Medvedev: “I can’t even tell where to press.”
Chemezov: “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.
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 Makers – what 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.