Russia: A Rapidly Developing Belt and Road TechnologicalPartner

To reduce its dependence on oil and gas and Western technology, Russia is rapidlydeveloping its technology and innovation sector and positioning it as a key component inthe process of economic diversification. The Russian government has introduced a widearray of incentives and a state-of-the-art infrastructure to support the sector, but it alsoneeds foreign participation in terms of investment and know-how transfer in order tobuild the inclusive and sustainable growth which it considers the key to success.Coinciding as this does with the current Belt and Road Initiative (BRI) and Guangdong-Hong Kong-Macau Bay Area development, Russia’s technology drive gives Hong Kong theopportunity to develop a closer and broader technology co-operation partnership with thecountry. This in turn could help pave Hong Kong’s path towards becoming a globaltechnology and innovation hub.

Russia’s New Growth Engine

Russia sees technology and innovation as a new engine of economic growth and a keycomponent in its attempt to cut the country’s reliance on the energy sector whichaccounted for more than half of the country’s exports and nearly 40% of the federalbudget revenues in 2017. The Western-led sanctions on Russia, which followed thecountry’s annexation of Crimea in 2014, included bans on selling technologies, especiallyin the military and energy sectors. In response, the Kremlin has encouraged Russiancompanies to develop home-grown technological solutions.

More than 15 billion rubles (US$250 million) were made available from the state budgetto develop alternatives to Western technologies. The Ministry of Economic Developmentcreated the Federal Targeted Programme for Research and Development in Priority Areasof Development of the Russian Scientific and Technological Complex for 2014-2020 (The2014-2020 Programme), which was designed to incentivise research institutes andprivate companies to develop homemade equivalents to imported tech. The aim was tomake Russia a world-class R&D leader with a competitive R&D ecosystem.

In December 2014, the country’s president Vladimir Putin launched the NationalTechnology Initiative (NTI) setting out the need for innovation solutions to protectRussia’s national security and quality of life. He heralded the advent of a newtechnological order in the next 10 to 15 years and called for the creation of anenvironment which would make Russia a global technological leader by 2035.

The NTI indicates new sectors and markets for Russian tech companies to target, andlooks at the main demand factors, key market niches and possible types of products andservices to fill these niches. It also identifies a number of key technologies which will leadto the creation of new products and services, and set out measures, includinginstitutional, financial and research tools, which will stimulate and support thedevelopment of domestic and global champions in these new sectors.

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One of the aims of the NTI is to create the conditions in which private investment in suchforms as joint investment, mutual funds, crowd-funding and crowd-investing can begin totake over the funding of Russia’s innovation and technology sector from pubic finance. Akey tool in the attempt to achieve this is the Russian Venture Company (RVC) – apublicly-owned fund of funds [1] set up in 2006 to develop Russia’s venture capitalindustry and provide support to the country’s high-tech sector. As of 2018, there are 26RVC-backed funds with a total valuation of 36 billion rubles (US$0.6 billion) in operation,supporting 225 approved investment projects across a variety of priority sectors,including: (i) biotechnology, medical equipment and pharmaceuticals; (ii) IT such ascomputer technologies and software development; (iii) energy efficiency; and (iv) spaceand telecommunications.

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The Russian government further set out its blueprint for sustained technology-driveneconomic growth in its Strategy for the Scientific and Technological Development of theRussian Federation, published in 2016. This policy document pointed to the need forRussia to import strategic technologies to strengthen the nation’s technological capacityand to increase the share of GDP on R&D.

In recent years, increases in federal spending on R&D have become even more vital fortechnological innovation in Russia as the country’s venture capital industry has beencrippled by the effect of international economic sanctions. Between 2010 and 2016,federal expenditure on R&D rose by nearly 70%. At the same time, FDI inflows intoRussia have begun to grow as private investors regain confidence in the Russia economy.Last year, foreign investors poured US$11.5 billion into professional, scientific andtechnical activities, making it Russia’s fifth-largest FDI category with 7.7% of the totalFDI inflows. That was up from just US$205 million in 2012.

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Federal R&D budget and expenditure increased sharply between 2010 and 2016.

With technology and innovation increasingly becoming a new engine of economic growth,the Russian Ministry of Economic Development expects the country’s high-tech exports togrow to about 3.5 times their current level by 2020, reaching 240-330 billion rubles(US$4-6 billion), and then to rise further to 400-670 billion rubles (or US$7-11 billion) by2025. Only time will tell if these goals could be realised. However, the recent growth ofRussia’s technology exports (especially software, which reached a record high in 2017,and telecommunication, computer and IT services, which surpassed their pre-crisis levelslast year) is widely regarded as the first fruit of the boost the country has given to itstechnology sector.

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Russia sees robust technology exports amid economic downturn and Western sanctions.

A Vibrant Start-up Scene

There has been a dearth in venture funding available to Russian start-ups in recentyears, due in part to international economic sanctions. In 2017, there were no listed USinvestors at all in Russian start-ups – a stark change from 2012, when US$400 millionwas put in by US investors. Despite that, Russia has maintained a vibrant start-up scene,laying a solid foundation for its technology and innovation ecosystem to thrive. As the2018 Inc. 5000 Europe [2] list, which tracks the three-year revenue growth of privatecompanies, shows, Russia is one of the best European destinations for fast-growingcompanies. Moscow was named the second-best European city overall with St.Petersburg in ninth place, the two cities accounting respectively for 171 and 70 of thecompanies on the list.

Examples of fast-growing private companies in Russia include Moscow-basedmanufacturer Varmega and food and beverage firm Kompaniya Optima, which both sawtheir revenues increase by about 2,000% between 2013 and 2016.

Some local Russian tech companies have already begun to take on their foreign rivals interms of market share. The homegrown internet behemoth Yandex reported a 24%growth in sales to 94 billion rubles (US$1.6 billion) in 2017 and is estimated to have beenresponsible for more than half of the country’s online searches, overtaking all foreignsearch engines.

To help create a technology and innovation ecosystem filled with vibrant start-ups, theRussian government has been strengthening the country’s tech-related infrastructure.This has included the establishment of more than 50 operating science and technologyparks throughout the country, aimed at encouraging local and foreign high-techcompanies to localise the R&D, production and application of their cutting-edge

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technologies.

Among the most active are Technopolis Moscow – the flagship project of innovationinfrastructures in the Russian capital and home to some 80 high-tech companiesincluding the Dutch micro-electro-mechanical systems (MEMs) producer MapperLithography and the European energy management giant Schneider Electric – and theScience Park of St. Petersburg, which has become one of the city’s key tools for thedevelopment of its innovation policy, implementing projects along the whole chain ofinnovation development from start-ups to industry and business incubation to clusterdevelopment.

Technopolis Moscow is a flagship project of innovation development in the Russian capital.Source: Technopolis Moscow

As well as providing physical infrastructures and favourable tax incentives for high-techcompanies, some of these science and technology parks have also implemented their ownincubators. One example of this is the Ingria Business Incubator of the Science Park ofSt. Petersburg, first launched in 2008 as a pilot project and now one of the country’smost famous and successful business incubators.

The Science Park of St. Petersburg boasts a complexsystem implementing projects along the whole chainof innovation development (1).

The Science Park of St. Petersburg boasts a complexsystem implementing projects along the whole chainof innovation development (2).

Ingria has attracted investment worth some 1.5 billion rubles (US$24 million). Riding onthe back of its success, the Science Park of St. Petersburg has also created a ClusterDevelopment Centre, an Engineering Centre (API) and a Prototype Development Centreto support and service its residents along the whole chain of development. Some of itssuccessful exits, such as the cloud-based business management solutions provider

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FreshOffice, have successfully entered the international market by opening offices, forexample, in ASEAN countries.

The Russian government has also spent a great deal of time and money upgrading andexpanding the Moscow-based Skolkovo Innovation Centre. One of the largesttechnoparks in Eastern Europe and home to more than 1,800 start-ups, Skolkovo is astate-of-the-art high-tech hub which is increasingly becoming a hotspot for venturecapitalists focusing on fields like bio-medicine, energy efficiency and strategic computer,nuclear and space technologies.

Skolkovo is one of the largest technoparks in EasternEurope.

Skolkovo is a state-of-the-art high-tech hub in Russia.

In line with the NTI and other tech-related initiatives, Skolkovo not only helps start-upsto accelerate and scale up in the local Russian market, but encourage them to makeinroads into the international marketplace. In collaboration with an extensive partnernetwork of more than 60 organisations in 17 countries and well-known internationalaccelerators such as Y Combinator, Plug and Play Tech Center, 500 Startups and SOSV,more than 200 Skolkovo residents have so far gained market access in more than 70countries worldwide, reporting international sales of over 4.2 billion rubles (US$66million).

Skolkovo orgainises Startup Village, the largest start-up conference for technologyentrepreneurs in Russia and the Commonwealth of Independent States (CIS), and theannual Open Innovations forum to bolster the development and commercialisation ofadvanced technologies, promotion of global technology brands and creation of new toolsfor international co-operation in the field of innovation. It has also been active in forgingpartnerships with foreign counterparts to help its earlier-stage start-ups with investment,incubators and accelerators, and market access.

One recent successful example of this is the joint venture between Skolkovo and China’sCybernaut Investment Group to create a joint Sino-Russian business incubator inSkolkovo, a robotics center in mainland China, a US$200 million venture fund and a jointacceleration program to invest in Skolkovo resident companies that specialise in IT,robotics, space and telecommunication technologies to enter the Chinese mainlandmarket.

A number of Skolkovo residents have already successfully launched products and projectson the Chinese mainland with their counterparts there. One example of this is OptogardNanotech which is, in co-operation with Shandong Trustpipe Industry, developing a laser-plasma technology for metals and alloys in pipe production in the Shandong province.

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Another is the content delivery service provider CDNvideo, which has had great successhelping its Chinese clients to deliver their internet and video content across the globe andrecently sold a controlling stake to the Shenzhen-listed Wangsu Science & Technology.

President Putin has described China’s BRI as "innovative” and is keen to step up efforts toalign the BRI with the development programs of the Russia-led Eurasian Economic Union(EAEU). Given this policy approach, it is unsurprising that the two economies are not onlymaking progress in promoting co-operation in traditional areas such as energy, logistics,manufacturing production and agriculture, but also in new areas such as the digitaleconomy and technology and innovation.

A Growing Role for Hong Kong

Skolkovo is already making good use of Hong Kong as a premier convention andexhibition centre in Asia. It is reaching out to prospective counterparts in Asia andbeyond, by attending and showcasing its offerings in the city’s flagship events such theAsian Financial Forum (AFF) and the HKTDC International ICT Expo. Some companiessuch as the Estonia-based digital security solution provider DigiFlak, have reportedlystarted production in the region, while others have found franchising partners or openedoffices in Hong Kong.

Taking note of Hong Kong’s pivotal role as a technology marketplace in Asia and its visionto become a global technology and innovation hub, the Moscow School of ManagementSkolkovo, a new graduate business school and research institution of Skolkovo, hasteamed up with the Hong Kong University of Science and Technology (HKUST) to roll outthe world’s first Executive MBA (EMBA) Programme devoted to the development of Beltand Road in Eurasia with a focus on innovation. With Hong Kong keen to move frombeing a renowned technology marketplace to a global technology and innovation hub, it isrolling out the red carpet for Russian technology and innovation companies. The city hasample opportunities for tech-related firms including start-ups, technology owners, patentholders and venture capitalists to exploit, under the umbrellas of the BRI and theGuangdong-Hong Kong-Macau Bay Area initiatives.

The Hong Kong/Shenzhen Innovation and Technology Park, set within the 87-hectare LokMa Chau Loop is a good example of the opportunities available. Occupying a strategiclocation in Hong Kong bordering Shenzhen, the Park offers four times as much land areaas Hong Kong Science Park. This not only gives Hong Kong’s innovation and technologyecosystem much more space to welcome Russian technology and innovation companies,but also allows the city to offer Russian R&D companies the opportunity to leverage thecompetitive advantages of both Hong Kong and Shenzhen in innovation and technologyand accelerate their access to the mainland market.

Russian technology companies can use the Park to tap the supply chain, manufacturingcapabilities and talent pool across the border in Shenzhen, while at the same timeenjoying the advantages of being in Hong Kong – a professionally managedsuperstructure, proximity to world-class universities and research institutions, and a top-notch business support service ecosystem and financial infrastructure.

The city’s robust IP protection regime, arbitration capabilities and professional licensing,franchising and IP registration services also make it an ideal launchpad for Russian start-ups looking to exploit the ever-growing markets for cutting-edge technologies in Asia.

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As a renowned international financial centre in which about half of the top 100 globalfinancial technology (FinTech) companies currently operate, Hong Kong is a usefulpartner for Russia companies specialising in this fast-growing field. Hong Kong canact as a landing pad for Russian FinTechs eyeing regional opportunities, a market forRussian FinTechs providing business-to-business (B2B) services and a platform forRussian FinTechs seeking Asian expansion.

With a holding company in Hong Kong, theRussian FinTech start-up ibox is growing itsbusiness in Southeast Asia.Source: ibox

A good case in point is the Russian FinTech start-up ibox which has been pushing its mobile pointof sales (mPoS) solutions hard to become a forcein Southeast Asia with a holding companysituated in Hong Kong.

Hong Kong’s ability to act as a capital-raising andbusiness platform for Russian companies wasstrengthened in 2016 when the Hong Kong StockExchange (HKEx) approved Russia as anacceptable jurisdiction of incorporation for listingapplicants and the Hong Kong-RussianComprehensive Double Taxation Agreement(CDTA) came into force.

In the near future, it is expected that the far-reaching Guangdong-Hong Kong-Macau Bay Area development will see Hong Kong growinto a global innovation hub, attracting more tech-savvy companies from Guangdong andabroad to capitalise on the city’s advantages such as free flow of information and capital,extensive international market networks, and sound corporate management.

As the largest and most advanced economy in the 11-city innovation-driven economiccluster in Southern China, Hong Kong is an ideal bridgehead for Russia companies lookingto gain access to this new center of innovation and technology in Asia.

[1] The RVC capital fund portfolio includes funds for the early stages, and seed funds,special-purpose, capital funds and supporting funds for the infrastructure and serviceprojects of the technological entrepreneurship market.

[2] The Inc. 5000 Europe list of the fastest-growing companies recognises the innovativeachievements of European companies in generating sustainable growth and jobs.

Copyright©2018 Hong Kong Trade Development Council. Reproduction in whole or in part without priorpermission is prohibited. While every effort has been made to ensure accuracy, the Hong Kong TradeDevelopment Council is not responsible for any errors. Views expressed in this report are not necessarilythose of the Hong Kong Trade Development Council.

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