The Defense Enterprise Fund (DEF) is a venture capital fund incorporated 8 March 1994 to financially assist partnerships in converting and privatizing former Soviet Union military technologies and capabilities into civilian enterprises. Its intent was to create economically viable joint ventures with Russian enterprises involved in weapons of mass destruction production. Such joint ventures would channel the technological expertise of the Russian defense industry into non-military products and services. In addition, they would provide jobs for Russian WMD specialists, and facilitate the conversion of defense enterprises. Projects administered by the DEF follow the model of the Department of Defense's Defense Special Weapons Agency (DSWA) conversion projects.  Joint ventures are formed between US firms and Russian firms to convert a Russian defense facility to one that produces civilian goods or services. The DEF then provides the seed money for these ventures and monitors their progress. An initial $7.67 million grant from Cooperative Threat Reduction (CTR) monies established the fund.[1]

The DEF is managed by a private Board of Directors that oversees the Fund's allocation choices and activities.  By July 1996, the DEF's board had approved four conversion projects in Russia, totaling $8.8 million, at Kirovskiy Zavod, Nauka, V.G. Khlopin Radium Institute, and Mashinostroyeniya. For specific information about each of these conversion projects please refer to Appendix II of the April 1997 GAO Defense Conversion report to Congress.[2] Although DEF funding was approved for these projects, no DEF investments were actually made.[5] 

By March 1997, funds totaling $51.7 million had been disbursed to the DEF by the DSWA, which was later merged into the Defense Threat Reduction Agency (DTRA).[2] Initially the DEF was to receive $118 million from Cooperative Threat Reduction funds.  However after the US Congress decided to no longer support defense conversion efforts, the DEF was left with only the funds that had previously been disbursed to it plus the transfer of $15 million in FY1997 State Department Freedom Support Act funds.[2]  An additional $5 million was to come from FY1997 or FY1998 State Department funds, through the US Agency for International Development (USAID), to the DSWA and on to the DEF.[2] 

By March 2000, the DEF had invested $38 million in various enterprises. The effects of the investments included defense conversion of 36,400 square meters of factory space and 2,000 workers. Nearly $7 million of investments had to be written off, however, and the gross investment value at the time totaled just $31.3 million. Of the investments made in 12 Russian enterprises, only five were still active as of March 2000.[5]

As of April 2001, the DEF had received $66.7 million, including $15 million in State Department funds.[6] The Defense Enterprise Fund hoped but failed to raise the $50 million more it had sought in private capital to sustain its efforts.[3] Moreover, plans to provide for the long-term self-sufficiency of the fund were unsuccessful. Although DEF investments were supposed to yield $100 million between FY 1997 and FY 2001, they had yielded only $1 million by April 2000. It is therefore extremely unlikely that the self-sufficiency goal of $170 million by the end of FY 2004 will be realized.[5]

DEF management practices have come under question. In July 1999, Matthew Maly, a DEF employee from 1996 to 1999, wrote a lengthy letter to a top State Department official alleging misappropriation of funds at the DEF.[4] An August 2000 Department of Defense audit found that the Cooperative Threat Reduction Program Office's oversight and planning for the DEF needed improvement, and that it was not capable of effectively evaluating the DEF. Moreover, the fund did not accomplish its long-term self-sufficiency objectives. The audit recommended that the CTR Program Office step up oversight of Fund activities and establish quantifiable performance goals. It also recommended updating the self-sufficiency plan and the creation of a strategy for liquidating or selling the DEF.[5] In December 2001, the Department of Defense issued a second DEF audit. It noted that, like other enterprise funds created in accordance with the Support for East European Democracy Act of 1989, DEF was exempt from the Office of Management and Budget (OMB) Circular No. A-122 "Cost Principles for Non-Profit Organizations," which regulates which expenses may be charged to government accounts. The audit found that DEF expended $32.4 million between FY 1994 and FY 1999, and determined that, had DEF been subject to OMB Circular No. A-122, DEF expenses totaling at least $2.2 million would have been disallowed.[6]
Sources:
[1] "The Defense Enterprise Fund," Post-Soviet Nuclear & Defense Monitor, vol. 2, no. 15, 31 March 1995, p. 6.
[2] "Cooperative Threat Reduction: Status of Defense Conversion Efforts in the Former Soviet Union" United States General Accounting Office, April 1997, GAO/NSIAD-97-101.
[3] Defense Enterprise Fund Response Letter to the GAO's April 1997 Report to Congress on Defense Conversion.  Found as Appendix IV of GAO/NSIAD-97-101.
[4] Matt Bivens, "Investing, Pentagon-Style," The Moscow Times, 4 April 2001, p. 7; in Support Nunn-Lugar Web Site, http://nunn-lugar.com/def/articles/4221.shtml.
[5] "DOD Audit of DEF dated August 15, 2000," Inspector General Office, US Department of Defense, 15 August 2000; in Support Nunn-Lugar Web Site, http://nunn-lugar.com/def/articles/41.shtml.
[6] "Management Costs Associated With the Defense Enterprise Fund," Inspector General Office, US Department of Defense, December 31, 2001;  in Support Nunn-Lugar Web Site, http://nunn-lugar.com/def/articles/31.shtml. 
{Entered 1/22/98 PBI; Updated 3/21/2003 MJ}

Last updated 8 April 2003

This material is produced independently for NTI by the Center for Nonproliferation Studies at the Monterey Institute of International Studies and does not necessarily reflect the opinions of and has not been independently verified by NTI or its directors, officers, employees, agents. Copyright © 2002 by MIIS.

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