Background Briefing: Current Innovation Environment in Russia and Innovation Environment in NovosibirskPrepared by Ilya Ponomarev, Deputy, Russian State Duma, representing Novosibirsk, Chair Duma Sub-Committee on High Technology

Prepared February 12, 2010.

The current environment for innovation in Russia has its roots in Soviet R&D and management practices. The USSR was one of the most science-intensive economies in the world within certain sectors. Most high tech applications were either military or space-oriented and were never applied to consumer goods.

Soviet legacy still heavily influences the innovation environment in Russia, bringing certain strengths and weaknesses:

Strengths:- Experience in complex, multidisciplinary projects;- High level of creativity, non-standard approaches, thinking outside the box;- Resource conscious, ability to work with a minimal budget and in a spartan environment;- Ability to adopt and re-invent best international practices;- Regenerating human resources potential (Russian labor is not the cheapest, but it is the

best in terms of price/performance ratio);- Huge legacy of as-of yet uncommercialized technologies.

Weaknesses:- Scientists have experience working as a subcontractor for one customer – the

government. No experience in creating and marketing products or services. No community of serial entrepreneurs;

- Lack of connection between universities (in Russia they just teach and do not conduct research), R&D institutes and industry;

- No practical experience of IP protection, although IP legislation is adequate;- Russian analogue of Boyle-Dole Act creates a very complex procedure for technology

transfer;- Funding system is focused on sustaining the status-quo and does not incentivize scientific

breakthroughs or commercial success;- Very limited exits through IPO or M&A for investors, thus VC financing is virtually non-

existent;- Failure is punishable;- Currently not socially fashionable to be a scientist.

In addition to this heritage of the Soviet period, the general economic climate impacts negatively on the potential for innovation:

- Existing tax code favors low value added industries and natural resource production, like oil and gas;

- Incompatibility of Russian legislation with international legal practices in certain important areas makes it hard to copy best practices from the West;

- Labor market is dominated by large corporations, who provide highest paying jobs and security; thus, it is easier and safer for talented young people to join large companies, rather than taking the risk of starting their own companies;

- Lack of domestic demand for innovative technology, because it is still easier to cut costs by optimizing management of existing staff and physical assets inherited from the chaotic past, rather than invest in new technologies. In the best case, Russian companies will purchase technology from international suppliers, rather then trying to find something locally, even if it is cheaper and better fits their businesses, because there is less risk purchasing an internationally accepted technology.

In 2008, President Medvedev announced his "4i" (Infrastructure-Institutes-Investment-Innovation) initiative, targeted to turn around the Russian economy and to reduce its dependence on natural resource production. In 2009, he formed two new executive bodies under his direct administrative control for this purpose. One is called the “Council for Information Society Development,” coordinated by Leonid Reiman and focused on coordinating efforts in IT, telecom and e-government. The other is the “Commission for Development of the Economy,” coordinated by Arcady Dvorkovich and responsible for the President's priority projects in 5 key areas: green-tech, bio-tech, space and telecom, nuclear, IT and supercomputing. Currently the topic of modernizing the economy remains the mostly actively discussed topic among the Russian elites – politicians, intellectuals, businesspeople and opinion leaders.

The Russian government has also initiated the creation of so-called "institutes of development." These are essentially, special-purpose investment vehicles. The largest of these is Rusnano, with over $5 bln. under management, targeted to investment in all aspects of developing companies in nanotech. Another one is the Russian Venture Corp. - a fund of funds, which is focused on developing the foundation of the innovation ecosystem. It is also important in this context to mention Vnesheconombank, the state-owned bank which finances large infrastructure projects, in particular in energy efficiency and alternative energy.

To physically facilitate the creation of start-ups, two national projects are being implemented. One involves development of a network of special economic zones in which companies located there get certain tax breaks and do not pay customs duties. The other is a network of high-tech parks, which are designed to provide a Western-style working and living environment for entrepreneurs and employees of start-up companies.

The most advanced high-tech industries in Russia today are:- IT services, including offshore programming- Telecom software- Internet services (search, security, social networks, internet media). Recently Russian

investors acquired Livejournal and invested in Facebook.- Payment systems, especially non-banking payments- Oil and gas E&P technologies- Measurement devices and precision equipment

Novosibirsk Innovation Environment in Brief

Situated in Central Siberia on the picturesque Ob River, Novosibirsk is the 4th largest city in Russia and is the undisputed capital of science and innovation. It began to achieve this status during Soviet era, when in 1957 the Soviet government decided to create a new type of science and research center on the outskirts of the then somewhat unremarkable city of Novosibirsk.

At the time, Novosibirsk was probably the youngest city in Siberia and much less important than its neighbours Omsk, Tomsk and Krasnoyarsk. It was founded at the end of the 19th century as a logistical support center on the Transsiberian railroad. It grew significantly during World War II, when numerous industrial enterprises were relocated there to avoid possible seizure by the German army; but after the war ended, its importance dropped once again. So the government decision in 1957 meant new life for the whole region.

Young and ambitious physicist Mikhail Lavrentiev was put in charge for the project. He proposed to create a dedicated satellite town near Novosibirsk, called Akademgorodok. He personally picked a place for it, and developed an innovative concept of urban development of a "forest town," which was later adopted in many places all over the world. He was the first in the USSR to blend education, science and comfortable lifestyle into one compact space, which for years became a dream place for Russian scientists. Akademgorodok immediately attracted the best brains from different locations all across the Soviet Union, and the Siberian branches of all three Soviet research communities - Academy of Sciences, Academy of Life Sciences and Academy of Agriculture - were established. Life in Akademgorodok was advertised in movies featuring heroic scientists that were building the new communist society. Very soon Akademgorodok became also a symbol of civil liberties, starting the political careers of some of the most visible Russian dissidents, like Alexander Galich.

At the present day Akademgorodok, with a population of 100,000, has lost a lot of its appeal. It is still one of the most expensive pieces of real estate. Novosibirsk State University is still one of the best education institutes in Russia. The Siberian branch of the Russian Academy of Sciences (RAS) is still the major research organization in the country. SRC Vector is the main biotech R&D facility in Russia. Large corporations like Intel, Sun, Schlumberger and others have opened offices in Akademgorodok. However the brain drain that started in 1991 (for example, Microsoft alone now employs thousands of NSU graduates in its US offices) resulted in a significant impact on the commercialization potential of the research institutes located there. Those who stayed focus mainly on state-funded basic research, avoiding thoughts of the applications of their technologies and in general resisting all changes in the country. Outraged with the results of market reforms, within a period of less than 5 years Novosibirsk became the biggest electoral supporter for the Communist party. Now there is a visible gap between the emerging young generation of scientists and engineers and their older mentors, which often results in the young scientists and engineers either leaving the high tech industry or the country.

During the past several years the local government has sought to address these problems by focusing on supporting innovation and entrepreneurship. In early 2005 after a brainstorming meeting in Novosibirsk chaired by then-President Putin, a nation-wide program for creating special economic zones and high-tech parks was announced. Governor Tolokonsky made it a top

priority in his agenda. In 2007, the Novosibirsk high-tech park concept was approved, money and land allocated, and in early 2008, construction started. Despite the serious problems caused by the financial crisis in 2009, the first stage of construction is to be completed by March 2010. Currently 100% of office premises for both first and second stages has already been reserved by future tenants.

The Novosibirsk high-tech park (NHTP) has been founded as a joint-stock company by the Novosibirsk Region, the City of Novosibirsk and SB RAS. It is chaired by the former vice-governor and ex-chief of staff of SB RAS, Dmitry Verkhovod. After launch, there are plans to establish a commercialization chain between NHTP and the MIT-affiliated Cambridge Innovation Center (located in the Cambridge/Boston hotbed of innovation), giving Novosibirsk companies an easy path to US market entry. Another Cambridge/Boston-based company, Cambridge Innovation Group, is creating a special technology brokerage company to be called the “Novosibirsk Innovation Collaborative.” They will open an office in the high-tech park to assist local companies to commercialize their IP for international technology markets. It is also important to highlight the example of Novosibirsk-born international companies like Parallels, to inspire new generation of entrepreneurs to stay in Akademgorodok and start their businesses there. So far no other Russian region has managed to match this approach.

The major Russian state-funded investment vehicles, like Rusnano and Russian Venture Corp., have announced their programs in Novosibirsk. Rusnano is going to open its first-in- Russian Nanocenter - essentially, a nanotech production cluster - in Akademgorodok, as an extension of NHTP. The idea of creating a new greenfield university which would resemble MIT and would produce high technology entrepreneurs, is now actively being discussed within the Russian federal government.

In general, the most promising sectors for development in Novosibirsk are:- IT- nanotechnologies- biotechnologies, pharmacology and life sciences- measurement devices and precision equipment- green tech and alternative energy- geology and earth sciences, especially in exploration