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Tuesday, September 25, 2012

Russia may jerk two steps forward and one step back—but hardly to a halt

More thoughts on Russia’s innovation development patterns in the wake of my prior posting from a couple of weeks ago…

Russia, in the last twenty years, has gone through fundamental transformation—from the commodity-driven economy to having now a strong national interest in developing the innovation-driven economy. We’re not there yet; there’s a lot of work to do. But there’s a critical mass of people that say Russia has no choice but to develop the innovation-driven economy.

The economy model based on commodities cannot work. The level of volatility is simply too high in such an economy for any government or culture to survive the ups and downs. If the global economy is on upward momentum, and oil prices are high, Russia does great; everybody’s just in a very wonderful mood. But if the global economy turns down, Russia may turn down three times worse than the rest of the world.

In this type of up and down momentum, and lack of stability in the foundations of the economic structure, Russian investors have had very short time horizons. They are worried about inflation, volatility; they’re worried of whether the government will change too abruptly. And all those worries create high levels of risk. Those risk levels make barriers for investors to think long-term.

That’s what has to change. And it’s changing. Russia’s developing fundamental basics of a structure to support innovation development at the grassroots—at the individual innovation leaders’ level—through education programs, through Eureka programs, through US-Russia Foundation programs. These types of programs to support fundamental law and civil society and institutional structures of democracy are critical for Russia’s long-term development.

All the people that I know in private enterprise and innovation entrepreneurship understand it well. And the people at the top who I’ve talked to also believe and understand this. But one must remember there’s a lot of people in the middle that have no vested interest in this future—people that thrive in chaos and ‘gray’ markets, and do well on corruption and kickbacks. They are not very interested in the type of society which is fully transparent and stable and long-term growth oriented.

Society is divided in Russia, and any observer of this country has to understand this.

There’re those who are for the process going forward; these are the young generation, innovators, entrepreneurs, doctors, lawyers—the professionals. They want to see a new society.

But there’s an older generation, and there’s an entrenched generation of bureaucrats and security service people that don’t really want to see the system change.

The situation isn’t clear-cut in Russia. The people have not decided as a strong majority, “This is what we want to do.” But we have to be on the side of the young generation that wants to move forward. The older generation wants stability and is prepared to sacrifice freedoms and human rights in order to have that stability. But young people, as in all cultures, are ready to risk it all in order to get more freedoms.

That’s what we have to support. I think that’s what we are supporting. And I think that’s what the world has to support in Russia. We shouldn’t take a critical eye and just condemn Russia that it’s not working out. It is working out. We’ve gone through twenty years of an extremely complex and difficult transitionary process. But the world has to realize that Russia needs to go through twenty more years.

We have to be patient with Russia; we have to work with Russia; we have to help Russia through this; we have to help its young generation. We have to understand that there are those in society that do not support what we’re doing. And they don’t want to support that because it’s against their interests. People that make a lot of money through non-transparent transactions don’t want the light of day shed on their work. We have to accept that that is reality in Russia that we have to deal with. But the people I work with, and the people I’ve met and been close to over the last twenty years, understand this and support the move forward.

I encourage any observer of Russia to really look at the situation with clear eyes, not rose-colored glasses, and not cynical glasses either. It’s easy to look at Russia and criticize; it’s easy to look at Pussy Riot like scandals and think, “Oh, Russia’s judicial system is just a mess!” Well, there are problems, but there are problems all across society. There are bright spots, however. There are lots of arbitration suits which are decided in favor of the Western investors; there are even those that uphold IP and trademark rights (take a look at a recent interesting one, with a Swiss watchmaker, Longines, awarded damages from a Russian delinquent online store in a trademark infringement suit). One must look at the overall picture and draw broad conclusions.

Russia is moving in a certain direction. It’s not negative. It’s two steps forward and one step back. It’s easy to point out the steps backward; but one should not forget we are making steps forward.

I remember when there were lines for bread and sausages in Russia; and it was chaos and hyper-inflation. Those times are long gone. Today, we live in a different world. Today, we’re talking about nuances, “How much freedom do innovators have? What type of tax incentives do business angels have to invest and risk their money in high technology?”

These are the real debates we’re facing today. And those are serious and need level-headed assessments on how to change the legal structure in Russia. Because in the end, it’s all about the rules of the game, and what rules we set for ourselves in developing this innovation economy in Russia. This comes back to the rule of law; this comes back to the judiciary and political structure. What we need to be focused on is helping Russia develop a proper set of rules to motivate and guide investors to make the right decisions, to make the decisions to invest in Russia.

That means that the government needs to consider that those investors have lots of alternatives in this world. They can invest in derivatives, or currencies, and speculate in any part of the world they want. So, if Russia wants investors to invest in this country, it has to create conditions that attract investors into this economy. And not only foreign investors but Russian investors.

This is what Russia has to face over the next five years. And I believe the next five years is the single most critical period we ever faced. Because if Russia continues to lose three or four hundred thousand young innovators, its ‘brain trust’ that now leaves Russia, this will be a catastrophe for this country. The top leadership and the elites in Russia understand that. So what we have to do is help Russia develop the right policy which will stimulate domestic young innovators to stay in the country and to work and develop their businesses.                

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