Nano-Potemkin Village

Earlier this fall, inside the sprawling Moscow Expo Center, hundreds of scientists gathered at the second annual International Nanotechnology Forum to mumble through dense presentations with antediluvian graphics and pace the halls, which were plastered with posters exploring nanopowders and silicomolybdic acid-diamine self-assembling ensembles.

But this was no ordinary scientific conference. For starters, there were the attendees, of which there were about 10,000, including hundreds of journalists, raging into their BlackBerrys and sprinting between press briefings. Then there were the TV crews and the professional cameramen archiving those scientific presentations for posterity. There were awards for international scientists. Siemens was there; Samsung and IBM were there. Even Russian President Dmitry Medvedev was there.

This, you see, was a Kremlin production.

Medvedev came to reassure all involved that he and the Russian state were still invested in making Russia the world leader in, of all things, nanotechnology. “I hope we will be able to make nanotechnology, the nano industry, one of the most powerful sectors of the Russian economy,” he said. The financial crisis, which has hit Russia especially hard, was but an opportunity, the president said, “to renew the Russian economy,” which has for too long coasted on the extraction of the earth’s riches.

Sure, modernization has long been Medvedev’s calling card, and getting away from fossil fuels is certainly a laudable idea, but nanotech? Really? Why, of all things, would the Russians focus on that as their ticket to a 21st century economy?

Historians Yuri Lotman and Boris Uspensky once noted that Russia does not do gradual change well. Rather, its leaders have long approached reform as a one-two break with the past, an approach that often has the reverse effect: In cleaning the slate, Russia too often simply locks in what’s already there.

And that’s what happened here. Like all such reforms, the nanotech initiative – diversifying the economy through some sort of futuristic magic bullet—was cooked up somewhere at the top. Why nanotech? Because, back when the idea was being entertained, sometime in late 2006, says an analyst familiar with the project, “nanotechnology was just the flavor of the month.”

But this being modern, corporatist Russia, the Kremlin did not stop at a directive praising the virtues of everything nano, nor did it take the route of incremental reform that encourages innovation through nudging incentives. Instead, it created a behemoth: a goskorporatsia—an opaque and controversial state-owned entity invented during the Putin era to squirrel away government money—called Rosnanotech.

Upon its formation in April 2007, Rosnanotech was given a budget of $5 billion and charged with developing a domestic nanotech industry capable of export and competition with the West. Around that time, the world nanotech market was $147 billion and predicted to grow to more than $3 trillion in the next eight years. To do this, Rosnanotech hired a professional, suited cadre trained in the liturgy of business plans and debt financing and set about growing a nanoindustry from absolute scratch.

Rosnanotech has become, essentially, a state-owned, state-funded venture capital fund. Scientists with a nanotech proposal apply to the company, which uses an international expert panel to weed out those projects worth investing in, in which Rosnanotech then acquires a minority stake. (According to Rosnanotech’s charter, its participation cannot exceed a 50-percent-minus-one share.) The company then ushers the project along the road to mass production—the goal is revenue of $8.5 million by the fifth year—by helping the project find private investors and properly structure their debt; dealing with Russian bureaucracy; finding and retooling production facilities, all with the plan of an early exit. “Our goal is not to maximize our investments,” says project office director Mikhail Chuchkevich. “And we are prepared to exit earlier, a lot earlier than other venture capital funds. We’d rather reinvest the money faster and create another project.”

To date, more than 1,200 proposals have been submitted, and of those 36—ranging from ventures in nanosprings to nanoink—are at various stages of implementation.

And there are bigger plans yet in store. Later this fall, Rosnanotech plans to open a stock exchange to connect fledgling companies with investors. By 2015, the new chair of Rosnanotech, the controversial and perennially embattled Anatoly Chubais, hopes to see the annual production in the Russian nanotech sector boom to about $30 billion, having repaid about $5 billion into the Kremlin’s treasury.

It sounds, at first, like an excellent idea: using government money to get new businesses off the ground, using primarily private funds, while simultaneously weaning the country off of petroleum.

But there are, of course, huge—and quite likely fatal—hurdles in the way of achieving such astronomical projections.

First, there are the money problems. Some of Rosnanotech’s budget, observers note, came from the forced sale of the assets of Yukos, Mikhail Khodorkovsky’s oil company seized in 2003. (The money, apparently, needed pockets.) And because it is a government corporation, notes Troika Dialog tech analyst Anna Lepetukhina, the money doesn’t always get where it’s supposed to go. “There’s a question of the allocation of resources and it’s not totally clear how it happens or who gets the money,” she says. “All of a sudden, oops, it’s gone.”

And then there’s the crisis, which has pushed Russia’s official unemployment rate to nearly 8 percent and opened up a yawning budget deficit. And so, in February, around the time of the peak of the crisis, Rosnanotech had to give $3 billion—more than half of its budget—back to the Kremlin.

What’s left is not nearly enough money to fund the necessary (and very expensive) research and development, because there is not much of a foundation left to build on. Nor are there people left to build this industry. The effect of brain drain is not to be underestimated. In the first decade after the collapse of the Soviet Union, more than half a million scientists and engineers left Russia for greener pastures. Yet there aren’t many saplings waiting to replace them. A recent study showed that 60 percent of engineering students in Russian universities had failed their college entrance exams. Medvedev has announced another government initiative to fund scientific research at cash-strapped institutions, but, again, much of the allocated money is simply disappearing en route to the lab.

As a result, many of the proposals flooding into Rosnanotech at the rate of 45 a month are utter nonsense, according to a private investor working with the company. “Russia is a country of dreamers,” he said.

Chuchkevich, the projects manager, acknowledged that this was a problem. “Our work is really interesting, just like it is at any venture fund,” he told me at the Rosnanotech headquarters. “We get proposals that promise to overturn all current notions of transportation. Others say they will get energy from the air or the magnetic field of the earth. One proposed using the nanostructure of water to cure illnesses. But,” he added, “we’ll talk to anyone that comes to us.”

Then there is the fact that Russia’s infrastructure continues to rust, along with Russia’s historic inability to compete on par with Western high-tech companies—mostly because it doesn’t have a modern high-tech industry. While the Russian government parades around the nano-initiative, it still starts from scratch: Chubais himself acknowledges that the sector is now no bigger than $150 million. Meanwhile, the West, which has established centers of technological innovation, continues to surge past Russia.

And yet Chubais hopes that the Russian nanotech industry will increase 200-fold in the next six years, a break-neck prognosis that looks delusional at best, considering all the very, very real challenges he faces.

Indeed, most industry watchers and observers of Russian politics agree that, given the obstacles and given the Kremlin’s lackluster track record, Rosnanotech and the Nanotechology Forum are little more than an elaborate a PR stunt designed to make the Kremlin appear to be forward-thinking and reform-oriented while shunting wads of cash to its friends. (Or, put more bluntly by another analyst, “It’s just bullshit.”) Meanwhile, all the problems of the past—corruption, dependence on oil, crumbling infrastructure, terminal brain drain—that this nano-initiative was supposed to fix have grown noticeably worse during Medvedev’s short tenure. The only difference now is that Russia has a self-assembling, decorative nano-Potemkin Village.

Nano-Potemkin Village [The Big Money]

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