Innovation, by order of the Kremlin

Around the time that Apple Computer was making it big in California, Andrey Shtorkh was getting a first-hand look at the Soviet approach to high tech: He guarded the fence keeping scientists inside Sverdlovsk-45, one of Russia’s secret scientific cities, deep in the Ural Mountains.

Ostensibly, the cities were closed to guard against spies. Their walls also kept scientists inside, and everybody else in the Soviet Union out. While many people in the country went hungry, the scientific centres were islands of well-being, where store shelves groaned with imported food and other goodies.

Security in these scientific islands was so tight, though, that even children wore badges. Relatives had to apply months in advance for permission to visit. The Russian government, hoping to diversify its economy away from oil, is building the first new scientific city since the collapse of the Soviet Union. Even more improbably, it is modelled, officials say, on Silicon Valley.

The site, still nameless and near a village outside Moscow, is conceived not as a secretive, numbered city in Siberia but as an attempt to duplicate the vibrancy and entrepreneurial spirit of America’s technology hotbed.

Russia’s rich scientific traditions and poor record of converting ideas into marketable products are both undisputed, cited as causes for the Soviet collapse and crippling dependence on mining and petroleum. Not surprisingly, then, its leaders look longingly at Silicon Valley.

“The whole country needs some sort of breakthrough,” Viktor F Vekselberg, the Russian business oligarch appointed as co-director of the project, said. Vekselberg was chosen in part because of his investments in solar power, an unusual venture for one of the Russian oligarchs who made fortunes in commodities. “The founding of the innovation city, in form and substance,” he says, “could be a launching pad for the country as a whole.”

Once developed, the site is intended to incubate scientific ideas using generous tax holidays and government grants until the start-ups can become profitable companies. Its backers in government and the private sector describe it as an effort to blend the Soviet tradition of forming scientific towns with western models of encouraging technology ventures around universities.

Skeptics see a deeper strain of Russian tradition: trying to catch up with the West by wielding the power of the state. Looking askance at the incongruous blend of the Kremlin’s will and the openness prized by Silicon Valley, they refer jokingly to the new city as Cupertino-2.

“We should not expect the same mechanisms that work in Silicon Valley to work in Russia,” says Evgeny V Zaytsev, a co-founder of Helix Ventures, a life sciences venture capital company based in Palo Alto, California, and a member of the advisory board of AmBar, the Russian business association in the real Silicon Valley. “The government will be involved, because that is the way it works in Russia.”

Indeed, the new city was conceived by the Commission on Modernisation, deep within the Kremlin bureaucracy.

The Russian government, though, has a long and conflicted relationship with entrepreneurs and scientists. There is still a thriving tradition of government crackdowns on private business with capricious enforcement of the tax laws, making entrepreneurship difficult.

For now, Russia’s hoped-for Silicon Valley is a panorama of muddy fields, birch groves, warehouses and storage sheds belonging to a state agricultural institute. The site was chosen for its proximity to another ambitious project, the Skolkovo business school, housed in a futuristic building financed by millions in donations from the oligarchs, including Vekselberg.

An exception

While similar ideas have been bandied about for years, this one was approved — and blessed with $200 million in government money — within a month of a visit in January to the Massachusetts Institute of Technology by senior Kremlin leaders, including Vladislav Surkov, the powerful deputy director of the presidential administration. Surkov says the new city will isolate new businesses from the bureaucracy that handcuffs the Russian economy today.

A government-financed foundation will build and run the city. Directors of existing state-financed tech companies will serve on the board and contribute funds. Separately, a scientific council will decide which companies can locate at the site. The infrastructure should be in place within three years Vekselberg says.

For a time, the Russian elite embraced petroleum as the ticket to restore the country’s domestic economy, its standing in the world and its power in regional politics. Vladimir V Putin, then the president, took to citing the stock price of Gazprom as a national accomplishment.

But Gazprom, a company that inherited title to the world’s largest natural gas reserves, is now valued by investors at well below Apple, a company that sprang from a garage. For nationalistic Russian officials, it only rubs salt in the wounds that Silicon Valley companies so easily recruit bright Russian scientists. AmBar, the Russian business association, estimates that 30,000 to 60,000 Russian-speaking professionals work in the San Francisco Bay Area.

A marquee name in the high-tech world, the Google co-founder Sergei Brin, immigrated to the United States from Russia with his parents when he was a child. Had Russia been a different place, perhaps Brin might have help start Google there instead of in Silicon Valley.

In the midst of the oil boom, Russian officials suggested luring back Russian talent by building a gated residential community outside Moscow, designed to look like an American suburb. What is it about life in Palo Alto, they seemed to be asking, that we cannot duplicate in oil-rich Russia?

The new effort, though, goes well beyond good housing. It also embraced the idea of encouraging new companies to commercialise the work done at university laboratories.
Russian officials looked at Asian techno-parks with favourable tax treatment and established four of their own. Three were based in former closed scientific cities.

The visions for Russia’s Silicon Valley, though, are grander still. A proposed law would liberalise a host of tax, customs and immigration rules in ways businesses have wanted for years. For example, the planners say they have studied the role of streamlined immigration rules in drawing talent to Silicon Valley.

President Dmitri A Medvedev appointed Vekselberg the co-director of the project, a position that will probably evolve into one of two directors of the foundation to manage the new city. As a first order of business, he is to recruit a foreign businessman to co-direct the city with him; he has so far sent out about 100 letters to foreign business contacts who are potential candidates.

Vekselberg’s Renova group, whose primary assets are in metals and oil, has a significant investment in solar energy through a 44 per cent stake in Oerlikon, a thin-film solar panel maker based in Switzerland.

Vekselberg said he was surprised by his appointment but is now a true believer in the project and would like to attract a mix of start-ups, established companies and academic institutions. Medvedev, in a televised meeting about the new city, emphasised commercialisation: “The new technologies which we are creating are not toys for eggheads,” he said.