In January 1992 Russia's first postcommunist government launched a comprehensive economic program to transform the Soviet command system into a market economy. Privatization was and remains the heart of this plan. The original program had a clearly defined objective, namely, to create profit-seeking corporations, privately owned by outside shareholders and not dependent on government subsidies for their survival. As of two years later, however, this objective had not been achieved. By the summer of 1993 insiders had acquired majority shares in two-thirds of Russia's privatized and privatizing firms, state subsidies accounted for 22% of Russia's GNP, little if any restructuring (bankruptcies, downsizing, unbundling) had taken place within enterprises, and few market institutions had been created. During the first two years of its existence, the Russian state simply did not manage to dismantle old Soviet institutional arrangements governing property rights of large enterprises. Specifically, the state failed to implement its original vision of privatization, enforce hard budget constraints for large enterprises, or stimulate the creation of market-supporting institutions such as a legal code regarding private property and corporate governance or a social safety net. In sum, the allocation of property rights according to market principles had not yet even begun to occur.

Starting in the winter of 1991, the project on Industrial Restructuring and the Political

Economy in Russia at Stanford University's Center for International Security and Arms

Control (CISAC) has provided technical assistance to Mashinostroenie, a large aerospace enterprise engaged in research, design, experimental production, and systems integration of a broad variety of space vehicles and equipment. Officially known as NPO Mashinostroenie, the firm is one of the most prestigious enterprises in the Russian military-industrial complex, with world-class, state-of-the-art technology. The enterprise brings together many of the country's best scientists and engineers, along with management systems to execute their ideas.

Since 1992, the CISAC Defense Conversion Project has been working with the Moscowbased Impuls. Impuls is a medium-sized firm with expertise in control microdevices for the military, such as control heads for guided bombs and detection equipment for various weapon systems. Currently Impuls is working aggressively to break into several commercial high-technology markets.

Given the privileged position of the military-industrial complex in the old Soviet order, many have asserted that the military-industrial complex would be most resistant to radical economic reform. As the coddled employees of the Soviet state, we should expect directors and workers of military enterprises as well as their ministerial superiors to fear liberalized prices, commercial markets, and privatization.

Presidential Decree No. 1400 issued September 23, 1993, fundamentally altered the course of Russia's political transition. Debilitating polarization during the two years before between President Boris Yeltsin's government and parliament had resulted in the virtual collapse of the Russian state. As Yeltsin explained when he announced the decree: "All political institutions and politicians have been involved in a futile and senseless struggle aimed at destruction. A direct effect of this is the loss of authority of state power as a whole..."

The Russian privatization program has been heralded as the crown jewel of Russia's economic reform. While other aspects of Russia's economic reform have been less successful, privatization has continued unimpeded throughout the first two years of economic reform. On paper, Russian privatization appears to be more successful than any other government privatization program in history. By January 1994, 90,000 state enterprises were privatized.

The first of its kind to focus on the concept of world security, this comprehensive collection offers nineteen original essays written by renowned scholars. Now in its third edition, World Security: Challenges for a New Century tackles the most significant challenges to world security in the post-Cold War era, giving a thorough and dynamic introduction to contemporary global issues. Completely revised to address the dramatic changes in the global arena, the third edition features eleven new essays and the addition of new discussion questions after each essay.

The demise of communism in the Soviet Union could not have occurred without the activism of dissident, anticommunist leaders who created a climate that gave ordinary Russians the courage to stand up to and defeat communist control. But with communism ousted, what new form of government and what new leaders will emerge in Russia, a society that has never known democracy? Michael McFaul, a Western scholar studying at Moscow State University, and Sergei Markov, an assistant professor at Moscow State University, interviewed anticommunist parties in the months preceding and immediately following the August 1991 attempted coup d'etat. To examine the range of the political spectrum in Russia, they also talked to procommunist leaders who emerged to oppose Mikhail Gorbachev's reforms, nationalist and anti-Semitic leaders of movements such as Pamyat', labor unions, Christian movements, and organizations opposed to the division of the Soviet Union.

During the most recent Russian-American summit in Vancouver, Canada in April 1993, President Clinton announced a major new initiative to assist Russia's transition to a market economy. In discussing how to aid the process of Russia's economic reform in ways of mutual benefit to both the United States and Russia, both President Yeltsin and President Clinton underscored the importance of promoting the conversion and privatization of state enterprises of the Russian military-industrial complex.

While most agree that conversion and privatization of these enterprises are laudable goals, few have discussed concrete methods of achieving these ends at the level of individual enterprises. By focusing on the actual experiences of one Russian enterprise that has both converted to almost 100% civilian production and, at the same time, become a private company, this report seeks to expand the discussion of the means and models for achieving conversion and privatization of the Russian military industrial complex.

This report covers work on conversion and privatization in the former Soviet Union that has been conducted over the past two years by the Center for International Security and Arms Control (CISAC) at Stanford University. In it, we explore the process of conversion and privatization through employee ownership. The report contains one chapter each on the major issues surrounding conversion and privatization, followed by a detailed explanation of the employee ownership method of privatization. The report concludes with the description and analysis of a case study of privatization through employee ownership: the Saratov Aviation Plant.