Business | Innovation in Russia

Can Russia create a new Silicon Valley?

Sergey Brin is still in California

The last Sputnik moment was a while ago
|SKOLKOVO

THE guards at the gate kept your correspondent waiting for half an hour. The taxi driver didn’t have the right papers, apparently. “We know that Russia’s bureaucracy is a big problem. That’s part of what we want to solve,” says the guide. Welcome to Skolkovo, Russia’s bid to build a new Silicon Valley.

On the construction site, things move faster: dozens of workers are busy putting in walls and heating ducts. If things go to plan, Skolkovo, near Moscow, will be one of the world’s biggest high-tech cities in a few years. At nearly 400 hectares, it is twice the size of London’s Olympic Park. It will boast a research university with 1,800 students, 40 corporate research and development (R&D) centres and a “Technopark” housing up to 1,000 start-ups.

More important, of course, will be what doesn’t meet the eye. Skolkovo will be a special economic zone, a bit like Shenzhen in China. Companies based there will receive whacking great tax breaks. They will also get special treatment when it comes to visas and imports.

The aim is for Skolkovo to become the basis for a vast ecosystem that spans all of Russia and brings together researchers, entrepreneurs and investors in five “clusters”: IT, of course, but also biomedical, energy-efficiency, space and nuclear technologies, all of which have deep roots in Russia. This new ecosystem, its champions hope, will help Russia modernise.

In other countries, such ambitious government-led schemes have usually flopped. Nonetheless, Skolkovo’s backers remain optimistic. Dmitry Medvedev, then Russia’s president, gave the green light in 2010. Since then the government has earmarked $3 billion over four years for the project, and will spend billions more indirectly, for instance via tax breaks.

The planning of the construction is going well. Half a dozen architecture firms are designing and developing the city’s districts. Nobody seriously doubts that Skolkovo will rise in one form or another—although it will probably take longer than planned. Conor Lenihan, a former Irish innovation minister who is in charge of Skolkovo’s corporate partnerships, praises the Russian government’s decisiveness. “In a typical European democracy,” he says, “it would have taken three to five years to get this far.”

The university, too, is no longer just a PowerPoint presentation. For an undisclosed sum, the Massachusetts Institute of Technology (MIT) has agreed to set up the Skolkovo Institute of Science and Technology, or SkTech. In August the first 21 Russian students will start taking courses (they will spend their first year studying abroad).

Skolkovo has already lured some big names. Attracted by the perks and anxious not to upset the Russian government, their largest customer in the country, some 20 companies have signed up, including Cisco, IBM and SAP. Each of them will open a sizeable R&D laboratory and co-operate with SkTech.

It will be much harder, however, to create the rest of the ecosystem. Silicon Valley has a critical mass of entrepreneurs and venture capitalists and, more importantly, a culture of turning whizzy ideas into profitable businesses. Such a culture takes decades to evolve. The Skolkovo Foundation, which runs the project, wants to jump-start it with cash—some $1 billion over five years. “We want to fill the institutional void and take some of the risk,” explains Alexander Lupachev, the organisation’s chief investment officer.

The aim is to build a long pipeline of start-ups to reside in Skolkovo. The Skolkovo Foundation will then provide them with some initial cash and hope that venture capitalists invest in them. Firms first apply for “resident status” and are reviewed by some of the hundreds of experts who work with the Skolkovo Foundation. If the firms pass muster, they are eligible for the city’s tax and other preferences and can apply for grants, usually $150,000. If they want more money, they have to find a matching investment from a venture capitalist.

So far, more than 500 firms have obtained resident status. Over 100 have received some money from the Skolkovo Foundation, and about half of these have attracted regular venture capital, mostly from Russian firms. Yet local capital is limited and foreign money is not pouring in—Western investors deem Russia too risky. Even the foreign venture capitalists who work with the Skolkovo Foundation do not invest directly in Russia, but funnel the cash through offshore shell companies.

A small version of the Technopark, with 25 firms, is already in place in part of the Skolkovo School of Management, based near the new city. It is early days, but most of the offices are empty. Many firms use them only occasionally and do the real work elsewhere. That may prove a lasting problem: being a Skolkovo resident does not mean that a company has to base its operations in the city, even after it is built.

More fundamentally, the project doesn’t exist in a vacuum. Russia is a tough place to work. Great fortunes have been made by grabbing a share of the country’s mineral wealth. But try to think of a Russian who has grown rich by inventing something and you’ll probably think of someone like Sergey Brin of Google, who moved to America when he was six.

Ready for the Skolkovo summit?

Graft may be a problem in Russia, says Mr Lupachev, but it mostly afflicts big, highly regulated industries. It seldom involves start-ups, he claims. And the process of selecting start-ups for Skolkovo and giving them grants is hard to rig, he says.

Not everyone is reassured. Skolkovo is Mr Medvedev’s baby. Will it thrive now that he has been demoted to prime minister, or will it end up as just another office park? Vladimir Putin, the current president, seems supportive. His government recently decided to host the summit of the G8 in 2014, when Russia holds the group’s presidency, at Skolkovo. Victor Vekselberg, the president of the Skolkovo Foundation, who made his billions as an oil oligarch, says: “This is no longer Medvedev’s or Putin’s project, this is Russia’s project.” He adds: “If the country really wants to change it needs something like Skolkovo.” Others retort that for Skolkovo to work, Russia would have to change so much that it would no longer be necessary.

This article appeared in the Business section of the print edition under the headline "Can Russia create a new Silicon Valley?"

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