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Home > Nanotechnology Columns > > Russian Silicon Valley: to be or not...

Eugene Birger
Principal Analyst

Russian flagship project - creating a Russian version of Silicon Valley in Skolkovo, near Moscow - was officially started last spring. But a year on, there have been no sound results, apart from a number of memorandums of understanding signed between the Skolkovo Fund and foreign companies, including Microsoft.

April 30th, 2011

Russian Silicon Valley: to be or not...

Russian President Dmitry Medvedev will on Monday (05/01/11) preside over a meeting of the economic modernization commission and the board of trustees of the Skolkovo high-tech hub. The meeting will focus on the preliminary results of work to create the research hub in the Moscow Region and prospects of its development. Medvedev is leading efforts to modernize Russia, and is seeking foreign partners for Skolkovo, which is being built from scratch just 20 km (12 miles) outside of the Russian capital. The Skolkovo center will focus on research in five priority spheres: energy, information technology, communication, biomedical research and nuclear technology.

Last year, then-California Governor Arnold Schwarzenegger brought a delegation of Silicon Valley business leaders and investors to Skolkovo to help establish connections.

According to Sergey Medvedev, a professor at the Higher School of Economics in Moscow (no relation to Russia's current president),- "The Soviet Union collapsed partly because the state could not transition to the Information Age. The USSR became complacent -- a victim of its own success. Bigger was no longer better. Russia stayed the modernization course at full speed ahead, while the rest of the world transitioned to new technology based on knowledge and to new organizational schemes based on networks."

"We intended for something better, but it turned out just as it always does." This famous quip, coined by Russian politician Victor Chernomyrdin in 1993, has become a catchphrase in post-Soviet Russia. It perfectly summarizes the attitude of contemporary Russians toward innovation or any attempt to enact change in Russia. A sense of helplessness has dominated the collective consciousness in the face of pervasive corruption, bureaucracy and outdated Soviet mentalities rampant in the country.

Russia's current leadership understands the past failures and is taking the steps necessary to position Russia back at the forefront of the global political economy. Such power moves intend to expedite the country's revitalization, revealing true foresight and a commitment to the goal of advancing Russia into the Technological Age.

Russian President Dmitry Medvedev made the modernization of the economy one of the key themes of his presidency. During the boom years of the 2000s, when Russia's budget was flooded with oil and gas export revenues, the government didn't take any serious and necessary, but unpopular steps to diversify the economy. Dmitry Medvedev became Russia's president in 2008 and soon afterwards the global financial crisis started. Left with little choice, the young president launched a program of modernization, aimed at turning Russia into a technologically advanced country.

Its flagship project - creating a Russian version of Silicon Valley in Skolkovo, near Moscow - was officially started last spring. "The Skolkovo project to establish a hi-tech research hub near Moscow is organic for Russia. I believe the concentration in one place of resources to create a model for a breakthrough to new quality is very organic for this country and reasonable from the viewpoint of world experience," said Anatoly Chubais - the chief of Rosnano State Corporation.

But a year on, there have been no sound results, apart from a number of memorandums of understanding signed between the Skolkovo Fund and foreign companies, including Microsoft.

"We are talking a lot about this modernization, both the president and the prime minister are talking about it, but frankly speaking there are not many things happening in this direction," said Andrey Kostin, head of Russian state Vneshtorgbank - one of the largest lenders in the country. Mr. Kostin pointed out that while the government sees no alternative to Russia being an open economy, he added: "How much we will benefit from this very much depends on whether we will manage to modernize our economy."

But Skolkovo Fund President Viktor Vekselberg pointed out in one of his interviews that while the fund was legally set up in May 2010, the Russian parliament only approved the law regulating its activities in September. He added that seven months elapsed since September was virtually nothing for such a project. Mr. Vekselberg also believes that the success in Skolkovo project must rely not only on the bold funding but on the names of serious scientists that would work here. But so far only Russians are attracted to this working place.

At the same time Mr. Vekselberg told the BBC that while Russian researchers are still more than capable of generating new ideas, there are almost no means, or even clear understanding, of how to transfer them to the real economy. It is not a secret that Russian scientists that have international value and have worked in advanced countries rarely return back to Russia.

That, according to the billionaire, is the task for the Skolkovo project: to create an ecosystem with rules, regulations and laws which will make the transfer possible. The government pledged 85 bln roubles ($3 bln, 1.9 bln) over four years for the project, Mr. Vekselberg said.

According to Sergey Aleksashenko from the Higher School of Economics in Moscow, one of the reasons that Russian Silicon Valley is mostly on the paper is that many of those who became responsible for implementing the project had no experience in the high-tech business.

But there is another important reason, believes Vadim Malkin, managing partner at Transitional Markets Consultancy LLP. Those who devised the project did not pay enough attention to why investors would choose Russia over other countries, such as Portugal, with equally attractive tax breaks, or India, with a much cheaper cost of labor, he told the Russian business daily Vedomosti.

Recent hike in oil prices could again make the government less willing to follow the modernization agenda, especially as 2011 is a pre-election year in Russia. Oil and gas account for about two-thirds of Russia's exports. Finance Minister Alexei Kudrin has already suggested that the country's budget deficit could be eliminated next year - three years earlier than initially hoped - if the price of Urals, Russia's export oil brand, averages $120 per barrel.

Rising oil prices probably may postpone Russian government making not simple investment decisions. But even if oil prices remain high, it would be impossible for Russia to enjoy high oil revenues without investing heavily into new technologies.

The Russian Ministry of Natural Resources said in its report earlier this month that the quality of the country's remaining oil reserves was declining. It means that even the oil and gas industry will suffer if the economy is not modernized.

"The question of modernization is the question of turning Russia into a 21st Century country," says Mr. Aleksashenko. "Otherwise, Russia will continue being stuck somewhere between the 19th and 20th Centuries."

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