Behold! The New Russian Smartphone

Medvedev: “I can’t even tell where to press.”
“It is still a prototype.”
Medvedev: “But this is entirely our product, which will be produced in our factories?”
Chemezov: For now, unfortunately, we will only be able to make it in Taiwan.  But soon we will completely switch over to production in Russia.”

Yesterday, in a meeting with President Medvedev, Head of goskorp Rostekhnologii Sergei Chemezov showed off a prototype smartphone that Rostekhnologii will manufacture and begin to sell in 2011.  Exact specs and details of the phone are still unknown – it will apparently operate on a 4G network – but the exchange above does not inspire a great deal of confidence.  At least, I would not expect iPhone-like lines waiting for the first models, though Nashi may be able to whip something together.

The announcement comes on the heels of several other suspiciously similar-sounding projects, including the “Russian” operating system, “Russian” search engine, “Russian” electric car, etc.  Combine these isolated projects with the giant money pit that is the Skolkovo ‘innovation city’ project, and you see a strategy developing.

You may be thinking, “Weren’t these companies supposed to be privatized?”  Well, kind of.  Currently, companies like Rostekhnologii are “State Corporations” (Государственные Корпорации), or goskorps for short.  Early this year, it was announced that the goskorps would be converted into ‘private’ company structures (e.g., joint stock companies).  As is becoming clear now, this does not by any stretch mean that the companies will cease being majority state-owned.  Indeed, it is obvious that companies like Rostekhnologii are central to Russia’s ‘modernization’ plan over the foreseeable future.

In addition to go-it-alone initiatives like the Russky smartphone, Rostekhnologii and others are pursuing strategic partnerships with major Western companies in the form of joint ventures.  Examples include JVs between Rostekhnologii and Boeing, Airbus, Alcatel, and others.

This change in strategy is a response to the global financial crisis, which has allowed Russia to evaluate the outcomes of its previous development strategy.  The previous strategy largely consisted of taxing the hell out Russian oil companies, buying up U.S. Treasuries, reducing capital controls, and hoping for ‘rational’ loans by Western banks to Russian companies.  The result was a full-scale evacuation right after the Georgian War and a bunch of overly-leveraged domestic companies in bad need of a government bailout.  And over that gangbusters period of 2004-08, Russia saw little if any ‘greenfield’ foreign direct investment in the country (i.e., no new factories, no new technology, no modern business practices implemented).

So what does the new strategy have in common with the old?  They are both at least partially premised on the understanding that the Russian state is simply not capable of making rational investment decisions.  The flaw of the previous strategy was that Putin et al thought Western banks could make better decisions than they could over who should get loans.  As we now know, they were oh so wrong.

The new strategy takes a novel approach by leveraging the technology and know-how of the best Western companies that make things, not loans.  Ironically, the strategy also leverages Russia’s horrible investment climate.  How?  In exchange for establishing production facilities in Russia, Western companies presumably bypass all the corruption, red tape, and enemies that come with investing in Russia by having the best krysha or cover that money can buy: participation in a majority state-owned joint venture.  Remember, Chemezov was Putin’s KGB colleague and Dresden roommate, and is a close associate of power player Dep. PM Igor Sechin.  And we all know Medvedev is on board (indeed – the coordination between Medvedev and the supposedly antagonistic siloviki on this issue belies any impending rupture of the tandem).

Of course, this strategy does not make all of the problems with Russia’s economy and investment environment disappear (a topic I promise to return to soon).  But for the short term, Russia may have found the best, albeit backwards and hamfisted, way of ‘attracting’ foreign direct investment to the country.

Update (9.20.2010):

A number of events following my post last week only further demonstrate the strategy I describe above:

  • Putin Speaks to Sochi Investment Conference – on Friday, PM Putin spoke to the 9th International Investment Forum in Sochi, where 200 deals worth $9.7 billion were signed.  Most important, Mr. Putin himself took the podium on the Forum’s final day, and gave a speech that touched on Russia’s modernization strategy with respect to foreign investors.  In particular, Putin cited a JV between Boeing and Russian titanium giant Avisma, which has operated since 2007.  Putin pointed out that until the Boeing-Avisma JV, Russia lacked the technological ability to produce certain titanium-based parts in Russia and that Boeing gets 25 percent of its titanium from Russia.  Putin said of the JV, “This is a high-tech production, and through joint efforts, they are building a foundation for economic and political cooperation.  But this is something that creates interdependency, as well.”  And wouldn’t you know it, the same day Boeing announced that Rostekhnologii would purchase 50 of its 737 commercial aircraft.  Putin clarified the Russian government’s expectations to potential investors: “[investors should] focus not only on the domestic market but also manufacture products that would be competitive in international markets.”
  • Putin Speaks to John Deere Company – also on Friday, Putin met with representatives from U.S.-based John Deere, to whom he directed a similar, but more direct message.  Noting how “our relationships with car makers are developing,” Putin stated, “If initially your company transitioned from using the assembly plant to further localizing your production, setting up production facilities in Russia and semi-knockdown [SKD] assembly, government support and various programs to promote your products would be possible.”
  • Speaking of Car Makerswhat did Putin mean by Russia’s “relationships with car makers”?  He was referring to Russia’s increasingly strict policy stance on foreign automobile imports.  Readers may recall from last year several protests in Russia’s far east against new tariffs on the import of used automobiles, which reportedly crushed Russia’s used car import industry.  This year the government set its sights on new cars, which Putin announced during his cross-country drive in a Lada.  During one stop on the trip Putin spoke to foreign car makers: “We don’t want to undermine your business in Russia.  Don’t just come here.  We want you to gradually transfer your technology, increase production and help boost the technical expertise of our specialists.”  And last Saturday from Sochi, Volkswagen AG announced that it will decide on cooperation with GAZ Group, the largest automaker in Russia.  What will VW decide?  My guess is to open some sort of JV, given that VW has pursued an aggressive Russia strategy over the past few years, establishing production facilities in 2009 and recently unveiling the first car designed specifically for the Russian market, the VW Polo sedan.  And just this month, VW announced the transition from semi-knock down (SKD) to complete knock down (CKD) production at its Kaluga plant, pursuant to its agreement with Russia Ministry of Economic Development.  And yesterday, like clockwork Hyundai Motor announced that it in January 2011 it will open a plant in Russia to produce small-size vehicles designed for the Russian market.
  • Kaluga as Model – it is worth noting that VW’s plant in Kaluga is one of many foreign automakers and other major, global, companies, all of which are a product of a government program launched in 2006 with the aim of creating a ‘Russian Detroit’ in Kaluga.  The project has expanded beyond automobiles to a variety of industries, recently including pharmaceuticals.  Hmmm, now why does that ring a bell?  Indeed, it would not be surprising if Kaluga will serve as the model for Skolkovo.  The difference is that Kaluga started as a regional initiative, whereas Skolkovo is a Federal initiative.
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3 Responses to Behold! The New Russian Smartphone

  1. Democratist says:

    An extraorinarily insightful piece: It seems to mark a shift away from the original liberal ”innovation scenario” (mentioned in the March 2008, “Russia 2020” policy document), which presupposes the development of a national innovation system, competitive human capital, regional development centers and all the rest of it, as a way of attracting western FDI, towards a different approach, much more in line with what we have come to expect from the way in which the Russian state has typically done business over the past decade. Of course, the main idea here is to get western firms “tied into” the system through their “greenfield” FDI. I wonder what the take-up rate is likely to be like given Yukos, BP-TNK, Renaissance and all the rest of it. State-liberalism, anyone?

    • jesseheath says:

      I think they still want to develop their own domestic source of innovation. The constant and genuine discussions on innovation and modernization in the Russian press suggest as much. And I’m sure we’ll see plenty more ‘go-it-alone’ projects like the smartphone. But deep down, the Russian political elites have agreed that they need to partner with Western firms if they are to have any chance of success. I forgot to mention that Sechin’s own INTER RAO is also pursuing similar JVs in the energy supply and engineering sector (e.g., with Australian WorleyParsons). I assume we’ll see something similar start to pop up in the medical device and pharma sectors.

      Re: Yukos et al, I think that the oil and gas sector is an exception. First, it’s not an exceptionally innovative industry. Second, Russia already has a strong and internationally competitive domestic industry consisting of both state- and privately-owned firms. I’m sure they are still interested in foreign portfolio investment into these companies, but they are less dependent on Western know-how and technology here. Ditto for the arms/defense industries, where Russia is a global leader. Though arms/defense is an innovative industry, it’s one of those classic Russian exceptions where they can make a plane that goes from a freefall to horizontal flight without pause but they cannot manufacture a decent microwave, refrigerator, etc.

  2. marknesop says:

    I don’t think they can reasonably move away from majority state control until the threat of new (foreign) majority ownership being committed to deliberately tanking the company is no longer a concern. Many countries still maintain an under-the-radar nationalist foreign investment review policy – Japan, for one. You can invest as much as you like, but only in extraordinary circumstances can you acquire a controlling interest in the company if you’re not Japanese.

    I’m sure Russians are perfectly capable of making a decent microwave or refrigerator; after all, if they can repair a refrigerator with a handful of wire and some spit, I’m sure they could build one from local suppliers given the parts and a little training. Could they build one competitively, however, given the huge technology and manufacturing lead Asian companies have? Probably not. They’d have to establish a “Buy Russian” policy, and impose tariffs on foreign-produced appliances. That’s bad for trade, and the Russian product would have to be at least as good for not much more money. Americans can build refrigerators and microwaves, too, but their manufacturing base is almost gone under a relentless onslaught from China, Japan, Taiwan and Korea.

    All those countries, however, are net arms and weapons importers, not vendors. That explains why Russian companies can innovate like nobody’s business in combat aviation, while not yet building a decent microwave.

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