Creating a 'Smart' City in Russia

When Vladimir Putin talked about restoring Russia's greatness, he evoked a deeply 20th-century vision of using state muscle, military might, and oil wealth to command respect. When his president, Dmitry Medvedev, speaks to the same point, he talks about building an "innovation city" in the Moscow suburb of Skolkovo, where the state will leave the nation's best minds free to pursue the scientific and technological breakthroughs that are the bedrock of a 21st-century "knowledge economy." Medvedev's vision is designed to liberate Russia from what he calls a "humiliating" reliance on oil and gas exports, and to revive the greatness of a nation once known for scientific and technological achievement. "The success of the 'Smart Russia' movement is a question of life and death for Russia," says Zhores Alferov, the only Nobel Prize winner still living in Russia, who was chosen by Medvedev last month as overall head of the Skolkovo project. "The idea of Skolkovo is like Noah's ark—all our ideas of hope and survival are pinned on it."

Whether Russia reemerges as a great power may well be determined by Medvedev's campaign to revive its smart side. For all its inefficiencies, the Soviet state was a generous supporter of science and technology, building the world's first artificial satellite and the capsule that put the first man in space. After the fall of the Soviet Union in 1991, state support for the sciences collapsed, scientists fled for posts overseas, and the state itself evolved into a predator—committed in theory to the free market, but too often in practice to plundering private enterprise for profit. In the generation that separated Yuri Gagarin's spaceflight from Putin's election in 2000, Russia's GDP and industrial production fell by nearly 50 percent, and with them investment in science fell from 6 percent of GDP to just 1.5 percent, where it stagnates today. The brain drain began in the 1970s as educated Soviet Jews—like the parents of young Sergey Brin, who went on to become a co-inventor of Google—headed to the free West. By the turn of the century it had robbed Russia of more than a half million of its most talented people. Putin and Medvedev both believe that the state can solve Russia's problems—but while Putin sees the bureaucracy as the source of his power, Medvedev sees it as a corrupt obstacle to creating a post-oil economy.

Skolkovo is the centerpiece of Medvedev's drive to create a new kind of economy. A nondescript Soviet-era suburb 40 kilometers outside Moscow, Skolkovo is already home to Russia's leading business school, which is (crucially) private but receives some state research money. The new innovation city is inspired by the relationship between Stanford University and Silicon Valley, or the Massachusetts Institute of Technology and the Route 128 tech firms outside Boston: a place where academic brains can find the private and government money they need to launch startup companies. The new Skolkovo will be "a real city of the future," says oil baron Viktor Vekselberg, Russia's 10th-richest man and Medvedev's choice to organize the business side of Skolkovo, selecting the best ideas for the state to back as startups. Construction is already underway on a 300-hectare plot that will be protected by walls and gates. If all goes as planned, by 2014 the new city will house 30,000 to 40,000 people. Viktor Ustinov, one of Russia's top physicists and a former pupil of Alferov's, says Skolkovo will be a "Russian Silicon Valley" devoted to innovation in communications and biomedicine, as well as in space, nuclear, and information technologies. According to Vladislav Surkov, the Kremlin's chief ideologue, "Only the best people will go there, and they will be carefully protected … The best people will be given the very best conditions."

Many nations have also tried to build their own Silicon Valleys. But Medvedev, however belatedly, has declared that the project is Russia's last best hope. His 2008 blueprint for the Russian economy, called "Strategy 2020," calls for the tech sector to make up 15 percent of exports, or 8 to 10 percent of GDP, by 2020. Currently it's about 1.1 percent of GDP, and much of that is in military hardware. So Medvedev is pumping billions in state funds into projects including Skolkovo, the world's biggest nanotechnology-investment fund, and a program designed to lure Russian émigrés and their companies back to the homeland. Medvedev has sent top officials on the road to drum up money for innovation bonds, and earmarked more than $10 billion for tech investment. That lags behind others—China has allocated $26 billion toward tech investment for 2010 alone—but is nonetheless a sign of seriousness.

Skolkovo's main chance of success is that its businesses will be protected from rapacious state bureaucrats and police. Today the subsidies and special privileges that the Soviet state once lavished on science and business projects have given way to plain theft. In a recent PricewaterhouseCoopers survey of global economic crimes, 71 percent of Russian enterprises reported being the target of such abuses by police or bureaucrats in 2009 (the worst of 33 countries in the study). Medvedev himself has publicly blasted Russia's culture of state corruption and has attempted to seal off Skolkovo, which will have simplified laws on businesses, a simpler visa regime, tax benefits, and no thieving bureaucrats. "We would create not just a new city but a new person who would live there—there will be no space for corruption in our city," says Vekselberg. "Somebody has to show an example of how Russia can change. We have to start killing the dragon [of corruption] inside ourselves."

But the trend lines are running against Smart Russia. In a couple of decades the cream of the Soviet intelligentsia will be dead, leaving behind a rotten education system. Most of Russia's traditional research institutes long ago lost many of their best people to better-funded universities in the West, and now there's not a single Russian university in the world's top 100. Just as the Russian state was plundered by its servants after the fall of communism, so the assets of its academic institutions were sold off, rented out, and systematically stolen by its administrators. In 2009 the country published fewer scholarly papers and journals than India or China, and Russians won only four Nobel Prizes in the last decade, compared with 67 for the U.S. (and only one, Mikhail Gorbachev's peace prize, in the 1990s). In the World Economic Forum's rankings of the world's most competitive nations, Russia has slipped 12 places, to 63rd, since Medvedev became president in 2008, and its information-technology sector has slipped four places in as many years, to a dismal 74th out of 134 countries. Some Russian businessmen, like antivirus-software designer Yevgeny Kaspersky, complain that what talent remains seems disproportionately focused on illegal activity, like the creation of the "Storm" Trojan horse that spawned a worldwide botnet infecting 1.5 million computers last year. "Russia is a nation of superhackers," says Kaspersky, whose Kaspersky Labs is one of Russia's few global tech businesses—devoted to blocking hackers.

In some ways Medvedev's plan to create a legitimate outlet for tech talent is quintessentially Soviet. The idea of a city for scientists harks back to Stalin's purpose-built tech cities within the Gulag where selected scientists worked in conditions of privilege—and hatched such breakthroughs as the Soviet atom bomb. But in this era "you can't have a centrally planned innovative economy," warns Vladislav Inozemtsev, director of the Moscow-based Center for Post-Industrial Studies. "Nowhere in the world has a Silicon Valley blossomed because of decrees issued by bureaucrats, even if the decrees are backed up by government financing."

The failure of central planning does not necessarily spell doom for Skolkovo, because Medvedev is guided by a more modern vision of how to use subsidies to steer business development. Already there are some success stories. One of Alferov's former students, Alexei Kovsh, is moving his energy-efficient-lighting company from Germany to St. Petersburg, because Alferov convinced him that he could get better funding in Russia, with lower costs than in the West, and better protection from technology copycats than in China. Kovsh recently sold stakes in his company, Optogan, to the state-owned Rusnanotech and to the metals tycoon Mikhail Prokhorov. With the state as a third partner, Kovsh feels protected. Alferov hopes to repeat the experience to draw similar businesses to Skolkovo. Ranged against Smart Russia are the bureaucrats who prefer Russia to stay dumb—because they make so much money from it. Medvedev is pushing innovation as one of his "four I's," or pillars of modernization, the others being institutions, infrastructure, and investment. But truth be told, he's not making much progress. Russia built just 1,000 kilometers of roads last year, compared with the 47,000 kilometers built by China. Former opposition legislator Vladimir Ryzhkov complains that the real four I's of Russian modernization are "illusion, inefficiency, instability, and incompetence." Yevgeny Gontmakher, a leading member of Medvedev's favorite think tank, the Institute of Contemporary Development, says the flaw in the president's strategy is that "they expect scientists to come and invent everything for them so there will be no need to reform political institutions." No, Medvedev is not out to reform the political system top to bottom, but it's also clear he understands the forces of Dumb Russia. "Corrupt officials … do not want development, and fear it," he wrote in his 2009 manifesto, "Forward Russia." "But the future does not belong to them—it belongs to us. We will overcome backwardness and corruption." May the smart Russians win.

Creating a 'Smart' City in Russia | World