Russia’s Venture Capital Adventure

by Cathy Huang:

At this year’s World Economic forum in Davos, Switzerland, participating heads of state collectively winced as two powerful men from opposite halves of the world shared an awkward moment. Michael S. Dell, the iconic CEO of the computer company that bears his name, and Vladimir Putin, Russia’s current prime minister, were contributing to a discussion panel when Dell offered to help Putin improve his country’s information technology industry.

Putin retorted abruptly, “We are not invalids. We don’t have limited mental capacity.” This defensive stance is understandable given Russia’s former scientific dominance; many people still remember the Russian Sputnik satellite that signaled the arrival of the Space Age. Even today, Russian intellectual talent stems from a math and engineering-centric curriculum. Russian scientists consistently conduct meaningful research. The problem is this research does not happen in their home nation.

Vladislav Inozemtsev, a Russian economist and sociologist, lamented that Russia’s brightest often view their ultimate career goal as emigration to countries with established informational technology industries and strong research universities. Richard M. Cooper, Harvard economist and former consultant to the Council of Economic Advisers and the United Nations, pointed out that “a lot of Russian talent is essentially going to waste in Russia, so the question is: Can you mobilize this outstanding human talent in a way that is economically or technologically productive?”

President Barack Obama of the United States and President Dmitry Medvedev of Russia have both placed technologies high on the list of fiscal economic priorities. (Mika V. Stetsovksi/Flickr Creative Commons)

The government believes it can. Urban planners are currently hard at work in what is now an inconspicuous suburb of Moscow, noted only for the Skolkovo Business School. Much of the area now consists of dilapidated farmhouses and dusty storage garages, but in the coming months, the planners will draw up blueprints for the creation of a technology city modeled after Silicon Valley in the United States. This project, announced last year and now known as the Skolkovo Project, is not set for completion until December 2015, but it has already attracted many key partners in the information technology sector like Siemens, Nokia, Google and CISCO, among others. Viktor Vekselberg, the billionaire owner of the russian conglomerate renova Group and co-director of the Skolkovo project, is confident that the project will entice innovation giants to invest in Russia, a country historically associated with collectivization, agricultural villages, and oil-export dependency. Vekselberg believes that Skolkovo could become nothing less than “a launching pad for the country as a whole.”


The Skolkovo Foundation is recruiting projects that fall into one or more of the five scientific priorities identified by President Medvedev: communications, biomedicine, space, nuclear power, and energy conservation. These industries are, not coincidentally, those that flourish in Silicon Valley and lure thousands of Russian graduates to emigrate each year. The young scientists who have earned office space in Skolkovo so far are working on energy efficient construction materials, anti-hepatitis C drugs, cancer diagnosis tools, and nuclear toxicity sensors, among other cutting-edge tools and technologies. These researchers are part of a group of 16 grant recipients, selected from over 2,000 submissions, and will become the first residents of the new city of Skolkovo.

Alexander Povalko, a 23-year-old physics graduate student, is a member of the federal Youth Committee, a government-sponsored group of entrepreneurs and scientists who represent Russia’s youngest generation of specialists. He explained that international entrepreneurs must prove that their projects and companies are “innovative, in-demand, business attractive, and implementable with russian and foreign resources” if they hope to earn space in the streets of Skolkovo. Povalko spoke excitedly of the promise Skolkovo holds for researchers: “These scientists are brilliant and they’re unafraid. Here’s an opportunity for them to grow their projects at minimal costs. They don’t have to worry about finding an audience or market later on. That’s been taken care of.”

The Skolkovo foundation emphasizes that no physical factories will be built in Skolkovo and that the city will draw its wealth from meaningful research. Cultivating an idea can often prove more fruitful—and profitable—than actual manufacture, as the theory goes. But how will the Skolkovo foundation and President Medvedev entice foreign investors to sow seeds in the new city? Any investor is exempt from paying the federal Value-Added Tax and any income tax until his profits exceed 10 million rubles—or about U.S. $335,000—a year and turnover exceeds 30 million rubles—about U.S. $1,000,000. The Executive Board also promises to refund all customs duties paid during investor import.

Cooper noted, however, that tax holidays are “marginal, at best.” He argued that an attractive economic environment is about more than saving money. Skolkovo scientists won’t want to continue their work if they can’t raise their families and find recreational opportunities. To address this concern, the foundation is putting together competitive benefits packages. The technology hub will operate as a regular residential community with plenty of after-hours additions. The hope is that if Russia is able to provide a standard of living for these scientists rivaling that on the U.S. West Coast, fewer bright minds will hop on planes and take their ideas elsewhere.


Concerns extend beyond the initial challenges of recruiting investors, though. Yale Professor of Anthropology Doug Rogers, who specializes in Russian economic history, believes that “many critics of Skolkovo work from the perspective of free-market absolutism in which any government intervention is seen as a harbinger of failure or inappropriate meddling in the free market.” Those critics have found plenty of evidence to fuel their claims. For one, the Russian bureaucracy is often perceived as corrupt. Since Putin began his first presidency in 1999, the number of people in the Russian bureaucracy has increased by two-thirds of the pre-1990’s number. This younger class of bureaucrat-entrepreneurs has been accused of market manipulation and racketeering. Rogers, however, explained that “state investment in spurring the economy is quite common around the world, even in the West.” He made reference to Chinese state-owned companies, the recent U.S. bailout of GM, and decades of U.S. government support of Boeing. Russia seems to be following this example: the Skolkovo Executive Committee is headed by none other than Dmitry Medvedev, the current president of Russia.

Fortunately for the Kremlin, its involvement in the project has yet to discourage private involvement. In fact, investors seem eager to collaborate with the very institution whose policies are responsible for a large part of the Russian brain drain. Rafael Reif, the provost of the Massachusetts Institute of Technology, which has contributed to the development of the Skolkovo project, said that the school looked forward to “exploring whether opportunities exist for MIT… to conduct educational and research activities that are consistent with MIT’s mission and may contribute meaningfully to the Russian government’s strategic initiative.”


So far, local and international support makes Medvedev’s ambitious vision seem attainable. The Russian government, however, must remain realistic. “This is a very decentralized world and the amount of leverage that any government gets out of it is very limited,” Cooper cautioned. “If leverage is what the russians have in mind, that’s a real long shot. If what they have in mind is using their talent locally and producing some useful ideas, that’s really a more modest idea.” After all, the nations whose technological capabilities russia strives to emulate are also working hard to further their progress. President Barack Obama urged the United States in his January 25, 2011 State of the Union address to remember the “Sputnik moment” and re-invigorate education and innovation. And with China spending as much as 12 billion dollars monthly on new energy technologies, russia isn’t merely playing “catch-up” with this project: It is throwing itself into the middle of a long-existing and highly dynamic technologies race.

Backers of the project must remember that the Silicon Valley didn’t become iconic in a matter of months or years. And though Sputnik was a crowning technological achievement for the Russian people, its physical presence in the skies was short-lived. The first earth-orbiting artificial satellite fell from space when its transmitter batteries died three months after the satellite’s launch. While Russians may hope that Inozemtsev’s observation of the Russian brain drain can be reversed in the coming years as big names in technology find valuable office spaces in Skolkovo, the players in the Skolkovo project must stay ahead of the competition to ensure that this project won’t run out of fuel.

Cathy Huang ’14 is in Morse College. Contact her at