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Can the Kremlin’s Silicon Valley Succeed?

Russia has a wealth of engineering talent, but needs to put a lot more in place.
April 8, 2010

Russia is finalizing plans to launch a Silicon Valley-like “innovation center” near Moscow. The Kremlin has selected a patch of farmland near a private business school, has set aside funding, and this week named a Nobel laureate, the physicist Zhores Alferov, as the project’s science advisor. Now comes the hard part: making it work.

Venture capital: Eugene Kaspersky, CEO of Kaspersky Lab (left) and President Dmitry Medvedev (right) met last year at the launch of a new Russian commission to promote technology development in the country. Medvedev recently announced plans to build a Silicon Valley-like innovation center outside Moscow.

This means deciding what kind of operating and funding model to pursue, and making sure Russia’s legal and financial structures will support entrepreneurship. “There certainly isn’t any shortage of really bright technical people with great technological ideas in Russia, and that’s a strong suit,” says Josh Lerner, a professor of investment banking at Harvard Business School. “But the big thing has to be: ‘What are the barriers to being an entrepreneur and how can we address them?’ The entrepreneurial environment represents somewhat of a challenge.”

In particular, Russia will need to prove that inventors can secure intellectual property and protect it in the courts, and that investors won’t face onerous taxes or other restrictions in financing new ventures. “I think all those areas represent challenges to them,” Lerner adds. “My guess is that litigating intellectual property will be challenging.”

The project was announced in February by Russian president Dmitry Medvedev and will be financed in part by a $340 million government modernization grant. The facility is to be built from scratch in the village of Skokolo, west of Moscow, flanking the site of a privately run business school.

Yesterday, Vladislav Surkov, a Medvedev aide who heads a working group on the project, led a meeting in Moscow attended by 200 scientists to discuss the best way to achieve two objectives. The first is to create a government-subsidized lab and corporate space to incubate startup companies built on innovations flowing from existing Russian and multinational companies. The second is to create a research university setting where PhDs can get a salary, laboratory facilities, and access to supercomputers to develop technologies that could then be sold to existing companies or launched within new startups.

The overall goal is to commercialize emerging technologies in energy, biomedicine, information technology, telecommunications, and nuclear engineering–and to eventually diversify Russia’s economy away from its dependence on oil and natural gas. “The new technologies that we create are not toys for eggheads, they’re something else entirely,” Medvedev was quoted as saying in the Moscow Times in late March. “They’ll help cut costs, raise enterprises’ revenue, improve labor conditions and the environment.”

In one sign of its preliminary nature, the project doesn’t even have a website. But Ivan Zassoursky, a new media professor at Moscow State University, has created a group on Facebook and is helping to run a competition for the Russian Center of Internet Technologies, an organization of information technology companies, to come up with a name and a design of the facility. He says the vagueness of the effort is “sort of a healthy thing,” and adds: “The Kremlin is trying to do it right. They are not trying to push and line up people and tell them what to do. This is an area where they don’t think they are experts themselves and are going out of their way to reach out to the scientific community.”

In the area of information technology Russia is already home to several successful companies, including Kaspersky Lab, maker of antivirus software; the search engine Yandex; and social networks Vkontakte.Ru and Odnoklassniki.Ru. Eugene Kaspersky, the founder and CEO of Kaspersky Lab, who is advising Medvedev on the innovation center and on cybersecurity issues, says Moscow has its advantages, including the fact that major educational institutions and government ministries are all nearby. On the other hand, he admits, the weather can be pretty bad, and living and office costs are very high.

But other countries have beaten the odds to create innovation centers. “If you went around in 1991, you’d see a lot of skepticism about whether Israel could establish itself as a VC hub, for any number of reasons,” Lerner says. “The skeptics were wrong. So you can’t be too dismissive.” As for the notoriously long and brutal Russian winters, he adds: “It’s cold in Boston, too.”

Countries that might seem obvious centers for incubating high-tech companies have faced steep challenges. It’s not enough to have a modern economy, great infrastructure, and a deep talent pool in science and technology. “If that were the case, we’d see Japan as the hub of venture capital,” Lerner says. But Japan presents numerous barriers, from a tax policy that inhibits venture funding to a corporate culture that frowns on people who decide to leave large companies to chase new ideas, he says.

The Kremlin project has its critics. “The real attraction of the Kremlin’s Innovation City lies not in what it will accomplish for innovation but in how it will line the pockets of Russia’s corrupt officials,” one opposition politician, Vladimir Ryzhkov, wrote in a recent Moscow Times op-ed. “The greedy bureaucrats are already salivating in anticipation of the hundreds of construction permits that will be required to develop a Silicon Valley from scratch.”

But something must be done. Russia lost many scientists and engineers during the 1990s. Russia’s economy is heavily dependent on exports of natural gas and other resources, and contracted 7.9 percent last year as demand dropped.

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