Russian fairy tales with Anatoly Chubais · 27 February 2010

Some people have a talent for spinning business stories and seem to be able to attract investors into their schemes in spite of their past failures. Of course, sometimes they eventually succeed and become admired for their persistence and leadership. One such story teller is Anatoly Chubais in Russia. According to Wikipedia, a 2004 survey by PricewaterhouseCoopers and Financial Times named him the world’s 54th most respected business leader.

Chubais has succeeded in making a lot of money for himself, but despite what the PwC/FT survey suggests the return to those who have believed in him has so far been negative. Now, he is at it again! Will he succeed?

Russia is proposing to create a sort of city of the future as part President Medvedev’s modernization drive. Located near Moscow it will supposedly accommodate between 30 and 40 thousand people who will be engaged in developing innovative products and commercializing them.

The process is being overseen by a working group headed by Vladislav Surkov, who is often described as the Kremlin’s ideological strategist and holds the position of first deputy chief of staff to Medvedev. Surkov is also deputizes for Medvedev as chairman of his Presidential Modernization Commission. Members of the working group include Medvedev’s personal economic adviser and another member of his staff, deputy ministers from the ministries of Finance, Economic Development, Industry and Trade, and the Ministry of Education and Science, and the Governor of the Moscow Region.

According to media reports, the Commission will in April/May begin making preliminary choices of innovative products to be developed and commercialized in the tentatively named InnoCity. They will initially be nurtured within selected large private Russian companies that are being allowed to participate in the scheme, and from the end of 2010 the most prospective projects will be transferred to InnoCity.

To be eligible for participation in the scheme, the products will need to fall within one of the five areas identified for pushing Russian modernization: energy efficiency and energy saving, nuclear technology, space technology, medical technology, and strategic information technology.

The Russian government will supposedly put up no more than 50% of the funding (although there will also be various tax and social security contribution concessions). Various outside investors are being sought.

What has this got to do with Anatoly Chubais?

For a start, he has joined the working group and this paragraph was carried in the Russian language newspaper Vedomosti last week:
The criteria for choosing innovative products include scale. For example, Chubais said that sales of a new innovative product should be able to reach $500m by 2015. The first 10 individual projects should be able to result in total sales of innovative products of between $3.3bn and $6.6bn. And, if 10 new innovative products are put in production each year sales should reach $33bn by 2015.

Do you get the picture? A group of people (including government officials) is going to choose those innovative products which will be commercially very successful. It all sounds like a fairy tale!

The involvement of Chubais is both surprising and not surprising.

It is not surprising because he is head of a Russian government owned entity called Rosnano which, according to one description for an event addressed by Chubais, was established in 2007 to enable Government policy in the field of nanotechnology. To accomplish this task, RUSNANO co-invests in nanotechnology industry projects that have high commercial potential or social benefit. Early-stage investment by RUSNANO lowers the risk of its investment partners from the private sector. RUSNANO participates in building nanotechnology infrastructure, which includes the nanotechnology centers of excellence, business incubators and early stage investment funds. RUSNANO provides scientific and educational programs that are required for its investment projects to succeed, and also supports the popularization of nano science and nanotechnology. RUSNANO selects promising spheres for investment based on longer-term foresight created by the leading Russian and world experts. To assist the Russian nanotechnology industry advance to the global market and strengthening of its international links RUSNANO develops partnerships with the leading nanotechnology centers in the world and organizes the annual Nanotechnology International Forum in Russia.

In early February 2010, Chubais said that Russian nanotechnology has more than 60 cooperation projects on the table, and some of them will be put into practice in the near future. In particular, Russia is building its largest solar panel factory, he noted. He added that dozens of new nanotechnology factories are being built with sponsorship from Russian Nanotechnology. The factories, which will work on national innovative projects, are expected to number more than 100 by 2015.

It—and I emphasise IF—this all true, it is not surprising that Chubais is part of the working group.

What is surprising is that Rosnano is being described as the general builder or contractor for InnoCity. Morever, it may be made responsible for general summarizing of possible projects for the Commission. Nano seems to mean anything but extremely small !!

It is also surprising to me at least that Chubais is head of Rosnano given his past success rate.

Under the then president Putin, Chubais was responsible for the privatization of most the Russian electricity generation sector. Putin, who may have had reservations at the time, is now complaining that the Russian buyers of these assets are not living up to their promised investments in additional power capacity. This is hardly a surprise as such commitments would be difficult to enforce in any economy!

Under the then president Yeltsin, Chubais became chairman of the State Property Committee in late 1991. From this post, he supported “shock therapy” for the Russian financial system and was one of the strongest advocates for privatization. From late 1994 to early 1996 Chubais served as First Deputy Chairman of the Russian Government in Charge of Economy and Finance. He was the leading proponent and for a time responsible for rapid privatization of state assets. In 1995, he implemented the controversial “loans for shares” scheme, in which the state borrowed money from private oligarchs with oil fields, metals producers and other state assets as collateral. When the state didn’t repay the loans, the oligarchs became owners of huge resource assets at discount prices. Chubais defended it at the time as necessary to break state control over the economy and says that the privatization of ‘90s was aimed at fighting Communism.

In mid-1992, after visiting Russia for the second time (when I was chief economist of HSBC in Australia), I could see that Communism was clearly dying and did not need to be overtly fought. I wrote that the planned pace of privatization is unachievable because of the lack of an existing market and institutional framework to support it. This pace is dangerous because of the massively disruptive effect that ownership changes and reorganization will have on the already mangled process of production in medium and large enterprises. Small enterprises and some service sectors, of course, may be privatized rapidly with less disruption. The other danger with rapid privatization of larger enterprises is that its lack of control may deliver many state assets into the hands of only a few groups who will then exercise monopoly powers and control over the economy. This appears to be a particular danger in Russia.

What is the secret of Chubais� �success�?

If we are to go by the claims for InnoCity, I suspect it is that he is a good story teller who has no difficulty in promising magical returns whether these yields be political, financial or modernization. He can truly be described as a leader even a creative one. But, of course, creative leaders do not always lead people to a better life. (Guess who I have in mind! They are characters in my book!)

As for the PwC/FT survey it simply tells me that Chubais has been very good at promoting himself to foreigners who are generally ignorant about Russia.

P.S. InnoCity is being marketed as Medvedev’s idea. Whether this is true or not, it is trashing his image with many intelligent and educated young Russians. One joke I have heard concerns a nano-bucket for nano-bolts, and nano-tweezers to pick up the nano-bolts, and possibly a nano-person to hold the nano-tweezers.