“Skeptics drive entrepreneurs, because when you are told you can’t do something, that gets you to want to do it even more. Mr. Chubais is trying to do it at a country level and a whole economy level, and he realizes that what he is doing is highly unlikely to succeed, but my guess is that’s why he is doing it… so […] let’s thank him for that.”
—Noubar Afeyan (2010)
INTRODUCTION
This research argues that the Russian Corporation of Nanotechnologies, the non-profit sovereign investment vehicle created to advance Russia into a world-leading position in the field of commercially viable nanotechnologies, faces too many restrictions to effectively achieve its main objectives. The Russian Corporation of Nanotechnologies (RUSNANO) faces major hurdles related to politics, legislation and technology in Russia and worldwide. The corporation, which was established in June, 2007, following the publication of the President’s initiative “Strategy of nanoindustry development” in April, 2007, and the subsequent passage of the Federal Law “On the Russian Corporation of Nanotechnologies,” is charged with much more than simply fostering Russia’s domestic high-tech industry by investing in promising technologies; indeed, the corporation’s success or failure in the near term could be seen as a precursor for the success of Russia’s attempt at modernizing and diversifying its economy.
State Corporations in Russia
State Corporations are a relatively new and unusual form of ownership introduced into Russian legislation in 1999. These corporations are non-profit conglomerates that are each established by means of a separate federal law in addition to the federal legislation that regulates the activities of non-profit organizations in Russia. (Wikipedia 2010) These large companies are generously funded by sovereign funds, yet their assets are not state property; they are not public companies and do not have to be transparent for public scrutiny. At the same time, State Corporations were initially given much leeway and few constraints in what they do and how they do it, as long as they stayed within the framework of the underlying law that made their existence possible. Initially, no government agency had any authority over State Corporations, as they were directly overseen by the government and the president of Russian Federation. (Rodin and Samarina 2010) This provision suddenly changed in 2009 when the Russian president ordered the Prosecutor General to conduct an audit of all State Corporations and discovered “serious problems” in the way they managed funds, defined remuneration packages for employees, organized procurement, selected suppliers and invested money. (Rodin and Samarina 2010) This result has led President Medvedev to push for the reorganization and privatization of State Corporations (Деловая газета "Взгляд" 2010)—a move aimed at increasing efficiency of these special organizations.
These enterprises are a result of a new development strategy that Russia is implementing. Moscow has established a number of Economic Development Institutions (EDIs) designed with the goal to create enough momentum in the economy to jumpstart a critical mass of private business activity in key sectors. These EDIs are seen as a key instrument for achieving Russia’s ultimate goal of innovation-based development and modernization of the economy: studies show that the proportion of Russia’s innovation-based enterprises is among the lowest compared to both developing and developed industrial nations in Europe. Figure 1 illustrates that only 9.6 percent of all manufacturing businesses in Russia were technology enterprises (RUSNANO 2009). The fact that former USSR republics, such as Estonia (55.1 percent), Latvia (14.6 percent) and Lithuania (26.8 percent), have been able to achieve significantly higher results in this domain after the dissolution of the Soviet Union implies that Russia has largely ignored or suppressed its innovation potential and therefore is well positioned to achieve similar—if not better—results.
Figure 1: Businesses implementing technological innovation
While all the elements of the support system for technological investment have been established, little has been done to increase coordination among these organizations, but this situation is quickly changing, and there will soon be an efficient mechanism for cooperation among EDIs. (Agamirzian 2010) For example, RUSNANO and the Russian Venture Corporation are already working together on improving corporate law and on doing investment projects (Tseitlin 2009).
Review of the scope of activities of State Corporations shows a distinct focus on infrastructure projects. In view of the fact that Russia’s need for good infrastructure is urgent (Noland 2000), this focus of State Corporations’ activities makes a great deal of sense, and these entities can be seen as temporary means to an end. Stimulating and supporting economic activities in the technology and energy fields is also an apparent trend in the focus of Russian state corporations. Table 1 provides a summary of State Corporations’ fields of activity highlighting overlaps in the functional areas.
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Defense
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Energy
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Finance
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Infrastructure
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Technology
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Avtodor
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Deposit Insurance Agency
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Housing and Municipal Sector Reform Fund
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Olympstroy
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Rosatom
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Russian Corporation of Nanotechnologies
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Russian Technologies
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Vnesheconombank
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Table 1: Fields of activity of State Corporations in Russia
It is safe to say that state corporations mainly protect and develop key sectors of the economy, which are largely based on the legacy assets inherited from the Soviet Union. The deterioration of these sectors was plaguing Russia’s economy after the dissolution of the USSR in 1991. (Noland 2000) State Corporations may also be aimed to protect state interests and isolate strategic areas of finance, infrastructure and technology from the influence and commercial interests of the large oligarchic groups that formed in the 90’s and were successful in concentrating large resources that once belonged to the USSR.
However, the Russian Corporation of Nanotechnologies stands out from the other state corporations in that it is the only such entity designed to create a completely new sector in the economy: nanotech. Some observers point out that the corporation was established spontaneously: it was created with no existing infrastructure to support its activities. Furthermore little due diligence was done in regard to the availability of human resources, the pool of potential technologies or the number and quality of domestic companies involved in nanotechnologies. (Tseitlin 2009) However, the corporation itself points out that it did not just appear in a vacuum: Mr. Chubais, the CEO of the company, states in one of RUSNANO’s corporate booklets that Russia’s existing nanotech businesses have been able to achieve aggregate sales of “4-5 billion rubles.” (Chubais, Chairman's Address 2007)
Dmitry Tseitlin writes that RUSNANO was created as an alternative to the Russian Venture Corporation—one of the first state-backed venture capital firms in Moscow following the traditional VC approach to investing—as an attempt to find an alternative venture investment model that would better spur innovative and entrepreneurial activity in Russia on a larger scale. (Tseitlin 2009) However, my observation is that RUSNANO and RVC complement each other in that RVC focuses on seed and early-stage investments (Agamirzian 2010), and RUSNANO is focused on mature technologies. The corporation’s management has been consistently clear about their strong preference for effective existing technologies that could be scaled up into a business with considerable revenue and international exposure (Chubais 2010). Thus, from the investment profile standpoint RUSNANO can be compared to a typical growth-stage Venture Capital firm tightly focused on nanotechnology.
However, RUSNANO’s Economic Development Institution status makes it more than a classic Venture Capital investment firm. The corporation’s goals are threefold: “ 1) bringing Russia to a leading position in the world market of (sic) nanotechnology products; 2) Supporting and increasing Russia’s contribution to the global pool of knowledge in the nanotechnology field; 3) Creating global forum in Russia to discuss progress and challenges in the nanotechnology industry” (RUSNANO 2008)
Continue to RUSNANO's Advantages: Money
