Finance, business

Russia needs a new mentality: it’s ok to be an entrepreneur

23 Nov '09
Oleg Kouzbit, Online News Managing Editor

On October 26-30 Nizhny Novgorod hosted an international business and scientific training program for entrepreneurial youth called Innovation Management School. Prominent coaches and experts from across the entire hi-tech sector, both domestically and internationally, were invited to speak with students on the intricacies of innovation entrepreneurship. One of them, Marchmont CEO Kendrick D. White with 17 years of experience in the Russian business environment, spoke about what he shared with students and why he thought such events are so important for contemporary Russia.


Why did you agree to talk with students at the Innovation Management School?

As a trained economist, who studied the former Soviet and Chinese command economic structures, I already understood many, many years ago that for Russia to avoid being forever trapped into being a commodity economy, subject to the whims of the global commodity markets, this country must diversify.

But into what?

It seems to me that the most pragmatic and successful strategy for Russia to choose for itself in the 21st century is to be an innovation economy. To determine its destiny by being a leader in developing new solutions to help solve global economic problems.

But it is hard to change the historical culture existing in Russia for the past thousand years.

To meet the requirements of a rapidly-changing 21st century economy Russia needs a new generation of scientists and innovators unburdened by its historical past.

I accepted the invitation to be a teacher in this program so I could not only share my international financial experience with students to help them understand why the U. S. innovation economy is so successful, but also help explain to a new generation of young Russians that they have the potential to create a new modern innovation economy in Russia.

What is Russia’s image in the West?

Unfortunately, Russia’s current image in the West is of an angry, irritated and frustrated bear that has woken up after a long hibernation and discovered that the world is a very different place in 2009.

Although smart and hard-working, Russia is still groggy and confused-- it really isn’t sure what it needs to do to be a major player on a 21st century stage.

I think the best way for Russia to secure its future is for the political and business elite to jointly support the development of small and medium-sized innovation companies.

But politics and business in Russia have always been fiercely competitive. Historically, Russia’s political elite also controlled the economy. In the mid-1990s however, privatization changed all that and put the business elite, the oligarchs, in the driver’s seat.

Then in 2000 the political elite regained control and has solidified its power ever since.

Both parties stopped fighting as long as Russia’s commodity-based economy, fueled by $140 barrel crude, continued to keep the general populace happy and the elite very rich.

The global recession proved the inherent weakness of relying on commodities and it wasn’t long until fighting between the political and business elites renewed, further reducing any chance of real economic structural change.

Nothing will change until the two factions agree to work together.

The challenges facing the Russian economy are so great that neither the political elite nor the business elite can manage them alone. They must act jointly.

The political elite can no longer simply command the business elite to “create innovation SMEs.” This top-down approach will not lead to the creation of a new, efficiently working economic system.

To really motivate business to diversify and grow, the political elite needs to create the right economic foundation and incentives

This is extremely important.

For its part, the business elite must tell the politicians, “we can’t do it alone. You must allow and encourage small business to join in this process.” Unfortunately, the mentality of the business elite is that, “we must be a monopoly. Only a monopoly can get the job done from top to bottom.”

But it’s monopolies that create high inflation, which means high interest rates. This devastates small business. Inflation cannot be stopped simply through currency control because the root of the problem actually lies in monopolies’ ability to artificially raise prices whenever they wish—ignoring market mechanisms, controls, and discipline.

In order for business to grow it needs to be able to borrow money at a reasonable cost. For this to happen, interest rates need to come down and banks must be allowed to compete on a much more level playing field.

Foreign banks especially, must be allowed in to make Russia’s banking sector more efficient. All of this will create more liquidity, which in turn will create the foundation necessary for SME’s to develop their latent potential.

So what I’m saying is that the political and business elites must cooperate and allow this competition. Otherwise Russia will fall further and further behind and risk becoming nothing more than a natural resource supplier instead of a multi-sector, connected global player.

If Russia becomes simply a commodities provider, it will lead to artificial isolation and numerous international trade conflicts. This is not the way to proceed.

Russia is meant for greatness, but it will not achieve greatness through fear. The world needs to say, “look at the global problems Russia has solved!”

This is the image Russia needs to create and cultivate.

What else do you think Russia should do to create its positive image internationally?

It should stimulate an open collaboration between its universities and foreign universities. It should also be more open to cooperation with international partners. This is a powerful way to create a positive image: through collaboration, exchange programs, academic partnerships, establishing B2B and citizen-to-citizen relationships.

At the same time, there’s a role for the federal government in this. There’s a role for the elites to support some high-profile programs to help solve global problems. If, for example, Anatoly Chubais were to announce that Rusnano’s investment in a new technology was made to help solve a specific global problem, everyone in the world would say, “Russia is doing something great!”

Instead of being seen by the West as an outdated stereotype, Russia would be viewed in an entirely new pro-active light. It will take one press conference – and the whole world will wake up.

Russia’s political and business elites can also do something to create a positive image.

There’s so much negative press about Russia—from Kremlin-meddling politics to bickering over gas prices with Europe. Is it any wonder this country has such a bad image?

The future is in Russia’s hands—it can be seen as still having one foot in the Soviet-era and the other in the 21st century or it can be seen a great, emerging powerhouse of cooperation and innovation. A country to be trusted and admired not feared and doubted.

What is your appraisal of the steps the RF government has been taking to promote an innovation economy?

I think that the Russian government has taken some excellent first steps. For example, the Rusnano program is a very useful top-down approach to stimulate the development of academic science in a direction of commercial viability.

I think it is very progressive that Rusnano plans to support infrastructure development and help finance educational programs.

The Russian government also gets high marks for developing a network of special economic zones (SEZs). This has been important in laying the right foundation for Russia’s innovation economy.

Then there’s the passage of Law #217 in August—a critical law that allows universities the opportunity to establish private businesses.

In parallel, the bottom-up strategy of the Russian Venture Company to help infuse the market with capital for small businesses, “seed” businesses and startups to help lower the risk for business angel investors has also been extremely essential.

RVC wants to attract other investors into projects by covering their risks through co-investing minority stakes. This helps motivate private investors and compensate for the high risk and barriers faced by new hi-tech startups and other innovation SMEs.

The company is also setting up regional venture funds and a special “Seed” Fund. All these funds are designed to put money into technology projects as long as there’s another investor.

So, there’s scientific development coming from Rusnano, there’s infrastructure development supported by the SEZs, technoparks and municipal incubators, and then you have new sources of investment liquidity.

All these things are very good. The main idea is that over the last five years I have seen many new initiatives coming from the federal and regional governments, and I strongly support them.

Russia is like a huge ship sailing through time and space--you cannot change the direction of this ship overnight. It takes time. After being historically focused on a particular economic model (the monopolization of commodity extraction and trade globally), Russia is finally changing course.

It has taken almost five long years to get the rudder in shape and I think it will take another five years of mid-course corrections to set Russia in the direction it needs to go to make it a far more efficient, reliable vessel.

This will take us to 2015.

Then we’ll need five more years of accelerated development for Russia’s technology sectors to generate enough “steam” so they can reliably start pumping out one project after another with increasing productivity and power.

Now it’s 2020.

At this point Russia will have a completely different image globally, like night and day.

Yes, Russia will still be a major global provider of oil, gas and other natural resources and making healthy profits from these sectors. But in parallel, it will be developing a more diversified innovation economy which will attract young innovative people to stay and work and develop.

Key to this ongoing development is consistency; not saying, “well, this process didn’t work, let’s try something different”. No, this process is working.

Back in 1992 I wrote a piece in Crain’s Chicago Business that the transition of Russia’s monopolized commodity economy to a diversified market economy would take up to 30 years. So, now we’re more than halfway through.

Why do you think the current innovation development strategy has failed so far?

It hasn’t failed – it hasn’t been given enough time yet.

How do Russian and international investors feel about putting money into Russian IT startups?

First of all, I would change the premise. International investors are not likely to be thinking about putting money into startups because “seed” stage, early stage and startup financing should come from mostly domestic investors.

This should be smart money that knows this environment and can help entrepreneurs develop their project in this economy, this structure, this culture.

International investors are needed to put money into later stage development to help companies expand and eventually go global.

The Russian IT sector should be extremely attractive to Russian investors because it has such a strong tradition of educational excellence and scientific accomplishment.

Does Russia have any strengths in the IT sector?

As I just said – yes, Russia does have extensive strengths. It is culturally very creative and also extremely strong in mathematics, two important keys in developing software and major competitive advantages in the 21st century.

What are main difficulties you have had to face doing business in Russia?

Answering in general, it seems to me that a fundamental problem facing any Russian entrepreneur is the high administrative cost of setting up a business here and the artificial barriers that exist.

These twin burdens make it extremely difficult for any small business in an early development stage to make a profit.

The historical tendency in this country is to create large-scale monopolies in commodities and trading. Small businesses and individual entrepreneurs were considered something “less than prestigious.” This made it hard for them to get through the bureaucracy to realize their dreams and ideas. This fundamental structural flaw in Russia’s economic system has made life particularly hostile for technology companies because of the inherent nature of their risk.

Technology companies are by their nature more risky. The difficulty for any small businessman to move from start up to production is one thing; if you try to do an innovation project, it’s next to impossible.

In the U. S. it’s very easy to start up a business and get government support for a firm that will employ five or ten people; and it’s the same in the U. K. or Spain. But here, once you’ve set up and are ready to move into production, you have to cope with an overwhelming load of required paperwork, inspections and burdensome financial accounting.

Without an extensive admin and accounting department, a single entrepreneur can be buried in paper before he ever produces his first “widget.”

Government reliance on an extensive system of centralized control, which helps ensure social stability, is contradictory to the concept of a diversified innovation economy.

Innovation needs freedom.

Without it, free-thinking innovators with visions of creating their own potential “Apples” or “Googles” will take their dreams abroad and Russia will experience a “brain drain” of historic proportions.

To ensure we don’t lose our best and brightest, the entire system needs to be changed to encourage these young innovators that it’s ok to be an entrepreneur and start up a small business.

This is the essence of my lectures at the Innovation Management School: to help change the mentality of the new generation so they won’t follow the same pattern as the previous generation.

This interview is also posted in a blog by Viktor Zamaraev, one of the students at the innovation management program ( www.softwareandstartups.com ).
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