Blog.Forbes.com: Russian High Tech in Focus at St. Petersburg Forum
When investors think of Russia’s economy, they tend to think of oil and gas. It might take some work to change the way Russian industry is seen abroad, but the Russian corporate and government leaders behind the 15th annual St Petersburg International Economic Forum are hoping to participants leave the three day forum starting June 16 knowing that Russia is also pretty high tech.
“Russia just doesn’t sit on fields of oil and gas, but also on fields of mathematicians and scientists,” says John Connor, fund manager of the Third Millennium Russia fund (TMRFX).
This year’s three-day forum is the usual pendium of star executives from the big emerging markets and multinationals — Vikram Pandit, Citigroup’s CEO will be there. This year, a decisive turn towards Russian innovation and technology is on the program.
Dmitry Akhanov, president of the US subsidiary of Russia’s government owned nanotech investment firm Rusnano, says the central theme of the new Russian economy is innovation.
Rusnano wants the size of Russian nanotechnology market to reach $30 billion by 2015. Russia was ranked 63rd in global innovation level in the World Economic Forum’s Global Competitiveness report for 2010-2011, with Switzerland topping the list. When it comes to nanotech, the US has the majority of companies operating in the space, while Russia has less than a third of the US total.
Akhanov wrote the following for Forbes about the government’s role in fostering the development of new technologies:
"Successful economic development depends chiefly on striking the right balance between government support and private sector investment. In Russia, government support has proven critical to jump-starting the country’s transition to a knowledge economy. Rusnano, Russia’s largest government-backed investment fund has played a leading role in that effort by helping to identify and develop Russia’s companies of the future.
In the US, Google and Facebook — and before them HP, Microsoft, and others — did not develop in government incubators but matured in a very different environment from Russian start-ups, making government support less necessary. However, unlike the US, which has benefited from years of open-market experience, Russia is relatively new to the market economy. Many barriers to start-up development remain, making it necessary for the government to step in as appropriate.
To achieve successful modernization, the Russian government must have a strategic, forward-looking investment strategy. This requires that it identify the most promising companies, technologies and ideas to invest in that are not only scientifically cutting edge but marketable as well. For true modernization to occur, these companies need to grow strong enough to compete against each other in the open market, creating powerful incentives for innovation from within the private sector itself.
Successful existing Russian brands such as Kaspersky Lab and Nitol Solar suggest that the spirit of entrepreneurialism exists in Russia and that Russian brands have the potential to go global. At the moment, however, these are isolated examples that took years of development to achieve global success. Government support can speed up this development process if applied correctly and to the appropriate targets.
Growing a vibrant and competitive private sector requires supporting start-ups in their infancy while preparing them for independence later on. While critics of government intervention in the private sector generally express concerns about excessive government control of private sector activity, advocates of this approach realize that in some cases the government must support ventures while being careful not to control them.
Support involves not only funding but also non-monetary assistance such as helping companies obtain legal approval for their activities; protecting them from corruption and helping them develop strong connections with regional authorities. This critical early-stage support offers companies more time to focus on innovation and internal development, allowing them to differentiate themselves from their competitors more effectively.
One of the best examples of such support in our portfolio is Optogan, an LED company established by Russian scientists and entrepreneurs. This company not only has strong IP, technology and production capabilities, but also has enormous market potential due to the longevity and competitiveness of LED lights.
Although demand for LED technology was growing globally, we found that market potential in Russia was next to zero because out-dated sanitary regulations and construction codes prohibited the installation of LED lighting in houses, offices and other places of residence. While changing these federal regulations appeared to be an insurmountable task for this small start-up to accomplish on its own, Rusnano helped the company convince policymakers to change the regulations. Today, Optogan is successfully selling its products and building a global and domestic distribution network.
When successful, government support will become less necessary as businesses mature. Yes, we at Rusnano help create the market and shift administrative barriers, but we never sell on behalf of our companies, develop products for them or manage their business because startups are fragile creatures that must either evolve or dissolve.
Ultimately, the goal of government involvement in Russia’s economic modernization should be to fuel the engine of private sector growth enough to promote innovation and modernization organically. Modernization cannot occur in a vacuum nor can it be addressed in a piecemeal fashion. Modernization requires a deeper process through which the government equips the private sector with the tools necessary to drive economic growth and innovation into the future."