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Russia is losing its innovative businesses

Russia is losing its innovative businesses

10.07.2013 — Analysis

A new wave of brain drain is expected in Russia. Experts predict that soon all the country's innovative businesses will relocate abroad. The columnist for RusBusinessNews has determined that it is the tacit clampdown on the entrepreneurial environment that is behind this departure of intellectual capital. This has occurred at the same time that the Russian government has been proclaiming a campaign to increase support for domestic exporters and to help their products better access foreign markets.

In June 2012, the government of the Russian Federation approved a course of action to increase exports of products other than raw materials and to promote innovative products on foreign markets. This road map assumes that customs procedures will have been simplified by 2015, that new financial instruments will have emerged to stimulate export, and that currency and tax laws will have changed, ultimately resulting in at least a two-fold increase in exporters. Officials grouped these measures by section and set deadlines for their completion.

A year passed. The Agency for Strategic Initiatives, a nonprofit organization that on behalf of business has taken on the job of monitoring how the government directives are carried out, decided to provide the business community of the Urals Federation District with an accounting of what has been done.

Dmitry Voronkov, the agency's head of the department for monitoring entrepreneurial initiatives, reported that 22 measures should have been implemented between August 2012 and June 2013, but only 15 actually were. Federal officials improved the procedure for subsidizing interest rates on export credits created in the regions by centers to support exporters and reduced the requirements for reserve funds at EXIAR, OJSC when insuring export credits against commercial and political risks. The time required for goods traveling by road to pass through customs checkpoints has also decreased.

But the list of what remains to be done is more substantial: the ministries have not made proposals to the government to change the currency and tax laws, have not developed a mechanism to use public funds to expand trade and economic cooperation with foreign countries, and have not made up-to-date financial products available to stimulate exports.

This "sluggishness" on the part of the officials meant that an instrument to increase exports that is commonly used throughout the world, international factoring, which makes it possible to safely provide foreign purchasers with payment deferrals and also to obtain working capital in order to extend credit to foreign partners, is still not available to Russian businesses. Russian exporters cannot take advantage of this service because our nation's laws are quite different from those found in other countries.

Financial networks involving intermediaries were long ago developed abroad. In Russia it is prohibited to assign claims in a foreign currency to an intermediary, just as it is not permitted for one to receive export revenue. Anton Podshivalov, a representative of National Factoring Company, claims that this rule is clearly not conducive to increased exports.

The needed amendments to the laws were drafted long ago, but have spent the last year drifting in and out of the ministerial cabinets. But officials were admirably prompt to approve the procedure to recover VAT on fixed assets used to sell exported goods. Irina Mamina, the general director of Mamina Auditing and Consulting Partnership, LLC claims that separate accounting procedures for export activities is extremely difficult and involves complex mathematical calculations. That expert says that the tax agencies' insane requirements discourage any attempt to export goods.

Alexander Makarov, the vice president of the Urals Chamber of Commerce and Industry, was even more adamant. He claims that designing road maps is the most common method of feigning real activity. Officials make a lot of noise and create bureaucratic structures, begetting all manner of reports and replies, but there are no changes in export policy. Thus there is silence in the business environment. It is not possible to increase foreign sales of high-tech products using the same old tools.

But apparently officials are not grappling with such a task. How else to explain the fact that when drafting the road map the government took no notice whatsoever of service exports? And these are the "goods" in which the real future lies. Experts say that no one needs just a piece of machinery anymore - they all want finished lines to produce final products. Engineering firms install them and they are exporting their intellectual labor. Such organizations exist in Ekaterinburg: according to Pavel Vorotkov, the executive director of the Sverdlovsk Regional Union of Industrialists and Entrepreneurs, they sell their services to Japan and the United States. But the state documents contain not one word about supporting this type of export.

One gets the impression that the Russian authorities do not see any connection between their country's future and the development of intellectual capital. It has long been common knowledge that fledgling innovative companies cannot afford to obtain a patent and conduct global market research. For this reason the government in countries like Canada and Israel assumes the burden of these functions. But Andrei Khazov, the head of the Hayada Group Technology Transfer Agency, attests that in Russia an inventor must publish the results of his research in records that are open to the public, whereupon foreign companies immediately patent them. Exports are no longer even an issue at that point.

But that's not even the biggest problem. The absurdity of the way the post-Soviet economic zone has been set up becomes apparent when one is confronted by the fact that it is not possible to easily relocate production within this common customs zone. According A. Khazov, his company needs to move products between Kazakhstan and Russia as part of its technological process. But officials bring these operations to a halt by demanding that the products' environmental credentials be certified. This is despite the fact that emissions standards in Kazakhstan were taken directly from the Russian versions.

That entrepreneur claims that bureaucrats turn any reasonable idea into something ridiculous. In Kazakhstan itself, it would seem that all the correct measures were taken long ago to improve the investment and business climate, in a manner similar to that of an "iron fist in a velvet glove," but as soon as one begins work, all traces of this allegedly agreeable business climate vanish. Andrei Khazov predicts that Russia will go the same way, assuming, of course, that she is given the distinction of implementing this course of action to stimulate exports.

And there are big doubts that that will happen. Maxim Grokhulsky, the head of Technology Transfer, LLC, suggests based on his own experience that the tax agencies have been given a secret directive to use any pretext to block the registration of new legal entities. Russian researchers and inventors also sick of working "for the man," and thus will open companies abroad, especially since it is such a simple matter to do so.

Because of this M. Grokhulsky predicts a further depletion of Russian intellectual capital. The only difference will be that previously this was in the form of a brain drain and now it will be a "drain" of innovative businesses.

Vladimir Terletsky

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