Committee for Russian Economic Freedom

A year ago Vladimir Putin declared that at least two Russian universities should jump to the cohort of the world’s leading educational institutions till the end of his tenure. Russian leader usually achieves his goals by concentrating overwhelming resources on his priorities. This time money can’t help Kremlin to buy breakthrough in science and technology.

It's time to go for Vladislav Surkov

According to Vice-President of New Economic School (NES) Konstantin Sonin, “the major problem limiting the development of NES is that we can’t invite strong professors to Moscow for any money”. NES, the only successful non-government educational establishment in modern Russia, offers best conditions in Europe, but loses one by one its best employees. Moscow School of Management SKOLKOVO, failed for the same reason, though Medvedev’s pet project was able to pay literally any money for talent.

SKOLKOVO Innovations Centre received not only money, but also best Kremlin’s managers. Victor Vekselberg, a billionaire, heads the hub, while Vladislav Surkov, one of the creators of the Putin’s political system, supervised the initiative in the government. Both men achieved remarkable results in their spheres before Skolkovo, but now they are in the defensive in the numerous scandals infused by the Investigation Committee.

Neither powerful Vekselberg and Surkov, nor independent Sonin can’t make miracles. They can’t turn Russia, and even small Skolkovo, into an attractive place to work. Though Moscow became a much better place for living in the last thirty years, it loses competition to other global cities. Moscow loses because of the absence of transparent rules, same to everybody. The shadow market of diplomas and scientific degrees includes even best Russian universities. The members of Russian Academy of Science, a privileged self-governed institution, tolerates plagiarism. World-level scientists, no matter of their origin, don’t want to invest their reputations into country which is not able to offer any attractive vision of future. The risks are too high.

Reuters

It’s been a month since President Medvedev’s visit to Silicon Valley and burger lunch with President Obama. And almost a year since Medvedev’s “Forward Russia!” speech introducing his modernization efforts at diversifying the economy and promoting home grown technology.

Despite Medvedev’s words and perhaps good intentions, his plans to reduce the police force have stalled and his executive order ending pre-trial detention for economic charges ignored by the courts. All of this points to his “non-leadership” as Pavel Baev points out in the Eurasia Daily Monitor.

There is a strong demand for “for-of-the-same” in the welfare-oriented society and in the predatory bureaucracy, so Putin’s message is conveyed easily–and his authority unshakeable. Medvedev’s discourse of “modernization” remains foreign, and his attempts to encourage innovations are treated with the same ironic indifference as Nikita Khrushchev’s orders to introduce corn after his “historic” visit to the US in 1959. Medvedev is often reduced to complaining about the sabotage of his orders, which only signals to bureaucrats opposed to modernization that real executive power remains out of his grasp.

Civil liberties of different kinds depend on each other and Medvedev’s initiatives have had little effect on shifting Russian into a more open society.

The Russian Interior Ministry today reported that bribes have doubled since last year to $1,320 per occurence on average. And overall, the Russian economy leaks $300 billion as the result of bribes. With only 10%  going to rank-and-file policemen, that leaves a large chunk of change for provincial and Kremlin authorities.

And what could Russia do with an extra $300 billion in its coffers? Repair infrastructure, for sure, invest in alternative fuels or new techonologies, reducing its dependence on foreign investment to diversify the economy or perhaps postpone the largest state asset sale since the early 1990s.

Corruption remains pervasive and the current power structure is unwilling to kill the golden goose. Sergey Magnitsky died in pre-trial detention for refusing to renounce corruption activities of senior Kremlin officials. With much fanfare, Medvedev launched an investigation into his untimely death, but the investigation has stalled. According to Valery Borshchev, head of the government oversight panel responsible for the investigation into Mr. Magnitsky’s death,

They’re dragging their feet because some very important figures are implicated

Aleksei Dymovsky, the YouTube policeman, whose video galvanized a country inured to corruption spoke about his new quest to raise a grassroots campaign against corruption. He knows it won’t be easy as someone who participated in the pyramid corruption scheme that required police officers to hand off that day’s bribes to a “cashier,” a senior member of the police force. Those who didn’t comply were reprimanded.

The dubious charges against Russia’s mobile phone king, Yevgeny Chichvarkin show how hard it is for companies to do business in Russia, even domestic ones. The problems started for Chichvarkin in 2006 when he refused to pay bribes in order to prepare his accounting books for an initial public offering in London. His refusal resulted in the confiscation of $20 million of Motorola phones and the current charges against him. Motorola was his largest corporate partner and suffered huge losses when Department K, the interior ministry’s economic crimes division, released false warnings about the safety of their mobile phones. Motorola’s market share has dropped from 20% in 2006 to less than 1% where it is today.

Cisco has pledged a $1 billion investment in Skolkovo but John Chambers should have scratched Russia’s surface a little deeper.

Serfs

Russian natural resource minister Yuri Trutnev annoucned that TNK-BP’s licence to develop the Kovykta gas field will be handed over to the state, where Gazprom has a natural gas monopoly. Although TNK-BP was in discussions to sell Kovykta to Gazprom for $1 billion, the transaction was never comnpleted and it appears TNK-BP will walk away from Kovykta with nothing.

Details of TNK-BP’s travails are covered in a previous post, but it’s worth rementioning that in 2007 the Kremlin passed a law restricting all gas exports to public entities, yes, Gazprom. Although the recent Reuters article touches upon weakening demand for natural gas, it neglected to mention that Kovykta is located in the eastern Russia and TNK-BP was developing those fields for natural gas export to energy hungry China. According to China’s official news agency Xinhua, China’s natural gas consumption is forecasted to more than double over the next ten years.

President Medvedev’s visit to California’s Silicon Valley last week focused on Russia’s ambition to make Skolkovo into Innovation City. But as a Moscow Times op-ed mentions, the President and the government must restore trust in government procedures and laws of the land. Only through the re-establishment of trust can Russia foster the kind of environment entrepreneurs, engineers and venture capitalists need to create and execute new ideas and projects. As an indication of his commitment, Medvedev signed along with other G20 leaders their commitment to combatting corruption and protecting whistle blowers by creating a committee that will eventually draft rules for all G20 members.

While the Skolkovo project renews debate over the successful path of Russia as a state capitalist country versus democratic capitalist nations, financial commentators have renewed interest in Friedrich Hayek, Nobel Prize winning economist. Counter to John Maynard Keyes who wrote about the importance of governmental intervention, Hayek warned against government intervention as it would lead to serfdom. Having experienced serfdom for centuries prior to 1861, Russia is at a political and economic crossroad. Will Medvedev’s commitment to innovation, rule of law and transparency extend to the coming presidential election in 2012, or will a perceived tainted election redirect Russia’s political and economic path towards greater government control and, serfdom?

Russian President Dmitry Medvedev looks through 3D glasses at an exhibition at the economic forum in St. Petersburg, Russia, Saturday, June 19, 2010. (AP Photo/Dmitry Lovetsky)

Just a few weeks ago Putin was front and center with his visits to Istanbul and Paris, negotiating foreign policy disputes over UN sanctions against Iran. He even made comments about his tandem leadership with Medvedev that Kremlinologist have interpreted to mean that Putin as no choice but take over the reins in 2012, lest Medvedev actually execute his modernization plans by reducing 160,000 bureaucrats and nearly 300,000 policemen. Of course not all of these government employees have profited from Putin’s rein at the helm but they benefit from the existing “old” system (“budget inefficiency and a resource-based economy” as Arkady Dvorkovich, Medvedev’s top economic advisor put it.)

What a difference a few weeks make.

This week President Medvedev is visiting Silicon Valley to drum up support for a Russian Silicon Valley in Skolkovo outside Moscow. Despite a more promising outlook for Russia’s growth this year, in order for Medvedev’s modernization to be realized, laws must be enacted and enforced.

Another hinderance to Medvedev’s efforts is widespread corruption in the country, equivalent to a third of the country’s GDP annually. The death of Sergey Magnitsky while in pre-trial detention hangs like a cloud. Today, Magnitsky’s business partner Jamison Firestone released a video documenting what the government officials who are responsible for Magnitsky’s death are doing with their ill-gotten fortunes.

Beyond the Magnitsky tragedy the Khodorkovsky trial is a symbol of the lack of property rights in Russia and is costing Russian companies a risk premium as foreign investors demand greater compensation for this political risk.

Leon Aron, director of Russian studies at the American Enterprise Institute wrote in the Los Angeles Times that:

The road to a Russian Silicon Valley starts not in California, Mr. President. It begins with unlocking the door to Mikhail Khodorkovsky’s jail cell.

This is a critical time for Russia’s development as an emerging market. It remains to be seen if Medvedev’s modernization initiatives will be allowed to proceed and allow Russia to develop in an ever crowded global economic playing field or will the presidential election of 2012 reaffirm the Kremlinologists prediction that Putin will rein in liberalizing efforts and lead Russia down the path of increased centralization in government and government oversight of business and trade.

Los Angeles Times
The government is building a Russian version of Silicon Valley. But the Kremlin’s Big Brother approach, along with lawlessness and corruption, leaves entrepreneurs wary of taking risks.
Leon Aron
June 23, 2010

Having survived — barely — an 8% contraction in its gross domestic product (the worst among the G-20 countries), Russia’s prospects for the next few years are iffy at best. Unless oil shoots back up to more than $100 a barrel, the country’s economy may grow only slightly — or stagnate for the next few years.

In response to its economic woes, the Kremlin has decided that what Russia needs is the equivalent of a Silicon Valley. And so the government is building “Innovation City” in Skolkovo, just outside Moscow. The project is envisioned as a kind of free entrepreneurial zone, aimed at attracting the best and the brightest from Russia and abroad. The Kremlin has appropriated $3.5 billion to build the “technopolis” — a gated community surrounded by guards

This is hardly a new strategy. Importing ideas and technology from the West has been a key element in Russia’s “modernizations” since at least Peter the Great in the early 18th century. For two centuries, Russian leaders followed in the czar’s footsteps, including when Stalin implemented his five-year plans. But Russia has tightly controlled what it imported. Machines and engineers, yes. A spirit of free inquiry, a commitment to innovation free from bureaucratic “guidance” and, most importantly, encouragement of brave, even brash, entrepreneurs who can be confident they will own the results of their work — most certainly no.

Peter and his successors sought to produce fruit without cultivating the roots. During the 17th and 18th centuries, this approach could be seen in the Nemetskaya sloboda (German district), where foreign craftsmen lived but Russians were not allowed lest they be tainted by foreign influences.

When national economies were defined by the amount of pig iron, steel and coal they produced, a serf or a worker with no rights would do. They could cast Peter’s cannons and pour concrete for the plants of Stalin’s industrialization. But only a man or woman free from fear and overseers can build a Silicon Valley.

And such men and women are harder and harder to come by in Russia today. Disgusted and scared by the lawlessness and rampant corruption, they tend to shy away from ambitious plans and avoid taking risks.

To be fair, President Dmitry Medvedev, who will visit California’s Silicon Valley this week, is aware of the problems and says all the right things about the need for liberty, private property and a spirit of unfettered innovation. He speaks of the importance of the rule of law. But after two years in power, he is losing credibility, and his words are wearing thin. “How are things, really?” I recently asked a top Russian entrepreneur, having made sure that no one could hear us. “Poka ne trogayut,” he answered. “They are not after me yet.” Hardly an environment for an innovation-driven business model.

Paralyzed with fear and uncertainty, Russian entrepreneurs are investing very little in their country beyond their immediate production needs. Up to 80% of investment in Russia today comes from the government. Capital flight is rampant. Worse yet, according to recent research, some of the most successful Russian entrepreneurs, not satisfied with merely sending their children to live and study in the West, increasingly think of selling their businesses and leaving themselves. At the very least, almost all are building their lives and business around the “two-home” model: one in Russia, one in the West.

Today’s atmosphere is a far cry from the end of the 1990s and first few years of this century. Then, with the worst of the rough-and-tumble, raw and crude capitalism behind it, Russia seemed as if it would soon be capable of forging its silicon valleys. State power seemed to be finally detaching itself from property, and top Russian entrepreneurs, newly confident of their property rights, began to invest billions of dollars to create companies every bit as modern, efficient and open as the leading Western conglomerates. With their profits, they donated millions to charity, promoted computer literacy and Internet availability and invested in a “knowledge-based” economy.

One company and its entrepreneurial leader stood as symbols of the new business environment: the oil company Yukos and its chief executive and principal owner Mikhail Khodorkovsky. Today, the company is no more. It was taken over by the state for alleged nonpayment of taxes, broken up and sold at rigged actions to the state-owned Rosneft. Convicted by a kangaroo court on charges of fraud and sentenced to eight years in prison after his 2005 trial, Khodorkovsky today is in the middle of another farce of a trial, accused of stealing 350 million tons of oil from Yukos’ subsidiaries.

The road to a Russian Silicon Valley starts not in California, Mr. President. It begins with unlocking the door to Mikhail Khodorkovsky’s jail cell.

Leon Aron is director of Russian studies at the American Enterprise Institute.