1. Russian Innovation Economy: Myths and Realities Ilya PonomarevState Duma – Russia ParliamentLondon, December 2nd,2009 г.

2. President’s call for modernization “4i” initiative Infrastructure Institutes Investment Innovation Presidential address to the parliament in 2009 was focused on innovation Most fashionable discussion topic

3. Russian competitive advantages People Education system Number of R&D specialists Technology legacy from USSR Potentially vast internal market Virtually unlimited financial resources

4. Problem 10. Inconvenient legislation Incompatible with usual approach legal acts: VC regulations NoLLP form VC funds in Russia are regulated as mutual funds Corporate legislation Technology transfer act Acts where bad wording leaves room for unfavorable misinterpretation Software VAT exemption act Privacy protection act Legislation that requires amendments in new economy environment Civil Code Internet crime liability definition IP rights protection State procurement act Bankruptcy regulations e-Payment systems Miscellaneous industry-specific acts (telecom, advertisement, mass-media, …)

5. Problem 9. Corruption Inequality between large corporations and start-ups when dealing with state agencies Getting approvals Response time Police abuse Access to contracts Widening gap between society and the government makes civil agreements invalid

6. Problem 8. International competition Low productivity in Russian economy drives up costs even for effective businesses Higher wages decrease competitiveness Brain drain Russian authorities do not help national producers to compete internationally No offset deals No technology brokers (or export support agencies)

7. Problem 7. Bad Russia’s image Russia is not associated with quality products, even less with technology intensive products Russia is perceived as an unreliable and unpredictable partner Civil society and democratic institutions crisis, decreased trust in national leadership scares investors

8. Problem 6. Infrastructure Lack and expensiveness of modern business infrastructure Office premises Telecom Financial instruments Debt financing is expensive and hard to negotiate Excessive concentration of business activity in Moscow, colonial policies towards other regions Low quality of life Housing and utilities deterioration Soviet education system collapse Urban planning traditions of the past outlived themselves

9. Problem 5. Inadequate institutions No unified management of economy modernization at the executive level Poor investments environment No traditional exits No technology IPOs No strategic investors VC funding is undeveloped State institutions (Rusnano, RVC) cannot replace working market Gap between universities, R&D and businesses State funding has not reached the point of influencing or just supporting innovation businesses

10. Problem 4. Resistance of the elites Russian elites do not have long-term plans in Russia They tend to diversify outside Russia They want to live in Western consumer society, but get their easy dollars in Russian regions Personal wealth is fully dependent on natural resources Any type of social innovation threatens stability of existing “sovereign” political and governing system

11. Problem 3. Business climate Outrageous court and police system Unsecure situation with private property protection Investing in Russian assets looks risky Customs Tax collectors either do not know specifics of hi-tech businesses, or consciously abuse innovators Extremely long time to get required decisions and approvals from any state agency

12. Problem 2. Structure of Russian economy At the current economy conditions hi-tech businesses present higher risks with at least uncertain return, compared to natural resources and other “traditional” enterprises 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 Tax code favors industries with higher revenues and lower added value Limited demand for Russian-made technologies

13. Problem 1. Deficit of human resources No entrepreneurs, even less – serial experienced entrepreneurs No success stories to follow No adequate business schools No professors with first-hand experience Decreased level of people’s geographical mobility Lack of international business experience and proper connections Language barrier Demographic crisis

14. How we deal with all these? 1. We have created “institutes of development”: Equity financing Rusnano – investment company, invests into all-stage companies, funds, manages projects, supports infrastructure Russian Venture Corp – fund of funds, includes dedicated fund for seed financing Rosinfocominvest – private equity fund for IT and telecom Bortnik Fund – pre-seed grants Debt financing Vnesheconombank Infrastructure support Hi-tech parks task force – new technology areas (Academgorodoks) Special economic zones – exclusive tax and customs regimes

15. How we deal with all these? 2. Presidential initiatives: Commission for Economic Modernization – President’s project office Council for information society development – President’s council to coordinate ministries to raise new technology awareness Fund to return compatriots (planned in 2010-2011) Agency to support hi-tech exports (planned in 2010) High School of Modernization (planned to be initiated in 2010) Skolkovo Business School

16. How we deal with all these? 3. Legislation and policy-setting efforts: Innovation companies tax support Step 1 – IT exporters Step 2 – all IT Step 3 – all hi-tech Self-regulatory bodies VC Support Act (introducing LLPs) Hi-tech Parks Regulation Act Bankrupcy regulation amendments LLC regulation amendments JSC regulation amendments State procurement regulation amendment e-Document Act Objective – to create Innovation Code

17. …We are still the smartest, so we’d definitely make it!