Intelligence Against Sanctions

13 february 2016

Russian Technological Development and Industrial Espionage

Dmitry Tulupov is a Lecturer in the Department of International Affairs at St. Petersburg State University.

Resume: Industrial espionage is capable of making up—promptly and at a relatively low cost—for the shortage of some components critically important for developing a certain industry. But as soon as the state begins to use industrial espionage systematically, this “remedy” instantly turns into a killer drug.

“There is no black and white, only shades of gray.” Oh, yes! There are fifty of them if some people are to be believed… Yet, setting aside irony, the wide palette of “gray schemes” easily comes to mind to describe the perspectives of many strategic Russian industries (oil and gas, shipbuilding, aerospace instrument engineering, and microelectronics) struggling for survival amid Western sanctions.

Relations Embargo-Style

After the end of World War II the economy was never used as a tool to advance U.S.-Russia relations. On the contrary, the U.S. used the economy and culture as additional methods to exert pressure on the Soviet Union. The Marshall Plan was the first and most graphic example. The Soviet Union regarded that program as an “infringement on the sovereignty of European countries or an encroachment on their economic independence.” The conviction that the United States was determined to strangle the Soviet Union economically grew stronger when in the summer of 1947 the Truman administration refused to extend a interest-free $6-billion loan that Josef Stalin and Franklin D. Roosevelt had agreed to at the Tehran Conference. The economic isolation of the Soviet Union took its final shape in 1950 with the emergence of the Coordinating Committee for Multilateral Export Controls (COCOM), which drew up lists of industrial equipment, dual-purpose technologies, and know-how prohibited for export to the Soviet Union.

Despite the vigorous military and political confrontation in the early days of the Cold War, the Soviet leadership was well aware that its national industry would not be able to push ahead with advanced development amid autarchy, and that it would have to borrow technologies and know-how available to the West. With this in mind, the Soviet Union displayed remarkable resourcefulness in a bid to overcome through diplomatic and intelligence means export control barriers put up by the United States. In 1952, Moscow hosted an international economic conference that heralded the first major attempt by the Soviet Union to bypass COCOM export restrictions. The conference demonstrated the leadership’s desire to develop the economy on a more open basis. As it conducted dialogue with Europe’s leading industrialized powers (especially Britain), Moscow, in a bid to secure agreement on the import of scarce industrial equipment and machine tools, played on contradictions between the military-political commitments of these countries as NATO member-states, as well as the natural commercial interests of private businesses. Although the Moscow conference produced no tangible results, in the following years the Soviet Union often used the dichotomy of politics and the economy as leverage to overcome the technological embargo.

So-called “gray schemes” were another widely used trick to circumvent high-tech export restrictions. Contracts for dual-purpose equipment were concluded in third countries that maintained normal relations with NATO member-states. Starting in the 1960s such transactions were performed via Finland, which was neutral and boasted a robust shipbuilding industry. In 1979, the Soviet Union’s Gas Industry Ministry created a special division called AMNGR, a giant responsible for offshore oil and gas drilling in the Arctic. Its task was to explore for oil and gas off the country’s Arctic shore. That required building an entire fleet of special ice-class ships. The Soviet Union concluded a contract with Finland’s Rauma Repola shipyard to build three drilling ships and nine ice-class freighters. This $440-million contract was fulfilled in 1982-1983. The Dutch engineering firm GustoMSC designed the drilling ships. Under the project the ships were to be equipped with the then state-of-the-art dynamic positioning system from Norway’s manufacturer Kongsberg, a recognized producer of navigation equipment, including instruments for naval ships. Naturally, if the Soviet Union had requested this type equipment, the answer would have been a firm “no.”

Another example of how the Soviet Union sidestepped the sanctions is a partnership agreement the Valmet company and Britain’s Foster Wheeler Petroleum signed in February 1985. The contract stipulated obtaining a license to manufacture the basic elements of offshore drilling platforms for their subsequent export to the Soviet Union.

The end of the Cold War and the ensuing fundamental reconfiguration of the system of international relations by no means put an end to the strategy of isolating Russia from cutting-edge Western technologies. The old-time approach underwent only slight revision to become more sophisticated.

Firstly, the COCOM restrictions are still in place. Although they were formally canceled in 1994, the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies was signed in 1996. The Arrangement also included other dual-use goods and technologies and was an exact replica of the export restrictions COCOM had established previously, as well as expanded lists of equipment prohibited for export. As an example, Professor Sergei Grigoryev of Moscow State Technological University points out the 5-axis CNC machines and robot control systems that are vital to aerospace instrument engineering, shipbuilding, electric power engineering, and other key industries.

The very continuity of the tradition of export control indicates that the Cold War never really ended. It is this unpleasant feature of Western-Russian economic relations that President Vladimir Putin mentioned in his speech on Crimea’s reunification with Russia: “The notorious policy of Russia’s containment that lasted throughout the 18th, 19th and 20th century is going on… Today we are being threatened with sanctions, but we have been living amid restrictions, quite significant for… our economy, anyway… The so-called COCOM lists… have been canceled pro forma, but in reality many bans are still there.” With the conclusion of the Wassenaar Arrangement, Russian economist Vyacheslav Shuysky said “international trade in technology grew increasingly reliant on the principle that any transfer of know-how is impossible as long as the recipient country lacks an effective system to protect and restore intellectual property rights.” In the process of Russia’s accession to the WTO this problem remained a stumbling block in negotiations with the United States. It was somewhat settled in December 2012 after the adoption of an intellectual property rights protection action plan. However, even after the plan was endorsed, no practical returns followed. No influx of U.S. technologies to the Russian market was in sight: the conflict that erupted in Ukraine messed things up…

Secondly, starting in the early 1990s, the United States stepped up its efforts to worm out technological secrets that new Russian industries had inherited. Special focus was placed on such traditional strengths of the Soviet Union as the production of composite materials, robotics, aerospace instrument engineering, and nuclear power engineering.

Thirdly, the United States took advantage of its exceptional financial, economic, and diplomatic influence on former Russian President Boris Yeltsin and his entourage in order to prevent the export of Russian know-how the military-industrial complex and nuclear power engineering industry had accumulated. Much of this technology offered strong competition to U.S. companies or bolstered the potential of countries independent from the United States. For instance, in 1992 U.S. Secretary of State James Baker forced Russian Foreign Minister Andrei Kozyrev to revise a contract with India for the supply of cryogenic rocket engines for the GSLV Mk.1 rocket worth $200 million. Should its demands be ignored, the United States warned, trade sanctions would follow and programs for U.S.-Russian cooperation in space would be curtailed.

Russian industry and science had to pay dearly for the “reformers”’ policy of worshiping the West that lasted throughout the 1990s. The competitive potential of Russian industry and science was largely undermined. This was most vividly seen in the preferential attitude towards foreign technologies and discrimination against national R&D projects and products. Heavy cuts in spending on both fundamental and applied research made things go from bad to worse.

Russian Industry Still Technologically Dependent

Unfortunately, the Russian industry’s dependence on imported know-how and technologies did not decrease in the 2000s, but remained on average at a level of 80 percent.

In 2004, in a newspaper article regarding the cancellation of the mineral resource reproduction fee, Alexander Romanikhin, chairman of the Oil and Gas Equipment Producers Union, coined the rather telling term, “schlumbergerization,” which he defined as “the active ousting of Russian oil and gas service companies by Western competitors,… who use Western equipment and exacerbate the technological dependence of the Russian oil and gas complex on imports.” A decade late, speaking at a conference devoted to the ways of effective and safe development of the Arctic, Director of the Mining University Vladimir Litvinenko acknowledged that all offshore seismic exploration was done using mostly Schlumberger equipment and, still worse, the original data was dispatched to the United States for interpretation before it was brought to the customer. In other words, the Americans know Russian resources much better than Russians do.

Russian Energy Minister Alexander Novak formulated the general diagnosis for the Russian industry. He told the Presidential Commission for the Fuel and Energy Complex that the share of foreign technologies in the Russian oil field servicing segment ranged from 80 to 90 percent, and that Russia, if and when stripped of access to them, would inevitably have problems with extracting hard-to-recover reserves, operating high-tech wells, and producing shale oil.

Similar indications of Russia’s technological dependence can be seen in the aerospace industry. The electronic components used in Russian spacecraft, including military, are 90-percent foreign-made.

The technological incapacity of domestic shipbuilding can be illustrated with the contract for building sixteen ice-class LNG carriers (worth $5.5 billion), which the Novatek company concluded with South Korea’s DSME, when it became pretty clear that not a single plant of the United Shipbuilding Company was capable of doing the job.

Thus, the 2014 anti-Russian sanctions simply drew a line under the “affluent years,” when a great deal was said about innovation and modernization, but in fact nothing was done to translate them into reality. The Russian industry’s lack of technological sovereignty proved a glaring problem.

Industrial Espionage: a Panacea Or an Illusion?

Harsh sectoral sanctions provoke the temptation to employ more extensively various roundabout ways of gaining access to much-needed technologies and know-how. Former “gray schemes” of importing equipment have surfaced again. Russia’s political discourse has come out with the concept of import substitution as an ideological counter-argument to sanctions and reverse engineering—thorough replication of the original product—has become the most popular trend in counter-sanctions policies. All three approaches have one common denominator—industrial espionage. The greatest breakthroughs in the Soviet Union’s technological development were largely a result of intelligence efforts in science and technologies. For instance, the creation of the atomic bomb and mass production of semi-conductors.

However, the feasibility of using industrial espionage in the current conditions requires a thorough analysis, because, despite the sanctions, the Russian economy remains firmly integrated with the world economy.

Industrial espionage is capable of making up—promptly and at a relatively low cost—for the shortage of some components critically important for developing a certain industry. But as soon as the state begins to use industrial espionage systematically, as an extensive means of boosting the economy’s technological development, this “remedy” instantly turns into a killer drug.

The abstract concept of industrial espionage has three major organizational and philosophical flaws.

First, industrial espionage is unable to ensure advanced development for a backward industry and is good only for addressing specific and tactical tasks. At best, industrial espionage will make it easier to come closer to the level of foreign competitors, but never catch up with them. Also, the effect will be felt only in the short term, because while the stolen know-how is introduced, the designers will find a new and better solution. Designers who steal or blindly copy technologies are doomed to constantly fall one step behind the leader.

Second, it is possible to steal sketches, diagrams, blueprints, or samples of certain high-tech equipment, but it is impossible to steal skilled services and personnel required for its effective operation.

Third, the risk is high that one who fully relies on foreign experience in some field will be doomed to follow somebody else’s ideas in science and engineering. With every new step one instinctively follows the paradigm already tested by foreign counterparts. In that case the industry’s leaders will tend to refrain from darting forward for fear of making mistakes and prefer to watch and wait for more experienced players to act.

As the methodological basis for such shady counter-sanctions mechanisms as import substitution, reverse engineering, and gray import schemes, industrial espionage is unlikely to be able to compensate for the Russian industry’s hunger for technologies and know-how, which will inevitably emerge if the sanctions last long enough (for eight to ten years). Industrial espionage can be effective only if it is used as part of a comprehensive and effective state policy in science and engineering.

“Smart Power” vs Sanctions

U.S. political scientist Joseph Nye Jr. defined “smart power” as a flexible combination of “hard” (military-political) and “soft” (humanitarian-political) power employed to attain a country’s foreign policy goals. Today Russia needs precisely this approach if it wants to overcome the harmful effects of Western sanctions.

The impressive show of the Russian armed forces’ combat readiness in the operation against the Islamic State in Syria and Moscow’s high-principled foreign-policy stance on the civil conflict in Ukraine—however critical comments by Western and Russian mass media are on the issue—are a clear sign that Russia is determined to avoid compromising its interests. But if that power resource is to play a constructive role, it has to be coupled with an active ideological and political course in relations with the West. Nye’s concept prompts such a tool as “persuasion.” In this context, Russia should think up and put to use such prognostic-analytical arguments that would meet absolute and unanimous understanding in Washington and other Western capitals; arguments that would persuade them it is crucial to seek a rapprochement. For this, the problem of sanctions should be considered in the widest context possible and in conjunction with modern trends, prospects, and risks inherent in both Russian and international policies. There are versions of such arguments worth discussing here.

The first argument in favor of lifting the sanctions is the expansion of terrorism, which Western countries and Russia should fight together. The idea has been widely discussed by experts and the mass media, so we will not analyze it here in detail.

The second argument looks a little bit more provocative: sanctions pose a far greater threat to the West for the simple reason that they push Russia towards closer relations with China, which in the long run may result in the emergence of a Eurasian military-economic bloc. That bloc would take final shape when India decides to join in (a sort of Eurasian triad similar to the concept developed by Russian diplomat and politician Yevgeny Primakov). In what position will NATO find itself if such an antipode appears in the East? What would this configuration spell for the entire system of international security and international relations?... While this idea is vulnerable to well-founded criticism, it is important above all as a possibility (albeit a remote one). All the more so since there are some politicians and commentators in the West (especially in the United States) who are already voicing such fears and criticizing Washington’s anti-Russian policies precisely for that reason.

Lastly, there is a third way of manipulating negative expectations, which, if properly worded and used, may look to the West even more convincing. Let us imagine that lasting sanctions will continue to fuel the internal political and economic crisis in Russia, which in the final count will bring about a radical change of the ruling elites and reformatting of the system of state governance. Power may not go to the liberal opposition, which is the latent aim or at least the long-cherished hope of the Americans and Europeans, but to conservatively-minded quarters with the mentality of law-enforcement agencies and who have the support of the army, security services, and the majority of the population. As a result, Russia’s domestic and foreign policies, which remain a product of compromise among the elites (a mere look at the economic segment of the Cabinet confirms this) will undergo fundamental change when the siloviki come to power. In response to the social and political degradation of the past 25 years, a counter-liberal ideology is likely to emerge, especially as the crisis of liberal ideas has lately become the subject of public debate not only in Russia. In this case property may be redistributed in favor of the state. The system of state governance will be streamlined and material and industrial resources will be consolidated. In foreign policy it will be even harder to negotiate with Russia and Russia will use its potential to undermine the positions of the West (nothing like this is happening at the moment). How will the United States and other Western countries feel when they find themselves face to face with a Russia that has undergone such transformations? So, is the current game worth playing at all?

When Russia became involved in the Syrian campaign, the West promptly developed the suspicion that Vladimir Putin was unpredictable and even dangerous. In this connection it would be appropriate to ask: What makes the West so certain a post-Putin figure would be more predictable? As the saying goes, “he who has never tasted something bitter does not know what is sweet.” It is important to remember that finding alternatives often requires opening Pandora’s box. But would it not be safer to keep it tightly closed?

Putin’s economy differs little from the Yeltsin economy (only in formal and insignificant aspects). Essentially, the economy remains loose, lopsided, and dependent on the import of industrial technologies and equipment. In its current shape, the Russian economy remains an ideal “client,” who, having no faith in his own strength, repeatedly turns to Western “partners” for assistance. But some day the client might wake up… Putin may be the Russian leader who is most acceptable for the West if real and not far-fetched alternatives are considered. And if so, is it really worth aggravating the current disagreements with sanctions?

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