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Moscow Times
August 23, 2004
Why Google Is Not a Russian Company
By Alexander Kim

Alexander Kim, president of the Our Talents Foundation and equity strategist at Renaissance Capital, contributed this comment to The Moscow Times.

Imagine that Google were a Russian company. This isn't as big a stretch as you might think, since one of Google's founders, Sergey Brin, is a native of Moscow.

If the six-year-old dot-com's initial public offering had gone as planned last week, it would now be one of Russia's two largest companies in terms of market capitalization, more or less on par with Gazprom, the world's largest natural gas producer.

Unfortunately, Google's IPO didn't meet initial expectations. The $85 initial share price set Google's value at $23.1 billion. Yet were it a Russian company, this would still qualify Google as the second-largest blue-chip, with a market capitalization slightly higher than LUKoil, one of the world's two top private oil companies in terms of reserves.

To investment analysts, this indicates the enormous potential of the Russian equity market. But it also raises a pressing question: What can Russian policymakers do to ensure that the country benefits from the ventures started by its scientists? The answer is simple, but hard to put into practice: The state must create the conditions in which the founders of future Googles can develop their ideas in Russia rather than Silicon Valley.

For starters, this would involve stimulating development of investment infrastructure for the high-tech sector. Since its creation in 1994, the government's Foundation for Assistance to Small Innovative Enterprises, headed by Ivan Bortnik, has backed some 2,500 start-up projects with 2.2 billion rubles ($75 million) in grants and investment. The impact of such support is often limited, however, by the shortage of private investors who could propel start-up companies to the next level.

As the experience of Israel shows, the state can successfully accelerate the emergence of a venture capital industry through specific policy initiatives. With a relatively modest outlay of $100 million, the Israeli government's Yozma program, started in 1993, has served as the catalyst for the emergence of a venture capital industry that now has several billion dollars under management. Yozma was designed in such a way that it stimulated private investment in technology companies while minimizing the potential for mishandling of state funds.

The state could also do much more to create research parks and technology transfer centers attached to the leading educational and research facilities. On a recent visit to a well-known scientific institute, a key source of qualified engineers for the high-tech sector, I was shocked to learn that extensive residential construction was planned on the institute's grounds, providing no apparent benefit to the institute itself. The federal government could make use of its vast real estate holdings to create a network of science and technology parks, providing affordable office space and a range of value-added services from marketing and business development advice to intellectual property rights protection.

Without state support, Russia's best scientists and researchers will continue to take their expertise elsewhere. With world oil prices at record highs, the government can well afford to fund matching grants to complement the initiatives of reputable, private nonprofits such as the Dynasty Foundation, established by Dmitry Zimin, founder of VimpelCom.

The government could facilitate access to international markets for Russian producers outside the natural resources sector by streamlining customs procedures. The director of a company that produces nonmilitary high-tech precision measuring instruments complained to me recently about the huge investment of time and money required just to take samples of his equipment out of Russia to display at international trade fairs. Bureaucratic red tape effectively prevents him from selling equipment in small lots to foreign buyers.

To be successful, these and other measures must be implemented as part of a comprehensive and well-coordinated program to support development of the high-tech sector. Without such a program, every time a Russian researcher launches a billion-dollar high-tech company in the future, all Russia will get is a passing mention.