Eastern bloc renews high tech economy bid

When it comes to the business of information technology, Russia is a slumbering giant. Its education system, which inherits a technical focus from the Soviet era, is a production line for talented science and IT graduates that regularly outperform their international peers in intercollegiate computing contests.

But its domestic economy is dominated by the export of energy and natural resources, and many of those graduates instead choose to apply their IT skills on foreign shores or, in a few cases, in the nefarious yet potentially lucrative world of cybercrime.

The world’s largest country is taking steps to address this brain drain, in part to remedy its heavy reliance on just a few sectors.

In June 2010, Russia’s latest effort to awaken its dormant technology sector saw president Dmitri Medvedev embark on a fact-finding and fundraising trip to the very model of a high-tech economy, California’s Silicon Valley. Medvedev secured around $1 billion in investment, including $100 million from networking equipment business Cisco Systems, for the purposes of advancing Russia’s IT and innovation industries.

Part of this cash is likely to end up in Skolkovo, a small town not far from Russia’s capital, Moscow, which the country’s government has earmarked to become the country’s Silicon Valley equivalent, or ‘tech cluster’. The project promises generous tax breaks and financial incentives for companies that set up operations in the region.

Some are doubtful, however, that such state-driven initiatives have much chance of success. “The successful clusters tend to be the ones that emerge fairly spontaneously, because they’re a genuinely conducive environment to business,” explains Anthony Evans, a professor of economics at London’s ESCP Europe Business School. “It’s very difficult to know in advance what kind of cluster is appropriate for a particular geographical location.”

Skolkovo is not the first region to attempt to repeat Silicon Valley’s success; in fact, it is not even Russia’s first attempt. In the late 1950s, on the advice of two Silicon Valley engineers reported to have been exiled for espionage, the government founded Zelenograd, a town designated to be the centre of the Soviet Union’s nascent microelectronics and computing industries.

But there is one common theme that unites each of these government-initiated stimulus measures, Evans says. “What we see is that they tend to fail.”

Lithuania calling

Russia was not the only former Soviet state touting its high-tech potential in June. Andrius Kubilius, prime minister of Lithuania, was in London that month trumpeting ‘Santara Valley’, an area of the capital, Vilnius, which also offers hefty tax incentives to those who invest in IT and science. Kubilius told reporters that the Baltic state’s “very good pool of people in engineering and high-tech” and “good digital infrastructure” made it ripe for investment.

On his PR mission, Kubilius was faced with pressing questions about Russia’s lingering influence. In particular, he was asked whether a dispute between Russian energy giant Gazprom and Belarus – the country through which Lithuania receives its own supply – over an unpaid gas bill could endanger the reliability of its energy supply, a vital consideration for high-tech companies. In response, Kubilius suggested that Lithuania may “have to look at building [its] own energy supply” if gas supplies in the region were being used as political makeweight.

Professor Evans is not surprised by this reaction, but argues that Medvedev – formerly chairman of Gazprom’s board of directors – needs to reassure high-tech companies and their investors that Russia does not “arbitrarily turn off the gas” over disputes with neighbouring countries if it is to attract their business.

The politics of energy supply is just one of the potential hurdles facing technology businesses as they consider building operations in Russia, according to professor Evans. The country’s notorious web of bureaucracy, corruption and cronyism will, he says, come as the largest shock to Western business people accustomed to “stabilities” such as a rule of law and property rights.

Foreign IT companies will have to learn how Russia’s business culture operates if they are to take part in it, Evans says, working with partners familiar with that culture. “If it’s a corrupt environment then you need to play that game,” he argues.

Operating within this culture is not without risk, of course. In April 2010, authorities in Germany and Russia revealed that they were investigating allegations that Hewlett-Packard had handed out millions of euros in bribes to secure large contracts in Russia, an accusation that the company rejects. That investigation is ongoing.

Some former and currently communist countries have succeeded in establishing vibrant and successful technology sectors, Evans observes. Georgia, directly south of western Russia has transformed itself into a “massive free enterprise zone” that enjoys the endorsement of the US, much to Russia’s chagrin.

China, meanwhile, has successfully introduced economic liberalism “on the margins” by relenting on bureaucracy and central control, an example that Evans suggests the Russians should follow. “[Russia is] going to be experimenting with these things on the margins,” he believes. “It will probably be relatively successful and drive a lot of growth and jobs; then it will become more and more difficult to retain that centralised power.”

But Russia and the former Soviet states are “decades behind” China in this regard, Evans says. “There’s a basic trade-off here between economic freedom and political control. If Russia wants to realise its potential and become a major player economically, it needs to sacrifice some control.”

Peter Done

Peter Done is managing director of Peninsula Business Services, the personnel and employment law consultancy he set up having already built a successful betting shop business.

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