Space PensHere’s an apocryphal tale: during the height of the space race in the 1960s, NASA scientists realized that pens couldn’t function in space and spent millions of dollars to develop a pen that could write without gravity.

The Soviets used pencils.

This was meant to demonstrate Soviet common sense overcoming the American wasteful solution to a problem – a possible reflection of the American paranoia about the perception of Russian innovation and invention in the high-tech arena where money just had to be thrown at it.

Of course, it isn’t a true story – in fact, the Fisher Space Pen Company developed a cartridge that worked in the weightlessness of outer space and the astronauts, beginning with the Apollo 7 mission using Fisher AG-7 Space Pens.

Interesting Times

IdeamenIt’s fair to say that we live in interesting times and interesting times make for interesting situations and interesting people.

I remember Leonid Brezhnev being in charge from 1974-1982 as General Secretary of the Central Committee (CC) of the Communist Party of the Soviet Union (try fitting THAT on a business card). He oversaw the ‘Era of Stagnation‘ with little economic and social activity but enough military investment to successfully position the Soviet Union on the world stage.

Brezhnev’s era of stagnation lasted into the tenures of Andropov (1982–1984) and Chernenko (1984–1985) until Mikhail Gorbachev (1985-1991) introduced his policies of glasnost (“openness”) and perestroika (“restructuring”).

In hindsight, we see that Boris Yeltsin’s reign as President of the Russian Federation (1991-1999) was a seismic shift with the instigation of economic shock therapy (sudden release of price and currency controls, withdrawal of state subsidies, immediate trade liberalization within a country, and large-scale privatization of previously public-owned assets).

Economic shock therapy had been used by West Germany in 1947 / 48 to kickstart their post-war economy and had been used in South America (Chile in 1975 and Bolivia in 1985) as well as in post-communist states in their transition to capitalist systems (Poland and Czech Republic fared well with this).

However, in the case of Russia, a majority of the national property and wealth fell into the hands of a small number of oligarchs – rather than creating new enterprises, Yeltsin’s democratization led to international monopolies. We can also put into the mix widespread corruption, persistent low oil and commodity prices, inflation, economic collapse and enormous political and social problems.

This was indeed one of Russia’s ‘interesting times’.

12 pillars of competitiveness

The World Economic Forum talks about ‘The 12 pillars of competitiveness’ that determine the level of productivity of a country which, in turn, sets the level of prosperity that can be reached by an economy.

    Factor-driven economies

  • Institutions
  • Infrastructure
  • Macroeconomic environment
  • Health and primary education
  • Higher education and training
    Efficiency-driven economies

  • Goods market efficiency
  • Labor market efficiency
  • Financial market development
  • Technological readiness
  • Market size
    Innovation-driven economies

  • Business sophistication
  • Innovation

According to WEF, Russia is currently making the transition from being an efficiency-driven economy to an innovation-driven one but how well is it doing – and will current conflicts, economic sanctions and oil prices slow the transition down?

So Here We Are

Bloc PartyRussia’s economy is highly dependent on the price of oil and the slump in oil prices is straining many economies including Russia (not to mention economic sanctions) but, whereas other nations have a diversified economy and a strong business community, Russia seems to be lacking.

Maybe (this is conjecture) with large organizations being owned more through nepotism and ‘right place, right time’ and less due to the capitalist drivers of competition, customer service, price sensitivities and human capital, there is no underlying entrepreneurial DNA within Russian industry.

And (maybe) with 12.5% of GDP being historically spent on defence, innovation is ‘hidden’ and subject to national security restrictions – although Russia is one of the leaders in developing space, defense and nuclear technologies it is hardly known for producing consumer technologies such as smartphones and laptops, for example.

Whilst Russia has a prolific scientific and R&D community that demonstrates a strong academic commitment, how is Russia to transform technical expertise and know-how into the types of goods and services that will be competitive globally?

Russians received Nobel Prizes for the discovery of the laser but today there is no significant Russian player in the international laser market; Russians built working electric light bulbs before Thomas Edison, but Edison’s companies prevailed; Russians transmitted radio waves before Marconi, but today their presence is negligible in this sector; Russians put the first artificial satellite into orbit, but today they have less than 1% of the international satellite telecommunications market; Russians built the first electronic digital computer in Europe, but who buys Russian computers today?

What’s stopping Russia from succeeding?

An ailing ecosystem

Capacitee Ecosystem ModelThe Community
Approximately 25% of the population has a university degree but the quality of higher education has been decreasing as it falls victim to underfunding (4% of GDP). In addition to this, the perception seems to be that Russians ‘lack’ the entrepreneurial DNA. Where are the role models that can inspire people?

A trickle-down from the general public’s mindset is a business community where less than 10% of Russian companies make direct investments into R&D and innovation (compared to 70% in Germany) – this equates to about 1% of GDP whereas leading economies are seeing 3-5% of GDP and even the developing countries are investing 1.5-2.5% of GDP.

In the World Economic Forum’s “index of companies ability to adapt new technologies” Russia ranks 41 out of 133 but ‘passive innovation’ (adopting of existing technologies) is still seen to be most widespread type of behaviour among Russian companies, whilst less than 20% develop their own advanced technologies.

Russia’s R&D expenditure is c. €5BN but this is only c. 2% of GDP – if a scientific breakthrough is to be exploited it is funded outside of the country.

Maybe the reason why there is a lack of visibility of Russian innovation is that Russia is still, predominantly an inward-facing country. I recall being told by an associate that, if you can do business in Brazil, you would never need to look outside of the borders (he went further by saying if you build a strong enough brand in São Paulo then you don’t even need to leave the confines of the city).

This insularity means that you could, theoretically, build a great business in Russia and not have to worry about being a global player… but only if the markets in Russia were robust enough (as of today, it’s unlikely that this is the case).

An option open to Russia would include developing their friendship with China.

There is a valid set of arguments for cultivating relationships with China (as well as a 2,500-mile border, their economies are dominated by state-run firms and oligarchies) – in addition to this, both nations are members of APEC, BRICS, G20, UN Security Council and the Shanghai Cooperation Organisation. Crucially, both nations have an interest in limiting the global American influence and are supporters of activities in North Korea, Syria and Iran. The major drawback is that the aspirations for growth and influence of both nations are the same and, therefore, competitive.

China is Russia’s second largest trading partner after the EU and, in 2014, Russia offered a stake in Rosneft’s Vankor oilfields to China but pipelines will be delayed by economics. Russia is a larger supplier of oil to China than Saudi Arabia and accepts the Yuan for payments (but China will always ‘shop around’ for the best deals particularly as it becomes more eco-aware and seeks out cleaner energy) so there is an element of co-operation in this area.

Similarly, we have military sales; a common desire to limit the US ‘ownership’ of the internet; and a growing Chinese community in Russia where the Chinese could become the largest ethnic group in Russia’s far east by the 2020s or 2030s (source: Federal Migration Service).

In 2014, Russian Prime Minister Dmitry Medvedev and his Chinese counterpart Li Keying committed to increasing the number of students studying under mutual exchange programs to 100,000 by 2020.

This announcement came at a time when Russia withdrew from the “Future Leaders Exchange” (FLEX) program due to a Russian student staying in the U.S. instead of returning home (the suggestion being that the gay Russian student requested asylum based on his sexual orientation).

Other programmes include the Fulbright educational program, EURECA: U.S.-Russia Innovation Corridor, Alfa Fellowship Program, IREX Global UGRAD, and U.S.-Russia Young Journalist Exchange Program.

As an example, researchers and students who seek to work on joint projects to commercialize their ideas and then apply them in practice can apply to EURECA which extolls the virtue of longer-term engagement in research projects capable of helping regional economic developments.

The core idea of the EURECA program is to bring together leading Russian and U.S. research universities to expand their opportunities in applied research in fields such as technology, business and innovation.

EURECA 1 launched in 2010-12 and brought together a network of Russian and American universities, while EURECA 2 – U.S.-Russia Innovation Corridor (USRIC) involves researchers and students in joint projects in 2013-2017.

Theoretically, a EURECA ‘corridor’ isn’t just an exchange with a university but a regional economy or government that matches with a similar demographic in the U.S. – I guess we could imagine ‘twin cities’ as a fair analogy. For example, the University of Maryland which is a major center for very high-end biomedical research and Lobachevsky Nizhny Novgorod State University which is one of the leaders in genome-based, precision medicine which is diagnostic and can provide non-invasive treatments for diseases like cancer.

EURECA 2 offers navigational services to young university-based startups or projects by providing them with key information on the U.S. market for their idea – this can be done through email or Skype to test out ideas or there is the option to take advantage of the University of Maryland’s International Incubator to establish a business in the United States.

The program looks for “clear business ideas with commercial potential” and those who can demonstrate “open communications and potential to benefit U.S.-Russia commercial ties”.

Whereas the ideology of China may align with Russia, there is a practicality about the Russian-U.S. engagement that encourages entrepreneurship in Russia as that relationship can attract Western venture capital leading to a growth of a more entrepreneurial culture within Russia and new technological innovations that respond to consumer demand.

Skolkovo Innovation Center
information_items_1672There is an obsession with creating a ‘silicon valley’ but there is little guarantee that a contrived region / zone will deliver what the Californian version delivers. In fact, as technology accelerates, it should become logical that, rather than relocate your enterprise to the U.S., you can head to places like Hong Kong’s “Cyberport”, Amsterdam’s “Brainport” or London’s “Silicon Roundabout”.

Or you can look to Russia’s Skolkovo Innovation Center near Moscow.

Covering five ‘cluster’s (Information Technologies, Energy Efficient Technologies, Nuclear Technologies, Biomedical Technologies, and Space Technologies and Telecommunications), the Center offers the ability to gain access to funding, attract leaders in different fields, and build strong relationships with government and private enterprise sectors.

Unfortunately, in a nation of 11 time zones, one center is not enough (it alienates parts of the country) so should be part of a wider network – a ‘dispersed’ silicon valley, I guess.

In addition to this, the highly-regarded universities have become disenfranchised – instead of integrating elements of Moscow State University and Novosibirsk State University, the decision was taken to build a new university. Having worked with academic organizations before, I could have predicted their reaction!

Over the last ten years or so, the Russian government has been investing intensively into both soft and hard infrustructure, establishing c. 200 technoparks and business incubators, 100 centers of technology transfer, 4 special economic zones with special tax and customs regime, Skolkovo, etc. However, the efficiency of the infractructure is low (primarily due to the poor natural business demand for innovations).

Nikolay Vasilyev, a staff scientist at the Division of Surgery at Harvard Medical School and a co-founder and current president of the Russian American Science Association feels that science in Russia is primarily funded by the government, with no private funds involved in supporting science. He believes private funds should contribute more to science. According to Vasilyev, some Russian professors are leaving country because they want to work in a foreign university and Russia has to encourage such mobility, and this mobility needs to happen in both directions.

Where Do We Go From Here?

hqdefaultAt the moment, Vladimir Putin states that he wants Russia to modernise and he supports Skolkovo.

Unfortunately, we see issues regarding low entrepreneurial aspirations, low commitment to R&D, diminishing budgets due to international factors, a lack of public-private partnerships, limited support to innovative SMEs, prohibitive procurement systems that make it difficult for SMEs to secure government contracts, overregulation of entrepreneurial activities, punitive taxation…

Skolkovo has 1,100 startups across the 5 clusters yet there are rumours of onerous bureaucracy, government interference and corruption – driving startups out of the country. Though most have yet to bring products to market, total revenue reached $1bn at end 2014 (firms like Microsoft, Samsung, Cisco, and Boeing were early investors). MIT partnered in the Skoltech university.

Yet the total investment in 2014 was only $60m.

Young Russian innovators are enthusiastic about the hub which secures them big tax breaks, office space, access to business angels and mentors and international trade fairs, as well as helping with operational aspects like setting up businesses and applying for patents.

Usef Hesuani, a 30-year-old former medical graduate, says Skolkovo gave his company a $400,000 grant to help produce Russia’s first 3D organ printer. “The potential is really huge when you consider that in China alone, 1.5 million people are waiting for organ transplants,” Hesuani says. Other stories refer to patents, intellectual property, access to senior mentors, international trade profiling.

This sounds fantastic – but seems to be the exception rather than the norm. In addition to this, it is at the whim of politicians who are not thinking long-term.

In 1968, NASA ordered 400 of Fisher’s antigravity ballpoint pens for the Apollo program. A year later, the Soviet Union ordered 100 pens and 1,000 ink cartridges to use on their Soyuz space missions. As far as I know, Fisher’s pens are still being used in space today.

But whilst Fisher got recognized (and rewarded) for his work, it seems that the Russian brand still has some way to go.

Contact Neil if you are involved in influencing entrepreneurship and innovation within your government organization.

Where is the Russian innovation?