Russia’s technological prowess, combined with Silicon Valley’s know-how and Wall Street’s capital, could create a new basis for business cooperation between Washington and Moscow.

Yandex, one of Russia’s top tech companies, made its debut on the NASDAQ stock exchange in May 2011. Photo: Reuters

Much is to be said about Russia’s relationship with technology. From the Space Race of the 1960s to the current development of Skolkovo, the heavily state-subsidized “innovation center” founded by then President Dmitry Medvedev in 2010, Russia continues to be a leader in technological expertise.

In market terms, Russian companies have also demonstrated their global appeal and ability to stack up against foreign competitors. One of Russia’s top tech players, Yandex, made its debut on the NASDAQ stock exchange in May 2011. Today, Yandex maintains its dominance, controlling some 60 percent of the Russian search market (compared to around 25 percent for Google). Like China’s Baidu, Yandex maintains its lead over its Silicon Valley competitor by retaining the loyalty of Russian Internet users. As a result, Yandex has silenced critics who thought the firm would be next in line to be added to Google’s balance sheet.

Despite the promise of companies like Yandex, both internal and external investors remain skeptical about Russia’s economic potential. Since 2009, foreign direct investment has remained well below pre-recession levels. Capital increasingly flows out of the country, reaching approximately $85 billion in 2012, according to the U.S. Department of State’s 2012 Investment Climate Statement for Russia.

Alec AlbrightLikewise, bright young Russians are leaving the country in search of rosier career, education, and lifestyle opportunities in the West. Although some of the blame is correctly aimed at outside forces associated with the global financial crisis, much of Russia’s investment problem stems from domestic causes.

A score of structural factors mar Russia’s ability to generate global relevance concerning its development initiatives. Endemic corruption, lack of property rights, and heavy-handed state involvement in a variety of sectors, notably energy, make Russia’s business climate less than enviable.

Indeed, Russia ranks amongst the bottom in several noteworthy indexes, including 92nd of 189 countries in the 2012 World Bank’s Ease of Doing Business Index, 133rd of 174 countries in Transparency International’s Corruption Perceptions Index, and in the 24th percentile of 212 countries in the World Bank’s 2012 Worldwide Governance Indicators Rule of Law Index.

While these data do not supply a complete observation of Russia’s ability to support business, they paint a general picture of the challenges that face the country’s development moving towards 2020.

Russia needs a new economic model

Russia’s economy is still struggling to fully rebound from the shocks of the most recent recession. Despite its inclusion in the BRICS grouping of emerging market nations, the Russian economic ministry forecasts an annual growth rate of 2.5 percent, much lower than the gaudy numbers produced in the early 2000s.

Russia’s one-dimensional economic model is showing its lack of robustness. It is no secret that Russia’s heavy dependence on oil and gas, coupled with a wide array of other structural issues (as noted above) has pushed the world’s largest country into the market doldrums. The North American shale gas boom and regional politicking (e.g. Ukraine turning West rather than East for its energy needs) have substantively diminished Russia’s leverage in the energy sector. In short, Russia’s economy appears to be on track to become a chronic underachiever.

Officials in the Kremlin are keenly aware of their country’s deteriorating economic conditions. Reforms, for example, President Vladimir Putin’s ubiquitous anti-corruption campaigns, continue to be discussed, promoted, and, sometimes, carried through. Yet, brainpower and capital continue to head for the nearest exits.

This way to Silicon Valley

Technology is often described as the cure for all of society’s ailments. This cliché may ring true in the Russian context. The accomplishments of Yandex and other tech firms like Mobile Telesystems (MTS), the country’s largest mobile phone company, also traded on the NASDAQ exchange, demonstrate the potential for consumer-driven companies to be fruitful outside of Russia.

Of course, the success or failure of a new business is not defined by the possession of a stock ticker symbol on Wall Street. However, it is emblematic of the gains that could be pursued by new tech projects in Russia. How does Russia pursue this exercise of diversification and technological development? What role can the U.S. play in facilitating such an effort?

To date, Russia has, at best, been an inefficient manager of its technology potential. Current Prime Minister Dmitry Medvedev is often portrayed as the modernizing, if not “hip,” face of Russia’s tech growth. The politician has over 250,000 followers on the photo blogging site Instagram. Yet Mr. Medvedev’s pet project, the state-run Skolkovo innovation complex, continues to face harsh criticism from a variety of sources, including the government. Most recently, the Prosecutor General’s Office has charged Skolkovo with misspending nearly $4 billion of government money.

Creation and innovation surely cannot excel in an environment rife with corruption, accusations, and heavy-handed state maneuvering. Russia must end these practices if it intends to wholly capitalize on the large sums of state funds already invested into Skolkovo becoming the Russian version of Silicon Valley. More importantly, it must address the structural problems that have created an environment where ideas have little chance to flourish. State investment can be a good thing, but not when political strings are attached, hindering growth.

For their part, U.S. tech leaders should devote more energy to Russia. Though problems persist, the Russian cannot be dismissed as a black hole. Public campaigns, such as Facebook founder Mark Zuckerberg’s visit in October 2012, are useful; however, more long-term partnerships, those that last longer than headlines, must be established.

The U.S. government must also make a more concerted effort at developing technological initiatives in Russia. As it moves into the Pacific Century, Washington must be more opportunistic in providing openings for tech partnerships amongst Asian, Russian, and American firms.

Today too much potential remains untapped for Russian and American tech companies not to reshape the way they approach developing the Russian market. As a result, Washington and Moscow must understand that amending their respective technology initiatives vis-à-vis one another will produce mutual benefits which extend well beyond just financial gains.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.