Guest Post: Russia Needs Economic Reforms to Fulfil High-tech Potential
By Dmitry Lisenkov
With a long history of scientific breakthroughs, a growing market for high technology and tangible commitment from the government to economic modernisation, Russia is well placed to diversify its economy with high-tech innovation.
International venture capital companies are starting to see the opportunities. I believe that with enough effort from the Russian public and private sectors to leverage the country’s technological and VC resources, the potential of Russia’s innovation can be turned into reality.
In the last five years, significant funding has been provided to stimulate Russia’s technological growth, including from RUSNANO, a state-backed high-tech investment vehicle.
Set up to drive economic modernisation through developing the domestic nanotechnology industry, RUSNANO has invested over $6bn in more than 100 companies. Together with partners, RUSNANO has commissioned 30 research and production facilities that develop and manufacture high-tech products with applications in electronics, life sciences, cleantech and renewable energy.
These include Optogan, an LED manufacturer, which raised $76m from RUSNANO, Plackart, a producer of equipment for depositing nanocoatings, which received around $40m, and HemaCore, a biotech company, which has recently started the production of its novel blood coagulation tests—a development made possible by a $19m RUSNANO investment.
Meanwhile, the state-backed Skolkovo Foundation, created in 2010 with a purpose of developing a global innovation hub in Russia, has already registered 790 participant firms, including Russian subsidiaries of IBM, Cisco and Siemens which are establishing R&D centres at the Skolkovo site in the suburbs of Moscow.
The foundation has approved over 160 grants to companies developing innovative projects in IT, biotech, energy efficiency, space and nuclear technology.
Yet, despite recent achievements, Russia’s innovation sector is still at the start-up stage. The national ambition is to establish a vast, dynamic and globally competitive network of innovation clusters across the country.
In order to catch up with our international peers, some of whom are way ahead of us, we need to do this incredibly fast. Tackling this challenge requires an unconventional approach that is why our strategy combines both fostering the development of domestic know-how and – in an unusual and innovative move—investing in start-ups across the border on the condition that the technology they are developing is transferred to Russia.
We see that international venture capitalists and start-ups are turning to Russia in move to raise funds and to take advantage of the country’s largely undeveloped market that is currently seeing a double-digit growth in many technology-related sectors
For example, over 30 per cent of RUSNANO’s investment portfolio is represented by projects that involve collaboration with international VC funds and emerging ventures, and this share is likely to grow in the future. Our portfolio companies and co-investment partners come from the US, UK, Italy, Israel, Germany, China and other countries across the world.
The trend has been particularly evident in life sciences: the largest investment in early-stage biotech projects last year was secured through a $760m partnership between RUSNANO and a U.S. venture capital fund Domain Associates. The partnership involves investments in approximately 20 US pharmaceutical companies, transfer of technology to Russia and the construction of a Russian-based production facility that will manufacture innovative drugs and sell them in Russia and elsewhere in the Commonwealth of Independent States.
We also see a growing number of international companies establish R&D centres in Russia to make use of the country’s extensive scientific expertise and resources. Apart from Skolkovo’s residents, recent examples include RUSNANO’s portfolio company Selecta RUS, a subsidiary of U.S.-based Selecta Biosciences, that last year opened a research centre in the Moscow region to develop nano-enabled vaccines.
Entrepreneur Richard Branson, who participated last year in the Open Innovations Forum in Moscow, has become involved. His Virgin Group signed a $200m co-investment agreement with Rusnano under which the partners have established an investment fund targeting companies operating in the resource-efficiency, renewable energy and energy sustainability sectors.
That said, we do have to admit that Russia still needs to deal with a number of issues in order to accelerate its progress on the way to becoming an innovation-based economy.
First, high-tech entrepreneurship needs a more favourable economic environment than Russia can currently provide. Start-up development is a cash-intensive business. Compared to traditional entrepreneurial initiatives it involves much bigger investments in R&D and staff development programmes, and requires a greater portion of personnel with higher education.
So, the macro-economic climate needs to be more stable. Russia’s current inflation rate of under 7 per cent, although a big improvement over previous years, should be pushed down much further to enable the steady growth of domestic start-ups.
It is also crucial that Russian business joins the national race to modernise economy: innovation is not just a buzzword but a major potential competitive advantage that can create a platform for sustainable long-term growth and industrial leadership.
This specifically applies to state companies whose commitment to adopting innovation in some cases has remained ink on paper.
Finally, much stronger moves are needed to build an environment that fuels entrepreneurial spirits through stimulating free competition, ensuring the protection of private business, and eliminating the legacies of corruption and bureaucracy.
Russia may be rich with natural resources but the problem with natural resources is that sooner or later they will deplete, while brainpower is as abundant as it is inexhaustible. Reducing dependence on commodity and developing an innovation-based economy is Russia’s only path towards long-term stability.