Trans-Siberian Railway: Voice of Siberia

by Ekaterina Serikova

Do you know where Siberia is located? Some Europeans feel that it is just “too far”. I would not exaggerate by saying that even Russians do not always know exactly where this region is located, assuming the periphery of it. However, it would have been even worse  if  in  the  20th   century  the  general  governor  of  Eastern  Siberia  N.  Muravyov- Amurskly did not start to build Great Siberian Way that connected central Russia with Siberia. This railway had significant influences on many areas’ development where it was built, while analyzing its impact on the development of Siberian region is of particular interest. The goal is to show how government  infrastructure projects can give live to economy of a particular region, entailing certain extent of policy selectivity and a matter of history.

The  project  heavily  affected  the  Siberian  region  in  several  aspects:  industry development, trade, labor mobility, foreign investments, and international relations.

Siberia was a huge and well-endowed region, having huge reserves of coal and peat, more than 50% of the whole of Russia’s forest reserves, lots of gold fields, salt, and non- metallic minerals.  Obviously, the Railway aimed to take advantage of these industries, which caused their rapid development. For  example, the changes in gold industry was caused not only by increased gold extraction, but also by structural changes, such as the switch from manufactures to modern factories as well as technical renewing due to easier transporting of necessary inventory and hardware. Thus, despite the Russian-Japanese war, average yearly gold extraction in 1901-1910 was 2289 poods1, which is 127% higher than during the last decade of the 19 century2.  Since the railway needed fuel, coal industry advanced a lot: by 1910 coal extraction already constituted 7% of total Russian coal extraction. Being mostly developed as “servicing” industry for the railway, coal industry growth also improved technological progress in other industries, switching them away  from  firewood   usage.  Other  industries  mentioned  above  were  also  raised significantly: salt, wood, and butter was exported heavily.

Obviously, such intensive industrial growth attracted huge capital inflow in the region. By 1912 a large net of trade places was already created: 60,000 retail shops, total trade in the Siberian part of the railway increased more than in 4 times in 1900-1913.

The Railway also led to the movement of labor to the cities located along the way, which can be explained  by people’s expectations of higher wage and access to larger market. Consequently, the cultivation area was extended together with agriculture growth and increased specialization. 80% of all imports of agricultural machinery in Russia were sent to Siberia because there were huge amount of unused land and lots of labor that came  because  of  the  Railway.  Later,  these  places  became  the  largest  and  the  most developed  Siberian  cities  with  the  highest  land  rent  –  Novosibirsk,  Irkutsk,  Omsk, Krasnoyarsk, which are still fundamentally important  Siberian cities. The creation of large cities and movement of labor into them, however, caused demise of  previously popular trade places, such as the Irbit fair that stayed more than 100km away from the Railway.

However, the overall impact of the railway was not as positive as it seems to be: many economists claim that the Great Siberian Way was the cause of making Siberia a “raw materials adjunct” for the whole of  Russia. As we can observe, development of local industries was not symmetric, it mostly favored industries  that  were connected closely with the needs of the railway. For example, metallurgy died as fast as it was raised  due to railway needs: smelting cast ironing was 540,000 poods in 1895 versus 150,000 poods in 19082.

Beside  this,  relations  between  Russia  and  China  began  to  develop  sharply: merchants from Siberia moved to China as well as a huge number of swindlers flowed into Siberia being attracted by high  profits. The rise of local and international trade caused progress in banking sector: by 1912 there were  already  106 bank offices in Siberia. However, they were mostly involved in trading finance instead of local heavy industry financing.

Being started from a local project connecting central Russia with Siberia, now Trans-Siberian Railroad is the largest international railway in the world that connects Far East with Western Europe, reaching 5,867 miles in length. For the country, it is also the source  of  income  which  has  increased  throughout  the  time  together  with  increased international trade and railway’s capacity. After 100 years of existence, this Railroad can still offer perspective alternatives for the future: there is a plan of prolonging the Railway to Sakhalin Island over the Nailski Strait, which will connect Eurasia with Sakhalin3.

Trans-Siberian Railway demonstrates a dramatic support of successful government interventions  in  economic  life  and  regional  development.  Despite  policy  selectivity favoring some particular places  (cities  along the railway), such interventions can be vitally essential for initial economic development of far regions.

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.    

Ingria Techno Park: A Promising Start

by Tetiana Protasova

Among the many incubators and techno-parks of Russia, Ingria proudly stands out from the crowd. Not only does it possess a substantial amount of capital (the total volume of investment in the creation of Ingria techno-park equals to 720 ml euro , but it also seems to have learned a lot from the success and failure of similar projects worldwide.

Overcoming Superficiality

Russia currently harbors over a hundred business incubators, most of them financed publicly. The standard list of services provided to the residents includes: free or under-priced office premises, conference rooms, channeling communication with investors and potential clients and mentoring. However, to-date most Russian business incubators and techno parks have not yielded any substantial innovations. World practice shows that getting the money and building a large office block is not enough for a government-initiated project to work. Similar to having the water fill the banks of a river, human capital in the face of incubatees and small businesses along with prospective investors need to come together, and with a bunch of innovative ideas, bring life to the freshly-built premises of a techno park. No wonder such concept as virtual incubators is up and running - material endowment can only be extra to knowledge and networking.

Good Examples

The number of successful enterprises that have left the incubator is by far the most important signal for the prospective incubatees. “The fact by itself that a business incubator has tenants is not a proof of success; the latter can only be decided if we are able to examine the incubated clients and their survival rates in a perspective of 3-7 years.”  Ingria has only been launched in 2007, and with such short history it is too soon to label it complete success, however its pilgrims have gained merit even in this short time frame. Ingria currently harbors sixty-four residents , many of them about to leave the nest of the incubator. Those who already did, are currently co-owned by big international corporations and appear to stand on solid ground.

Media and Culture

Another important success factor of a techno park is its popularity in the media and the familiarity with the concept of incubation in the society. Given it is a fairly new concept for this part of the world, incubation appears to gain popularity among the progressive Russian youth. IT specialists are in the forefront, as Internet is flooded with information concerning incubators and the success stories worldwide.  Further, ideology plays a crucial role in attracting IT specialists to business, as the popular US movies  give a sense of courage, and a feeling that a good concept and a will to succeed are enough to make a break. The fact that Ingria cooperates with all the major universities in St. Petersburg is also a good sign. Universities can offer entrepreneurs equipment, laboratories, training programs and special services that would not be available to them in their own organizational framework . Students and fresh graduates, having closely observed the incubation while studying may also aspire to become a resident, to invent and to cooperate. Acquiring professional skills and specialization is also easier and faster when a student knows what skills he would require after graduating.

Reasonable Eligibility Requirements and Transparency

Eligibility criteria has to be clear and reasonable in order to attract innovative projects. For instance, one of the requirements introduced by Skolkovo is to have at least one foreign specialist on your team when you apply for their residency. No wonder Ingria is already 2 years ahead of Skolkovo . According to Russian press , Skolkovo simply doesn't want to attract prospective specialists, it is said to harbor corruption, as the sphere of nanotechnology is difficult to monitor. This is why Ingria's apparent transparency, ensured by regular report publication, statistical data provision and the support of large multinational corporations is a good start to attract further success.

Hopefully Ingria will continue the inspiring trend and will further serve as a fine example of wise policy-making to science parks, incubators and innovation clusters in other developing countries.