Skolkovo: Land of Milk and Honey (Part 3)

Jul 26, 2010

By Olga Blyumin

Skolkovo: The Future of Russia's Economy (Part 1)
Who's Who in Skolkovo? (Part 2)

The first reading of the bill outlining the Skolkovo project took place in early July. The plan submitted to the Duma outlines in greater detail what defines a ‘project participant’ – that is, a Russian legal entity created exclusively to pursue innovative research or facilitate research on the Skolkovo territory. To be considered, the project will be reviewed by the Skolkovo Foundation. Once approved, the participant will have rights to the amenities and benefits of the planned city. These rights include aforementioned tax incentives as well as rights to all of the city’s amenities. As described in an earlier post, the Skolkovo Fund will be in charge of housing, health issues, environmental efficiency, security/safety, utilities, etc. Instead of oversight by the Russian government ministries, the city will have its own governing organs for daily life, also overseen by the Foundation. Projected expenditure for the project for the next year will be around 15 billion rubles and 110 billion rubles in the next 5 years. Despite this heavy price tag, the first reading saw no opponents to the bill. United Russia is in full support of the project and vice-speaker Oleg Morozov believes that while the project calls for unprecedented benefits, the path to innovation is not cheap.

Since this is a government led project and the city will primarily be financed from the state budget, the state will be the primary land owner through the Housing and Public Utilities Fund, a government corporation. The final site will require approximately 600 hectares, with 375 hectares needed to begin construction. Dmitri Medvedev has ordered the procurement of the necessary land by December 31st of this year. This means appropriating neighboring land which includes 78 hectares owned by a company called Gloria that is controlled by Roman Abramovich. Another 15.4 hectares is held by Zarachenskie Dachi which is owned in part by Olga Shuvalova, wife of First Deputy Prime Minister Igor Shuvalov. The company is planning development on the land and has not officially organized talks with the government regarding the Skolkovo Innovation Center.

Project participants will be able to rent property practically at cost and provide housing for their employees. They will benefit from exemptions from VAT, real estate, and profit taxes. It is also proposed that the Federal Customs Service will offer tariff incentives either through exemptions on imports and exports or subsidies for these taxes. Additionally, import and export regulations regarding standards and quotas will be relaxed in order to facilitate information and technology exchange. Resident companies may continue to obtain these tax benefits for 10 years with the option to apply for extension, or until their profits exceed 300 million rubles in the year after total profit reaches that benchmark.

Foreign experts will benefit from simpler work visa requirements. Qualifying experts will be granted permits outside of the FSM quota limitations based on a written Notice of Intent from their prospective employer which will be reviewed within 14 days. Qualification will be based on annual income above two million rubles ($67,700) and may be lowered, especially for experts to be employed in Skolkovo. Experts will also be subject to the same income tax as Russian employees – 13% rather than the current 30% tax for foreign nationals working in Russia.

While the government will be providing most of the incentives and financing for concrete infrastructure, private investors will also be contributing. For instance, Cisco aims to replicate its Smart City concept as in Bangalore, India. The company will build Smart Connected Buildings, a Smart Grid, Smart Connected Real Estate, and even connected transport. This plan was outlined in the memorandum on mutual understanding between Cisco’s CEO, John Chambers and Viktor Vekselburg, president of the Skolkovo Foundation. Cisco has pledged to invest $1billion over the next ten years into the city and hopes to gain additional government contracts to build more high tech cities as a result of this partnership. Additionally, Cisco’s vice president, Martin De Beer will open a 2nd global head quarters in the new city. Another major private investor in Skolkovo is Siguler Guff, with a $250 million investment intended for digital and IT infrastructure.

These beginnings make Skolkovo quite attractive to potential startups, but several observers have posed the question: “if the state owns the city and funds the project, who owns the innovations?” The issue of intellectual property rights and patents is complicated and not very much is known about how it will develop. More details will be outlined in the next post.


High-tech Realities

While the measures taken so far are encouraging to the global investment community, the intellectual property issue is certainly an impediment. Another matter to consider is that such a highly developed sphere cannot operate in isolation from the current problems with corruption and weak rule of law. President Medvedev has taken steps to show some progress on the recognition of the problem but despite the rhetoric, significant results are yet to be delivered on implementing these programs. Whether Skolkovo can emulate the Silicon Valley will be largely dependent on the political will for reform, and subsequent action, that has long been a problem in Russia.