Kremlin Intrigue Threatens Russia’s Silicon Valley; A $4.6 billion effort to jump-start Russia’s technology industry is running into trouble even before it’s finished

Kremlin Intrigue Threatens Russia’s Silicon Valley

By Henry Meyer on July 18, 2013

When agents stormed the offices of the Skolkovo technology hub in Moscow on April 18 to seize documents, a top Intel (INTC) executive unexpectedly got caught up in the raid. Dusty Robbins, head of global programs for the chipmaker, had to surrender his mobile phone. He was only allowed to leave the building escorted by officers after Skolkovo managers appealed to investigators to let him go. Robbins flew back to the U.S., skipping a planned meeting with the tech complex’s billionaire president, Viktor Vekselberg.Skolkovo, unveiled in 2010 as a personal initiative of then-President Dmitry Medvedev to build Russia’s own version of Silicon Valley, has won pledges of almost half a billion dollars in investments from companies including Intel, Microsoft (MSFT), Siemens (SI), Samsung Electronics (005930:KS), and Alstom (ALO:FP). Cisco Systems (CSCO) has promised to invest $1 billion in the technology sector in Russia, much of it in Skolkovo, which is currently under construction outside Moscow. Companies that participate in the tech center will pay no income tax, value-added tax, or property tax for 10 years provided annual Russian revenue doesn’t exceed 1 billion rubles ($31 million) and net profit doesn’t exceed 300 million rubles. Skolkovo companies will pay lower social security taxes for employees and are exempt from customs duties on equipment imported for research.

Since President Vladimir Putin took back the top job last year from his former protégé, the project has come under attack, with two criminal cases opened against Skolkovo executives and Putin reversing preferential treatment for the hub. By 2020 the master plan calls for a 400-hectare (1,000-acre) site with 25,000 permanent residents, its own schools, housing, and mass transit connections to be fully functioning.

“The fate of the project is very important,” says Sergei Guriev, a Medvedev economic adviser. Guriev fled Russia for France in April for fear of prosecution because of his ties with opposition leader Alexey Navalny. If the project fails, “there will be serious damage to Russia’s international credibility,” Guriev said by e-mail from Paris.

Medvedev, who took the prime minister’s job in May last year after surrendering the presidency to Putin, is being targeted by Putin allies seeking to sideline him, according to Kremlin adviser Sergei Markov, a former lawmaker from the ruling United Russia party. Three ministers in Medvedev’s Cabinet have been fired or forced out since October, most recently Deputy Prime Minister Vladislav Surkov, the government’s chief of staff. The announcement of Surkov’s resignation in May came after he publicly criticized the criminal investigations into the use of state funds at Skolkovo, which Surkov oversaw.

Companies such as IBM (IBM) say the Russians must prove they are serious about securing Skolkovo’s future. “People need to feel that it’s backed by the government at large and not just by an individual,” says Ian Simpson, who has run IBM’s software research and development center in Russia for the past five and a half years. IBM has plans to transfer its R&D facility to Skolkovo in 2015 and invest almost $100 million there.

The tech complex is a hallmark of Medvedev’s efforts as president to wean Russia off commodities and nurture a knowledge-based economy. Medvedev was president while Putin, who was banned by the constitution from serving more than two consecutive presidential terms, bided his time as prime minister. On a U.S. visit in June 2010, Medvedev toured the offices of Apple (AAPL), Twitter, and Cisco, securing the latter’s $1 billion investment commitment. The 47-year-old Medvedev, a lawyer who was one of Russia’s first iPad owners, is an avid tech consumer with an active Twitter account. Putin, 60, who served as a colonel in the Soviet-era KGB, has said he doesn’t have time to use social networks.

Gleb Pavlovsky, an ex-Kremlin adviser who heads the Moscow-based Effective Policy Foundation, says, “The idea of the project itself is anathema to the leadership because of its special status and independence. Without Medvedev able to protect it, it can’t survive.”

In December, Putin vetoed a law that had exempted Skolkovo from the need to obtain state planning permits. A week later, Putin said at his annual press conference that Skolkovo isn’t the only scientific center in Russia that deserves government support. He also slapped down Medvedev’s idea to host the Group of Eight summit there in 2014.

Putin spokesman Dmitry Peskov says it’s “not true” that Skolkovo has been targeted for political reasons. The prime minister’s spokeswoman, Natalya Timakova, did not answer requests for comment. In February the Investigative Committee, a top law enforcement body, said it was investigating the misspending of $106 million provided by the government and deposited in a bank Vekselberg controls. The Investigative Committee also announced it had opened a criminal case against two Skolkovo managers over the alleged theft of $720,000.

On April 19, a day after the raid, the government opened a second case, accusing a Skolkovo vice president, Alexei Beltyukov, of allegedly making illegal payments of $750,000 to opposition lawmaker Ilya Ponomarev for preparing a series of lectures about Skolkovo.

Beltyukov, 42, who received an MBA from France’s INSEAD business school and worked at McKinsey, declined to discuss the accusations against him as the case is ongoing. “It doesn’t make sense to damage the project itself,” he says. “It would be a great loss for the country if it was shut or wound down.” Ponomarev, one of the organizers of mass protests against Putin in 2011 and 2012, says he spent more than 90 percent of the $750,000 on travel expenses and hiring experts, including from the New York Academy of Sciences. “The case is politically motivated, linked to the conflict between the Putin and Medvedev camps,” Ponomarev says, defending his contract with Skolkovo as legal.

Putin’s chief of staff, Sergei Ivanov, met leading investors in Skolkovo at the St. Petersburg International Economic Forum in June to reassure them. Yet a few days later it became known that the president had canceled Medvedev’s order that state companies contribute $910 million to a technology institute called Skoltech, which was founded by Skolkovo and the Massachusetts Institute of Technology. MIT declined to comment for this story. Vekselberg, who also declined to comment, told reporters on June 25 that state corporations, which so far have paid $122 million, had complained about having to fund Skoltech.

Multinationals backed Skolkovo because it offered “alignment with a flagship project and a safe harbor where they can locate R&D and receive protection for their intellectual property,” says Conor Lenihan, a former Irish science minister tasked with attracting foreign companies to the project. With Skolkovo largely on the drawing board, investors can still pull out, especially if the projected state funding of $4.3 billion doesn’t materialize. So far $2.6 billion has been approved.

Intel is aware of “these fluctuations” and is monitoring the situation, spokesman Chuck Mulloy said by e-mail. The company expects the authorities to “clearly define” the way forward for Skolkovo. In today’s Russia, such clarity may not be possible.

The bottom line: A $4.6 billion effort to jump-start Russia’s technology industry is running into trouble even before it’s finished.

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 (, 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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