Russian research and innovation, today, has a great number of past and current technological achievements, of which to be proud. Such Russian achievements include the AK-47 assault rifle, the Soyuz rockets and Eugene Kaspersky’s world beating anti-virus software.
However, what is of great concern to the Kremlin is that Russia’s existing advanced technology industries are falling behind other world technological powers, including its fellow emerging economies Brazil, India and China. The country has become too dependent on oil and gas exports, and this has tended to result in a neglect of its sophisticated technology industries.
Clearly, the Russian economy needs to transform itself into a modern knowledge economy, able to compete, on an equal footing, with other technological powers.
There are a number of causal factors, which are contributing to Russia’s under-performance in the present situation. These include the challenges that the Kremlin is facing in transforming the current systems of government, policies, society, culture and the economy, as exemplified by the recent terrorist attacks on the Moscow underground.
Part 1: Russia faces a shortage of innovators and entrepreneurs The reasons behind such a crucial innovation issue
Today, Russia is in the process of turning itself into an entrepreneurial culture. At present, there are too few Russians with the required business skills necessary to exploit the results of Russian innovation. Amongst the reasons that Russia does not have an entrepreneurial culture, is due, in part, to the Criminalization of independent commercial activity during Soviet times. In fact, as an investor in Russia put it recently ‘in the United States, an engineer, when he graduates, has a business plan in his pocket, whereas, a Russian is more likely to have an international plane ticket!’
For Russian high-tech entrepreneurs there has also been a shortage of domestic business opportunities to exploit, until now, due in part to lack of government demand for their products and a preference for imported technology by potential customers. Therefore, it is not surprising that Russia’s ability to absorb new technologies is rated ‘poor’, in terms of the UK’s Economist Intelligence Unit rankings for e-readiness.
TRAINING AND RECRUITMENT
In Soviet times, the education sector could meet the needs of the economy. Today, Russia is facing a skills gap, as the country’s education and training sectors are struggling to adapt to provide the new skills required for the modern economy. Nevertheless, it appears that the country’s elite universities are not producing sufficient numbers of skilled graduates and those that become available, are often snapped up by foreign employers.
Nevertheless, those graduates that remain at home tend to prefer to work for the state sector or big businesses such as Gazprom. This can make it difficult for small to medium sized high technology companies to recruit the necessary staff they need.
To meet this problem the Ministry of Education and Science has allocated 12 billion Roubles ($400m) as part of a program to create new job and research opportunities for expatriate Russian scientists and engineers living abroad to return home. However, some commentators think this will do little to prevent young Russian scientists and engineers, leaving for research posts abroad, or jobs in the business sector. The government needs to increase substantially the science budget to levels competitive with the EU if Russia is to keep its skilled workers at home.
Since 2004, western companies, operating in Russia, have noted a marked deterioration in the quality of potential recruits. The problem appears to lie in the low government investment in education, since 1991.
In the 1990s, the education and science budgets experienced cuts in funding, and it was not until 2006 that the budget begun to increase, together with a program of reform. Unfortunately, these results have proven unsatisfactory and the President Medvedev has complained that: ‘Fundamental modernisation has still not taken place in this sector.’ Russia’s skills shortage has hindered the Kremlin’s e-government policies to place its services online. President Medvedev has given civil servants a choice of taking ICT courses or resigning!
The planned Russian state R&d budget for 2009 was $5.45 billion, China – $136.2 billion, reports Russian Academy of Sciences vice president, Alexander Nekipelov. However, government figures suggest that the business sector is still failing to make up this deficiency.
Part 2: The Investment Climate in Russia and the challenges facing investors in Russia.
Before the current recession, Russia enjoyed an economic boom caused by the high prices it could charge for its oil and gas exports. For this reason, there was little incentive for the Kremlin or the business sector to make Russia less dependent on commodity exports. Therefore, it was not surprising that many Russian technology companies found raising domestic capital for investment difficult.
Finding the money
In 2007, the funds available from Russian government funding for high technology start-ups was $40 million a year; the American equivalent was $2 billion per annum. Roland Beck at Deutsche Bank Research comments: ‘that Russia is not seen as an attractive place to invest by either Russians or foreigners.’ According to Transparency International, the country ranks alongside Pakistan and behind most of Latin America with regard to the quality of its legal system and the level of crime and corruption.
Nevertheless, Russian businesses have been visiting the world main financial centres recently, in order to attract foreign investment. However, despite ambitious new government spending for high tech investment, London analysts remain cautious at the likely opportunities, at present.
A knowledge economy
A further problem arises from the fact many overseas investors find the current situation regarding intellectual property rights in Russia very unsatisfactory, especially in the case of joint research projects. Such uncertainty has encouraged investors and innovators to set up their own private Russian research laboratories, whereby such rights are better protected. An example is America’s Intel Corporation, which has setup a network of seven software research establishments in Russia, which are located near major state research centers.
Another key issue affecting President Medvedev’s knowledge economy aspirations is the current state of much of Russia’s technological and connectivity infrastructure, which lags behind that of Eastern Europe, notes the World Economic Forum’s Global Information Technology Report 2009.
Russian President Medvedev & colleagues
As for societal attitudes towards innovation and business, Sergey Konovalov, Ministry of Education and Science, has made several key observations about the country’s attitudes towards the knowledge economy.
- It’s the lack of experienced and effective leaders who are able to transform this oil-based economy into a modern knowledge economy.
- That there is a lack of sufficient strength and political will to make the changes required.
- Russia has a tradition of treating knowledge as a spiritual human virtue, some kind of a gift that is not suitable for commercialisation purposes.
Nevertheless, Dr. Andrey Gidaspov, a telecom consultant suggests the problem in Russia, is not one of a shortage of ideas. The real problem is the current process of commercialization of technology and its practical implementation is in its infancy stage. Andrey Gidaspov suggests that there is a huge gap between the idea- creators and moneylenders!
Part 3: The Current State of Russian Innovation
The current state of Russian advanced technology and innovation can be best described as mixed. In the following sections, the current Russian approach, state of innovation and technology in the military, software and transport sector is described and analysed.
Russia pioneered the Silicon Valley model. Since the days of Stalin, there have been what Russians calls science cities known as ‘naukograds’. Ivory towers of innovation located often in the remotest parts of the country. Somewhat like the science fiction town portrayed in the American comedy television series ‘Eureka’. In Soviet times, these cities’ citizens led a relatively privileged existence as compared to the rest of the population. However, these naukograds were designed as much to keep its citizens in and prevent unauthorised outsiders from entering. Such restrictions on access and the free flow of information severely damaged such town’s ability to innovate. It is not surprising that the KGB (now the FSB) spent much of its time collecting information on the latest advances in Western technology to overcome this issue of free flow of information.
The Russian approach to innovation 1
Today, the Russian government has opened most of its naukograds, as part of its bid to bring Russian innovation and technology into the twenty first century. This February, President Medvedev announced ambitious plans to build the equivalent of America’s Silicon Valley. This new town to be built at Skolkovo in Odintsovo County, west of Moscow will eventually be the size of Britain’s Milton Keynes. It will have its own golf course built by Chelsea Football Club owner Roman Abramovich. When I visited the site last February, the temperature was minus six degrees and there was still snow on the ground. Imagining that this place could be the world’s next Silicon Valley I found difficult to believe. For many the harsh and long winter weather makes the site an unattractive location. Yet such harsh weather did not stop Finland from developing its telecoms industry or hamper Boston’s leadership as a major world centre of research and technological innovation. In Russia, the winter weather has not stopped Russian’s playing golf, as I soon discovered when I visited with several Russian friends the nearby Nakhabino golf club. Golf in Russia has its rather unique innovations; you play with red balls, and negotiate the course on snowmobiles and ice skates. However, for many Russian golfers there are additional hazards including drunken snow mobile drivers, attacked by a bear and even falling through the ice!
Russian autumn in Odintsovo County
President Medvedev’s ambitious plans are much more practical than they first appear. The site is located next to the campus of the Skolkovo Moscow School of Management, in Odintsovo County, just outside Moscow’s ring road. This area has always been the preferred location of the homes of Russia’s elite, so has always enjoyed a priority when it comes to infrastructure investment. In addition, as part of the Moscow region, Skolkovo is near many of the country’s leading private, public and military research establishments and universities. In this sense the location shares similarities to conditions that encouraged the growth of California’s Silicon Valley, which originally depended on the meeting the needs of America’s military science industrial complex. In another sense, living in Moscow has its attractions, unlike Silicon Valley, it’s cultural and nightlife is much more exciting!
Doubts are being expressed that this project will succeed. I think the critics are wrong; it has the backing of Russia’s elite. People including Eugene Kaspersky, the founder of Kaspersky Labs and billionaire Viktor Vekselberg are advising President Medvedev on this project. It’s in a good location, in the most prosperous and accessible region in the country, which should promote the free flow of information. No, the real question that will determine the success of this project will be how well Russia manages to reform its business, innovative and education environments. For many big potential investors, despite the already generous incentives on offer to participate, the Kremlin will have to prove it can protect intellectual property rights and improve governance standards. No doubt, in a few years time comedians will be making jokes about Skolkovo as they do today about the success of England’s science city of Milton Keynes!
PAK FA jet fighter
Today, it appears that the Russian military industrial complex has lost its technological edge. It is no longer the second largest arms exporter after the United States. The country’s $40 billion defence equipment industry is facing similar problems to that of its civil compatriots. Even it’s regular customers are beginning to look elsewhere.
Recently, Algeria returned its order for new Russian Aircraft Corporation MIG fighters, due to quality control problems and even the Russian Navy is looking for purchases abroad. Moscow is in negotiations to purchase from France, four Mistral class amphibious assault ships, each costing around €600 million, reports President Dmitry Medvedev. Dimitri Trenin military analyst at the Carnegie Mellon think tank in Moscow has said about this deal that it is: ‘the most salient example of the deficiencies in the Russian defence industry.’
Nevertheless, even Russia’s dated military technology can be desirable, according to analysts at Stratfor Global Intelligence. The Chinese wanted to purchase fifty Su-33 fighter aircraft for their proposed fleet of small aircraft carriers. However, Russia’s military industrial complex is becoming increasingly wary of selling advanced technology to Beijing, due to China’s propensity to analyse and build copies domestically.
Even so, Russia’s weapons industries can still manage to pull off surprises. A good example of this technical excellence is the new fifth generation stealth PAK FA jet fighter from aircraft manufacturer Sukhoi. Ruslan Pukhov, an expert of the Centre for Analysis of Strategies and Technologies, has indicated that he expects this new fighter will be very competitive in the global markets. ‘I think that this aircraft will be able to occupy up to one third of the market.’
Some of the world’s top innovators are Russian
Russia has many leading edge software companies, which include the world famous Kaspersky, Paragon and Abbyy; this is not surprising given its historic proficiency in maths and physics.
Take Yevgeny Kaspersky, who established Kaspersky Labs , whose anti¬virus software, directly competes with its American rival Symantec’s Norton. Then, there is Paragon Software , a maker of hard disk management, partitioning and drive backup software that has won many international awards abroad for its products. Lastly, there is ABBYY a specialist in linguistic and scanning software that has provided simple and easy to use products for not only computers, but increasingly for the latest generation of mobile phones.
ABBYY is a typical example of what is best in Russian innovative companies. Its development history is virtually identical to the Silicon Valley model for advanced technology companies. A group of students at one of the Russia’s leading research universities at the Moscow Institute of Physics and Technology, the Russian equivalent to Massachusetts Institute of Technology, got together to form a software company led by its current chairman David Yang. Their first product was Russian – English dictionary software called Lingvo in 1989. Since then the company has grown by producing an ever-wider range of products. Today, ABBYY is a leading provider of document conversion, data capture and linguistic technologies, in over 130 markets worldwide.
Like its competitors elsewhere in the world, ABBYY has a similar innovative working culture. Nastasya Savina, ABBYY vice-president on corporate communications says: ‘It’s a great place to work; it’s very democratic and flexible.’ This means ABBYY can attract the country’s top innovators from its best schools in software development. Nastasya Savina says: ‘the company is sponsoring students at the Moscow Institute of Physics and Technology, and is allocating 27% of its revenue in R & D into breakthrough products, which is five times the industry average.’
How Russia is modernising the technology used in its transport sector
Sapsan Russian High Speed Train
The civil transport sector is a good example of how variable is Russia’s technological abilities. Its Space program is like much of the state sector, underfunded. However, its Soyuz rockets are the workhorses that deliver many of the earth’s commercial and science packages into space. Such projects as the International Space Station, depend for much of their deliveries into earth orbit, on the latest Russian rocket technology launched from the Baikonur Cosmodrome.
The European Space Agency (ESA) has been so impressed with its experiences in using the services of the Russian Federal Space Agency that it has invested heavily in a new Soyuz launch site at Kourou, French Guinea, next to where it launches its own heavy lift Arianespace rockets. ESA has bought 14 Soyuz rockets able to lift packages up to three tons. This is not surprising given that ‘Soyuz is reliable and commercial,’ says Bogdan Udrea Professor of aerospace engineering at Embry-Riddle Aeronautical University, Florida.
On land-based technology, such as cars and trains, it has been a case of Russian companies playing catch-up; many of the new investments have involved foreign companies in technology transfer deals.
A good example of technological transfer and cooperation is the ongoing relationship between Russia’s rail businesses and the German Company Siemens Mobility , which has operated in Russia for over 155 years. As the result of recent joint projects with Russia’s rail industry, Siemens Mobility has patented 35 technological solutions. With its Russian partners, its most notable recent success is the delivery and development of Russia’s first 300 kph high-speed trains, the Sapsan (Russian for Peregrine Falcon), which are a broad gauge variant of German Railways Siemens ICE3 intercity trains. This new Russian Railways (RZD) service, designed to operate at temperatures as low as -40˚ C, was brought into service last December, linking the Russian cities of Moscow with St. Petersburg and Nizhny Novgorod. Eventually there will be a nationwide service network linking major cities in the country.
Part 4: Russian Innovation Reform
The action the Kremlin is taking to implement its innovation policies
In recent years, the government has announced a whole series of policies that are favourable to Russia’s technology intensive industries. These include a nationwide program of science parks, often located next to the country’s network of research centres, coupled with the setting up of an innovation fund for new technology businesses, together with the awarding of huge money prizes. In addition, the government is creating a series of national ‘champions’ to promote Russia’s leadership in certain technologies like nanotechnology.
Furthermore, major reforms of the education and science systems are taking place, together with the creation of a more favourable tax regime for high tech companies are being proposed, reports CNN. Further Aleksei L. Kudrin, the finance minister, has ordered that 15% of the government’s $133 billion procurement budget, together with similar spending from state companies like Gazprom, must be spent on high tech.
RT.com reports that state technology companies, like Rosnano, are likely to be partly privatised this year in order to raise vital new investment. Government orders will: ‘support every person who wants to work in this sphere, every organisation, who wants to work for the future,’ Mr. Kudrin said. Clearly, for the government’s policies to succeed, the country has to tackle many issues and solve many problems. These include a shortage of scientists, with the necessary business skills and experience. There is also what venture capitalists would describe as a ‘deal-flow’ problem, i.e. a shortage of viable investment opportunities. Then there is what Andrey Gidaspov describes as widespread scepticism amongst decision makers in local government, and above all reforming the rather complex relationships between state agencies, state owned corporations and the private sector is essential.
Overall, Sergey Konovalov suggests that the future of the high tech sector is that in the short to medium term, that this sector will be dominated by state-controlled companies simply because modernization is the country’s strategic project. In the longer-run, he predicts the role of small to medium-sized enterprises will increase. However, he says: ’I do not see Russia as one of the world leaders in the high-tech field. Nevertheless, as a smart and committed follower, it should stand in the top-20 countries by the percentage of GDP generated in the innovative sector.’
Looking into the future
Russia has an incredible innovation potential. It could be a world leader again in high technology, if it manages to make the necessary reforms. However, the problems facing the Russian Federal government are vast. Above all, it needs the full commitment to such policies from all sectors of society if it is to succeed, and catch up with the West.
For further information:
Andrey Gidaspov http://www.linkedin.com/pub/andrey-gidaspov/0/2bb/885
Ministry of Education and Science http://eng.mon.gov.ru/
Russian Federal Government http://www.gov.ru/index.html
Russian Railways http://eng.rzd.ru/
SIEMENS MOBILITY AG http://www.siemens.com/entry/cc/en/