Power Grab Trumps Nanotechnology in Putin’s Russia

Power Grab Trumps Nanotechnology in Putin’s Russia

Russian President Vladimir Putin’s changing attitude toward two giant government-led high-tech projects sends a troubling message about his third term in office: Maintaining power is more important than modernizing the economy.

The projects, known as Rusnano and Skolkovo, were meant to propel Russia’s raw-material economy into the technology age. They involved multibillion-dollar government investments, the first in nanotechnology and the second in a new city that would become Russia’s answer to Silicon Valley. They were supposed to provide the infrastructure and stability required to attract large amounts of foreign investment.

Now, both have become targets in Putin’s campaign to demonstrate that he’s being tough on corruption and mismanagement of government funds. As a result, their chances of succeeding are looking increasingly remote.Putin himself ordered the establishment of Rusnano in 2007, endowing the state-owned company with $5 billion to invest in ventures that would put Russia at the forefront of the nanotechnology revolution. Headed by Anatoly Chubais, the architect of Russia’s early 1990s privatization, Rusnano initially had to place most of its money in bank deposits for lack of ready projects. Since then, it has managed to invest more than $3 billion.

Trouble came in April, when the Accounting Chamber, a body charged with auditing government spending, accused Rusnano of inefficient management in a report that received ample coverage on state-owned TV. It said that Rusnano had transferred about $40 million to shell companies and pointed out that a silicon factory in which Rusnano invested about $450 million was not functioning and was about to be declared insolvent. The report also highlighted the state company’s 2012 losses of 2.5 billion rubles ($80 million) and the 24.4-billion-ruble (about $800 million) in reserves Rusnano had formed against potential losses from risky ventures.

In a recent televised call-in session, with questions carefully screened, Putin did little to support Rusnano and Chubais, who is still reviled by many for his role in the 1990s privatization program. “I believe that he and a number of people who worked with him then made many mistakes,” Putin said in response to a caller who asked when Chubais would finally go to jail. Putin then declared that CIA operatives had been among Chubais’s advisers.

Moving on to Rusnano’s losses, Putin suggested that investing in alternative-energy projects such as solar batteries doesn’t make sense in a hydrocarbon-rich country with long, dark winters. “It’s dark when you get up and dark when you go to bed, when would these batteries charge?” he said. All he could say in Rusnano’s support was that “it has invested inefficiently, but this is not theft.”

The company responded that its initial strategy was geared toward maximizing sales, not profit, and that it was far ahead of plan in that respect. But the objections did not get much airplay, and to a large extent the damage was done. Putin’s coldness and the widely publicized Accounting Chamber report offered a clear indication that the project is out of favor with the Kremlin. That’s not good for Chubais’s plan to have Rusnano fully privatized by 2020, with the first partial sell-off coming this year.

Skolkovo was a pet project of Dmitri Medvedev, the former president and now increasingly sidetracked prime minister. The plan, conceived in 2010, was to invest 85 billion rubles ($2.8 billion) in taxpayer money and offer other special incentives to attract Russian and foreign tech companies to a new city just outside Moscow. The Massachusetts Institute of Technology was enlisted to set up an educational partnership called Skoltech. Billionaire Viktor Vekselberg signed on as head of the Skolkovo Foundation, receiving and administering both government and private funding. On the government’s side, Vladislav Surkov, then seen as the eminence grise of Russian politics, was appointed the project’s “curator.”

At about the same time as the Accounting Chamber published its Rusnano report, Russia’s Investigative Committee charged Skolkovo vice president Alexei Beltyukov, a former McKinsey consultant, with illegally paying $750,000 to parliamentary deputy Ilya Ponomaryov, ostensibly for a series of lectures and research papers. Ponomaryov, a vocal Putin opponent, responded in a lengthy LiveJournal post that the money was for a major promotional campaign aimed at attracting foreign and domestic investors.

“I am proud of what has been achieved,” Ponomaryov wrote. “MIT in Russia, 860 resident companies, thousands of people prevented from emigrating — these are the direct results of the work that has been done.” He called on the investigators to leave Skolkovo alone: “If you have to investigate opposition figures, deal with me directly. Skolkovo is just two years old and it is supposed to yield results only in 10 years. Do not touch the innocent, do not kill off projects of fundamental importance to the Russian economy.”

Vekselberg has sought to distance himself, evidently spooked by the investigators’ mention of a potential conflict of interest in which a Vekselberg-owned bank held the project’s endowment. “Even in a bad dream I could not imagine a deputy head of a parliamentary committee submitting fake reports” to receive money, the state-controlled RIA Novosti news agency quoted the billionaire as saying. The Skolkovo foundation, which Vekselberg heads, has filed suit to get the money back from Ponomaryov.

Surkov, who has normally shunned public appearances, publicly defended Skolkovo during a question-and-answer session at the London School of Economics. “I believe Skolkovo is one of the cleanest projects in terms of possible graft. If some pig has spoiled our reputation that does not mean the whole cause should be multiplied by zero,” he said, according to the BBC. “In my view, it is wrong to talk about possible transgressions prior to a trial.”

Investigative Committee spokesman Vladimir Markin responded to Surkov in an article written for the pro-Putin newspaper Izvestia: “How long would Her Majesty’s minister keep his job if, on a private visit to Moscow, he publicly condemned Scotland Yard for doing its job?” Skolkovo managers must have been “stoned,” he wrote, when they approved the contract with Ponomaryov.

Markin’s words proved prescient: On May 8, the day after the Izvestia article was published, Surkov’s resignation was announced. On May 15, Putin appointed presidential adviser Andrei Fursenko to oversee Skolkovo, effectively taking it out of Medvedev’s control.

Political commentator Alexander Morozov likened the campaign against the “innovation institutions” with Ivan the Terrible’s drive to extinguish potential treachery among his courtiers. In the 16th century, czar Ivan’s personal guard, the oprichnina, terrorized the land, riding around with dogs’ heads tied to their saddles, killing and burning on the czar’s behalf.

“To the approving cries of the masses, demanding that corrupt courtiers be executed for conspiring against the czar, the oprichnina will receive colossal political dividends,” Morozov wrote on the website snob.ru. “Skolkovo, whether any wrongdoing occurred there or not, will be quickly forgotten.”

Whether or not Putin is turning into a modern-day Ivan the Terrible, he clearly cares more about appeasing the masses with the appearance of a major anti-corruption campaign than about furthering technological innovation. While the oil and gas last, modernization can wait. There are more important items on the agenda, like consolidating power.

(Leonid Bershidsky, an editor and novelist, is Moscow correspondent for World View. Opinions expressed are his own.)

To contact the writer of this article: bershidsky@gmail.com.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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