Russian Innovation Economy: Myths and Realities

Ilya PonomarevState Duma – Russia Parliament

London, December 2nd, 2009 г.

President’s call for modernization

“4i” initiative Infrastructure Institutes Investment Innovation

Presidential address to the parliament in 2009 was focused on innovation

Most fashionable discussion topic

Russian competitive advantages

People Education system Number of R&D

specialists Technology legacy

from USSR Potentially vast

internal market Virtually unlimited

financial resources

Problem 10. Inconvenient legislation Incompatible with usual approach legal acts:

VC regulations No LLP form VC funds in Russia are regulated as mutual

funds Corporate legislation Technology transfer act

Acts where bad wording leaves room for unfavorable misinterpretation Software VAT exemption act Privacy protection act

Legislation that requires amendments in new economy environment Civil Code

Internet crime liability definition IP rights protection

State procurement act Bankruptcy regulations e-Payment systems Miscellaneous industry-specific acts (telecom,

advertisement, mass-media, …)

Problem 9. Corruption

Inequality between large corporations and start-ups when dealing with state agencies Getting approvals Response time Police abuse Access to contracts

Widening gap between society and the government makes civil agreements invalid

Problem 8. International competition

Low productivity in Russian economy drives up costs even for effective businesses Higher wages decrease

competitiveness Brain drain Russian authorities do not

help national producers to compete internationally No offset deals No technology brokers (or

export support agencies)

Problem 7. Bad Russia’s image

Russia is not associated with quality products, even less with technology intensive products

Russia is perceived as an unreliable and unpredictable partner

Civil society and democratic institutions crisis, decreased trust in national leadership scares investors

Problem 6. Infrastructure

Lack and expensiveness of modern business infrastructure Office premises Telecom Financial instruments

Debt financing is expensive and hard to negotiate

Excessive concentration of business activity in Moscow, colonial policies towards other regions

Low quality of life Housing and utilities deterioration Soviet education system collapse Urban planning traditions of the past

outlived themselves

Problem 5. Inadequate institutions

No unified management of economy modernization at the executive level

Poor investments environment No traditional exits

No technology IPOs No strategic investors

VC funding is undeveloped State institutions (Rusnano, RVC)

cannot replace working market Gap between universities, R&D

and businesses State funding has not reached the

point of influencing or just supporting innovation businesses

Problem 4. Resistance of the elites

Russian elites do not have long-term plans in Russia They tend to diversify outside

Russia They want to live in Western

consumer society, but get their easy dollars in Russian regions

Personal wealth is fully dependent on natural resources

Any type of social innovation threatens stability of existing “sovereign” political and governing system

Problem 3. Business climate

Outrageous court and police system

Unsecure situation with private property protection Investing in Russian assets

looks risky Customs Tax collectors either do not

know specifics of hi-tech businesses, or consciously abuse innovators

Extremely long time to get required decisions and approvals from any state agency

Problem 2. Structure of Russian economy At the current economy conditions

hi-tech businesses present higher risks with at least uncertain return, compared to natural resources and other “traditional” enterprises

Chosen way to privatize created large “cash cow” corporations with low debt and virtually unlimited resources, creating unfair competition with any new companies and demotivating managers to improve productivity

Tax code favors industries with higher revenues and lower added value

Limited demand for Russian-made technologies

Problem 1. Deficit of human resources

No entrepreneurs, even less – serial experienced entrepreneurs

No success stories to follow No adequate business schools

No professors with first-hand experience

Decreased level of people’s geographical mobility

Lack of international business experience and proper connections Language barrier

Demographic crisis

How we deal with all these?1. We have created

“institutes of development”: Equity financing

Rusnano – investment company, invests into all-stage companies, funds, manages projects, supports infrastructure

Russian Venture Corp – fund of funds, includes dedicated fund for seed financing

Rosinfocominvest – private equity fund for IT and telecom

Bortnik Fund – pre-seed grants Debt financing

Vnesheconombank Infrastructure support

Hi-tech parks task force – new technology areas (Academgorodoks)

Special economic zones – exclusive tax and customs regimes

How we deal with all these?

2. Presidential initiatives: Commission for Economic

Modernization – President’s project office

Council for information society development – President’s council to coordinate ministries to raise new technology awareness

Fund to return compatriots (planned in 2010-2011)

Agency to support hi-tech exports (planned in 2010)

High School of Modernization (planned to be initiated in 2010)

Skolkovo Business School

How we deal with all these?3. Legislation and policy-setting

efforts: Innovation companies tax support

Step 1 – IT exporters Step 2 – all IT Step 3 – all hi-tech

Self-regulatory bodies VC Support Act (introducing LLPs) Hi-tech Parks Regulation Act Bankrupcy regulation amendments LLC regulation amendments JSC regulation amendments State procurement regulation

amendment e-Document Act

Objective – to create Innovation Code

…We are still the smartest, so we’d definitely make it!

…We are still the smartest, so we’d definitely make it!