One word for Investing in Russia: Insanity

The New York Times Dealbook reports (note that a group of crazed Russian businessmen thought they could buy off this reporter with a free trip to Russia a la Valdai; it blew up massively right in their faces and we could not be better pleased):

From Matt Marshall at VentureBeat:

Russia is the sixth-largest economy in the world, but it’s also a country relatively untouched by foreign investors, especially investors in technology. Could Russia potentially be the home of the next massive tech boom?

The short answer is: No way. At least not anytime soon. That’s the conclusion I’ve come to after a week in Moscow, a week in which I took part in the first ever delegation of US venture capital investors to visit Russia.

The organizers invited me as the sole member of the U.S. media. (Disclosure: My trip was organized by AmBar, a group of U.S.-based Russian professionals, and paid for by Rusnano, a government investment fund. In return, I promised to write an honest account of what I found.)

Russia is making huge efforts to change. It is plowing billions of dollars into the planned high-tech city of Skolkovo over the next couple of years that it hopes will replicate Silicon Valley. Through $5 billion in other investments, it also plans to produce a $30 billion nanotechnology industry by 2015. Russian leaders, led by President Dmitry Medvedev, have convinced me they want to clean up corruption and that the only way they can achieve sustained economic growth is to diversify, and that means supporting the tech industry. Russia is trying hard to reform and progress. My brief visit makes me think it will get there. Eventually.

But right now, Russia is still a mess. It is totally reliant on its oil wealth, and as prices for oil inch upward again, Russia may once more gain comfort and lose the urgency to change. It has a long way to go, and much of its plans are being implemented through Soviet-style top-down government mandates. The government needs to reduce its size drastically and let personal initiative take over. “It’s the people, stupid,” U.S. angel investor Esther Dyson, one of the earliest successful investors in Russia, said to me.

Granted, the buzz is good

During our visit, we met with government officials, investors, parliamentarians, incubators and startups. I tagged along with 20 other investors. We also met several of the nation’s wealthiest tycoons, including the richest “oligarch,” Michael Prokhorov, who refused to do a video interview with me. Independently, I also organized a meetup of startups at the Ritz Hotel, just off Moscow’s Red Square. Some 45 entrepreneurs showed up. These guys are experimenting in all kinds of areas, but most of them are still focused on the Russian market. Still, there’s plenty of innovation evident here: Just a couple of examples: One company, Innosystems, has built a widget that lets you click a number to call online, with no software download. Another, QiwiPay, backed by Moscow-based venture capital firm DST, is building kiosks that let Russians pay their traffic violation fines automatically — so they can avoid waiting in line in court for a day, or worse, being shaken down by police soliciting bribes. I met others doing harder core stuff, such asLight Engines, which has a sophisticated lighting technology — although it is hardware, not the stuff Silicon Valley typically invests in.

Now, of course, I’d be delighted if I could report that this Russia is the next India, China or Israel — all places that have seen massive foreign investment in recent years. Russia has among the highest per capita number of students in the world, boasts high levels of mathematics and science education, and being in desperate need of modernization, you’d think Russia would be a gold mine for investors. President Medvedev greeted the delegation, and made clear that technology is needed to diversify from Russian oil, gas and metals — which make up 80 percent of Russia’s total exports. That legacy industry is highly influenced by a group of about 22 so-called oligarchs — many of them exerting their power behind the scenes through corruption. Technology entrepreneurship, if it is fostered, will lead to positive change — there is no question. Everyone agrees.

But investing in Russia can be “insanity.”

The more time I spent in Russia, the more complex the story became (and I’m not the first to say that about Russia). The more I learned — about corruption, the abuses of the courts, the terribly archaic educational system, the choked up traffic, the lack of investment in infrastructure, the cultural penchant for Hobbesian brute leaders, the lack of a truly independent media, and the assassination of journalists when they do show independence — the harder it is for me see a positive short-term future for U.S.-style tech investment for this country

3 responses to “One word for Investing in Russia: Insanity

  1. Well, Russians themselves send as much money abroad as possible. At least those Russians who earn some real money. Even Moscow real estate “market” now became 95% residential. Because nobody invests even in apartments anymore. Well, you may find several stupid people from “middle class” who still do it but that’s just because their own profit comes from corruption and not their skills. So they are so stupid that can’t even see that even Moscow real estate “market” is collapsing. Prices went down about 40% and this is only the begining. There was this crazy situation when Moscow apartment was almost the same price as New York one. Well, it changes pretty quickly.

    You also must not forget that high prices in Moscow based very much not on the prosperity of its citizens but on the miserable condition in which they live. You see, average social mobility in Russia is 1.5. So when someone buys apartment, it’s probably the only one single major investment in their life. So it’s like put everything you have and don’t have in one place. Sponsor those corrupt Moscow officials and builders. Then it all collapses.

    Even Moscow does not have free citizens as many middle-aged cities had. They can’t be free in the middle of the slavery.

    Investing in Russia? Well, if you want to get killed on the street or die slowly and painfully in Russian prison – go ahead, invest.

  2. Putin and Medvedev believe Russia’s economic future lies in high tec industries and wants venture capitalists from abroad to back them. Well sounds like a winner …only problem; the Russians can’t keep up with the fast paced world of high tec. Here’s an example-

    With consumers in Russia just coming to terms with 3G, (technology the west and Asia have been using for years) telecoms are looking at the next generation technology 4G (now on sale in the west and Asia), with military concerns and profitability questions still unanswered.

    The military says the operators are going a bit too fast, and haven’t used all the resources available for 3G technology. So there’s no need, they say, to be asking for access to 4G frequencies
    Nikolay Tamodin, General Director at Voentelecom believes, however, that some companies themselves have little interest if 3G is yet to show a return on investment.
    “From today’s point of view, its nonsense, but it’s the truth. The current operators are not interested in the development of this technology because the previous one, 3G, which has just been built (Yikes!) hasn’t paid for itself yet”.

    However analysts like Alex Kazbegi from telecoms research at Renaissance Capital, believe companies need it for survival.

    “If you’re not in the game you’ll be marginalized by the players who have this technology (yes and were already selling it to the consumer numb nuts!!). Inevitably your service level will show you have wrong technology. It’ll either be speed, capacity or the ability to provide the services. The game now is you need to have it.”

    Figures provided by VimpelCom, one of Russia’s top three mobile operators, suggest how little the previous, third generation technology is used.
    “According to our information, about 13 per cent of our subscribers use phones which support 3G technology in Russia (pathetic). The relevant figure in Moscow is over 17 per cent,”(wow) says Vimpelcom press-secretary Anna Aybasheva.

    The Russians are at the “blunt” end of technology… invest at your peril!!!

  3. We have heard a lot of hollow words from Medvedev and Putin regarding tackling corruption in Russia. Many new initiatives have been launched so let’s look at the results.

    The cost of the average bribe in Russia has nearly doubled in the last 4 years, the Levada analytical centre reports.

    If in 2006 the average bribe amounted to 5,000 roubles ($165), now it reaches 9,000 roubles ($298). The number of people who take bribes has also grown.

    It turned out that most people give bribes to obtain a business license: 92% of people surveyed said that they paid for that. In 2005, only 19% of businessmen admitted to doing so.

    Like 5 years ago, about 65% of those surveyed gave bribes when they had problems with traffic police. 30% paid to avoid military service,

    Corruption has gotten worse under Putin and Medvedev.

    Invest at your peril

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