Cautious hopes for a Russian economic rebound in 2016
Russia’s Deputy Minister of Economic Development Oleg Fomichev argues that there is relative optimism for economic growth in Russia. He explains what needs to be done to improve the investment climate and support Russian innovation and start-ups.
The Big Three credit rating agencies - Standard & Poor's (S&P), Moody's and Fitch Group - forecast slightly positive economic growth for Russia in 2016, which they think will come about with a stabilizing economy and continuing adjustment of Russian business to the new reality of low oil prices and certain reforms.
This spark of optimism is quite welcome, especially on the eve of the holiday season. The year 2015 has been quite important and even crucial for the Russian economy: It marks the first year without access to Western financial markets and the first year with extremely low oil prices. This seriously challenged the Russian economy, which still cannot get rid of its “oil curse,” deeply ingrained bureaucracy and huge government-controlled corporations that dominate the country’s economic life.
However, during recent years, Russia has witnessed certain improvements in the sphere of innovations and start-ups, which gives a glimmer of hope for the pivot of Russia towards a more innovative, high-tech economy. With that in mind, Russia Direct sat down with the Deputy Minister of Economic Development Oleg Fomichev, who is in charge of innovation and start-ups in Russia. Below, he gives his view on the current state of the Russian economy with a vision for what’s ahead in 2016.
Russia Direct: In what shape is the Russian economy today? Is it better or worse than what you personally expected at the end of last year when the ruble started to fall so dramatically?
Oleg Fomichev: The current economic situation is definitely not that good. The Russian economy is not in the best shape, but it is not as bad as it was expected one year ago. As you know, the government has its own anti-crisis plan - we have direct financial measures, which targeted particular sectors of the Russian economy, like the banking sector and some other sensitive industries. So the current downturn of the economy is not as deep as it was expected one year ago.
In any case, the situation is not good taking into account not just sanctions. Actually we do not consider them as the only factor of the downturn. It is mostly due to weaknesses of the Russian economy and low prices for Russia’s main export – oil and gas.
We are now relatively optimistic about economic dynamics for the next several months and the next year because we see from June, and more positively from September, we see an upturn in the Russian economy. We see that Russia’s GDP now is stable and is even slightly rising and we expect this tendency to strengthen further. But anyway the situation is very unstable, so we are cautious about the current state of affairs and preparing measures to strengthen these dynamics.
RD: Recently Russian PM Dmitry Medvedev unveiled a new Strategy 2030, which concentrates on four priorities: investment activity, import substitution, the quality of state governance, and budgetary policy. How timely do you think this new strategy is for the Russian economy? Do you think all 4 priorities are chosen correctly?
Oleg Fomichev: I am not in a good position to discuss whether the Prime Minister set priorities right or wrong. Of course these four priorities are among the most important in the strategy but when we go further with the development of the strategy, of course, there will be further discussions as the planning horizon, 2030, is quite distant and priorities might be changed along the way.
If we are talking about whether it is the right or wrong time to develop the strategy, there are two divergent positions among experts.
One says that it is the right time just because when you don’t have long-term priorities and a vision for the future, it is very hard to perform the current actions and you couldn’t take into account the long-term outcomes of what you are doing right now. It is very hard to choose between several short-term actions, especially under budgetary restrictions, when you couldn’t see which one of them directly targets a long-term priority.
The second position is that we have to wait for a while, say for at least a year, taking into account several factors. The first factor is the political cycle. We currently have elections and a political struggle between different parties. So every initiative that is discussed during this time can be interpreted as a means for a political fight between pro-government, anti-government and opposition parties. And the second one is that it is very hard for now to develop long-term priorities due to the very risky and uncertain situation in which Russia is now. Considering this factor it is also discussed that in one-two years from now the situation will become more stable and predictable and in such environment it is easier to develop a long-term strategy.
So, with these two positions, I think, the government will choose something in the middle. We will wait for one year discussing the strategy but start to develop it right now.
RD: Now let’s turn to the more specific sphere which you are managing. How would you describe the situation with development of innovation in Russia in general? What are the successes and failures in this field? What are the main obstacles the field is facing?
Oleg Fomichev: The current situation as economists like to say is a matter of two hands: on one hand and on the other. On the one hand, we see, I would say, a very successful movement of start-ups and we actually have been witnessing the rise of start-up activities for the last four-five years. All of these started to happen with the development of Russian institutions aimed at helping start-ups to exist and grow; I mean here Skolkovo, Russian Venture Company, Rosnano and the Foundation for Assistance to Small and Medium sizes enterprises (SME) in high-tech. All of them are helping young entrepreneurs to start up, to find venture capital or seed capital or business angels. This movement I would say is very good and we are very optimistic about that.
But on the other hand we have a relatively bad, let’s say honestly, a bad business environment. When we are talking about small and medium-size innovative companies, first of all they are small companies and they also perform in the same business climate as the other small companies perform. So we have red tape and also have many restrictions in our environmental, technical and security regulations, and it is very hard for them to get access to finance to banks on affordable rates, etc.
So we have here two tendencies and they collide because when we see start-ups, which are relatively successful, then they face the reality of the Russian business climate. As a result, some of them survive, some of them go elsewhere and some of them just die. And this is a serious challenge for the Russian government and for the Russian economy because we of course will move on with the further development of specific innovation ecosystem but the first priority is to enhance overall business climate for start-ups in Russia to become world-class, or at least, industry leaders
RD: The development of innovation is directly connected with the amount of investment going there. Lack of investment in Russia it is one of the major issues, especially considering the current political situation. How to solve this issue of lack of investments?
Oleg Fomichev: Two points here. The first one is specific investments for start-ups, which are provided through governmental funds, venture capital funds and grants from several Russian institutions. So on the stage of a young start-up, teams can get necessary financing to get their own project. But when they go out of the techno parks and business incubators into real life and try to find, let’s say, financing from banks or microfinancing organizations – this is the stage where they face real problems.
So we develop several more measures to support not just small innovative companies but also small and medium size companies as a whole. For example, the Corporation for Support for Small and Medium Size Enterprises which is created on the basis of the Agency for Credit Guarantees (formed a year ago and provided guarantees for loans for the SMEs). These guarantees will be supported by guarantees by financing from SME-Bank (under Vneshekonombank, a.k.a. VEB), which is also becoming subordinate to this Corporation. This Corporation will be responsible for more instruments of support for these SMEs.
RD: There is an opinion that government is a bad investor and the Russian government is an even worse investor. But on the other hand it is the only guarantor of stability for investors. Why is it so? How do you think then the government should build its policy to improve the situation with investment in Russia?
Oleg Fomichev: Frankly speaking, the Russian government relatively seldom invests by itself directly in businesses. It has many state-owned corporations and it is a problem in itself because the government does not perform itself but, rather, through the state-owned corporations.
If we are talking about direct investments, let’s say in innovative companies, the government allocates funds through developing institutions, most of which have requirement to have outside private investment to invest into companies. For example, Skolkovo Foundation, Rosnano they jointly invest with private investors into particular companies and Russian Venture Company provides funds for private venture capitalists to invest into particular innovative companies. So these instruments and tools which government possesses we consider truly market-oriented as they combine state funds with private sector funds. There are also several tools that allow the government to invest directly like federal targeted programs, however they mainly targeted at infrastructure development. It is a necessary investment but we also consider them as not so effective as they could be and, therefore, in this sense, we introduce internationally recognized instruments like Public Private Partnerships (PPP), concessions and so on which help to ensure that infrastructure is also built with the private financing and under private management.
RD: Talking about start-ups and SMEs, it is quite obvious that the Russian economy is dominated by huge corporations with big state participation, which makes it hard for small and medium companies to get to the market because big companies totally dominate them in terms of innovations, amount of investments and resources they have. Do you think it is bad for the economy and if yes, how it can be improved?
Oleg Fomichev: Well, actually there is no direct collision between huge companies and SMEs because it is hard to say that, let’s say, Gazprom is preventing a SME from entering the market for gas development. But if we are talking about the combination of resources of huge state-owned companies and SMEs, what can be done?
Every state-owned corporation and especially huge ones have an obligation since the last year to procure a particular part of their goods and services from the SMEs. 10 percent of all procurement must be done directly through SMEs and 18 percent overall. And now we are thinking about raising this rate during next several years as it is a good motivation for both huge companies, which can develop their own ecosystem, and for SMEs to have demand for their goods and services from the huge corporations. This is eventually a win-win situation for both.
RD: There are more and more start-ups leaving the country for the U.S. or Europe. Some officials say it is a natural process and it does not say anything about a bad investment environment or complex political situation in the country. How do you assess this view?
Oleg Fomichev: Firstly, I do not have any statistical data that their number is rising because during previous years we also had this movement and, honestly speaking, some part of this flow is objective because some start-ups just do not have any market in Russia. They have markets in Europe, in Asia because they develop particular products and technologies aimed specifically at those markets but it is not the main share of start-ups that are leaving Russia. We really consider that the majority of the start-ups leaving do so because of the poor business climate, lack of economic stability and unpredictable institutions. That is a problem.
RD: Why should foreigners or anyone at all invest in Russian start-ups and innovations?
Oleg Fomichev: There are a number of reasons. First of all, because of the brilliant human capital, as the level of technical sciences in Russia is still very high and we have a lot of brilliant minds. Russian students and scholars win many of the natural sciences international contests. Russia has prominent scientific schools not only in Moscow and St. Petersburg but also in Tomsk, Novosibirsk, Krasnoyarsk, etc. So, that is why investing Russia you invest into top-level scientists and science at a relatively low price.
The second reason is the size of the Eurasian Economic Union (EEU). If you invest in Russia, you get the market of the EEU.
The third reason – we have various instruments to support both venture capitalists who invest in Russian start-ups and for start-ups - like special economic zones, tax incentives, governmental grants and so on.
There are plenty of reasons to invest in Russia.