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Friday, July 13, 2007

The Eternal Russian Nightmare: The Kremlin Likes Screwed-up Russia Best

Something that cannot be emphasized often enough when trying to understand Russia is that it simply isn't in the Kremlin's interests to have fully successful businesses or a vibrant, healthy population. A business with fully developed modern technology is a power center, and it can become a competitor to the Kremlin. The same is true of a healthy, well-informed population. Ignorant, weak entities are much easier to control than smart, strong ones. Above all other reasons, that is why Russia remains such a mess.

A reader tips us on a an excellent overview of this tragedy. Steven Pearlman, business columnist for the
Washington Post, reports:

MOSCOW Most Russians know plenty about Roman Abramovich, the 41-year-old former commodities trader who parlayed his interest in former state oil and aluminum companies into an $18 billion empire that includes England's Chelsea soccer team and the governorship of the Arctic province of Chukotka, where reindeer outnumber people.

And they know all about Mikhail Prokhorov, 42, Russia's nickel czar, who caused a minor diplomatic incident this year when police raided his infamous Orthodox Christmas bashes at a French ski resort after receiving reports that he'd flown in private planeloads of Russian prostitutes for the event.

But few Russians have ever heard of Anatoly Karachinsky or Arkady Volozh, who are as close as it comes to a local Bill Gates or Sergei Brin.

One reason is that they have received little, if any, attention from the Russian media, in particular television news operations, which are known to demand payment for favorable company coverage.

And neither man has yet to pass into the ranks of Russia's billionaires, despite the runaway success of the technology companies they founded -- Karachinsky's IBS Group, the country's largest software company and the first to have its shares listed on Western stock exchanges, and Volozh's Yandex, which is the rare Internet search engine that has managed to maintain a dominant position in its home market against an aggressive push from Google.

"There is no tradition or concept of entrepreneurial success, and this is a big issue for us," Karachinsky told me. "The stories people tell are of criminals or failures. There simply are no business heroes in this country."

By right, it ought to have been Russia, not India, that rode the technology sector up the development curve. This is a country, after all, of nearly 100 percent literacy, with a scientific community rich in mathematicians, physicists and engineers who in the past were able to develop nuclear weapons, supersonic jets and sophisticated spy satellites, and who pioneered space travel. The telecommunications infrastructure, at least in the big cities, is remarkably advanced. And wages have been comfortably below those of Europe or the United States.

But several factors conspired to create a slow start for the Russian technology sector.

The technology know-how was trapped in bloated, inefficient state companies and bureaucracies. And although many of those firms have been privatized, they have been stubbornly slow in adopting the latest information technology to drive down costs and boost productivity.

"It will take a very long time before Gazprom has information systems comparable to Shell," says Karachinsky, who has a number of contracts with subsidiaries of the state-owned natural gas monopoly.

And while Russians excel at the theoretical side of science, Western executives tell me they are less skilled in managing complex projects and applying their scientific knowledge to practical business applications -- vital skills for a modern software industry.

Also hampering development of the Russian high-tech sector is the lack of a reliable system for protecting intellectual-property rights. What copyright and patent laws that exist can be easily avoided or manipulated, with the help of judges who are corrupt and a court system that is largely incapable of dealing with complex intellectual-property litigation.

Certainly that is the experience of Microsoft, which asserts that piracy of its software is rampant here, and Motorola, which has been prevented from selling some of its cellphones because of claims that it violates Russian patents, and several pharmaceutical companies that have identified Russia as the source of counterfeit drugs.

Recently, a number of local high-tech executives were able to persuade Russian President Vladimir Putin to spend a day of his trip to India in Bangalore to convince him of the need to develop a similar technology cluster in one of Russia's university towns. Putin appeared to be taken by the possibilities, but since then the initiative seems to have been put on the back burner by a state bureaucracy that sees a much bigger payoff for the country, and itself, from booming natural-resource industries.

And therein lies the biggest challenges to the development of an entrepreneurial business culture in Russia, even in sectors like high-tech that are relatively free of government interference or the unwanted attentions of expansion-minded corporate oligarchs. In theory, all that's needed is talent and investment capital, both of which are plentiful in Russia. But as long as huge rewards can be earned buying and selling natural resource assets, the most skilled and ambitious Russians are probably not going to opt for the hard work, uncertainty and long time required to build a business from scratch.

And as long as investors can reliably make 40 or 50 percent annual returns by investing in state-owned enterprises or companies controlled by politically favored oligarchs, it doesn't make much sense for anyone to assume the significant greater risks of venture capital investing for similar or even smaller returns.

This crowding-out effect became all too clear to me as I sat in the cafeteria of the Higher School of Economics here speaking with half a dozen undergraduates about their goals and aspirations. None expressed much interest in starting his or her own business, or saw that as the preferred route to fame or fortune. The most common aspiration was to get a job in one of the government's economic ministries, where good salaries and the possibility of bribes or kickbacks make it possible to earn a comfortable living, or make contacts that could lead to an even better job with an oligarch or a state-owned enterprise.

"We have something wrong with our business culture," said 20-year-old Alexei Yurtaev, the son of a university professor who came to Moscow from his hometown in the Urals. "Success is dependent more on how close you are to politicians than it is on economic considerations. Certainly you can have a very small business and devote your life to it. But if you have ambitions to create a big and successful company, you have to face the question of how the government will treat you."

Three or four years ago, students would probably have said the future was with the private corporations, big international companies and even start-ups. That they now perceive that their best bet is to find a way into the state-run "power structure" is a step backward in the development of Russian capitalism.

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