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.

Vekselberg’s question is common in Russia today. In fact, it has been common every time Russia’s leaders tried to modernize their country. Yeltsin and his reformers worried that the Russian people weren’t ready for a market economy. Lenin and the Bolsheviks worried that the Russian people weren’t ready for Communism. Peter the Great worried that the Russian people weren’t ready to leave the Middle Ages.

But just as it is a little disingenuous to blame the failure of Communism on the inadequate enthusiasm of the Russian proletariat, describing the Russian people as the chief barrier to the creation of an innovation economy seems misguided today. While the Russian economy isn’t leading the world in innovation, plenty of individual Russians are among the world’s top innovators. The Nobel Prize in physics last year went to two Russian expats. In Silicon Valley and on Wall Street, Russian mathematicians and programmers are prized.

Two of Europe’s biggest Internet IPOs in the past 12 months were of Russian companies—Yandex, the Russian search engine whose founders boast their technology is better than Google’s; and, Russia’s Facebook-and-Yahoo copycat. Today, these companies are among the top Internet ventures in Europe, as measured by market capitalization, despite the seeming handicaps of the Russian economy. Moscow, meanwhile, is home to what may be the world’s smartest and most aggressive IT investment fund—DST Global, which made a pioneering $200 million investment in Facebook in 2009 and has a stake in Zynga, the flourishing gaming company. DST’s founder and a major shareholder, Yuri Milner, made it onto the Forbes rich list earlier this year, with a net worth estimated at $1 billion, and bought a $100 million estate in Los Altos Hills.

The reason these stories remain scattered—at least inside Russia itself—involves incentives, as is so often the case in business. And for all the Kremlin’s current, Skolkovo-inspired enthusiasm for the technology sector, the unwelcome truth is that at least until recently in Russia, high-tech entrepreneurs have been, at best, second-tier successes—people who lacked the savvy or the chutzpah to follow more-lucrative commercial opportunities. That is how Serguei Beloussov, a 40-year-old entrepreneur who employs more than 1,000 Russian programmers at three international tech companies, explains his country’s dearth of high-tech industry.

“In Russia, all the property belonged to the state and the most money was made by people who were involved in privatization,” Beloussov, wearing dark jeans and a long-sleeved red shirt, told me. “Then, 10 years ago, the big scarcity in Russia was brick-and-mortar businesses, and many of my engineers would come to me and say, ‘I want to open a chain of drug stores’ or ‘I want to build homes.’ Then, five years ago, many businessmen decided to work for the government.” Only now, he thinks, is it starting to make real sense to work in technology.

Beloussov, an international businessman who travels on a Singaporean passport, has no illusions about his own decision to focus on building computers and then computer software at the start of his career, nearly 20 years ago. “I was young and stupid,” he said, sipping an espresso one night in a crowded Starbucks in downtown Moscow. “If I had invested my first money in privatization, that would have been much more profitable.”

For the most part, since the fall of Communism, Russia’s smartest and most daring mathematicians and physicists—the cohort that in the U.S. would have gone to Silicon Valley or Wall Street—have focused their energies on a different sort of enterprise. Consider one math Ph.D. who earned his investment capital by selling computer programs, but then quickly turned to privatization: Viktor Vekselberg.

Vekselberg made his initial small fortune in 1988—when Gorbachev’s U.S.S.R. took its first tentative step into capitalism with the cooperative movement—by writing and selling his own computer software. Within three months he had earned enough, he told me, “to buy an apartment, a car, and a dacha.”

He and his five partners next devised a more complicated operation, involving salvaging copper wire from scrap heaps in western Siberia, then exporting the copper and using the revenue to import IBM computers, which his group loaded with its own software and sold to Russian companies. The business was lucrative—Vekselberg said he and his partners made $100 for every single dollar invested—and within a year, they had made $1 million. “That sounds funny today, but in those days it was huge money.”

If this were a Silicon Valley story, Vekselberg and his partners would probably have gone on to become serial software entrepreneurs. If this were a story about India, they would probably have moved on to technology outsourcing. If they were Chinese, they might have used that first million to build a factory. But this was Russia, and Vekselberg was turning out to be one of the country’s most adept businessmen. “People didn’t know what to do with privatization vouchers, so we bought up vouchers and used them to participate in privatization auctions. That is how we bought our first real assets, beginning with aluminum factories, and from there on, we built our real business.”

Those early landgrabs are now gone, of course. Perhaps Skolkovo will appeal to the next generation of Russia’s most highly skilled, most intelligent people. But then again, maybe not. Ironically, the greatest barrier to Skolkovo’s success may be precisely what the Kremlin and the oligarchs pray for—continued high commodity prices, especially for oil and gas. “Too high a price for oil is bad for an innovation economy,” Serguei Beloussov told me. “If the price is too high”—he later said he thought the critical threshold was about $100 a barrel—“all the engineers will want to work at the banks and at Gazprom.”

Or in the government, which continues to siphon off so much of the country’s oil-based wealth. One consequence of Russia’s klepto-capitalist model is the growing appeal of government jobs, with their lucrative opportunities for payoffs. Over the past decade, the federal bureaucracy has grown by two-thirds, from 527,000 bureaucrats to 878,000. Vladislav Inozemtsev says that of the 109 students he taught in 2008 at the Higher School of Economics, one of the country’s most prestigious universities, 88 aspired to work for the government.

Skolkovo, if it works, will offer these and other students a different path—although that path will entail many risks, ranging from the ones inherent in any high-tech job to those involving the strength of the government’s commitment to a hands-off environment. The question is, how many people will take that path, when more-certain opportunities exist elsewhere—not least within the bosom of the state itself?

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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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