Cablegate: Conferences Highlight Barriers to Innovation And

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R 020739Z DEC 09
FM AMCONSUL YEKATERINBURG
TO RUEHC/SECSTATE WASHDC 1390
INFO RUEHMO/AMEMBASSY MOSCOW 1034
RUEHLN/AMCONSUL ST PETERSBURG 0613
RUEHVK/AMCONSUL VLADIVOSTOK 0623
RUEHYG/AMCONSUL YEKATERINBURG 1428
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UNCLAS SECTION 01 OF 03 YEKATERINBURG 000079

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EFIN RS
SUBJECT: CONFERENCES HIGHLIGHT BARRIERS TO INNOVATION AND
COMPETITIVENESS IN URALS REGION

Sensitive But Unclassified. Please Protect Accordingly.

1. (U) Summary: At recent events in Yekaterinburg, prominent
government, business, and academic representatives discussed
issues of the Greater Urals economy. Several presenters from
business and government noted signs of improvement in the
Russian economy, but called for greater diversification of the
Urals economy, modernization, and innovation. It was left to
the academic participants to note that modernization and
innovation cannot be imposed by decree and that competitiveness
must come through investment in research and modern production
techniques. The importance of "good" employment (e.g., in
efficient, competitive enterprises) versus "bad" employment
(mass employment in inefficient, non-competitive dinosaur
enterprises) was also stressed. End summary.

2. (U) Introduction: The Fourth Annual Urals Conference devoted
to the Greater Urals Economy, hosted by Ural Ekspert magazine
and the oblast government, took place on November 13 in oblast
government offices. Guest from Moscow included Deputy Minister
for Economic Development Andrey Klepach, Deputy Minister of
Industry and Trade Stanislav Naumov, and Acting Director for
Infrastructure of Rosnanotech Yevgeniy Yevdokimov. Federal
officials focused on statistics rather than actions federal and
regional governments can take to stimulate innovation and
modernization. From Sverdlovsk oblast, Deputy Polpred Aleksandr
Beletskiy and Prime Minister Viktor Koksharov spoke on the
current state of the regional economy. Sergey Afontsev, of the
Institute of the World Economy and Foreign Relations, spoke
critically about the situation in the regions and monocities.
On November 19, a conference at the Urals Law Academy focused on
IPR in the Innovative Economy. Well-known economist Aleksandr
Tatarkin, who is a member of the Russian Academy of Sciences and
a Communist, demonstrated that despite President Medvedev's
vision, Russia faces an uphill struggle as it tries to reset its
economy. End introduction.

Regional Economy Recovering, Post Crisis Planning
--------------------------------------------- -----------------

3. (U) Sverdlovsk Prime Minister Viktor Koksharov opened the
Nov. 13 forum with news that the Sverdlovsk oblast economy is
showing signs of recovery. In January 2009, the oblast economy
showed a drop of over 50 per cent compared to 2008; in October
2009, however, the economy grew by 10-12 percent over September
2009. The oblast government is now working on a post-crisis
development plan focused on industrial modernization. He
underlined that Sverdlovsk depends on the world market for
metals and metallurgical products and would benefit from
diversification. Orders for machinery products have decreased
significantly due to the slump in oil and gas production, and
reduced road construction. He said that forestry products
constitute an underdeveloped sector and called for high end wood
processing in the region. The oblast plans to develop a new
plant in Nizhniy Tagil to process gas into methanol and pitches.
This plant would develop out of the state-owned Khimplast
plant. Koksharov also mentioned the first
medical/pharmaceutical cluster in Russia where artificial
kidneys, insulin, anti-viral medicines, etc., are being
developed and produced. Finally, he said, Sverdlovsk oblast is
one of the first regions of Russia to have digital TV
broadcasting, which now extends to 25 percent of the population.

Low Investment Hinders Modernization
---------------------------------------------

4. (U) The Deputy Chief Editor of Ekspert magazine criticized
Russian managers who think strictly in the short term and do not
invest in modernization required to become competitive. Andrey
Klepach compared Russia to China, noting that Russia spends only
1.3 per cent of GDP on research and development while China
spends ten times more. For businesses to be competitive, he
said, they should invest at least 10 per cent of their income in
R&D. He added that infrastructure development is lagging, with
Russia investing only 2-3 per cent of GDP in infrastructure
while even Kazakhstan spends 4-7 per cent of GDP in this sector.
He called for new laws to allow construction of toll roads,
which currently are not allowed if there is no state financed
road serving the same route.

Rosnano Leading the Way
-----------------------------

5. (U) Yevgeniy Yevdokimov, Managing Director of Rosnano's
infrastructure department focused on Rosnanotech's plans for the
Greater Urals. Rosnano does not finance research, concentrating
instead on commercialization of innovations. In 2009 it
financed 38 projects valued at RR 100 billion. Yevdokimov

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stressed that almost all projects receiving support from Rosnano
can be considered small- or medium-sized enterprises. In 2010
Rosnano plans to establish ten regional centers, each with RR 19
billion to support innovative start ups. He said major
challenges for innovative companies are the absence of high-end
equipment for research and production; lack of demand for
leading edge products; and lack of financing for the full
production cycle.

Modernization Cannot Be Decreed
----------------------------------------

6. (U) Sergey Afontsev of the Institute of World Economy and
Foreign Relations created a stir when he criticized the
government for its attitude towards business. According to
Afontsev, local officials regard businesses as tax-paying and
employment machines, without regard for the efficiency or
competitiveness of the enterprises. He took government to task
for supporting enterprises that are not competitive and
instituting barriers to trade that limit consumers to locally
manufactured goods and prop up failing industries which face
inevitable bankruptcy unless they invest in modern technology.
He said that government cannot impose modernization from above.
Government should incentivize long-term planning by businesses
with long-term loans. According to Afontsev, the longest term
loan available locally is limited to two years, which is not
enough to recoup investment in modernization or innovation.
Afontsev linked low salaries to support of "bad" jobs by
government. By continuing to support ineffective enterprises
merely to maintain employment levels, low labor productivity
will continue and keep salaries low. He urged government to
fund real retraining programs for employees of inefficient
enterprises to prepare them for modern, high-tech jobs.

E-Government Coming Soon
-----------------------------------

7. (U) A young Yekaterinburg city duma deputy who owns his own
IT company, Leonid Volkov, spoke about the necessity of
e-government which he said will increase transparency and
minimize corruption. He called on government at all levels to
standardize documents and forms in preparation for greater use
of computer technology. He is currently developing the master
plan for implementation of e-government in Yekaterinburg and has
been invited to participate in a similar federal project.
Volkov expects that e-government will result in layoffs of
government employees.

Russia Lags Behind
----------------------

8. (U) Meanwhile, at the Urals Law Academy, Professor Aleksandr
Ivanovich Tatarkin of the Russian Academy of Sciences took
Russian government of all levels to task for not investing in
R&D that would help develop innovative technologies and products
as well as increase the competitiveness of Russian companies.
Despite constant "reforms" in education and research since 1999,
he finds that financing has decreased significantly since the
era of the USSR. He cited statistics showing that Russia lags
behind the U.S. and China in R&D investment: the U.S. spends
about 7 percent of GDP on R&D; over 83 percent of Finland's GDP
is based on innovative technologies; in the U.S., 80 percent of
GDP is based on innovations; in China, 40 percent of GDP is
based on innovative technologies. In Russia, by contrast, only
1 percent of GDP is attributed to innovation. Tatarkin
commented on survey results that highlighted the following
challenges: 1) Russian consumers do not demand innovative
products; 2) banks are afraid of lending to innovative
companies, particularly start-ups; 3) there is almost no
government support for innovative developments; and 4) the
education system does not turn out innovators or employees with
the skills to work in high-tech industries.

Comment
------------
9. (SBU) It seems that the academics are ahead of government and
business. In these two meetings we heard some frank criticisms
of the Russian economy and government's role in stimulating
development. Academics also presented many suggestions for how
to reshape the economy to promote entrepreneurism and
competitiveness. Business and government presenters, on the
contrary, repeated the themes of President Medvedev but seemed
to have no idea how to realize them. "Innovation" is becoming
the mantra of political leaders but there does not appear to be
a common understanding of what this means. Those in entrenched
positions, whether business or political, pay lip service to
ideas of the new economy but then impede measures that might aid
restructuring. The recent visit to Yekaterinburg of Defense

YEKATERINB 00000079 003 OF 003

Minister Serdyukov is a perfect example. Serdyukov advised
defense contractors to minimize new research projects. As the
military is a major investor in R&D, its de-emphasis of new
research will likely dampen the effects of Medvedev's push for
innovation, modernization, and competitiveness. The first
official actions of Governor Misharin provide another example.
He visited a bankrupt production facility where power had been
cut because the company, which owes power and wage arrears,
cannot pay. But the Governor has decreed that the factory will
stay open and that it must have power. This is a clear example
of a non-competitive enterprise with "bad" jobs. As the
academics noted, command economy solutions have failed to lift
the Urals regional economy out of its slump. Without a change
in strategy, the Urals economy has little chance to become
competitive in the global market.
SANDUSKY

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