Tech Report October 2011

The Next Russian Revolution

Outside Moscow, the Kremlin is laying plans to turn a forlorn patch of farmland into a new Silicon Valley, and Russia into a major technological power. Cisco, Nokia, and MIT are eager partners. Russia’s people, by and large, are less enthusiastic. A report on Russia’s peculiar version of capitalism today, as that country gathers itself for its next leap forward.

Above: Field of dreams? A scale model of the technology center to be built at Skolkovo

If you start at the Kremlin—as almost everything still does in Russia—and drive down Novy Arbat, the first landmark you’ll pass, just before crossing the Moskva River, will be the White House, site of the famous confrontation with the hard-liners that ended the Soviet Union. Soon after, on your left, as you travel along Kutuzovsky Prospekt, is the post-Soviet Victory Park, home to a grandiose architectural monstrosity. Just down the road on your right, you’ll see a shiny white mall, featuring Chanel and Cartier, which is, perhaps, a truer monument to the spirit of post-Communist Russia. Eventually, after turning left off the main highway and driving about half a mile down a dirt road, you’ll come to a 900-acre patch of farmland, some 15 miles from the center of Moscow.

I went there on a hot, dry day last fall. The land looked unremarkable, and there were no passersby, but entry to it was blocked by two uniformed government guards, a border-style barrier, and concrete blocks. After a 20-minute negotiation and an appeal to higher authorities, the guards let me and my official escort through. Most of the cultivated fields beyond them had already been harvested, with only yellow-green stubble left from the year’s crop. In one corner, two men in undershirts dug potatoes.

To the south, the fields looked out at the vast, pink Three Whales shopping mall, whose billboard claimed it was “the biggest furniture center in Europe.” To the northwest, the site abutted a cluster of houses—ramshackle, white-washed cottages in the traditional village style, side by side with newer faux-French châteaus and multistory brick fortresses, their roofs sprouting satellite dishes. The only distinguishing natural feature was a pond in one corner of the site, surrounded by a birch copse littered with beer bottles, cigarette butts, potato-chip bags, and bonfire ashes left by local picnickers. A herd of cattle grazed nearby.

If all goes according to the Kremlin’s plan, by 2015 those cows will be replaced by 15,000 scientists and entrepreneurs. From these fields will rise a new “Silikonnovaya Dolina,” Russia’s version of Silicon Valley. Over the next few years, the government plans to spend some $6.6 billion on the new city, colloquially known as Skolkovo, after the existing village. It is to be the centerpiece of the Kremlin’s plan to turn Russia into a major technological power.

Skolkovo is partly a construction project—the idea is to create a modern and luxurious mini-city that can serve as an incubator for technology entrepreneurs. It is also meant to be a legal and economic oasis: Russia’s restrictions on visas and imports are to be relaxed, and tax breaks created, for the city’s resident companies; as to most business matters, the city will sit outside the purview of Russia’s normal government bureaucracy, with its vast capacity for graft, red tape, and delay. Finally, Skolkovo is an effort to bring together in a single place all of the elements that are essential for commercially viable innovation. To that end, the community will include the Skolkovo Institute of Science and Technology, to be created in partnership with MIT. But to transform a smart new technology into a business, you also need project managers, marketers, lawyers, and accountants. In Silicon Valley, once you have a good idea, you can pull together a solid team of these pros in a week, as easily as a good musician can bring together a band in college. The hope is to make the same variety of human capital available at Skolkovo.

The project represents Russia’s latest effort to grapple with one of the recurring, central questions of its history—how to keep pace with the world’s leading countries. Peter the Great dragged a resistant Russia out of the Middle Ages into a socioeconomic order that was at least conversant with Enlightenment Europe. Alexander II began to pull Russia into the industrial age. Stalin brutally completed the job, allowing his successor, Khrushchev, to send the Soviets into space. By the time Gorbachev came to power, it was clear even to the Kremlin that Russia had again fallen behind. And so, over the past 20 years, the country has struggled to catch up with Western capitalism.

Skolkovo is the pet project of President Dmitry Medvedev, a short, bespectacled, technophilic lawyer who is sometimes described—with equal measures of affection and sarcasm—as “Blogger Medvedev,” thanks to his heavily promoted Kremlin blog, occasional tweets, and enthusiasm for Facebook. One senior Russian journalist told me that Skolkovo was Medvedev’s “Great Pyramid,” the shining legacy he hopes will endure long after his presidency ends. A businessman described Skolkovo as Medvedev’s application for the job of prime minister, a post that may be vacated in 2012 when Vladimir Putin reassumes the presidency, as many Russians expect he will. Last year, shortly after the Skolkovo project was announced, Medvedev visited Silicon Valley for inspiration, just as Peter the Great had once traveled to the shipyards of Zaandam.

National politics and national pride have doubtless helped propel the project forward, but it has also been greeted enthusiastically by the leaders of many Western blue-chip companies. Intel’s Craig Barrett is on the Skolkovo Foundation Council, as is Eric Schmidt, Google’s executive chairman. Last year Schmidt told me, “We are big supporters of the Skolkovo project, simply because the Russian history of math and science, the innovation, the craziness that is the modern culture of Russia, should enable the creation of a whole bunch of new industries.” Cisco and Nokia have pledged to house significant research teams within the new city. If all goes well, the Skolkovo project will begin to redress one of Russia’s biggest problems—and one of its worst-kept secrets: despite massive privatization in the 1990s, and strong growth in the Aughts, the particular version of capitalism that the country has built is ill-suited to an increasingly high-tech world.

Moscow certainly now has capitalists. Last year, 101 Russians made it onto the Forbes “World’s Billionaires” list, giving Russia the highest number of billionaires per trillion dollars of GDP of any country in the world; and lower down the income-distribution scale, a growing middle class is emerging, especially in the capital and in St. Petersburg. The European Union officially recognized Russia as a market economy in 2002. And Russia’s abundant natural resources, particularly in energy, have given its leaders and oligarchs clout beyond the country’s borders.

Yet many critics claim that the past decade’s high energy prices are the main reason for Russia’s resurgence, and have been papering over severe problems that are likely to come to the fore as oil and gas reserves decline (or sooner, if the price of oil falls). Per capita income is roughly $15,900, below that of Lithuania, Croatia, and Puerto Rico, and male life expectancy is 59 years. On a 2011 World Bank ranking of nations based on ease of doing business, Russia sat at 123, below Bangladesh, Yemen, and Pakistan.

Vladislav Inozemtsev, a leading Russian economist, says Russia’s system is not so much true capitalism, or even classic authoritarianism, but rather “neo-feudalism.” Government corruption, he argued in an essay published this spring, is the system’s central trait—bribes aren’t an exception, they determine how the economy operates and how the country is ruled. Inozemtsev wrote:

What Westerners would call corruption is not a scourge of the system but the basic principle of its normal functioning. Corruption in Russia is a form of transactional grease in the absence of any generally accepted and legally codified alternative.

The main function of the state is to divide the country’s natural-resource wealth among an interconnected group of oligarchs and apparatchiks.

According to the Russian think tank Indem, bribes accounted for 20 percent of the country’s GDP as of 2005. To put that number in perspective: in 2010, United States federal tax revenues were about 15 percent of U.S. GDP. Georgyi Satarov, a Russian sociologist who is one of the country’s leading experts on corruption, estimates that the value of bribes paid annually in Russia rose from $33 billion when Putin came to power at the turn of the millennium, to more than $400 billion at the end of his presidency in 2008. Thanks to WikiLeaks, we know that in private, American diplomats agree that government predation is a defining feature of Russian life. One leaked cable, for example, explains that in Moscow, the Ministry of Internal Affairs and the federal intelligence service have crowded out the private mafia as a source of “protection” for private business, “since they not only have more guns, resources, and power than criminal groups, but they are also protected by the law.”

Many Russians, even within the elite, now look back upon the past 20 years with ambivalence—or at least the sense that Russia’s transition from a planned economy remains incomplete. Anatoly Chubais was the architect of Russia’s privatization program and market reforms in the 1990s, when the big national project was the wrenching shift from central planning to capitalism. I met with him in his Moscow office just past 9 o’clock on a Friday night last fall, after a busy day that included a visit from Prime Minister Putin (“He sat right where you are now!,” I was informed). Reflecting on Russia’s recent history, and his own role in it, Chubais said, “I am not judging whether we did it well, or we did it badly, but the fact is that the mission was accomplished—a market was built.”

The chief problem facing the country, he told me, is that while Russia was creating its rough-and-ready version of a market economy, many others took the next step: “I can name you a dozen countries which, during that precise period, built what is called an innovation economy.” Chubais now runs Rusnano, a state-controlled investment fund founded four years ago to finance companies pursuing innovation in nanotechnology and other high-tech realms. It is one of the key sponsors of the Skolkovo project, and Chubais sits on the Skolkovo Foundation Council. In his view, Russia today is at another difficult crossroads: “Innovate, or degenerate.” Turning Russia’s economy into an engine of innovation, he believes, is as important to the country’s future as privatization was—and will be harder to achieve.

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Chrystia Freeland is the editor of Thomson Reuters Digital. She is writing a book on the super-elite.

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