Amid predictions by some experts that Western-led sanctions may push Russia to modernize its economy, Russia Direct is conducting a round-table on “Innovations and the Russia-West confrontation” in an attempt to understand to what extent such predictions are really viable.

It remains to be seen if Russia's innovation sector will be robust enough to survive economic isolation. Photo: Skolkovo Community

While the U.S. and Europe have agreed to sharply escalate sanctions against Russia on July 28 in response to the downing of flight MH17 and the ongoing Ukrainian crisis, there are increasing warnings that tougher sanctions will cripple the Russian economy. The sanctions are expected to restrict the sale of technologies and equipment that can be used for both civilian and military purposes as well as for Russia’s oil industry.

At the same time, there are some voices within Russia who argue that exactly the opposite might be true. “U.S. Sanctions May Aid Russian Reform,” was the headline of a recent column by Dmitri Trenin, Director of the Moscow Carnegie center. Before the MH17 tragedy Trenin argued that economic sanctions might “jolt the Russian economy out of its complacent reliance on oil and gas” and spur Russia’s “long-delayed” re-industrialization.

Video by Pavel Inzhelevskiy

On July 24, Russia Direct conducted the round table discussion “Innovation and the Russia-West Confrontation” to figure out whether Russia’s misfortune could indeed “give something which fortune has failed to give,” as Trenin put it in his article. The discussion brought together experts in innovation and education as well as start-up entrepreneurs, including Dmitry Repin, the director of the Moscow-based Digital October technology center, and Michael Akim, Chairman of the Working Group on Modernization and Innovation at the Association of European Business (AEB).

Today, Russia doesn’t have a highly developed innovation industry, with the so-called “innovation vector” being actively developed only over the past decade. Russia’s traditional innovations have been primarily based in the nuclear and atomic energy fields or within the space and military-industrial complex. So, with its small scale and relative underdevelopment, Russia’s innovation industry may face even more challenges in the near future if the West broadens and toughens its sanctions, according to Vadim Kulikov, investor and chairman of the board at IntroVision, who took the floor at the roundtable.

He argues that technological innovations will die out in Russia as a result of economic isolation. This isolation may aggravate other domestic problems that could, in turn, further affect the development of innovation in the country. These problems include bureaucracy, corruption, burdensome taxation, and numerous obstacles in getting off the ground many start-ups in the Russian market because of the lack of domestic demand for them. Given the fact that a lot of Russian homegrown innovations are fleeing abroad to Israel or Silicon Valley, this trend might be catalyzed in the worst-case scenario of total isolation.

“The conditions of doing business in Russia are currently difficult enough [to attract investors],” Kulikov warns. “And if there will be isolation, at worst it might put at risk the market economy. Quasi start-ups will appear while real ones will disappear. Without a market economy, innovation growth is impossible.”

In contrast, AEB’s Akim questions the implications of isolation for Russia. “What does this isolation translate into?” he asks, calling for more specific and in-depth analysis. He believes that the economy shouldn’t be mixed up with politics because sanctions can bring about so-called collateral damage, or “parallel effects.”

According to Akim, sanctions might lead to a backlash against the “social and humanitarian situation” in the country and affect living standards of ordinary Russians. In addition, the effect of sanctions may spill over to other countries. He warns against “pegging short-term political situations” to a long-term innovation vector. He also suggests that those companies that have already established their business in Russia are hardly likely to leave.     

“One thing is the start-up that exists from month to month, the other is the big business that is interested in long-term projects. I don’t know of any such big companies that have decided to leave Russia forever,” he said. Akim was referring to the history of trade and economic relations between the West and Russia that have existed regardless of geopolitical upheavals throughout history – including revolutions and the Cold War confrontation. 

Russia Direct's round table "Innovations and the Russia-West confrontation." Photo: Ruslan Sukhushin

Likewise, Carter Johnson, regional director for Russia and Moldova at American Councils for International Education, sees isolation as a relic of the past, as political rhetoric that shouldn’t prevent Russia and the West from collaborating in innovation and technology.   

“The current tensions have not yet hampered, in any significant way, U.S.-Russia university collaboration in the sphere of innovation,” he said. “I think it's fair to say that universities in both Russia and the U.S. are closely monitoring the situation but we have not seen any deleterious effects as they relate to EURECA [U.S.-Russia Innovation Corridor that brings together U.S. and Russian students to work together on joint innovation projects – Editor’s note]. Over the medium and longer-term, I would expect universities in both countries to follow a pragmatic approach to partnerships that are not tied to short-term changes in bilateral political relations.”

Andrey Tochin, the director of Trade Policy Department at the Eurasian Economic Commission, also questions the effect of sanctions, asking to what extent they are really significant and what economic sectors these sanctions affect.

"For which sectors will they be a problem, and for which sectors will they be an advantage?" he said. "This actually requires a comprehensive and thorough analysis."

Likewise, Ilya Rodin, Investment Director at the FPI Innovation Fund, argues that, technically, isolation is impossible, but some form of economic and trade reorientation might take place. “It is very difficult to isolate Russia currently [in the era of globalization],” he said, calling into question the real implications of the sanctions. “The question if we could develop innovation in isolation is not quite correct, because the impact from the sanctions [on Russia’s economy] is very ambiguous.”

Maybe it was possible 30 years ago, when the Asia-Pacific region was not yet developed, yet now it is problematic, Rodin argues.

When asked whether Asia really may help Russia tackle economic challenges and boost its innovation potential, other experts are cautious. They assume that Asian investors are hardly likely to be able to counterbalance the capital outflow of their Western counterparts in the case of isolation. Russia needs the Western “smart-money” investors, who not only invest, but also provide consulting advice – “knowledge and experience” – about proper development, said Kulikov.

Meanwhile, Karen Kazaryan, senior analyst at the Russian Association for Electronic Communications (RAEC), says that he hasn’t felt the influence of geopolitics (and, thus, sanctions) on his business, which deals with defending the interests of Internet companies in Russia and abroad. According to him, domestic obstacles and regulations are more relevant for Internet businesses than sanctions.

In this context, Akim refers to China’s experience. Regardless of its isolation in the second half of the twentieth century, Beijing sent its students abroad and, then, created favorable conditions to return experienced and talented specialists to the country.

“The Chinese left for America to study, worked there and, then, came back to China, because it created favorable conditions for them,” he told Russia Direct. “They shared their experience and competence. After all, in the 21st century the world is flat. And if young and talented Russians leave to study abroad, it’s good: If they find comfortable conditions of doing business here [in Russia], they will come back.” 

Nevertheless, with the looming threat of economic isolation from the West, a new wave of EU and U.S. sanctions that prevent Western technologies from coming to Russia, domestic restrictions on the Internet and a questionable investment climate, will Russia be able to create such favorable conditions for Internet and other high-tech companies to persuade them not to leave? It remains to be seen.