CXO

Rolling out Russian tech reforms

Could Russia be the next China? A Shanghai on the Lena could happen, says Russia's top technician, but it's going to be a tough process.

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By Michael Kanellos
Staff Writer, CNET News.com

PALO ALTO, Calif.—Andrey Fursenko, Russia's minister of education and science, certainly has his work cut out for him.

The government official in charge of the country's technology strategy laid out ambitious plans for his nation during an interview and a speech at the U.S.-Russia Technology Symposium at Stanford University last week.

In January, President Vladimir Putin gave him the go-head to come up with a plan for erecting tax-friendly technology parks to attract local and international IT companies, similar to those in China, Ireland and the United States.

Fursenko, a scientist himself, has also initiated reforms at the Russian Academy of Sciences and in the nation's university system. Part of the reforms will involve changing degree programs so that the credentials more closely resemble the bachelor's, master's and Ph.D. degrees of the West, further smoothing the path for intellectual exports.

"This is one of the most challenging reforms in the immediate future. We are losing our position. We need to make sure there is no longer a decline in the quality of education," Fursenko said. "Engineering training is sometimes better in Russia, but business training is better here."

Ideally, the reforms could help India and China become established as low-cost centers of advanced technology. Russian technology exports include Sea Launch, a company that launches satellites from a platform on the equator, and antivirus software. Yandex, the company's version of Google, is growing rapidly and has emerged as a possible takeover target, one high-tech executive said.

The country also remains one of hot markets in the world for IT products and has outpaced other European countries in the consumption of cell phones, PCs, networking equipment and other items for the past few years. The growth there, in part, prompted Microsoft to launch a low-cost version of Windows there.

"Engineering training is sometimes better in Russia, but business training is better (in the United States)."
—Andrey Fursenko
Minister of education
and science, Russia

But creating a Shanghai on the Lena won't be easy. Foreign investors remain wary about Russia, especially when it is so much easier to open operations in China. The amount of U.S. venture investing in Russia pales in comparison to the billions flowing to China and India, noted Drew Guff, managing director of Siguler, Guff & Co., an international investment firm. Most of the "foreign" investment in Russia comes from offshore funds created by local oligarchs, he added.

Recent events like the Yukos scandal have reinforced the country's reputation for instability, inefficiency and corruption.

"If we weren't there already, we would probably be waiting," said Claude Leglise, vice president of Intel Capital, commenting on the current business environment. Intel began to place venture investments in the country two years ago.

"You can scour the country and find wonderful things, but you can't get a simple answer to who has to say yes" to starting a project, Leglise added.

Even Fursenko has problems sometimes with the government inertia. A year ago, he proposed a law that would allow universities to transfer their patents to the inventors for free. The idea was to pave the way for start-ups. Now the institutes keep the royalties.

"If we weren't (invested in Russia) already, we would probably be waiting."
—Claude Leglise
VP, Intel Capital

"But there was a problem with the minister of finance," Fursenko said. There is now a compromise proposal on the table. The inventors would have to pay royalties to the university, but no royalties accrue until revenue from products—based on their patents—comes in, and the royalties would have to be dedicated to further expanding the ideas behind the original patent.

Russia also remains at loggerheads with the West over the export of its nuclear technology. Russia says it does not want to see the proliferation of nuclear weapons. "It is an excellent area of cooperation" with Western countries, Fursenko said.

Selling nuclear materials, however, "is a business. A big business," he said.

One avenue toward success may lay in thinking small. In the past, Russia has primarily sought marquee projects, such as getting Boeing or Motorola to build factories or research centers in the country.

Now "we have to be much more practical. We have to talk about concrete, maybe not-so-huge projects," Fursenko said.

"There is not a lot of long-term credit in Russia."
—Esther Dyson
Editor, Release 1.0

One element of the effort to foster smaller enterprises will likely involve establishing a basic credit system. "There is not a lot of long-term credit in Russia," said Esther Dyson, editor at large at News.com publisher CNET Networks and an investor in several Russian companies. A few years ago, she recalled, someone in the Ural region sought $50,000 in venture funds to build a bowling alley.

Legal incentives have to be created for people to not use pirated software, Fursenko said. Western companies also have to stop ignoring the problem, too, because crackdowns might interfere with their own sales channels, he asserted.

"Sometimes their (local) partners use a gray scheme," he said, "but the companies turn a blind eye."

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