Investing in Russia

Investing in Russia for Westerners has typically meant investing in the Western oil companies, such as British Petroleum, that operate in Russia. Now that Russia wants to develop its own silicon valley Cisco has promised a billion in investment over the next decade. Stock investing always entails risk. Will Cisco be able to manage its investment risk in a Russian “silicon valley” being developed outside of Moscow? Russia has had a strong, state managed, technology base since the middle of the twentieth century as evidenced by their space program that landed robot craft on the moon and that ferries crew to and from the International Space Station today using the Proton rocket. What Russia does not have is a history of entrepreneurial innovation, unimpeded by heavy handed government oversight. It is interesting that a recent series of meetings between Silicon Valley heavy weights did not include Russian born co-founder of Google, Sergi Brin. Brin has publically referred to his native land as “Nigeria with snow” and “run by a bunch of criminal cowboys.” Commonly voiced reservations to investing in Russia are corruption, human rights abuses, questionable rule of law and an economy almost totally dependent upon exploiting its oil and gas reserves.

Western technology has helped Russia pull its huge oil and gas reserves back online after they were thought to be played out. It is the export of oil and especially natural gas to Western Europe that has supported Russia’s economy for a decade or more. However, there is another Russian resource that is not being put to use. That resource is Russia’s immense intellectual talent. Although dissent was stifled under the old Communist regime and may well be today as well, its universities have turned out spectacular talent. Russia’s problem has been putting its talent to work to create commercially viable products. The fact that one of its smartest native sons, Mr. Brin, finds himself a famous and wealthy computer scientist in the Silicon Valley and not in St. Petersburg or Moscow is a telling fact about the climate for starting and growing a business, unimpeded by bribes, threats, and heavy handed political meddling. In picking new winners does the investor stick will lucrative dividend stocks at home or look to an uncertain future developing high tech products from Russian talent? Some of the concerns seem be addressed in what is being offered to Western investors. According to the Russian press Cisco and other are being offered a ten year tax holiday, fast track residency, work permits for foreign scientists, and the Skolkovo facility’s own police force. We will have to see if centuries of heavy handedness can be undone to make investing in Russia profitable.

Interested parties in the Silicon Valley believe that Russia needs to learn to “get it right” regarding allowing a free flow investment capital and allowing those who do the intellectual heavy lifting to reap the rewards of their work, free from payoffs and free from political meddling. Investing in Russia has worked for some Western companies when it was investing in oil provided that the contracts are written carefully. Cisco believes that the risk is manageable. It is also of note that the networking giant is doing this gradually over a decade.

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