Will Russia Really Change? Cisco Places Its Bet. But Seeing Is Believing.

Russian president Dmitry Medvedev toured Silicon Valley last week, meeting with tech vendor executives and local entrepreneurs.  At Cisco, Medvedev participated in a telepresence session and used a Flip video camera for the first time. He met with representatives of public organizations and academic and business circles at Stanford University.  And, more informally, AmBAR, the American Business Association of Russian-Speaking Professionals, hosted a session in a café in Palo Alto with local students and entrepreneurs.  In each setting, the Russian president hoped to gain an understanding of what makes the Silicon Valley tick and glean some of the best practices developed in the region to take home and apply to his new Skolkovo initiative.  He has been talking about diversifying the economy for some time.  But with this initiative he has plans to develop a Russian “Silicon Valley” just outside of Moscow.  This new “inno-grad” (from “innovation” and the Russian word for city – think Leningrad) will promote Medvedev’s new modernization directions, including advancements in IT, telecommunications, and also biomedical and nuclear technologies. He aims to attract local and foreign high-tech companies with infrastructure, tax incentives, and other government support.  

Cisco for one is excited about the opportunities in Russia. During Medvedev’s visit, Cisco announced a $1 billion investment in Russia to promote innovation and technological transformation.  Cisco’s commitment includes five simultaneous initiatives:

  • Increased financial participation in venture capital investment with a commitment of a total of $100 million (up from an initial investment of $30 million).
  • Commitment to an active role in the creation of Skolkovo, including business development, thought leadership, services and consulting, with the goal for Skolkovo to be the first Smart+Connected Communities in Russia and a model for Russia's future smart cites.
  • Extension of Cisco’s research and development capability in Russia, with a second global headquarters for its Emerging Technologies Group in Skolkovo.   
  • Collaboration with the Russian VC community on incentives for start-ups including a new phase of its I-Prize competition, open specifically to entrepreneurial teams in Russia to identify ideas and participate in Cisco start-ups.
  • Development of a model for partnering with existing businesses, venture capital and technology companies in Russia.

Cisco sees big opportunity.  As Glen Cox, VP Cisco Services, put it, we “can’t even see the sides of the opportunity.”  They’re thinking about the 20,000 branches of Sberbank, the state savings bank, and the 86,000 kilometers of the Russian Railway – desperately in need of modernization.  But, that’s not the only front on which Russia needs to transform.  Fortunately, Cisco has also recently formed a council to study the opportunity and devise a more detailed strategy – one that will certainly also be mindful of the realities of doing business in Russia. 

Russia needs to do a lot more than build an innovation city in order to transform its economy.  Obstacles are institutional and structural.  Corruption is endemic.  And, for many Russians, fatalism is a way of life. 

Sure, Russia needs to diversify in order to be less susceptible to the rise and fall of oil prices – which it certainly benefitted from in the early years of Putin’s regime.  But, in order to truly create an environment that fosters innovation and empowers the average Russian to buy the products of that innovation – that is, addressing both supply and demand – the government needs to address a few harsh realities:

  • Russia ranks 120th out of 183 countries in the World Bank’s Doing Business Index, a measure of the ease of doing business in a country in terms of the regulatory environment as it affects various stages in starting, operating and closing a business.  In sub-indices Russia ranks 106th in terms of starting a business, 93rd for protecting investors tied with Tanzania and Nicaragua, and 2nd to last in terms of obtaining construction permits only ahead of Eritrea.
  • Russia ranks 132nd out of 158 countries in the Heritage Foundation’s Index of Economic Freedom, falling from 117 in 2000. The Index ranks 183 countries across 10 specific freedoms such as trade freedom, business freedom, investment freedom, and property rights.
  • Russia ranks 59th out of 70 countries in the Economist Intelligence Unit’s 2009 eReadiness Index, a measure not only of technology availability but also use – since you only get the full benefit of the technology if you use it. Russia falls below its other BRIC partners as well as countries such as Venezuela and the Philippines. 
  • Russia tied for 146th out of 180 countries in Transparency International’s 2009 Corruption Perception Index (CPI), and finds Transparency International's Corruption Perception Indexitself in the company of Kenya, Sierra Leone, and below Nigeria and Bangladesh. The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world.
  • Russia ranks 22nd out of 22 in Transparency International’s Bribe Payers Index (BPI) – a component of the broader CPI. TI’s 2008 BPI ranks 22 leading international and regional exporting countries by the tendency of their firms to bribe abroad – that is, measuring the supply side of corruption.

With this track record, Russia needs more than a technology park to promote economic diversity and encourage investment and entrepreneurship. For starters, Russia needs to create demand for technology, not just supply.  To do this, Russia needs to promote business, not just innovation.  Only a business-friendly environment will create the demand for technology – both from successful SMBs and enterprises, but also from the middle class that they create.  For this to happen, Russian needs serious institutional and societal reform.  Not just a new city.  Russia has a history of company towns, of academic villages and of unsuccessful reforms.  Let’s hope with Cisco’s stake in the game they can help encourage a truly broader country transformation.

A Russian saying that President Medvedev evoked in his speech at Stanford University last week asserts that “it is better to see something once than to hear about it a hundred times.”  Let’s hope not to only hear about changes in Russia.