An Insider Perspective on International Business in Russia

Volume 12, Number 65

LEAPING AHEAD:Hi-Tech in Russia

Volume 12, Number 65 AmCham News

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Cover Story

Russia’s Greatest NaturalResource Forgotten?

By Lawrence Wright, Deputy Executive Director, International Science and Technology Center

Russian Scientists and Researchers Carry on Tradition of Innovation

Billions of dollars in untapped resourcesare spread across Russia. Noexploratory drilling will ever locate

these resources and no pumping or miningoperation will ever tap into one barrel of them.Russia’s greatest strategic reserve lies largelyuntapped by today’s market-driven economyand most entrepreneurs remain oblivious tothe opportunities that await them.

What, or rather whom, are we talkingabout? The 900,000-plus scientists, engineers,programmers and technicians and their vastknow-how, which represents the largest andmost highly-educated and innovative techni-cal workforce the world has ever seen.

Some companies have recognized thepotential and positioned their businesses toexploit the talent. Well-known names such asMotorola, Boeing, United Technologies andIntel among others are employing thousandsof specialists as software developers, designersand engineers. Since 1994 the InternationalScience and Technology Center (ISTC) hasalso contributed significantly to the preserva-tion of Russian science and technology (andtheir redirection from work on weapons sys-tems) and is currently the largest investor inRussian/CIS technology, having funded over$650 million in grants and the purchase ofmodern laboratory equipment at some 600institutes.

More Than EducationRussia’s vast human capital is a product of

more than just a good educational system. Itsroots go back to the way technologies weredeveloped in the Soviet Union and the uniquecombination of restraints (in the form of lim-ited computing power) and opportunities(nearly limitless state funding for R&D).Soviet spending on science and technology,mostly to support its war machine, was fundedto excess, creating unique opportunities toexplore the boundaries of science and technol-ogy in ways that would not be possible in amarket economy. But, because of the lack ofpowerful computers and access to Westernequipment, Russian scientists were forced tobe highly creative and innovative in developingtheir “elegant” solutions. Essentially, theysimply look at problems in a different way thantheir Western counterparts.

The tendency of late to characterize Russiaas another India, and have Dubna competewith Bangalore, is missing the mark. Given theinnate innovation potential of Russianresearchers and the highly sophisticatedRussian educational system, this comparisonshows a misunderstanding of the situation and,in fact, sells short Russia’s hi-tech potential.This is not to take anything away from the needfor highly-skilled programmers and softwaredevelopers in Russia. On the contrary. It justshouldn’t be the basis for a national strategy todevelop the knowledge-based economy, asPresident Putin has called for. Putin’s idea todiversify the economy, to reduce the depend-ence on hydrocarbons and to double GDP canonly be achieved by a full engagement in link-ing the vast technology sector with industry inthe way appropriate to a market economy,inclusive of offshore programming. And this isin the strategic long-term interests of every-body, not only the Russians.

An Isolated SectorBut why then over the past 15 years has the

technology sector been largely forgotten? Firstof all, the technology sector has always beenisolated from the markets (even physically insome cases). The command-driven economy,rather than markets, dictated research goals.In contrast, in the U.S., Germany and Japan,two-thirds of all R&D funding comes from theprivate sector. After the collapse of the SovietUnion, there was no strategic restructuring ofthe technology sector and industry wasfocused on exploiting easy-to-develop naturalresources. Meanwhile institutes collapsed, sci-entists emigrated or were absorbed in the localeconomy as taxi drivers, businessmen andinsurance salesmen. But, many remained andsuffered through the impoverished years (forscience) of the 1990s. With the help of pro-grams like those of ISTC, CRDF, IPP, NCI,INTAS, TACIS and others, these committedscientists were able to hold on to and, in somecases, advance their technologies.

Now there are renewed opportunities toprofit from Russian innovation. Over a decade,economic hardship has forced institutes tocompete for funding and to rethink their rela-tionship to the market. Successful Russianentrepreneurs with technical and engineering

degrees are returning to look at hi-tech businessopportunities. Technical departments at univer-sities are seeing hot competition in areas such asbiotechnology, mathematics and physics.

The desperately needed tools in this sectorare business management, marketing, IPRprotection and knowledge of hi-tech markets.

Startling InnovationWhen Russia’s hi-tech talent is combined

with Western business and marketing skills, theresults usually prove both startlingly innovativeand commercially effective as powerfully dis-ruptive technologies emerge.

For example, one scientist developed aunique enzyme as a burn treatment. The mar-ket for this type of burn treatment was smalland didn’t warrant serious investment. Butwhen ISTC asked a team of graduate studentsto look at the technology, it determined thatthe enzymes could make an interesting food-processing product. With ISTC’s help, newmulti-billion dollar markets for this technolo-gy were found and development to exploitthese markets is underway.

Efforts in recent years to develop a venturecapital market for the country are welcome,but along with venture capital, other mecha-nisms designed to develop those investment-worthy opportunities need to be in place.When venture capital groups look for invest-ment opportunities, they are often disappoint-ed to discover that most of the opportunitiesare at a very early stage of development. So theinfrastructure of commercialization and inno-vation needs to be developed. Technoparkscan certainly play a role in that, but as innova-tion centers and not as state subsidies to com-puter manufacturers or software developers.ISTC’s new commercialization program helpsRussian and CIS scientists find the rightWestern partners, reduces risks for investorsand develops early-stage opportunities to thepoint of marketable products and services.

The match between the Russian and CISinnovators and Western business is a naturalone, whether for software development, drugdiscovery, new medical devices or solid statebatteries. Opportunities abound for thoseentrepreneurs who have the foresight and per-sistence to see the opportunity and bring it tofruition. n