the region have to be from industry.

The famous Russian scientist Ivan Petrovich Pavlov advised his nation's students, "Learn, compare, collect the facts." I urge you to do this. As you do it, I believe you will find the opportunities, and we are counting on you to do that.

Thank you very much.