RUSNANO CEO Speaks Out on Building an Innovation Economy in Russia

25 January 2010

RUSNANO CEO Anatoly Chubais recently took part in the international conference “Russia and the Global World: New Decade Challenges.” Mr. Chubais delivered a speech on building an innovation economy in Russia.

The Institute for the Economy in Transition, the Academy of National Economy under the Government of the Russian Federation, and the Committee on Improving the Sustainability of the Russian Economy of the Expert Council under the Government of the Russian Federation, sponsored the conference, which was held on  January 21-23, 2010.
The conference was dedicated to the memory of Yegor Gaidar.

The conference took  the form of panel and a expert roundtable discussions in which participants were able to present their views and discuss the trends in Russia’s development and the challenges they pose.

Anatoly Chubais hosted the plenary session, which was held on the final day of the conference. His speech was devoted to building an innovation economy in Russia. Mr. Chubais made the following key points:

1. Innovative development is a charge that has not been fulfilled by either the Soviet or the Russian economy.

2. The historical reserve of time for establishing an innovation economy in Russia is dwindling away; its falloff behind the leaders in this sphere may become irreversible.

3. In today’s Russia, notwithstanding acute socio-political problems, neither the economic nor the socio-political mechanisms block the start of building an innovation economy.

4. An innovation economy in Russia can be built entirely on fundamental market institutes with simultaneous reconsideration of the role of government.

5. The building of an innovation economy in Russia is a tremendously complex socio-economic reform, requiring long-term political will and powerful intellectual support. But it can be achieved in a foreseeable period of 10–20 years.

Here you may download the presentation that accompanied Anatoly Chubais’s speech. 

The full text of the speech is below:

Good morning, dear guests, and thank you for devoting your time this Saturday morning to discuss the economics of innovation.

For the past three days of the conference we have spoken of what our country should become over the next decade. We have essentially been talking about the serious issue of modernization. And today, we want to get down to the heart of the matter and come to understand exactly what it means to build innovation economy in our country. More importantly, we want to understand whether or not we will be able to handle the task at all and if so, what needs to be done to achieve it. Vladimir Alexandrovich and Yuri Arkadievich have already shared their opinions on the issue in the very beginning, so I will try to join the discussion. I apprehensively called my presentation “Construction of Innovation Economy in Russia: Endeavor to Comprehend.” The word “endeavor” is the point of emphasis here, and we should realize the magnitude of this task and the intellectual challenge behind it. Of course, I doubt I will be able to address all the issues concerning the matter, but nevertheless, I think that if we are to attempt to construct an answer to such a problem, we must first determine and differentiate between the achievements in the field that belong to our country and those of international scientific community.

I would like to mention the names that you all know, and I will start with Alfred Marshall and Joseph Schumpeter. As I understand it (and the experts will correct me if I am wrong), Joseph Schumpeter was the one who introduced the term “innovation” into the scientific lingo. Next comes Mr. Toffler, who offered a philosophic understanding of the issue in his concept of the “third wave” following the agricultural and industrial historical waves. Of course, Russian economic science doesn’t take a back seat in this discussion. There are names in our history that are comparable. First of all, I am talking about N.Y. Kondratyev with his now almost classic theory of long waves, which, by the way, was highly appraised by Schumpeter. I would also like to mention such important scientists of the late Soviet period as Academician Anchishkin and Academician Yaremenko, who many of you have known and have had the wonderful opportunity to work with. Let me also add that there were several scientific schools in the late Soviet period that studied the economics of science. I have the honor of having belonged to one of those schools. My teachers were Professor Puzynya and Professor Kazantsev, fathers of the Leningrad science school whose object of study was the integration of scientific research and development.

We have some intellectual background in this respect. We should also cover some aspects of applied results, even if they are very subtle and superficial. Indeed, what do we have behind us? What specific achievements have been made in the field of innovation economics, or however else it might be called, in the contemporary history of Russia and during the Soviet times? First of all, I have to mention a couple of obvious fundamental breakthroughs that occurred in Soviet history. In my opinion, and I am not exaggerating, they both were of universal importance. I am talking about two unique projects – the Soviet nuclear project and the Soviet space program. This is not the time and place to discuss the political aspects of these projects, and it is not my intention to discuss how many years the people who were involved in them spent in Stalin’s camps. This is a completely different issue. We just have to admit the unprecedented scale of these projects.

As we all know, the Americans were decisive in responding to the Soviet space project by determining to land on the Moon, and we know they succeeded in that when they launched Apollo-11 in 1969, but there is another fact that is curious to me. The American lunar program was cancelled in 1972, and over the last 38 years neither the United States, nor any other country have tried to do it again despite the existing technologies. Apparently, the massive concentration of financial, human, and political resources that enabled the Soviet projects and the American response program is only possible in an environment of equally massive and vicious geopolitical struggle, when two clashing sides of the planet are willing to do anything to achieve superiority or at least demonstrate it at any cost. In this regard, we could talk about the essence and the justification of such struggle and areas of concentration, but I do not want to discuss this subject in any more depth, especially considering the unprecedented scale of these projects.

In fact, this is a tangible matter of pride for us and our country for the coming centuries. At the same time, with all due respect to the achievements of that period, I believe I will not be criticized for mentioning that, starting in the 1970s, Soviet science was heading more and more towards its so-called “prime of stagnation.” The eighteen years of Brezhnev’s reign gave explicit proof to this statement. And I believe there was a reason why the Gorbachev initiative, launched long before the times of glasnost and perestroika, was essentially a concept of acceleration using the products of technological progress. Using contemporary terms, the government and political elite had a very good understanding of the failure in building innovation economy and felt an urgent need to finally do something.

A major meeting of the Communist Party Central Committee, now forgotten by everyone, took place in 1985. It was intended to discuss deployment of the products of technological progress. The same period was marked by the appearance of a unique document – a 20-year comprehensive technological advance program. Some of you here took part in drafting this document. Still, it seems obvious that all these efforts, even though perfectly substantiated, ended in failure. It is perfectly clear that, already by the 1970s, the Soviet research institute (NII) had become a symbol for the inefficient usage of intellectual potential, a symbol that made its way into one joke after another. The classics referred to it as a NIICHAVO (an institute of nothing). We all still remember what our scientists were doing at vegetable warehouses and potato fields, and here we have to admit that the Soviet attempt to face the challenge of that period failed.

This is not just an emotional assessment. There is also a simple pragmatic aspect that, I believe, is closely related to what I am saying. I mean labor efficiency. At the end of the day, this is the most aggregate indicator of achievement. Here are the well-known Soviet statistics: the maximum rate of labor efficiency in the USSR was just 29.4% of that in the USA. This is far from breakthrough results. What happened next? What has been happening over the next 20 years of Russian history starting in the early 1990s? Let us look at some plain statistics as exemplified by trends in the industry sectors most closely associated with innovation economics or, using the language of the Soviet scientists, technological progress.

We all know a lot of industry sectors have retrograded and cut down their rate of production over this period. These include public transportation, automobile manufacturing, textile equipment manufacturing, clothing manufacturing, and a number of other sectors. It is a less known fact that there are a number of other industry sectors that have seen substantial growth over the same period of time. These sectors include electrical equipment production, metallurgy, chemical production, petrochemical industry, telecommunications (appearing out of nowhere virtually), high-rise construction, and some other sectors that did not exist in the Soviet period. With all these advances, the aggregate industrial index still looms in a spell at almost the same level as in the early 90s.

That means we have not moved a bit over this time period. What happened to labor efficiency, then? If we look at it in the same classical terms of purchasing capacity parity for Russia and the USA, we obtain yet another mystic result: labor efficiency in Russia in 2005 compared to that of the US was at the same level of 29.4%-29.5%. This leads us to a rather obvious conclusion. Before we put it in words, though, let us examine the problem from another point of view. I have talked about the processes that took place in our country, also in contrast to the US, but we also need to consider our other neighbors. There are two more indicators that draw a very vivid picture. One of them is the proportion of companies involved in thematic innovations. This is the data from the, in my opinion, very serious research conducted by the Higher School of Economics. The graph shows that we have been passed up not only by the UK, USA and Norway, but also such countries as Estonia, Check Republic, Turkey, Lithuania, Latvia, Bulgaria, Romania, Hungary and dozens of other countries.

According to another indicator called the innovation activity index, research by the World Economic Forum placed Russia in 51st place out of 130 countries worldwide. This means we are not playing in the major leagues, or even in the minors. We are more likely still playing little league. This is our honest state of affairs today. To summarize this part of our discussion, I think there is one conclusion we can draw with confidence: the Soviet economy has already failed and will definitely never succeed in this mission. At the same time, Russian market economy has not yet been able to handle this task. Hence a very logical question arises: does it have the capacity to handle it? Can an economy of the type that we have complete the mission successfully? If the answer is yes, we are now facing a unique challenge that I tried to point out on this slide. If we try and break down our economic history into stages, we will clearly see the first one: the 1990s, the stage of building the foundation for market economy, a stage that has been completed. There are no doubts among serious political researchers that Russia has indeed succeeded in building the market economy.

The second decade, the 2000’s, is a stage of economic growth based primarily on a very specific resource driver having well-known limitations. In this regard, our current mission is the transition to a completely different model, a new kind of economic growth based on innovation development rather than resource export. When we ask ourselves if we can handle this third stage, we should again look around to see what has been going on in the world over the last decade. And the world will give us a simple answer. This chart provides an in-depth, but very rational account of how other countries were building innovative models while we were busy with somewhat different tasks. The USA started on this mission back in the early 1960s and definitely accomplished it by the beginning of the 1980s. It took that country 25 years to tackle the issue. Little known in my opinion, Taiwan is one of the obvious leaders in the world of innovation, and it was able to handle this task within 25 years starting in the 1970s. Israel and South Korea needed 20 years for the same task. Singapore and Finland are very interesting examples. In as recent as the early 1990’s, Finland was not considered to be an innovation economy, but an economy that was hardly capable of becoming innovative. The Finnish economy of the early 90’s was a disaster. Who could have thought that this country that lived mostly by wood processing and had a few chemical facilities would build a powerful innovation industry? Now, at any serious conference or international symposium today, Finland is clearly acknowledged to be the leader in innovative economics. The country only needed twenty years to earn this status, and they had a rough start. Please remember that. We will return to this example later.

World history presents to us several obvious facts. First, in the 1980’s and 1990’s a pool of countries leading in innovative development was established. This is not something that goes a century or two back. This is very recent history that we were all witnesses of. The time required to accomplish the task does not stretch as far into the past as five hundred or even one hundred years. It is only ten to twenty, maximum twenty-five years. Moreover, I think we have no more time to wait. Nobody waited for us and nobody will: if we don’t want it, we just don’t do it. The market will still be there. This is what the others think about us: “It’s great if you need your industry. It’s wonderful if you want to have your own aircraft manufacturers. And if you don’t, it’s even better. We can handle it. We already have Airbus and Boeing, and Bombardier is coming.” It is clear that nobody else but us actually needs this challenge, and that is what makes it so special. This is a very important aspect of understanding the current situation. Now let us discuss the main question: can we handle the challenge, and will we be able to accomplish it within the social, political, and, I would add, confessional, geographical, and other conditions of our country? All the discussions that are now in progress give us mutually exclusive answers regarding any aspect of the question.

Take a look at our science and educational institutions that, beyond any doubt, represent one of the core elements for building an innovative economy. Many will say today: “Our science and schools have degraded altogether. We are clearly far behind the world leaders and have no chances of gaining the lead.” Well, there exists a completely different point of view: despite some serious obstacles, both sectors are in rather good shape. We must admit they have been greatly supported by the government over the last 5-7 years. I often visit Russian regions these days, and, for instance, I saw such state-of-the-art equipment in Voronezh State University that no one in my alma mater, Leningrad Engineering and Economics Institute, could even dream of back in the 70’s and 80’s. And I see that almost everywhere. I decided not to give you any statistics, but I would like to comment on the most valuable prerequisites for starting to build an innovation economy.

Looking at another sphere called technological and engineering culture, we see the same spread of opinions as with science and schools. According to one opinion, we were trailing behind already in Soviet times and completely degraded in the 1990’s. The culture has been destroyed, and the chances of saving it are down to none. If we look at this sector more closely and with less emotion, we see that there are hundreds of companies in the classic Soviet hi-tech industries that have maintained very high performance. I am not only talking about the space or nuclear industries, although nuclear power is one of them. I mean the classic industries, as well as telecommunications. In addition to those, a few other large industries have emerged in our country over the last 20 years that are referred to as hi-tech. From telecommunications, as I have already mentioned, to software development and high-rise building construction: we ourselves barely noticed how these sectors excelled to meet world standards. In this aspect opinions are controversial and even mutually exclusive.

Let’s move on. Another component to be analyzed in determining our ability or inability to build an innovation economy is private industry. Many think this industry is not capable of working in an innovation environment or taking part in innovation development. It is commonly believed that this realm is not for the private sector, that businesses are not motivated to work on innovation and have never been, and that they will never be keyed to handle a task like that. But there is a different point of view. Private industry in Russia is a very young sector, basically an infant, less than 20 years old. Some 21 years ago, private entrepreneurship was classified as criminal activity by the Criminal Code of the RSFSR and was punishable by 3 to 8 years of imprisonment, and we should not forget this fact. Over the last 20 years Russian private business has moved from street tents into shops and from shops into modern wholesale and retail merchandize chains with state of the art equipment. We all use their services every day now. The private sector has penetrated not only mid-sized organizations, but also large-scale and huge businesses, global businesses with complex structures and tasks. In certain industry sectors, our businessmen are now competing with the largest international corporations on the global market. Of course, Russian private industry is not engaged in innovation, and that’s the truth. But what if it has already reached the stage when it has the capabilities for it?

We understand that innovative business is perhaps one of the most perplexed categories in terms of required intellectual strength, degree of complexity, non-determination and stochastic behavior. But maybe it is now that Russian business has matured for challenge, and we just haven't seen it yet.

One more aspect we should consider is the global financial crisis. Pessimists say: “We’ve lost our last chance. What innovation economy are we talking about when the whole economy has collapsed and everyone is either bankrupt or almost bankrupt and just haven’t told us yet?” Opponents of this opinion say that it was the recession’s cause, the so-called “bubble,” that was making businesses want to get rich fast. The fact that the cause no longer exists may be the real driver for the natural rearrangement of business necessary for engagement in modern hi-tech industry. We could keep comparing such opinions on and on, but I would like to move to the next ladder in our logic and, instead of comparing the pros and cons and analyzing our capability and incapability, start discussing what exactly we have to do. And we begin this from the very foundation, from fundamental values. Which values will lay the foundation of our movement towards innovation economy? In pursuit of an answer, I found some evident aspects, as well as some that had been unobvious to me before and that I want to share with you now. It is obvious that private property, a competitive environment, commonly accepted rules, long-term macroeconomic stability, and low inflation rates are the fundamental market values essential to building a market economy. However, there is another aspect that is just as essential. It will demand that everyone, including us, Russian liberals, reconsiders their point of view. I am talking about the role of the state. There is so much we have to think about again. Thinking of the role of the state, we should refer to the experience of other countries, as we are not the first to travel down this road. On the other hand, we should ask ourselves what exactly the state is to do. Global experience gives a simple answer to this question. I only presented one chart, although I could have given you hundreds of them. Israel is a classic example of innovation economy with its Yozma program, well known among experts. It helped establish the venture industry in Israel, and the state invested over a hundred million in it. There exists in the country the Office of the Chief Scientist of the Ministry of Industry with an annual budget of half a billion dollars and significant state support of private businesses. South Korea contributed one billion dollars. Finland’s investment was 582 million Euros, and that is only in terms of the TEKES program that many of you know, and then there is the SITRA project and the intellectual center with a budget of some 50 million dollars. The chart also shows Switzerland and other countries. The USA grants two billion dollars each year under the well-known Small Business Innovative Research support program SBIR. So I insist on a simple and obvious conclusion: there is no successful innovation model in any country of the world that would emerge and exist without direct state support. This is a matter of fact. Gentlemen do not argue over facts, they argue over their interpretations. And this fact is plain to see.

So, if this is all true, what should we do? What would be our tasks? We could talk about theory forever. I tried to answer a simpler question: what should the state do today? What are the evident objectives for the state to get us moving in this direction? I came up with so many aspects that I had to group them first. The first of the three groups that I got is the goals, priorities and policy. Clearly, there can be different goals, priorities and policy. Clearly, they can be set by no one but the state. Let us refer to some countries with innovative models. In Israel that we have already mentioned, the entire innovative economy concept is practically based on intellectual property, and the country has no large innovative businesses. Japan and South Korea have a completely opposite model with no small innovative businesses. There are some technology-oriented models. There is an extended list of countries with basically no fundamental research capabilities that are, in fact, the strongest innovative economies in the world. And there are some models that work the opposite way. It is the role of the state, and nobody else, to point out the goals, priorities and policy in this regard. Of course, the state should consider certain real aspects when doing that, such as the capabilities and demands of business and the society, but to determine the goals, priorities and policy is the state’s immediate function, and no one but the state can address this issue.

Legislation is a very large aspect that deserves special attention. It includes many instruments, regulations and procedures. It is a very complex aspect that requires tremendous effort from the state to even come close to modern practices and procedures. We at RUSNANO tried to spell out not so much individual laws, but some key domains for the state to work on. What do we see? It is clear that corporate legislation is obsolete and does not meet the requirements of innovation economy. Let me give you one example that I believe the professionals here will understand. The venture fund is a classic, basic component of the investment system in the innovative economies of all the more or less developed countries of the world.

How does it work in our country? As we all know, we have a form of incorporation called CMIF – closed mutual investment funds for high-risk venture investments. Where do they get resources? From financial markets and, primarily, collective investors, such as pension funds. Pension funds all over the world are conservative financial institutions that invest money, including into venture funds, but they only invest a small amount of their assets, around 0.5% to 1%. What about Russia? We look at the regulations and see that pension funds can invest up to 40% of their assets into high-risk venture investment CMIFs. Well, that is tremendous progress! We have done something that nobody else has ever succeeded in! But then we take another regulation, and it says this rule is only valid for those high-risk venture investment CMIFs whose equities are traded on active exchanges under AAA index. Let me translate it into Russian for you: everything is prohibited. The first document says you can do everything, but the second one says you can do nothing, we’ve changed our mind. What does all that mean? It simply means that nobody in our country has ever really tried to comprehend the existing laws in terms of innovative economy in a professional manner. Nobody has ever set this mission. I remember how we were making the joint-stock companies law and what goals we were trying to achieve with it. And I know how we were writing tax legislation that was mostly produced by Yegor Gaidar at the Institute of the Economy in Transition. Our goal was to save the state treasury, plug the holes that were vigorously leaking state money at a time of complete lack of regulation. We were not in the least concerned about the complex concept of interest rate subsidies or the factor of increasing state costs associated with specific research and development activity with allowance for non-taxable portion of income. We did not address any of these issues and, as a matter of fact, were not supposed to. We were then tasked with building the foundation for the economy, and we accomplished this task. Today we are facing a different challenge.

Corporate and tax legislation needs some serious revisions. We are now trying to finish this work together with the Institute of the Economy in Transition. Yegor Gaidar was working on it almost up until his last day, and today it is in its final stage. Hopefully, we will present the results of this work in February.

As for export and import regulations, there are many innovators in several dozen towns of our country, but they cannot operate because of the customs regulations. The first thing they will tell you is that it is impossible to work with the customs authorities. Customs do not care whether you are shipping a million tons of grain or just a little can with a sample – it is the same grain for them. This kind of regulation for export or import wastes all efforts of building international relations in innovation economy. In this regard, we have been working on the Green Corridor project that calls for significant changes in the Customs Code, Export Control Law, Currency Control Law and a whole number of Government resolutions that are based on these regulations. Our current task is to provide an incentive for exporting high-technology products, which, I repeat, will require significant modifications to the current export and import laws.

Technical regulation. As many of you know, some major amendments were made last December that imply a significant rearrangement of the technical regulation in the country. But this is not the key point. We must admit the fact that the Technical Regulation Law has failed. There is no technical regulation in our country. This law represents the bits and pieces of the Soviet system diluted by the Milk Regulation and five other regulations that have been adopted quite recently. We could use that model when our economic growth depended on oil export. In other words, that was possible in the times of export-oriented growth. We have to abandon this practice if we want to build an innovation economy, because it will not work without the technical regulation. It is simply impossible.

Intellectual property. We have this subtle and delicate expression: amnesty to the results of intellectual activity obtained through state financing. This expression is hiding a term even more sinister, which I fear even to mention: intellectual property privatization. We are trying to understand why it does not work and thinking that the assessments are wrong and we have to revise the accounting rules. In fact, accountability of intellectual property requires auditing companies and making sure they report all their intangibles along with tangible assets. That is correct. But first – the property, give it to me, and then I will lobby and make you revise the laws. Today it belongs to the state, meaning it is nobody’s. Or, due to the provision of Civil Code Part 4 that regulates intellectual property handling, intellectual property rights may be announced as belonging to a legal entity instead of the state. Which legal entity? A state-financed organization that may become the owner of intellectual property due to progressive changes in this area. So what? What is this owner – a state-financed organization? We more or less understand its motives and business. Here I am only touching upon some fragments of this subject that, as a whole, is very large and complex and clearly requires a different approach.

Budget code is a super-complex aspect. It is obvious that the budget code is basically killing the state-financed organizations’ interest in long-term research work and reducing the spending on such research. But our current research budget is 10 billion dollars, and that is a lot of money. The biggest trouble is that this budget makes up the most part of all our research funding. This means that the funding channel that exists in the current financing economy is ineffective. It is killing motivation for effective use of such funding. This is caused by the largest substantial issue of the budget code structure, and experts know this aspect much better than I do. We will definitely have to address this issue and suggest some solutions. Migration laws. Suppose you own a large company and want to install some modern hi-tech equipment. You invite the chief process engineer from, let’s say, Siemens, to supervise installation. This process engineer will have to obey the same regulations as the worker from one of the South Caucasus republics that you hired to build your country house. The approach to them will be the same. We are trying to restrict immigration, but this is absolutely not enough. There are different kinds of migration in Russia. Unless we understand this, we cannot set any enhancement objectives or build an innovative economy. Therefore, it is clear that every aspect of regulation in this area needs substantial revisions.

This was all regarding legislation. As I mentioned earlier, there are also instruments and procedures, and we could discuss these for hours. Let me only say a couple of words. What do I mean by them? We can talk about five blocks in regard to this subject. The first block is the innovation economy infrastructure. Financial infrastructure includes grants and seed, pre-seed and venture funds. Non-financial infrastructure includes industrial parks, business incubators, technology transfer centers, and engineering and integration zones. This entire infrastructure can never be built without state support. Look at the statistics, and you will see that we now have many hundreds of industrial parks, business incubators, and technology transfer centers. Unfortunately, they only exist on paper. Why? Because there is no adequate legal framework for their existence and they have to operate in an environment they are not designed for. Also, because the state did not consider the issue closely enough. You cannot build innovation economy unless you have the infrastructure for innovation economy. This is simply impossible.

Public industry enterprises constitute the largest portion of our national economy. Today the state should already begin demanding movement towards innovation from public industry, and we also believe this is right. As we remember, directors of all the Russian state corporations started off their speeches at the Presidential Committee by saying that their company is a world leader in innovations, but clearly no one has done anything in this regard. I support the concept of innovation programs. It is similar to the concept of investment programs that appeared ten years ago. This investment program concept brought to life an aggregate of standards, organization procedures and board of directors’ framework. I believe the next step is transition from investment to innovation, from mere growth to changing the nature of growth. This means we should start seeing innovation programs of large corporations with clear goals. Oil companies will aim at higher recovery ratios, generating companies will want higher generation efficiency and less grid losses. Such innovation objectives will then require appropriate equipment and integration of new technologies. What the state companies need is a consistent document to outline all these components.

This will never work with the large and largest private businesses. They simply do not work this way. These demands are inadequate for them in our country. In my opinion, the state’s interface with private businesses must be based on the following two concepts. One of them is initiative support. You can count on state support if you are going to do something really big in terms of innovations or planning to go to the global market with a world-class product. Today we only see one side of this concept – requesting assistance. Almost every large private company asked the state for support over the last year, and they are still asking. Make this support conditional. Conditionality is the classic approach. This issue will be debated very soon, perhaps at one of the next Presidential Committees, and I hope we arrive at the appropriate solution.

Regional innovation policy. I could have told you nothing of the above and simply talked about the regions. As a matter of fact, I believe the regions of Russia play a unique role in building innovation economy. Vladimir Alexandrovich Mau mentioned the regional component. We all know that innovation economy in the USA is focused in just two regions – California (Stanford) and Massachusetts (MIT). Half of their innovation economy is based in two states. Although, if you come to Texas, they will tell you: “Texas is the leading state in innovation economy.” Which is not true. They will tell you the same in Oklahoma and a dozen other states, but not everyone can actually succeed in building such an economy. They succeed in some special cases by combining a mixture of elements all together. It is just the same for Russia. The one thing you should do is study the existing examples. They don’t know that in Moscow. They don’t know in Moscow that Tomsk and Kazan are world-class leaders in innovation economy. They don’t know that these regions have dozens of top-class innovation companies with many hundreds of millions of dollars in turnover. They are not aware of the regional policy established in the Tomsk Region and Tatarstan to support innovation economy. They should just read it, to start with. Then it would be nice to think of what to do next. Are we going to build innovation economy in every region from Chukotka to Chechnya? Or will we give higher priority to some specific regions? If so, which regions will these be? Who can answer these questions if not the state? This is clearly a great challenge to the state that we have not yet tried to face. There is another less significant aspect – federal executive authorities. Which ministry is in charge of innovation economy today? If we are really going to build it, then who is in charge? What about distribution of power among the ministries? What about the resources they have available to accomplish this mission? What about the decision making procedures and regulations? Are we limited by our federal target program, or is there anything we can do on top of it? Many questions that arise in this respect clearly mean that the state has a lot to take care of. I had a discussion with one Finnish expert who I truly respect not long ago, and he told me: “Dear Mr. Chubais, innovation economy will not crop up at the government’s command.” I considered his statement and replied: “Yes, you are right, innovation economy will not crop up by command, but as far as Russia is concerned, it won’t crop up without the government’s command, either.” This is the way it works. It means we will have to consider this issue very thoroughly and come up with a solution. On top of everything that I have just said, pessimists would note: “What are you actually arguing about? What innovative economy are you planning to build in our country with its sore socio-economic and sociopolitical systems?” Well, everyone is aware of the fact that intellectual property rights protection in Russia is a bad case. We have a high corruption rate. We have a weak legal system. We have inadequate competition. And we have a situation where there is no political competition and all major media are controlled by the state. So what does all that mean? Conclusion number one: “don’t even start it.” Or let me quote my democrat counterpart: “We want to see dependent justice cancelled first, and then we will start building innovation economy for them.” Otherwise, this initiative is impossible and starting it makes no sense, some of my counterparts say. I absolutely disagree with both the content and the logic of these comments. Ironically, innovation economy already exists in many regions despite all the above drawbacks. Danaflex in Kazan is a world-class company today. Micran in Tomsk and many other companies use modern innovation models. They all appeared when innovation economy was the last thought on the government’s mind. They appeared when the state was setting the concrete blocks that I mentioned above on their way to building innovation economy. I know there are some discrepancies in the concept when they tell me: “First we need to build democracy in our political system, and then we can start thinking of building innovation economy.” Well, it emerges anyway, and here is the clear and simple proof. Does that mean we do not need to make our political system democratic? Of course, it does not. This is a very complex and important goal for our country, and we have to work on it. At the same time, neither of these diagnoses precludes the possibility, the need, and the practicability of working to build innovation economy in our country.

Lastly, I want to say the following. First of all, building innovation economy is a mission that was never completed during Soviet times and is still an outstanding issue for Russian economics. Secondly, we are running out of time allocated for us to build it. I don’t know how much time we have left. If could be a year, two, three or five years, or maybe more. The one thing I know is that the clock is ticking. I can see that absolutely clear. The third conclusion is that there are no social, political, or economic obstacles in Russia today that could prevent us from building innovation economy. The fourth conclusion – innovation economy in our country can only be based on fundamental market values, and of course, provided that we reconsider the role of the state. And we will have to work a lot on this reconsideration. The fifth, and the last conclusion, is that building innovation economy in Russia is a very complex socio-economic mission. I tried to imagine the degree of its complexity, and it is basically a reform comparable to the most substantial transformations our country has gone through over the last 20 years. This is a very important conclusion that is hard to comprehend. At the same time, I think we can accomplish this mission in the near future. I understand that my conclusions truly don’t offer the last word on the matter. Using the language of Vladimir Alexandrovich Mau, the practicing economist in me understands this. Many of you here are great scientists, and you and I share the same ideas, so I appeal to you to join this work with the most serious intentions. I also appeal to our opponents, those who have been blaming us for the last 20 years: we need your feedback, but not something like “you turned Russia into ruins” or “how much is this voucher that sells for two cars” – we need a serious and objective suggestion from you. We all need it now. Give us an answer to this simple, yet mystical Russian question of all times: what should we do? Because we already have an answer to the question: “Who is to blame?” Thank you for listening.