Skolkovo – the Heart of Russian Modernization

by Aleksei Khlystun

20 years after the collapse of Soviet Union Russian economy is still backward and highly uncompetitive. The major source for resent growth is constantly growing commodity prices which are heavily exported abroad. However, during financial crisis when drop in oil prices led to 7% contraction of GDP, government realized scale of structural problems and in 2009 announced federal program of economy modernization. The aim of this program is to develop new innovation industries, improve competitiveness of domestic producers, and achieve higher levels of economic growth. To accomplish this ambitious goal, authorities decided to utilize development of innovation parks.

The first step in this direction was made in 2010 when federal law “About innovation center “Skolkovo”” was signed. This so called Russian Silicon Valley is expected to be fully completed by 2015; some parts were completed earlier in 2011 and have been already used. Skolkovo project aims creating of environment which will promote concentration of intellectual capital and leading global companies which through cooperation can generate innovations and progress. It will specialize in priority sectors of economy modernization: space and telecommunications, medical technology, energy efficiency, information technology, and nuclear technology. Each of these areas will get own industrial cluster where Russian and foreign companies will work together. Industrial clusters will be situated around main technological park where participants will have necessary facilities, research equipment, scientific and technological expertise, interaction with venture funds and business support.

Given the level of priority devoted for the project, the government approved various benefits and exemptions for companies operating in Skolkovo, including:

• Pay VAT on the general terms or obtain an exemption;
• Pay income tax on the general terms or obtain an exemption (until accumulated profits reach 300 million rubles, profit tax rate is 0%);
• Pension fund contributions at  reduced rate - 14%, payments to the social insurance and mandatory health insurance funds eliminated;
• Organizations are exempt from property tax and land tax;
• Customs duties and import VAT on imported equipment will be offset by a subsidy;
• Simplified work permit procedure for foreigners.

These measures can significantly facilitate operation of innovation companies and provide some incentives for foreign companies to enter and invest into development of Russian economy.

Funding for innovation center will come from the federal budget to develop logistic and scientific infrastructure. Other expenses, related to the commercial environment and innovation projects, will be co-financed. In 2010, $150 million has been allocated from federal budget, in 2011 - $500 million, in 2012 - $730 million and in 2013 - $600 million. Moreover, following companies agreed to provide venture capital for innovation projects in Skolkovo: VTB Capital, Softline, Pangaea Ventures ($20 million), Runa Capital ($5 million), etc. In total, venture capitalists have committed around $260 million. As a result, of this domestic and foreign capital inflow, Skolkovo has already funded 40 start-up companies with $200 million. These companies cover wide range of innovations: visual search, cyber attacks security, 3D animation, data analysis, etc. In total by the end of 2013 Skolkovo will distribute $1 billion for start-ups.

In addition, like in many traditional innovation parks, operation of Skolkovo will be based on the close cooperation between universities and companies. For this purposes, the Moscow School of Management was opened here to teach new business leaders. But the real achievement is that in 2011 an agreement between Skolkovo and Massachusetts University of Technology (MIT) was reached to establish joint Skolkovo Institute of Science and Technology (SIST) which will be capable to integrate business and innovation in educational programs and scientific research. Both of these universities will create pool of qualified labor force for local companies and research centers.

Skolkovo graduates most likely will find job opportunities very quickly since already 200 companies registered there; in the future this number will reach 800. What is more important is that Russian innovation park already managed to attract global high-tech titans such as Intel, IBM, Microsoft, General Electric, Siemens and Sisco. These companies already agreed to open their R&D and production facilities and provide capital for development of Skolkovo. For example, just Sisco alone is willing to spend $1 billion on development of their research facilities. Attraction of foreign is extremely important for success of the project since they can bring additional FDI, enhance image of the project and create necessary critical mass for innovation progress. In the near future ABBYY, Novartis, Honeywell, Airbus, Alstom, DuPont, Google, Kodak, and John Deer can join Skolkovo.

Skolkovo is relatively new project, so it is hard to judge about its success or failure. Even though, some minor projects, as program for improvement of utility sector efficiency and development of business incubators, were completed, according to estimates it can take 15 years for Skolkovo to produce feasible results. At the current stage, creation of Skolkovo Institute of Science and Technology (SIST) in partnership with MIT can be one of the greatest achievements which in the long run can boost innovation acceleration and knowledge spillovers in the innovation cluster. Moreover, it worth to highlight positive dynamic with which Skolkovo attracts big international players and venture capital and subsequently funds new startups (more than 40 in less than year). However, due to country specifics the future success of the project will depend on government policies effectiveness to mitigate problems associated with Russian business environment and stimulate positive dynamic between participants of Skolkovo.