As sanctions hit harder, Russia cautiously opens up to innovation

Emre Kızılkaya MOSCOW

A Russian scientist works at the STROGINO technopark near Moscow, under a poster of President Vladimir Putin.

“Rumors have it that everything gets more expensive, absolutely,” say the lyrics of a song by the legendary Russian artist Vladimir Vysotsky, who died 34 years ago as an unusual figure in the Soviet society, banished by the establishment, but cherished by the masses.

A similar tune is ringing in the streets of Moscow today, as the increasingly tight sanctions from the United States and European Union against the Russian policy in Ukraine have led to a 50 percent fall in the value of the ruble against the dollar this year, bringing an annual cost of up to $140 billion. With foreign capital markets shut down in Russia, the country’s growth has stalled and the purchasing power of its citizens has dramatically decreased.

Russian Prime Minister Dmitry Medvedev’s Dec. 17 statement that “market mechanisms” would be enough to save the ruble did not stop Russian consumers from flocking to stores to pre-empt the imminent rise in prices the same day.

This was not the case just last week, when a group of foreign journalists visited the Russian capital for the “It’s Time for Moscow” press tour organized by Russian media group RBC.

Once home to artistic giants like Tolstoy and Tarkovsky, and now the most expensive district in Moscow’s city center, Khamovniki was calm when its wealthy residents left their houses in luxury cars to shop around for designer brands or enjoy their time in the neighborhood’s upscale venues, like Soho Rooms. Similarly for the middle class, there was neither panic at grocery stores in Taganskaya, nor an extraordinary halt of activity in the shopping malls around Red Square.

The lack of public panic, however, was not due to ignorance or apathy in the face of the upcoming storm. It might be more about what is called “Russkaya dusha,” or the Russian soul, that fatalist resignation to suffer for others when the time comes.

Literary critics say Russians see themselves and look ahead with a unique optimism for the future rooted in the past, in spite of today’s challenges. For political observers, this socially-bonding self-reflection was what kept the fabric of Russian society from tearing apart in the deepest crises, like the collapse of the Soviet Union in 1991 and the crash of the ruble in 1998.

After enjoying a decade of stability, Russian authorities and foreign businessmen now sound equally resilient as the crisis deepens. Kirill Tokarev, editor-in-chief of RBC TV, described the mood as “reservedly optimistic,” while Sergey Cheryomin, a minister of the Moscow City Government, said the Russian capital’s claim to become an international finance center continues, despite what he dubbed as “new political realities.”

Apparently everyone braced for impact in Moscow with a somber readiness. “We see that the Russian market is shrinking and each company feels the effects of the crisis. Everybody sees that recession is coming. But we will overcome it,” Thomas Kerhuel, a director of the Chamber of Commerce and Industry Between France and Russia (CCIFR), which represents 450 companies, said during a panel on Dec. 9.

Turning the crisis into an opportunity

“I don’t know any single investor who says he wants to leave Russia now. Like in the 2008 crisis, those who stay in Russia will get long-term benefits,” he added.

"Turning the crisis into an opportunity" is today’s favorite phrase for politicians and businessmen in Moscow.

As the weak ruble could be considered relatively good news for Russian exporters, officials in Moscow tell foreign companies that they will have additional benefits if they “localize” their production, instead of seeing the country merely as a market.

European businessmen, on the other hand, say they are happy to see that the Kafkaesque labyrinths of the Russian bureaucracy have become much easier to navigate after the sanctions.

Russian officials and businessmen in the country prefer to not debate whether “it was worth the trouble.” After all, President Vladimir Putin had assuredly declared that Ukraine was in Russia’s “sphere of influence,” and some of his predecessors had dubbed the whole region as “blizhneye zarubezhye,” or "the near abroad."

“Not that I have any fear to speak about the issue ... But arguing over Ukraine won’t solve today’s problems,” one Moscow-based businessman argued, while an adviser to a Duma deputy uttered on the condition of anonymity, “You want a summary? Money, money, money.”

The Russian government’s response to the crisis is also generally approved of in business circles, at least publicly. “The reason that there is no panic is because Russia plays by the rules of liberalism. The ruble should have remained flexible and it is flexible,” says Andrei Joosten, the CEO of Lincoln International Russia.

“Not the current exchange level of the ruble, which is adaptable, but rather its volatility is the problem, because people can’t see the future now,” adds Tim Millard, regional director of advisory group JLL Russia.

Taking steps to stabilize the ruble, attract FDI, increase exports and invest in the ailing infrastructure -which needs some $753 billion – with more dynamic policies for public-private partnerships are seen as a need to alleviate the damage of recession, which is “likely” according to Millard.

The Russian dream vs. reality

Nobody disagrees, however, that the long-term key is in diversifying the energy-based economy by expanding in technology, finance and tourism through innovation, as the Gulf countries have been doing for a while.

In fact, the Russian government had begun to focus on an “innovation-for-diversification” program long before the crisis, but sanctions have urgently rekindled their interest at this time. Putin, himself, stressed the importance of diversifying the Russian economy during his key press conference on Dec. 18.

STROGINO, for instance, was created by the city government in 2007 as a 17,000-square-meter technopark in the suburbs of Moscow. Its purpose is to encourage young scientists and entrepreneurs to innovate through a series of incentives, like providing their newly-created companies an affordable headquarters, equipment and business services, as well as making them come together with mentors and investors to reach a global market.

Small and medium-sized companies based in the technopark’s “incubator” are from various fields, from genetics to heating. Whether a local or a foreigner, anyone who would like to invest in such areas is welcome, Russian officials say, counting a number of incentives including zero income tax for the salaries of high-tech sector employees.

Even outside high-tech sectors with added value, many foreign entrepreneurs manage to flourish in Russia. CoffeeBean, founded by an American citizen, competes with Starbucks and BuzzFactory, a digital marketing agency founded by French citizen Thierry Cellerin, dominates the Russian market.

The problem with the pragmatic Russian approach to innovation lies in its highly controlled, centralized attitude, which clashes with the essence of this concept itself.

As long as the product of innovation does not touch upon sensitive political and social issues, it is wholeheartedly supported by authorities, who allow the individual to achieve “the Russian dream.” However, if it does touch on other issues somehow, like Russia’s involvement in Ukraine or its own political opposition, it can turn into a nightmare.

Passion of Durov

Take Pavel Durov, who founded Russia’s largest social media network VKontakte when he was a 22-year-old. Soon after he was dubbed “the Mark Zuckerberg of Russia,” Durov’s house was raided by Special Forces after the government demanded the removal of pages of opposition politicians in 2011.

After weathering this storm, Durov publicly refused to hand over the data of Ukrainian protesters to Russia’s security agencies in April 2014. Five days later he was dismissed as the CEO of his company. Accusing “Putin’s allies of taking over” his innovative company, Durov now lives in self-exile in San Francisco.

“Vladimir Putin’s Russia presents one of the most dire media freedom situations in Europe, characterized by ongoing impunity for attacks on journalists and an increasingly repressive climate,” the Vienna-based International Press Institute’s (IPI) Senior Press Freedom Adviser Steven M. Ellis says.

“He also has expanded control over new media, hinting at unplugging Russia from the rest of the Internet, even as he created an online blacklist, granted authorities sweeping powers to shut down ‘extremist’ websites and requiring bloggers to register with the government,” Ellis adds.

Entrepreneurs whose businesses do not have any relation with free speech choose to ignore people like Durov.

“Business is business. Politics is politics. Business is free and there is no influence of politics,” BuzzFactory’s Cellerin insists. But cases like Durov’s are likely to have a chilling effect on the Russian government’s policy to encourage innovation to improve the economy in the long run.

One may argue that innovation has some peculiarities in the Russian mind, as compared to the Western one, as for many other concepts imported to Russia from the West. Like the concept of “the Russian soul,” many see a certain degree of exceptionalism in Russia as business-as-usual.

After all, even the Open Innovations Forum organized two months ago in Moscow and featuring speakers including Prime Minister Medvedev had chosen the main theme of “Creative Disruption,” but together with China as the official partner.

China currently ranks 29th in the Global Innovation Index, which is topped by Switzerland, the United Kingdom, Sweden, Finland and the Netherlands. Russia, on the other hand, is at the 49th place in the same index.

Knowing the limits of innovation in Russia

But how could a new Russian social media network flourish now, for instance, after it has been seen that it could guarantee neither the privacy of its users nor the safety of its founder in an environment where “creative disruption” is allowed only under certain conditions?

In STROGINO, Russian engineers develop many high-tech products that can compete in global markets, like next-generation drugs developed by molecular geneticists at Peptogen. In the same technopark, however, a digital game developer knows the limits of innovation here.

After I checked the website of 101XP, an international publisher of online and social games for the largest Russian and international gaming platforms including VKontakte, I asked if they only produce fantasy games to stay away from political troubles.

“Yes, yes, yes, yes, yes,” exclaimed Andrey Skochok, a PR manager of 101XP, while laughing. He recounts how the Canadian-made “Company of Heroes 2,” a real-time strategy game, had to be taken off the shelves in his country last year because of depicting World War II in an “anti-Russian” manner.

At the same technopark, Russian company Rantex produces an innovative secure flash drive that “would be loved by Edward Snowden,” the American computer professional who is now in self-exile in Moscow after leaking classified information from the U.S. National Security Agency, the NSA.

A European member of the foreign media delegation hosted by the Moscow city government argued that “all countries have double standards when it comes to free speech and public interest,” so “exceptionalism is not a Russian-exclusive phenomenon.”

A Moscow-based entrepreneur disagreed, though, while admitting how Russia adopted the free market, but not free speech, which led to the janus-headed practice of its innovation policy.

“Whatever other countries do to themselves or to us, we must uphold the highest standards of democracy, reaching from culture-specific peculiarities to truly universal values not only in commerce, but also in all political and social domains. The solution to all crises is in opening up, not closing down,” he added, reminding of the word "glasnost."

But as Vysotsky, an all-around artist who can be seen as one of the greatest Russian “innovators” ever, says in his song, “Rumors have it that even rumors might be banned soon,” underlining the existential paradox that “the Russian soul” has been facing for decades - struggling between national security and universal freedoms.