Lessons from Russia's Dysfunctional Pre-War Innovation Economy
April 11, 2022
By Gregory Arcuri
In 2009, as the global financial crisis battered Russia’s fossil fuel-dependent economy, then-Russian President Dmitry Medvedev penned a series of reforms meant to revamp Russia’s economy for the 21st century. Known as “Go Russia!” these reforms sought to harness the power of innovation and technology to encourage economic growth and diversify the economy. The establishment of Skolkovo Innovation Center, a 600-acre technology park in the northwestern suburbs of Moscow explicitly styled after California’s Silicon Valley, was the only tangible result from this initiative. Skolkovo initially attracted significant enthusiasm, luring capital from notable global tech firms including Microsoft, Samsung, Cisco, and Boeing, and secured a research partnership with the Massachusetts Institute of Technology. However, by 2015, three years into Vladimir Putin’s return to the Russian presidency, the project had declined, with investment from home and abroad drying up.
Skolkovo’s dismal fate reflects the broader issues that have prevented Russia from developing a viable innovation economy. Now, with Putin’s invasion of Ukraine, the crippling international economic sanctions it has elicited, and as thousands of highly educated Russians seek to flee their homeland’s disintegrating economy, little remains of the "Go Russia" ambitions to jumpstart Russia’s innovation ecosystem.
Why did “Go Russia!” fail, even before the Ukraine invasion? We explore how Russia squandered its chance at technological competitiveness despite abounding human capital and a long history of leadership in science and technology.
Russia’s “High-Education, Low-Human-Capital Paradox” and Worsening Demographic Decline
While Russian universities have never been world-renowned, most Russians hold some form of higher education (63% in 2019), nearly 20 percentage points higher than the global average assessed by the OECD. However, despite such a highly educated population, Russian ingenuity is rarely translated into domestic economic success.
Explaining this paradox, author and historian Stephen Kotkin points out that domestic crackdowns on political freedoms, initiated by Russia’s authoritarian regime, have driven many educated Russians out of the country. This exodus, Kotkin says, is largely to blame for this “high-education, low-human-capital paradox.”
This brain drain has been significant. Since the fall of the Soviet Union 1991, over five million Russians have fled abroad. While the initial wave of emigration was spurred by the economic despair which gripped the Russian Federation in the 1990’s, a recent uptick correlates with increased repression post-2011 and with Vladimir Putin’s return to the presidency in 2012. The head of the Levada Center, Lev Gudkov, observed in 2014 that “people who are leaving today are more liberally oriented, more intelligent, better educated, and consequently, we are left with a rather inert, passive mass with opportunistic attitudes.” The ongoing invasion has accelerated this crisis, with a reported 50,000-70,000 tech workers fleeing the country since mid-February and signs of a “second wave” of nearly 100,000 more Russian IT professionals poised to escape Russia’s crumbling economy.
Decreasing birthrates and the devastation wrought by the COVID-19 pandemic have also contributed to Russia’s worsening demographic decline, with the country’s total population decreasing by over 1 million people in 2021. Current trends (predicted before the Ukraine invasion) indicate that by 2030 Russians will account for just 3% of the world’s working-age college graduates, down from 9% in 1990.
A return to the Soviet era mindset emphasizing the military value of technology investments has further undermined the Russian innovation economy. In September 2017, Russian President Vladimir Putin proclaimed in an online address that “artificial intelligence is the future,” and “whoever becomes the leader in this sphere will become the ruler of the world.” Despite these assertions, Putin’s regime has been at best indifferent – and at worst, hostile – towards the civilian and purely economic application of emerging technologies. Instead, in line with Soviet tradition, the majority of Russian state investment in scientific research goes towards military technologies.
Former U.S. ambassador to Russia Michael McFaul explains that Putin has invested billions in modernizing Russia’s conventional, nuclear, and hybrid warfare capabilities. Technologies like AI are only valued for their enhancement of Russia’s ability to achieve its revanchist foreign policy objectives or to bolster regime security. Albert Yefimov, head of robotics at the Skolkovo Innovation Center, quipped to The Guardian in 2015 that “we don’t want to make war; we want to make robots.” However, in May 2021, the Russian Ministry of Defense hailed the beginning of production of Russian “battle robots,” suggesting that the Putin regime does not see a difference between the two domains.
The growth of much-lauded Russian information technology (IT) sector is also aligned with Russian security objectives. Russia has been seeking to decouple itself from the Western internet and establish its own parallel digital environment (colloquially dubbed “Runet”), largely as a means of controlling the information available to Russians and insulating itself from cyber espionage. Accordingly, state support for Russian software firms (Yandex, Kaspersky), state-affiliated hacking groups (Internet Research Agency, DarkSide), and propaganda outlets (Sputnik, RT) reflect an attempt to enhance Russian hybrid/grey-zone warfare and regime security rather than a broader appreciation for technology as a means of civilian economic growth. All tech firms that refuse to toe the Kremlin line or to their house servers on Russian soil have been targeted by the now-infamous “foreign agent” law, which blacklists companies or individuals who facilitate the flow of information critical of the regime.
Meanwhile, Putin’s disregard for property rights, the rule of law, and the crack down on domestic opponents have made Russia a particularly unattractive place to invest capital. For years, Putin has routinely imprisoned or forced into exile prominent Russian businessmen and appropriated their physical and financial capital via the state. Perhaps the best-known example here is the fate of Mikhail Khodorkovsky, Russia’s richest man in the early 2000’s and the erstwhile head of the massive Yukos oil company. Khodorkovsky ran afoul of President Putin by funding opposition parties and resisting state control of his enterprises. As a result, he was sentenced to ten years in prison for likely fabricated fraud, embezzlement, and tax evasion charges, while his Yukos empire was carved up and auctioned off to bidders loyal to the regime.
Before the invasion, an international property rights index developed by the Property Rights Alliance ranked Russia 81st out of the 129 countries it measured in terms of its overall respect for private property, scoring significantly lower than most of its international competitors, including the U.S. and China. This hostile market environment has likely scared away untold investment, including the all-important venture capital needed to make places like Skolkovo a hub of economic dynamism.
Lessons for Tomorrow’s Russia
The Russian invasion of Ukraine has seriously handicapped Russia’s market-based innovation economy, which was born in the tumult of the early 1990’s. In its place, a command economy with elements reminiscent of the Soviet Union is beginning to emerge. Even so, Russia’s attempts and missteps at developing an innovation economy for the 21st century provide useful lessons for Russia and the world.
The foremost lesson is the need to cultivate an environment where personal freedom and property rights are respected and where entrepreneurs and inventors that succeed are rewarded. Both physical and intellectual property rights are critical to the strength of any innovation economy. Without a guarantee that they will be able to safely monetize their invention, innovators will lose their incentive to bring products to market in Russia, stifling both domestic idea-sharing and market competition.
Second, Russia needs public policies that sustains training and boosts the retention and reward of the human capital. Russia must develop an attractive value proposition for its best and brightest minds, offering them the opportunity to improve, apply, and reap the benefits of their skills and expertise at home. In 2015, a representative of a Russian-speaking business association based in California told Foreign Policy that many Russian startups were clamoring to relocate to Silicon Valley given the dim prospects for success if they remain in Russia. Retaining this talent must be a top priority for Russia, or indeed any economy looking to become a hub for innovation.
Third, Russia’s leaders must recognize the strategic value of an innovation-based economy. The Putin regime’s disregard for the development of civilian technologies in favor of new tanks, missiles, and planes fundamentally misunderstands the nature of national security in the 21st century. In today’s world, a state’s security depends on its capacity to innovate and compete globally in civilian, military, and dual-use technologies. This is a goal that Chinese leaders have recognized and have been working towards for decades, with any investment into the modernization of the People’s Liberation Army accompanied by substantial support for homegrown tech giants like Alibaba, Tencent, and Huawei.
Finally, (and accordingly) Russia should stay the course on commitments to strategic investments like “Go Russia!” Building a healthy and thriving innovation ecosystem takes time given the necessary shift in entrepreneurial culture and investor confidence. If the government remains indifferent to the project’s success or, as in the case of Russia, works to undermine it, such a shift is highly unlikely to happen, and any initial investment will be wasted.
As Russian missiles continue to rain down on Ukrainian civilians, discussions of the future of a vibrant Russia remain sidelined. A Russia that invests in its innovation economy will more likely contribute to the global good and be a reliable partner. The world needs a stable and prosperous Russia to emerge from the wreckage of the Ukraine invasion. Russia, and the world, should learn from its mistakes.
Gregory Arcuri is a research intern with the Center for Strategic and International Studies in Washington, DC.
The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).