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Tuesday, November 2, 2010

Russia’s modernization from a bird’s eye view

I’ve been between places lately, doing business in Moscow one day and in Perm on another. Travel is always a good opportunity to give thought to things that matter…

Even with its own vast new gas reserves the U.S. is gearing up for an ambitious $5bn phase 1 of its Atlantic Seaboard offshore wind farms. I was wondering if Russia was ever seeing its place in this changing global energy paradigm.

In the current patterns of the global economic development I think it’s critical to work and find as many lower-cost alternative sources of energy as we can. If the U.S. government and private investors are going to develop these types of programs using advanced technology it will clearly help diversify their economy’s energy base.

As global economic developments transpire, certain costs will go up for certain technologies and commodities and other costs will go down for others. As there becomes a critical mass for solar technology, for example, with the Chinese producing a lot of solar panels, the costs to consumers will go down overtime. So to the degree that there are more countries getting involved in promoting alternative energy sources, the costs of those sources will go down and any given country will be able to have a portfolio of different sources.

If Iran, awash in oil, is extremely interested in developing nuclear energy, one has to ask the question: “Why is it so important for Iran to develop nuclear energy?” While there are clearly many alternative views to consider in answering this, it’s also clear that they, too, want to diversify energy usage inside their own country, being free, of course, to export their huge oil reserves around the world at the same time and generate as much profit as possible.

So, what’s good for one country is good for another country as well.

I think it’s absolutely not acceptable for Russia to ignore this global trend; and I’m glad that more than 60% of Marchmont website visitors answering the related poll questions share my view. It’s extremely important to also develop alternative sources of energy based on wind, solar, alternative battery and other ‘clean’ technologies. Looking at everything that Russia does to help support and promote its broad-based domestic energy industry I find it useful for this country; diversification will make it much stronger in the long run.

I reviewed Russian press last week and the following was a real eye-catcher—if not an eye-opener. Sberbank launched a year ago its Ideas Exchange project to encourage and pay for its own employees’ innovation ideas aimed at the bank’s operation optimization, and has now economized about $30m in cost-saving stemming from this program.

It is a very interesting initiative, I believe, and the fact that Sberbank launched it is an excellent example of how all companies in Russia should really view themselves and how they analyze their operating costs, their marginal profitability and the overall effectiveness of their business process.

If the owners of Russia’s industrial base really begin to look at their companies as an asset to be improved in its value rather than a source of free cash flows to milk, and begin to invest in the improvement of their companies’ performance and ultimate value, this will inevitably create, in fact, a very strong market for innovation projects in this country. This is an essential factor in building Russia as an innovation economy in the 21st century.

If Russian shareholders fail to understand this simple fact, the markets for innovation in Russia will continue to be sparse, with most innovators left to feel that the only markets that exist for their products are the EU, Asia or the U.S., and the results will show few projects will be commercialized locally.

To the degree other Russian companies follow Sberbank’s example and begin to invest in themselves and try to reward creative ideas, this will all certainly lead to an improvement in Russia’s development of an innovation economy.

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