Skolkovo: the future of Russia's economy (part 1)

On Tuesday, June 23rd, President Medvedev spoke at Stanford University, an integral part of Silicon Valley. The subject of course, was his own vision of a Russian Silicon Valley in Skolkovo, just outside of Moscow. 

 

What exactly does this project mean for Russia’s economy?

 

It is difficult to write about almost any aspect of Russia without making some kind of clichéd reference to the country’s inscrutability. Economic reform and development is a particularly hot topic today and comes with the requisite hope and skepticism that we expect when discussing Russia's development. Everyone is in agreement that Russia must diversify its economy or continue to suffer the consequences of the resource curse. But how?

 

Enter the catch-all term 'modernization'. At the moment, it refers to a concentrated effort to expand the high technology sectors in Russia's economy. Keith Crane's chapter on high technology in Russia After the Global Economic Crisis looks at the potential of the five most competitive high tech industries in Russia (software and IT, specialty materials and nanotech, nuclear technology, aerospace, and armaments) and notes that the entire sector only represented 3% of the country's total GDP in 2008. This is woefully small if high tech is to be Russia's future. Russia's research and innovation system lacks a robust mechanism to bring ideas to the market. In 2007 the government created Rusnano, a state owned capital fund. But in 2009 the corporation returned approximately half of its charter to the federal budget in a loan-type transfer that the government plans to return in 2010-12. More importantly, there are very few private investors (foreign or domestic) in the Russian economy outside of the raw materials sectors.

 

The problem is the investment climate. Several times throughout out his presidency Dmitri Medvedev has commented on the atrophy of rule of law in the country. Whether these pronouncements are all part of a political game with or against Vladimir Putin doesn't actually matter, because the fact remains. As Timothy Frye also notes in Russia After the Global Economic Crisis, the past decade has seen the suppression of institutions that are essential to the rule of law including media, business organizations, as well as nongovernmental organizations that monitor corruption, human rights abuses and protect consumer rights.

 

More specifically, observers have watched the investment climate become increasingly unpredictable beginning with the Yukos affair in 2003; then the forced sale of foreign-owned shares to Gazprom in the Sakhalin II project in 2006; then 2008 saw the expropriation of Hermitage Capital by tax authorities after Bill Browder exposed corruption in the oil and gas industries; most recently, London is now home to yet another Russian billionaire being investigated for tax evasion, Evgeny Chichvarkin who after several problems with law enforcement [failures], sold the chain Evroset' for a very low price and left the country.

 

Luckily, Skolkovo will be Russia's answer to Silicon Valley... Hopefully. 

 

Skolkovo is specifically intended to develop an environment that will foster research and ideas and make capital readily available to bring this research to the market. The research center seeks to make investment more attractive in Russia by offering tax breaks and other incentives to foreign and domestic venture capitalists. The city will have its own police force and property, but many observers are not convinced that this will be enough to overcome the risky climate where the government has shown its disregard for property rights and other protections for investors. Additionally, there is the ideological/methods criticism that the best way to foster innovation is for the government to get out of the way of entrepreneurs. Dmitri Medvedev had an answer for this when a delegation of investors and tech experts visited Russia several weeks ago: "In Russia, many processes have prospects only if they are dealt with by the head of state... that's the way our society functions, it's not very good, but that's the way it is for now." Not everyone is comforted by this. Either way, this ambitious project is already under way so it is useful to outline what it entails: Who's who? (government officials and investors involved); What will the city look like? (tax breaks, housing provisions, laws and enforcement); What will the programs look like?  (research institutions involved and available new resources).