091203 UK VC Workshop at LSE - Invest In Russia?


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091203 UK VC Workshop at LSE - Invest In Russia?

  1. 1. Russian Innovation Economy: Myths and Realities<br />Ilya PonomarevState Duma – Russia ParliamentLondon, December 2nd,2009 г.<br />
  2. 2. President’s call for modernization<br />“4i” initiative<br />Infrastructure<br />Institutes<br />Investment<br />Innovation<br />Presidential address to the parliament in 2009 was focused on innovation<br />Most fashionable discussion topic<br />
  3. 3. Russian competitive advantages<br />People<br />Education system<br />Number of R&D specialists<br />Technology legacy from USSR<br />Potentially vast internal market<br />Virtually unlimited financial resources<br />
  4. 4. Problem 10. Inconvenient legislation<br />Incompatible with usual approach legal acts:<br />VC regulations<br />NoLLP form<br />VC funds in Russia are regulated as mutual funds<br />Corporate legislation<br />Technology transfer act<br />Acts where bad wording leaves room for unfavorable misinterpretation<br />Software VAT exemption act<br />Privacy protection act<br />Legislation that requires amendments in new economy environment<br />Civil Code<br />Internet crime liability definition<br />IP rights protection<br />State procurement act<br />Bankruptcy regulations<br />e-Payment systems<br />Miscellaneous industry-specific acts (telecom, advertisement, mass-media, …)<br />
  5. 5. Problem 9. Corruption<br />Inequality between large corporations and start-ups when dealing with state agencies<br />Getting approvals<br />Response time<br />Police abuse<br />Access to contracts<br />Widening gap between society and the government makes civil agreements invalid<br />
  6. 6. Problem 8. International competition<br />Low productivity in Russian economy drives up costs even for effective businesses<br />Higher wages decrease competitiveness<br />Brain drain<br />Russian authorities do not help national producers to compete internationally<br />No offset deals<br />No technology brokers (or export support agencies)<br />
  7. 7. Problem 7. Bad Russia’s image<br />Russia is not associated with quality products, even less with technology intensive products<br />Russia is perceived as an unreliable and unpredictable partner<br />Civil society and democratic institutions crisis, decreased trust in national leadership scares investors <br />
  8. 8. Problem 6. Infrastructure<br />Lack and expensiveness of modern business infrastructure<br />Office premises<br />Telecom<br />Financial instruments<br />Debt financing is expensive and hard to negotiate<br />Excessive concentration of business activity in Moscow, colonial policies towards other regions<br />Low quality of life<br />Housing and utilities deterioration<br />Soviet education system collapse<br />Urban planning traditions of the past outlived themselves<br />
  9. 9. Problem 5. Inadequate institutions<br />No unified management of economy modernization at the executive level<br />Poor investments environment<br />No traditional exits<br />No technology IPOs<br />No strategic investors<br />VC funding is undeveloped<br />State institutions (Rusnano, RVC) cannot replace working market<br />Gap between universities, R&D and businesses<br />State funding has not reached the point of influencing or just supporting innovation businesses<br />
  10. 10. Problem 4. Resistance of the elites<br />Russian elites do not have long-term plans in Russia<br />They tend to diversify outside Russia<br />They want to live in Western consumer society, but get their easy dollars in Russian regions<br />Personal wealth is fully dependent on natural resources<br />Any type of social innovation threatens stability of existing “sovereign” political and governing system<br />
  11. 11. Problem 3. Business climate<br />Outrageous court and police system<br />Unsecure situation with private property protection<br />Investing in Russian assets looks risky<br />Customs<br />Tax collectors either do not know specifics of hi-tech businesses, or consciously abuse innovators<br />Extremely long time to get required decisions and approvals from any state agency<br />
  12. 12. Problem 2. Structure of Russian economy<br />At the current economy conditions hi-tech businesses present higher risks with at least uncertain return, compared to natural resources and other “traditional” enterprises<br />Chosen way to privatize created large “cash cow” corporations with low debt and virtually unlimited resources, creating unfair competition with any new companies and demotivating managers to improve productivity<br />Tax code favors industries with higher revenues and lower added value<br />Limited demand for Russian-made technologies<br />
  13. 13. Problem 1. Deficit of human resources<br />No entrepreneurs, even less – serial experienced entrepreneurs<br />No success stories to follow<br />No adequate business schools <br />No professors with first-hand experience<br />Decreased level of people’s geographical mobility<br />Lack of international business experience and proper connections<br />Language barrier<br />Demographic crisis<br />
  14. 14. How we deal with all these?<br />1. We have created “institutes of development”:<br />Equity financing<br />Rusnano – investment company, invests into all-stage companies, funds, manages projects, supports infrastructure<br />Russian Venture Corp – fund of funds, includes dedicated fund for seed financing<br />Rosinfocominvest – private equity fund for IT and telecom<br />Bortnik Fund – pre-seed grants<br />Debt financing<br />Vnesheconombank<br />Infrastructure support<br />Hi-tech parks task force – new technology areas (Academgorodoks)<br />Special economic zones – exclusive tax and customs regimes<br />
  15. 15. How we deal with all these?<br />2. Presidential initiatives:<br />Commission for Economic Modernization – President’s project office<br />Council for information society development – President’s council to coordinate ministries to raise new technology awareness<br />Fund to return compatriots (planned in 2010-2011)<br />Agency to support hi-tech exports (planned in 2010)<br />High School of Modernization (planned to be initiated in 2010)<br />Skolkovo Business School<br />
  16. 16. How we deal with all these?<br />3. Legislation and policy-setting efforts:<br />Innovation companies tax support<br />Step 1 – IT exporters<br />Step 2 – all IT<br />Step 3 – all hi-tech<br />Self-regulatory bodies<br />VC Support Act (introducing LLPs)<br />Hi-tech Parks Regulation Act<br />Bankrupcy regulation amendments<br />LLC regulation amendments<br />JSC regulation amendments<br />State procurement regulation amendment<br />e-Document Act<br />Objective – to create Innovation Code<br />
  17. 17. …We are still the smartest, so we’d definitely make it!<br />