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CHAPTER 6 - INFORMATION ON RUSSIAN FEDERATION LAWS

REGARDING DEFENSE INDUSTRY CONVERSION

AND PRIVATIZATION

RUSSIAN FEDERATION LAW ON DEFENSE CONVERSION

The law on conversion was signed by President Yeltsin in March 1992 and first published openly in May of that year. Parts of it are outdated, and it is unclear what weight this law currently carries. Nevertheless, it is the most comprehensive Russian legislation related specifically to defense conversion published to date.

The law defines the legal foundations for the activity of defense and associated enterprises, associations, and organizations in the conditions of the reduction or cessation of defense orders and the associated conversion of their production capacities, scientific and technical potential, and manpower resources.

The law regulates relations between Russian Federation organs of state administration and organs of state administration of national-state and administrative-territorial formations, and enterprises, associations and organizations during the conversion process, and guarantees protection of the interests of all participants in that process under conditions of market relations and the use of economic methods of management.

The law specifies the procedure for resolving legal, economic, and social questions arising during the conversion process, and is aimed at ensuring the most effective utilization for civil purposes of the production capacities, scientific and technical potential, and manpower resources of the enterprises undergoing conversion.

SECTION 1: GENERAL PROVISIONS

Article 1. Main Terms and Definitions

1. In the present law, conversion of the Defense Industry (hereinafter Conversion) means the partial or complete reorientation from military to civil needs, under the procedure specified in this law, of the freed production capabilities, scientific and technical potential, and manpower resources of defense associated enterprises, associations, and organizations.

2. An enterprise undergoing conversion is a production or science-and-production association or plant, design or research organization, or any other enterprise irrespective of form of ownership which is engaged in scientific and (or) production activity for military needs (that is, the production, development, research, testing, maintenance, and servicing of arms and military equipment and of subassemblies, materials, and specialized technological equipment for them, as well as the extraction, processing, reutilization, and storage of specialized types of raw and semifinished materials for the production of arms and military equipment used by the Armed Forces, security organs, and law enforcement organs of the Russian Federation) at which the said activity is being reduced or terminated and where measures are consequently being implemented to produce civil output and reutilize military-technical facilities.

Defense Enterprises in respect of which a decision has been adopted to terminate their activity or to eliminate them due to the technical and economic inexpediency of redesignating them, are also defined as undergoing conversion under the present law.

Article 2. Principles of Conversion

1. The reduction or cessation of production activity for military needs at a defense enterprise is founded on decisions by Russian Federation organs of state power, and also on the de facto reduction of military expenditure for these purposes.

2. The main principle of work by enterprises undergoing conversion is the use of the high-technology capabilities of the defense complex to produce output capable of competing on the foreign market.

3. The production capacities, scientific and technical potential, and manpower resources of defense sectors of industry that are freed during the conversion process are enlisted to implement priority state targeted programs for the socioeconomic development of the Russian Federation. Here account is taken of the requirements of the national economy, the proposals of the enterprises groundwork that has been built up at the enterprises undergoing conversion, the professional skills of the personnel, and the enterprises' specialization and technical equipment.

4. Enterprises undergoing conversion make provision on a contract basis, out of funds allocated for defense needs, for the creation, preservation, and development of mobilization capacities in accordance with the targets approved by the Russian Federation Government, and also for the preservation of the necessary servicing personnel.

5. Conversion takes place in the context of full observance of all norms laid down by Russian Federation legislation for the social protection of the personnel of enterprises undergoing conversion.

SECTION 2: ORGANIZATION, PLANNING, AND FINANCE OF DEFENSE INDUSTRY CONVERSION

Article 3. Planning of the Defense Order and Conversion

1. Planning of the state defense order for the development, production, and delivery of arms and military equipment (hereinafter the Defense Order) is based on the military doctrine of the Russian Federation and its basic principles. On the basis of the military doctrine of the Russian Federation adopted by the Russian Federation Supreme Soviet, the Russian Federation Defense Ministry, with the participation of the relevant ministries and departments, enterprises, associations, and organizations, draws up long-term programs for the development of arms and military equipment and programs for the creation, preservation, and development of mobilization capacities. Similar programs are drawn up by security organs and law enforcement organs of the Russian Federation.

In accordance with these programs, long-term contracts are concluded and the Defense Order is approved. The said long-term programs are also used in the compilation of state conversion programs and are communicated to the interested enterprises undergoing conversion for the purposes of planning conversion and organizing production.

2. On the basis of the Russian Federation republic budget, the details of the corresponding long-term programs are worked out, existing contracts are extended, and competitions are held for the fulfillment of new orders.

Conversion is reckoned to begin in the year in which the production and development of arms and military equipment is actually reduced or ceased at the enterprises, or in which the redesignation of uncommissioned capacities begins.

Article 4. Conversion Programs

1. The main role in organizing the switch from military to civil production and the drawing up of conversion programs belongs to the defense enterprise.

The basis for drawing up the conversion program at the enterprise consists of:

a) Programs for the development and production of arms and military equipment and programs for supporting the activity of security organs and law enforcement organs of the Russian Federation;

b) Programs for the creation, preservation, and development of mobilization capacities; and

c) The order for the development, production, and delivery of output and goods for important state needs (including Defense Needs).

2. The drawing up of state conversion programs and the organization of their execution are carried out by the Russian Federation Ministry of Industry.

3. Regional conversion programs are drawn up by the organs of executive power of national-state and administrative-territorial formations, and also by conversion coordination councils or other organs promoting the processes of implementation of conversion in a region.

4. The participation of enterprises undergoing conversion in state and regional programs is strictly voluntary and based on the principles of economic interest and competitiveness.

Article 5. Finance and Material and Technical Provision for the Conversion Process

1. The procedure for finance and material and technical provision for the defense order is defined by means of a contract between the executor of the order and the client, concluded in accordance with Russian Federation legislation.

2. The procedure for finance and material and technical provision for work under state conversion programs is established in the said programs.

3. The material interest of the leader of a state enterprise undergoing conversion in improving the economic indicators (including that of maintaining the level of employment) is ensured by the terms of the contract concluded in accordance with Russian Federation legislation.

4. With a view to ensuring credit availability and the implementation of state conversion programs, a state conversion fund is set up. The sources and procedure for financing the said fund are determined by the Russian Federation Supreme Soviet in the course of approving the Russian Federation Republic budget.

5. Enterprises undergoing conversion are granted the right to form special centralized funds for the financing of research, experimental, design, and planning work, and also for the assimilation of new types of output. The said funds are formed on the basis of contributions from profits up to a level of 1.5 percent of the prime cost of the enterprises' commodity output (operations, services), such payments being deductible from the taxable base for the calculation of income tax (profit tax).

Article 6. Aspects of Reorganization and Privatization of Enterprises Undergoing Conversion

1. In the case of the full conversion of enterprises which belong to an association and are not legal persons in their own right, or of shops, sections, or other structural subdivisions of enterprises, they may be designated as autonomous state enterprises with the rights of a legal person. The decision to designate a subdivision as an autonomous state enterprise is made on a vote at a general meeting of the subdivision's labor collective, by a majority of the total number of members of the collective. Designation as an autonomous state enterprise takes place in accordance with Russian Federation legislation.

2. The labor collective of a state enterprise undergoing full conversion may submit an application for the privatization of its enterprise, participate, through its representatives, in the formulation of the privatization plan, and enjoy, in the privatization process, the privileges granted by Russian Federation legislation to members of enterprises' labor collectives.

3. In the case of partial conversion, an enterprise or its structural subdivision is privatized in accordance with Russian Federation legislation and the state privatization program.

4. Participation by foreign investors in the privatization of enterprises undergoing conversion takes place in accordance with the state privatization program, the RSFSR law "On Foreign Investments in the RSFSR," and Russian Federation legislation on privatization.

5. Enterprises or structural subdivisions of enterprises whose purpose relates to mobilization and which are not used in current production are not subject to privatization.

SECTION 3: SOCIAL PROTECTION. COMPENSATIONS AND CONCESSIONS FOR ENTERPRISES UNDERGOING CONVERSION

Article 7. Social Protection for Workers at Enterprises Undergoing Conversion

1. Citizens of the Russian Federation working at enterprises undergoing conversion and also those who are freed as a result of conversion are entitled to social protection in accordance with the present law and other legislative acts of the Russian Federation.

2. For workers at mining, metallurgical, radiochemical, and specialized assembly facilities in the uranium industry who are freed as result of conversion, the period for which an unemployment allowance is received may be extended by up to two years by decision of the local Soviet of People's Deputies.

3. Workers freed as a result of conversion who had worked in defense sectors of industry for at least 15 years are entitled to the use of sector social facilities and sector medical services and to retain their place in the waiting line for housing, and are also granted preferential rights to individual housing construction or membership of housing construction cooperatives in all regions of the Russian Federation.

4. Cities and settlements where more the 20 percent of the employed population is made redundant as a result of conversion may be granted the status of priority development territories under article 17 of the RSFSR law "On Employment of the Population in the RSFSR."

5. The dismissal of workers from an enterprise undergoing conversion as a result of conversion is an additional condition of dismissal to be compulsorily recorded in the worker's labor record as a reason for dismissal.

6. The requirements set forth in point 5 of the present article also apply to workers dismissed in accordance with Article 29 points 5 and 6 and Article 33 point 1 of the RSFSR labor law code.

7. All concessions stipulated for labor collective members by Russian Federation Legislation and the State Privatization Program are extended to unemployed workers dismissed from an enterprise undergoing conversion under points 5 and 6 of the present article in the course of privatization of state enterprises.

Article 8. Compensations and Concessions for Enterprises Undergoing Conversion

1. Tax concessions for enterprises implementing conversion are established in accordance with Russian Federation Taxation Legislation.

2. State enterprises undergoing conversion are entitled, with the permission of the Russian Federation Government, to the accelerated amortization of a proportion of the fixed production capital, or -- in the event of the complete removal of the defense order from them and the absence of the possibility of using the said capital in the civil sphere -- to write off highly specialized equipment without amortization.

3. Where there is a reduction in the order for the production of arms and military equipment produced on specialized production lines, in specialized shops, or at numerically designated production units, and also in other cases leading objectively to an increase in the unit cost of the said output, on renewing the contract the client must, at the enterprise's request, revise prices for the output ordered on the basis of calculations submitted by the enterprise to ensure the production unit's profitability in the new conditions and to maintain the existing level of labor remuneration for workers at the said lines, shops, and production units.

4. In the event of failure to comply with the time scale stipulated in the present law for communicating to defense industry enterprises the starting data relating to conversion, the losses sustained by these enterprises, including:

a) Expenditure on the mothballing and maintenance of mobilization capacities, social measures, and compensation for increased costs of output resulting from a reduction in the production of arms and military equipment;

b) Sums paid in penalties imposed by suppliers or raw and semifinished materials and subassemblies; and

c) Other losses relating to loss of earnings for groundwork done on uncompleted output and the need to write off tools, gear, instruments, and equipment that cannot be used for the production of civil output-- are compensated for by the Russian Federation Government out of Russian Federation Republic budget resources, unless other provision is made in long-term contracts between enterprise and client.

5. Provision is made for enterprises undergoing conversion which produce, under conversion programs, equipment and machinery for the needs of the agro-industrial complex to receive compensation for a proportion of overhead, so as to ensure that price levels are no higher than world prices.

SECTION 4. ENTERPRISES' FOREIGN ECONOMIC ACTIVITY IN CONDITIONS OF CONVERSION

Article 9. Forms of Foreign Economic Activity

1. Enterprises undergoing conversion are entitled to carry out foreign economic activity autonomously in accordance with Russian Federation Legislation.

Enterprises are entitled to:

a) Export raw and semifinished materials and equipment freed in the course of conversion -- on condition that they cannot be used for the production of civil output and taking into account the requirements of article 10 of the present law;

b) Import new equipment and technologies, as well as subassemblies, for the production of civil output;

c) Transfer (exchange and sell), in accordance with the specified procedure, technologies, licenses, know-how, and scientific and technical information which, prior to the commencement of conversion, were used in the development of arms and military equipment;

d) Participate in conferences, symposiums, exhibitions, and fairs involving the demonstration of new materials, equipment, instruments, and publicity materials describing technologies which were formerly used in the production of arms and military equipment;

e) Develop, produce, and sell arms and military equipment under licenses according to the procedure stipulated by Russian Federation Legislation; and

f) Participate in cooperation with foreign firms in the development, production, and sale of military output in accordance with Russian Federation legislative acts making provision for the protection of the Russian Federation's military-technical interests.

2. The activity of enterprises with foreign investments is regulated by the RSFSR law "On Foreign Investments in the RSFSR" and other Russian Federation legislative acts.

Article 10. Protection of the Russian Federation's Military Economic and Scientific and Technical Potential

1. To prevent damage to the Russian Federation's military economic and scientific and technical potential in the course of foreign economic activity by enterprises undergoing conversion, and also to ensure the nonproliferation of weapons of mass destruction, enterprises should be guided strictly by restrictions imposed on the export (transfer, exchange) of output and technologies that have a civil purpose but could be used in the creation of weapons of mass destruction. Restrictions on the export (Transfer, exchange) of the said types of output and technologies are imposed by the Russian Federation Supreme Soviet and the Russian Federation Government.

2. In their foreign economic activity enterprises undergoing conversion are guided by the following provisions:

a) The export of strategic types of raw and semifinished materials and equipment takes place under licenses issued in each specific case in accordance with Russian Federation legislation;

b) The transfer of technologies, licenses, know-how, and scientific and technical information for the organization of the production of civil output and (or) their use in commercial and scientific and technical links with foreign firms are conditional on ensuring the protection of the Russian Federation's military-economic interests; the sale to other states of arms and military equipment and specialized systems, complexes, functional units, and assemblies that are components of arms and military equipment and also technologies for their production takes place in accordance with the procedure specified by the Russian Federation Government.

Russian Federation President

B. Yeltsin

Moscow, House of Soviets of Russia,

March 20, 1992

No. 2551-1

SUMMARY OF THE RUSSIAN UKASE ON ACCELERATION OF

PRIVATIZATION OF STATE AND MUNICIPAL ENTERPRISES

Ukase No. 66, signed by the President of the Russian Federation, Boris Yeltsin, and effective as of January 29, 1992, consists of seven appendixes dealing with regulations and methodology pertaining to privatization of state and municipal enterprises. Listed below are appendix titles and summary of the articles as they appear in Ukase No. 66. The titles of the appendixes which do not contain articles are indicative of the subject matter they cover thus providing a brief summary of each appendix. The Ukase applies to the Russian and foreign legal entities and citizens.

Appendix No. 1

Temporary Regulations on the Procedure for Submitting, Filling Out, and Accepting for Consideration Applications for Privatization of State and Municipal Enterprises in the Russian Federation.

Appendix No. 2

Temporary Methodological Guidelines for Assessing the Value of Objects of Privatization.

The articles contained in this appendix pertain to the composition of appraised property of the enterprises, determination of the value of the enterprise's property, determination of the initial price of the enterprises and the amount of the charter capital of the joint-stock company, and documentation of the result of the appraisal of the enterprise's property.

Appendix No. 3

Temporary Regulations on the Transformation of State and Municipal Enterprises Into Open Joint-Stock Companies.

Appendix No. 4

Temporary Regulations on Privatization of State and Municipal Enterprises in the Russian Federation by Auction.

The articles of Appendix No. 4 focus on the preparations for conducting an auction, conditions, for buyers' participation in auctions, procedure for conducting auctions, documentation of the right to own a privatized enterprise and accounts with participants in the auction, distribution of proceeds from the sale of objects of privatization at auction, and invalidity of privatization transactions and liability of parties.

Appendix No. 5

Temporary Regulations on Privatization of State and Municipal Enterprises in the Russian Federation Through Competition.

The articles in Appendix No. 5 are concerned with the preparation and organization of competitions, conditions for participation of buyer in the competition, procedure for consideration of offers for buyers, documentation of the rights to own privatized objects and accounts with participants in the competition, distribution of proceeds from the sale of the object through competition, and invalidity of privatization transactions and responsibility of the parties.

Appendix No. 6

Temporary Regulations on the Procedure for the Use in 1992. During Privatization of Money From Economic Incentive Funds and Profit of State and Municipal Enterprises.

Appendix No. 7

Temporary Regulations on the Work of Privatization Commission.

Ukase No. 66 "On Acceleration of Privatization of State and Municipal Enterprises" was developed on the basis of the RSFSR law "On Privatization of State and Municipal Enterprises in RSFSR".

Both of these laws are available in their entirety from the National Technical Information Service ("NTIS"). Contact NTIS at (703) 487-4650 and request order number PB92-967119-ACV for Ukase No. 66 and order number PB92-96147-ACV for the law "On Privatization of State and Municipal Enterprises".



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