RBW Winter 2010-2011

Russia Business Watch Vol. 18, No. 2

WINTER 2010-2011

Washington, DC

The Report of the U.S.-Russia Business Council

USRBC ANNUAL MEETING 2010

From Silicon Valley to Skolkovo: Forging Innovation Partnerships PRESIDENT’S MESSAGE: Edward S. Verona p.1 KEYNOTE ADDRESSES:

Viktor Vekselberg p.13 Anatoly Chubays p.15 Arnold Schwarzenegger p.20

Sergey I. Kislyak p.23 James Turley p.25 Mikhail Shvydkoi p.26

John Watson p.30 Mikhail Margelov p.32 Dana Rohrabacher p.33

The Outlook for Russia and its Place in the Global Economy p.34

Supporting Entrepreneurship in Russia p.39

The High-Tech Dimensions of Energy p.44

Infrastructure – Not Just Roads and Bridges p.48

Innovation in Healthcare Technology p.37

Skolkovo: An Insider Perspective p.42

Klaus Kleinfeld p.5 John R. Beyrle p.7 Arkady Dvorkovich p.10

PANELS:

Preparing the Next Generation of Innovative Thinkers p.46

Contents

PRESIDENT’S MESSAGE p. 1 The U.S.-Russia Relationship: Hopes and Shadows .... p. 2 Американо-российские отношения: надежды и тревоги ....

ANNUAL MEETING ...

Klaus Kleinfeld, Chairman of the Board Edward S. Verona, President and Chief Executive Officer

Russia Business Watch • Winter 2010-2011

Chairmen Emeritus Robert S. Strauss E. Neville Isdell Theodore Austell, III, The Boeing Company Ozer Baysal, Pfizer Inc. Stephen E. Biegun, Ford Motor Company James P. Bovenzi, General Motors Corporation Laura M. Brank, Dechert LLP Carolyn L. Brehm, Procter & Gamble Peter A. Charow, BP America Inc. James F. Collins, U.S. Russia Foundation for Economic Advancement and the Rule of Law Jeffrey R. Costello, JPMorgan Chase Bank Andrew Cranston, KPMG Marthin De Beer, Cisco Systems, Inc. Richard N. Dean, Baker & McKenzie Neil W. Duffin, Exxon Mobil Corporation Dorothy Dwoskin, Microsoft Corporation C. Cato Ealy, International Paper Terrence J. English, Baring Vostok Capital Partners Mark B. Fuller, Monitor Group Piotr Galitzine, TMK IPSCO Toby T. Gati, Akin, Gump, Strauss, Hauer & Feld, LLP Peter Gerendasi, PricewaterhouseCoopers LLP Herman O. Gref, Sberbank Drew J. Guff, Siguler Guff & Company, LLC Trevor Gunn, Medtronic, Inc. Jay M. Haft, Renova Group Greg Hill, Hess Corporation D. Jeffrey Hirschberg, Kalorama Partners, LLC Kamil S. Isaev, Intel Corporation Karl Johansson, Ernst & Young LLP Alexey Kim, Philip Morris Sales and Marketing Ltd. Klaus Kleinfeld, Alcoa Sergei A. Kuznetsov, OAO Severstal Ramon Laguarta, PepsiCo, Inc. William C. Lane, Caterpillar Inc. Eugene K. Lawson, Lawson International, Inc. James J. Mulva, ConocoPhillips Peter B. Necarsulmer, The PBN Company Thomas R. Pickering, Eurasia Foundation Jay R. Pryor, Chevron Corporation Daniel W. Riordan, Zurich-American Insurance Company Paul Rodzianko, Hermitage Museum Foundation Charles E. Ryan, UFG Asset Management Claudi Santiago, General Electric Company William M. Sheedy, Visa Inc. Maurice Tempelsman, Lazare Kaplan International Inc. Peter L. Thoren, Access Industries, Inc. Clyde C. Tuggle, The Coca-Cola Company Alberto Verme, Citi Mark von Pentz, Deere & Company Daniel H. Yergin, Cambridge Energy Research Associates (CERA) Honorary Director Peter J. Pettibone, Hogan Lovells U.S. LLP

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USRBC 18th Annual Meeting Keynote Address: Klaus Kleinfeld, Chairman and CEO, Alcoa, Inc. Keynote Address: Amb. John R. Beyrle, U.S. Ambassador to the Russian Federation Keynote Address: Arkady Dvorkovich, Aide to the President of the Russian Federation Keynote Address: Viktor Vekselberg, Chairman, Renova Group Keynote Address: Anatoly Chubays, Chairman and CEO, Rusnano Delovaya Rossiya Delegation of Russian Entrepreneurs Keynote Address: The Honorable Arnold Schwarzenegger, Governor of California Keynote Address: Amb. Sergey I. Kislyak, Russian Ambassador to the United States Keynote Address: James Turley, Chairman and CEO, Ernst & Young Keynote Address: Mikhail Shvydkoi, RF Special Envoy for International Cultural Cooperation Fort Ross Film Presentation and Signing Ceremony Keynote Address: John Watson, Chairman and CEO, Chevron Corporation Keynote Address: Mikhail Margelov, Chairman, International Affairs Committee, RF Federation Council Keynote Address: Rep. Dana Rohrabacher, Member, Foreign Affairs Committee, U.S. House of Representatives Panel: The Outlook for Russia and its Place in the Global Economy Panel: Innovation in Healthcare Technology Panel: Supporting Entrepreneurship in Russia Panel: Skolkovo: An Insider Perspective Panel: The High-Tech Dimensions of Energy Panel: Preparing the Next Generation of Innovative Thinkers Panel: Infrastructure — Not Just Roads and Bridges

OUTLOOK p. 52 ... Modernization of the Russian Economy: The Positive Role of Foreign Independent Directors p. 54 ... NEW MEMBER PROFILES

Russia Business Watch The report of the U.S.-Russia Business Council

1110 Vermont Avenue, NW, Suite 350, Washington, DC 20005 Tel: (202) 739-9180 • Fax: (202) 659-5920 • www.usrbc.org Novinskiy boulevard 8, Office 907, 121099 Moscow, Russia Tel: 7-495-228-5896 • Fax: 7-495-228-5893 ditor: Svetlana Minjack • Assistant Editor: Jeff Barnett E Design and Production: Maryia Dauhuliova Research Assistants: Martina Bozadzhieva, Robert Fojtik, Alla Malova, For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org.

PRESIDENT’S president’sMESSAGE message

The U.S.-Russia Relationship: Hopes and Shadows operations in Afghanistan and in antipiracy actions in the Indian Ocean.

The business community has been especially heartened by recent progress in Russia’s protracted bid to join the WTO. The last remaining bilateral differences are being resolved, and multilateral negotiations are gaining momentum in Geneva. It is conceivable that Russia’s accession process could be finalized by early summer next year. If this happens it would be a giant step toward integrating Russia into the global economy and ensuring that it has an equal stake in upholding internationally-accepted rules for trade and investment.

Dear Council Members and Friends:

The second concern is the JacksonVanik Amendment. Three consecutive U.S. Presidents since Clinton have

A third shadow over our relationship is the growing perception that Russia’s efforts to combat corruption are faltering. This matters to everyone, but it is a particular concern for business.

Russia’s steady decline in international indices of corruption and transparency are a serious impediment to potential investors who expect — and comply with — high legal and ethical standards. The case of the pre-trail detention and subsequent death in custody of Sergey Magnitsky is directly related to charges and countercharges of corruption. The manner in which that case was conducted raises questions about the fairness and integrity of the Russian legal system and about the risks of doing business there. The case

Russia Business Watch Winter 2010-2011

There has rarely been a more promising moment in the post-Cold War history of U.S.-Russia relations. Since the “reset” last year, the tone of discourse has notably improved, and considerable progress has been achieved across a broad range of often contentious political and economic issues. This gives us reason to believe that we are on track for a more balanced and stable relationship. To cite a few major diplomatic accomplishments in recent months: Russia increased the scope of the transit agreement for movement of troops and materiel through its territory in support of NATO operations in Afghanistan; it has supported more robust UN sanctions against Iran and cancelled the sale of S-300 antiaircraft missiles to that country; and it has cooperated in counter-narcotics

However, despite the evidence of progress on many fronts, some of the hopeful signs are being overshadowed. First, at the time of this writing it appears that the New START Treaty, signed by Presidents Obama and Medvedev in April, might not have the backing in the Senate for ratification during the current ‘lame duck’ session. Some fear that postponing a vote until the next session will result in a lengthy delay in ratification. While the debate over the specifics of the Treaty is beyond the expertise of a business association such as ours, we feel nonetheless obligated to point out the possible unintended consequences of failing to act promptly on START, especially the damage that it could do to the overall bilateral relationship and on Russia’s willingness to cooperate in other areas of vital interest to the United States.

pledged to take action to permanently “graduate” Russia from Jackson-Vanik since it is no longer relevant to Russia.

The amendment was adopted in 1974 in response to Soviet restrictions on the emigration of Soviet Jews. Russia does not restrict travel by its citizens, and today the country has a visa-free travel regime with Israel While annual waivers of Jackson-Vanik have been granted since 1994, the fact that Russia remains subject to the amendment has been a chronic irritant in our relationship and is widely seen in Russia as a failed test of good intentions. If, as we expect, Russia accedes to the WTO, the U.S. will be unable to take advantage of the resulting increased access to the Russian market unless and until Jackson-Vanik is lifted. We believe that it would much behoove the U.S. to take legislative action before Russia’s accession in order not to be at a competitive disadvantage to other countries once it is in.

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PRESIDENT’S MESSAGE

Russia Business Watch Winter 2010-2011

>

has cast a particularly long shadow, leading to the introduction of a bill by U.S. Senator Cardin that would impose U.S. visa bans on more than 60 Russian government officials allegedly implicated in Magnitsky’s death. Lawmakers in Europe have proposed similar legislation in their countries. The Russian government’s failure to take credible action to clarify the facts of that case in particular and to take measures against the perpetrators of abuse of the criminal justice system generally is deeply disturbing.

Those of us who have toiled for years on improving the business climate and the broader relationship between our two countries are accustomed to the cyclical nature of this relationship.

Progress in the past year has given reason for optimism. Getting Russia into the WTO would be the best hope of introducing many of the changes that business has been advocating for decades, and would be an important step towards laying the groundwork for other bilateral commercial initiatives, such as a Bilateral Investment Treaty. We are not naïve about the challenges still before us - including the three cited above - but we have never been so close to achieving what could be a watershed in Russia’s economic evolution and a flourishing of trade and investment between our two countries.

With warm regards,

Edward S. Verona

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Американо-российские отношения: надежды и тревоги Уважаемые члены и друзья Совета: Настоящий момент является одним из наиболее многообещающих в истории американо-российских отношений после окончания Холодной войны. После прошлогодней «перезагрузки» тон дискурса заметно улучшился, и был достигнут значительный прогресс по целому ряду политических и экономических вопросов, которые часто были предметом разногласий. В числе крупных дипломатических успехов последних месяцев можно выделить: расширение соглашения о военном транзите США в Афганистан через Россию в рамках поддержки операций НАТО в Афганистане; поддержка Россией ужесточенных санкций против Ирана и отмена продажи Ирану зенитных ракет S-300; сотрудничество США и России в борьбе с наркотиками в Афганистане и в борьбе с пиратством в Индийском океане. Бизнес-сообщество с особым энтузиазмом приветствовало недавний прогресс в затянувшемся процессе вступления России в ВТО. Оставшиеся разногласия на двустороннем уровне находятся в стадии разрешения, в то время как многосторонние переговоры набирают силу в Женеве. Возможно, что процесс вступления России в ВТО завершится к лету будущего года, что стало бы огромным шагом в продвижении интеграции России в мировую экономику как игрока, поддерживающего международно принятые правила торговли и инвестиций.

Однако, несмотря на убедительные примеры прогресса во многих сферах американо-российских отношений, существуют также некоторые разочарования. Во-первых, на момент написания этого послания представляется, что Договор о сокращении стратегических наступательных вооружений между США и Россией (New START Treaty), подписанный президентом Обамой и президентом Медведевым в апреле этого года, может не получить достаточной поддержки Сената США в режиме сессии «хромой утки» (RBW: в период завершения полномочий сенаторов, не переизбранных на новый срок). Существуют опасения, что отсрочка голосования до начала следующей сессии приведет к длительной задержке ратификации. Хотя анализ конкретных условий Договора выходит за рамки полномочий нашей бизнес-организации, мы, тем не менее, считаем необходимым указать на возможные непредвиденные последствия бездействия по вопросу ратификации Договора — в частности, ущерб, который такое бездействие может нанести двусторонним отношениям между нашими странами и готовности России сотрудничать с США по другим направлениям, важным для США. Вторая проблема — это поправка Джексона-Вэника. Три американских президента, начиная с Клинтона, обязались принять меры, чтобы окончательно отменить поправку Джексона-Вэника в отношении России, поскольку эта поправка больше не имеет смысла. Поправка ДжексонаВэника была принята в 1974 году как реакция на препятствия, чинимые

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ПОСЛАНИЕ ПРЕЗИДЕНТА

странами и привело в тому, что американский сенатор Кардин предложил принять закон, запрещающий въезд в США 60 российским чиновникам, подозреваемым в причастности к смерти Магнитского. Европейские законодатели предложили введение похожих мер в Европе. Неспособность российского правительства по-настоящему прояснить обстоятельства этого дела в частности, а также принять меры в отношении лиц, злоупотребляющих системой уголовного правосудия в целом, вызывает сильное беспокойство.

> Советским Союзом в отношении эмиг-

сравнению с другими странами после вступления России в ВТО. Третья проблема, омрачающая наши отношения, — это крепнущее мнение, что Россия недостаточно решительно борется с коррупцией. Это затрагивает всех, но в особенности бизнес. Устойчивое снижение рейтинга России в международных индексах коррупции и прозрачности является серьезным препятствием для потенциальных инвесторов, ожидающих высоких правовых и этических стандартов, которые они сами соблюдают. Дело Сергея Магнитского, который был помещен под стражу до суда и умер в следственном изоляторе, напрямую связано с обвинениями в коррупции. Способ ведения этого дела поднимает вопросы о справедливости и честности российской системы правосудия, а также о рисках, с которыми связано ведение бизнеса в России. Дело Магнитского серьезно омрачило отношения между нашими

С уважением,

Эдвард С. Верона n

Russia Business Watch Winter 2010-2011

рации советских евреев. Россия не ограничивает свободу передвижения своих граждан, и сегодня страна имеет безвизовый режим с Израилем. Начиная с 1994 года, США ежегодно одобряют документ, на год отменяющий действие поправки Джексона-Вэника для России. Но сам факт того, что эта поправка все еще распространяется на Россию, представляет собой постоянный раздражитель в отношениях между нашими странами и воспринимается Россией как нежелание США пойти навстречу. Если Россия присоединится к ВТО, как мы ожидаем, то США будут не в состоянии воспользоваться новыми возможностями, созданными в результате расширения доступа на российский рынок, до тех пор, пока поправка Джексона-Вэника не будет отменена. Мы считаем, что США должны принять законодательные меры до вступления России в ВТО, чтобы не оказаться в невыгодном положении по

Те из нас, кто уже много лет работают над улучшением делового климата и укреплением связей между нашими странами, привыкли к цикличности американо-росийских отношений. Прогресс, наблюдавшийся в течение последнего года, дает нам повод для оптимизма. Принятие России в ВТО было бы отличным шансом для претворения в жизнь тех изменений, в поддержку которых бизнес выступает уже в течение нескольких десятилетий, а также важным шагом на пути к созданию фундамента для других двусторонних коммерческих инициатив, например Двустороннего договора об инвестициях. Мы признаем наличие проблем, все еще стоящих перед нами, — в том числе, трех названных выше — и все же, мы никогда еще не были так близки к достижению целей, которые могут стать переломным моментом в экономической эволюции России и привести к расцвету торговли и инвестиций между нашими странами.

Annual Meeting

Annual Meeting The U.S.-Russia Business Council’s 18th Annual Meeting From Silicon Valley to Skolkovo: Forging Innovation Partnerships October 20-21, 2010 • San Francisco, CA

The

Russia Business Watch Winter 2010-2011

USRBC’s 18th Annual Meeting, “From Silicon Valley to Skolkovo: Forging Innovation Partnerships,” took place on October 20-21, 2010 at the Fairmont Hotel with the Gala Dinner at the historic Ferry Building in San Francisco, CA.

The 2010 Annual Meeting focused on efforts to drive innovation and modernize the Russian economy across a range of sectors, and how cooperation between Russian and U.S. companies could help propel long-term growth and development in both countries. In addition to discussing Russia’s place in the global economy, the meeting highlighted the potential for cutting-edge technologies to revolutionize Russia’s market. The meeting brought together top experts in Russia and on Russia for dynamic and interactive discussions on the promotion of entrepreneurship.

The Honorable Arnold Schwarzenegger, Governor of California, reported on his visit to Moscow and expressed great optimism about the potential for growth in trade between his state and Russia (read more on page 20). Renova Chairman Viktor Vekselberg (p.13), Rusnano President Anatoly Chubays (p.15) and other experts also shared their vision for the future of innovation in Russia.

A delegation of young Russian entrepreneurs, led by Delovaya Rossiya and

made possible through the support of Ernst & Young, traveled to San Francisco for the Annual Meeting and participated in a number of meetings with innovative companies in Silicon Valley (p. 19). Also as part of the Annual Meeting program, the USRBC was proud to host a signing ceremony between USRBC member Renova Group’s Fort Ross Foundation and the Department of Parks and Recreation of the State of California and the Fort Ross Interpretive Association (p.27). n

SAVE THE DATE!

USRBC’s Annual Meeting 2011 October 3-4, 2011 Chicago, IL

October 20, 2010 •The Ferry Building

Annual Meeting

KEYNOTE ADDRESS: Klaus Kleinfeld Chairman and CEO, Alcoa; Chairman, U.S.-Russia Business Council

The following is an excerpt of Mr. Kleinfeld’s address at the USRBC Gala Dinner.

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“… et me start with an event that is very important to me, and that is my birth. I was born on November 6, 1957, and I was born as a son to two refugees from East Germany, born in the north of Bremen, where they actually settled down…. So, it was November 1957, and it was just four weeks after a very important event had shaken the nation — Sputnik.

It was a big surprise, showing to the Western world the superiority of the Soviet Union, putting a man-made satellite into orbit. It only took three years after that, in 1961, when Yuri

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Russia Business Watch Winter 2010-2011

Klaus Kleinfeld addresses the Gala Dinner guests.

Annual Meeting

> Gagarin

became the first man to orbit the Earth. That was another shock to the West. It took until 1969 for the U.S. finally to achieve a breakthrough in the race to space with the manned mission to the Moon. And I will tell you, I think it was a very good symbol for the relationship between the two nations, just to look at this race for space and the emotions that were behind it.

Let us fast-forward to today, and talk about Alcoa, the company that I represent. Today, we have two plants in Russia: one in Samara and another in Rostov region, in Belaya Kalitva. Interestingly, these two plants provided aluminum and aluminum alloy for the Sputnik satellite, as well as for the vessel that Yuri Gagarin used. Alcoa acquired those two historic facilities in 2005 and invested about $1 billion in them. We removed about 40,000 tons of scrap metal from those two sites and upgraded the facilities and they now produce the same thing that they produced in the 1950s and 1960s — high-quality materials for a variety of sectors, among those the aerospace industry, ship-building, packaging, and other very important industries.

Russia Business Watch Winter 2010-2011

Who would have ever thought, back in 1957 when I was born, that this would be the world we live in today? While there is still room for improvement, the rapid growth in economic ties between both nations is an important phenomenon.

Strong economic ties are the foundation that is needed for strong, stable relations between our countries…. This growth in the commercial relationship is due, in large part, to all of you here and the companies that you represent. I think we should continue on this path. Obviously, this development also laid the groundwork for overcoming a very difficult period politically between our two countries, which was the situation created by the Georgia crisis.

When the presidents met last year and announced the ‘reset’ in the relationship, it put our relations on a new level that, I believe, has worked very well. Granted, there are millions of things that still need to be done. However, who would ever have thought that today we actually have progress, political progress, in a substantial form on many fronts? The New START Treaty, the 123 Agreement, Iran embargo, the agreement to ship military supplies though Russia to Afghanistan, and, last but not least, the WTO agreements. All these things are not entirely done, but the very fact that they are so far down the road, and they have made so much progress, allows us to have hope that we are at the start of a new era

Klaus Kleinfeld (c.) talks to Renova Chairman Viktor Vekselberg (l.) and RF Ambassador to the U.S. Sergey I. Kislyak (r.).

that I would probably call the ‘era of collaboration and innovation.’ It could not be more timely that the U.S.-Russia Business Council chose San Francisco as the place to hold the Annual Meeting. San Francisco and Silicon Valley are quintessentially representative of the American dream, based on collaboration and innovation.

I will tell you, it will always be a very memorable event in my life to have been part of another wonderful and collaborative experience at the beginning of this year. It was on a cold night in January when I was walking through the rainy and windy streets of Boston, unrecognized by most people that were walking by us, with a delegation of probably the highest-ranking Russian group that has ever visited the U.S. The group was comprised of many people, some are here in this room, and led by Deputy Prime Minister Igor Shuvalov along with Finance Minister Alexei Kudrin, Economic Development Minister Elvira Nabiullina, Head of Sberbank Herman Gref, CEO of Rusnano Anatoly Chubays, and many more. What did they do? They came to the U.S. to study, to learn from this country how they can use some of the experience here to foster innovation and entrepreneurship in Russia.

In the new sprit of the reset, the U.S. has welcomed them with open arms. It was, I think, a remarkable event that I will never forget, particularly with my historical ties there. It was topped, in my view, by the visit of President Medvedev to the U.S. after President Obama had visited Moscow for the first official visit the year before.

Instead of going first to Washington, he came here, to the West Coast, and he met with Silicon Valley entrepreneurs to do exactly what his delegation had done before. Again, he was welcomed with open arms. I think that is the spirit that we, as the U.S.-Russia Business Council, want to continue to nurture. That is what we stand for, and I think we should actually be very proud, because many of you here in this room have played a role in that, and will continue to play a role in that, and I think this is wonderful to be a part of it.

Just in the last day, about 40 entrepreneurs from Russia have been invited to come over here and to sit down with entrepreneurs here in Silicon Valley to learn from them, how have they done it, what mistakes have been made, and what is to be avoided. I do not think that all of these things can be copied, but it is important to have an open dialogue and to understand what things can be copied and what things cannot be copied…. That is why I believe we are at the brink of a new era. The USRBC is an important vehicle in that; I believe it is probably going to be even more important going forward than it has been in the past. I think it is all because of you, because of the members, and I really do see as a vision that we will continue to see the membership growing. Spread the word around and be part of this. I think we will see this new era create better opportunities for us, for our businesses, for both of our countries, and it could bring better possibilities for the whole world.

Thank you very much.”

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October 20, 2010 •The Ferry Building The following is an excerpt of Ambassador Beyrle’s remarks at the USRBC Gala Dinner.

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“… hen we all got together last year in New York, we were discussing the remarkable upturn in the U.S.-Russia political relationship that we had all witnessed in the first months of the Obama Administration. I tried to describe at that time a new mindset, one of partnership and collaboration instead of zero-sum mentalities and the new institutional structure that we were trying to build through the Bilateral Presidential Commission, which was designed to lock in that new productive, constructive approach. All these changes were premised on an understanding that U.S.Russia cooperation is today more crucial than it has ever been in our history, whether we are talking about terrorist groups or financial instability. Modern threats to security and prosperity do not respect borders, and, recognizing this, our ‘reset’ in relations has really tried to provide both the conceptual framework and the institutional tools to enable these two great countries to work together to address these global challenges.

We are really doing a lot together. I will give you one example. The drug cooperation between our anti-drug agencies has reached the point where we conducted a joint operation in St. Petersburg earlier this summer, in which an American undercover agent, trusting his Russian colleagues, put his life on the line to shut down a potential drug channel. That is the kind of trust that we are building back in the relationship. That is the kind of trust we need at all levels.

Cooperation between our defense establishments has always been a barometer in our success in building trust, and just over the past few months we have seen a real robust uptick in exchanges and cooperation between our militaries. The Russian Defense Minister recently came to Washington and held over five hours of talks with Secretary of Defense Bob Gates. We are expecting the first visit by the new Supreme Allied Commander at NATO, Admiral James Stavridis, to Moscow in two weeks, and of course we are all extremely encouraged by the news that President Medvedev has accepted the invitation to attend the NATO summit in Lisbon.

At the same time, we have been pushing into new areas of cooperation outside of the political-military sphere. Through the Bilateral Presidential Commission, we have established ties among industries, venture capitalists and scientific institutions. I sometimes feel like I probably met half of the venture capitalists in California in Spaso House just in the last six months. We nearly doubled the number of partnerships between American and Russian universities and facilitated numerous cultural and sports

exchanges, including the famous ‘shooting hoops’ on the basketball court of the White House with President Obama.

I began saying last year that I had not seen such a positive and productive atmosphere in U.S.-Russia relations in more than a decade, and I have been hoeing this row for a very long time. Since that time, we have not only sustained, but improved that atmosphere, and we have been able to leverage it to produce some tangible results. As Americans and Russians, we should all be proud of that record, and I am grateful to many of you here tonight for the role that you have played, for the part that you have done in the Bilateral Presidential Commission in growing commercial ties that exist between our two countries, and for the improvement in the broader relationship in general.

Of course, Russia and the United States are never going to agree on everything.

We have our differences. Russia disagrees, for example, with our visa policy vis-à-vis certain members of the Russian Federation. We have made very little progress, I am sad to report, in resolving our differences, narrowing our disagreements, over Georgia, or on implementation of the CFE Treaty. We speak very candidly, both in public and in private, with our Russian friends when we see developments in the Russian society that seem to us that are running counter to our desire and most Russians’ desire to see a strong, vibrant civil society and democracy take hold in Russia. But nonetheless, across a broad range of issues we have been successful in both coming to the table to talk about these issues in a civil way, and in finding ways forward. The tools that we have established and have been using to considerable effect are designed to facilitate agreement where our interests overlap, and it is here, specifically in that area, that business has a key role to play.

In June, President Obama called on both nations to look beyond the traditional security-based areas of U.S.-Russia cooperation, and to forge new cooperation across a whole range of areas. In particular, we seek to expand the arc of collaboration to include the economy, trade and innovation. President Medvedev’s address to Russian ambassadors in July of this year made exactly the same points. So from the U.S. government and the Russian government’s perspective, the theme of this year’s USRBC Annual Meeting is right on target. It could not be more apt. And if we reflect on the list of accomplishments that Klaus and I talked

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Today we are in a position to provide an updated assessment of how well we have been able to use these tools, and, quite frankly, I think that the scorecard is pretty impressive. Not without reason, a number of fairly well-known political analysts in the United States assess President Obama’s Russia policy as a stand-out success of the administration. Even our critics grudgingly admit that we have gotten a few things right.

Klaus [Kleinfeld] did a very good job of running through the list: the signing of the START Treaty, the Afghan transit agreement, the convergence of views, the consolidation and consultation around the critical issues of the nuclear ambitious of North Korea and Iran, which have led to strengthened action through the United Nations Security Council and a halt to potentially destabilizing arms transfers in the Middle East. This is the growing list of successes between Russia

and the United States, and a lot of it is taking place off the front pages, out of the headlines. We have taken concrete steps together to eliminate and secure nuclear materials. I just worked this week to secure the return of fissile material from a country neighboring Russia into the secure hands of Russia through a joint effort.

Annual Meeting

KEYNOTE ADDRESS: John R. Beyrle U.S. Ambassador to the Russian Federation

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about earlier, it is clear that the work has really already begun. Moving forward, we need to intensify our efforts in these areas. Many of you had the opportunity to take part in the exchange of views during President Medvedev’s visit here in California and the business summit that Klaus chaired in Washington. It is crucial for us to continue this work, and we rely on you, we rely on our business leaders in both countries to provide the ideas, to

Part of this process lies in continually expanding the number of investments and trade relationships between our two countries. Since we met last year, just to name a couple of examples, we have seen the opening of John Deere’s mammoth assembly plant in Domodedevo and the expansion of Boeing’s joint venture on titanium processing with Russian Technologies, not to mention the sale of those 50 Boeing 737s, that we signed the

good for Russia, it is good for America, and it is good for the world economy.’

In response to the U.S. commitment to move forward, President Medvedev set an ambitious target for resolving outstanding bilateral issues on WTO accession. When we met in the cabinet room in June, Ambassador Kislyak was there with me, the Americans were a little hesitant to set a deadline of September 30; we thought it was too ambitious.

Russia Business Watch Winter 2010-2011

Ambassador Beyrle takes questions from the Gala Dinner guests.

provide the energy to meet the tremendous potential that our two countries possess in expanding trade and developing innovative technologies and business methods. The regular contacts that we have established, the information-sharing, the cultural exchanges that come hand-in-hand with commercial activity create powerful stakeholder groups that can help even out the bumps in the political relationship and make the overall relationship more transparent, more stable. But, even more importantly, these contacts provide a depth to the relationship that helps anchor political discussion to the reality that our two countries simply profit more when we cooperate than when we compete. With strong commercial ties, the political differences that inevitably occur will occur in a context of a broader cooperative relationship.

papers on in Sochi just two weeks ago.

In both countries, economic cooperation produces strong constituencies, which have a central interest in maintaining strong bilateral ties. Much of the core of that constituency is right here in this room with us tonight. I appreciate the work that you are doing, both to expand U.S.-Russia cooperation and to demonstrate so clearly why that cooperation is in our mutual interest. But we have some important work to do this year.

We have to expand the ranks of that constituency in both countries.

And nothing, to my mind, can help us do that better than Russia’s accession to the WTO. That is why the United States is firmly committed to doing everything possible to help make that long-standing goal a reality. As President Obama said in June, ‘Russia belongs in the WTO. It is

We did not want to set ourselves up for failure. We were wrong. Russia made tremendous progress in three months by passing major pieces of legislation, and the Russian government has taken and continues to take significant steps to meet its bilateral commitments.

In Moscow yesterday, I joined Larry Summers for his meeting with First Deputy Prime Minister Igor Shuvalov to take stock of where the U.S. and Russia are on WTO. Only a few small technical details remain to be finalized between us bilaterally, and we agreed we will have those completed within a month.

Our main focus now — and in fact the main focus of the discussion between Summers and Shuvalov yesterday — has shifted to the larger multilateral aspects of Russia’s accession, which President Obama has pledged to support so that

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Russia can join the WTO as soon as possible.

The USRBC has a crucial role to play right now, at this point. I hope that you will increase your outreach on Capitol Hill about the current nature and the realities of the U.S.-Russia relationship and in particular the trade and business relationship. This outreach is critically important now as a new Congress is elected, and we witness a real change of the guard as we lose senior senators and congressmen who had a solid understanding of the realities of U.S.-Russia relations.

Demonstrating how much the U.S. economy gains from U.S. investment in Russia — both in terms of exports and in local jobs — will be absolutely crucial to our efforts to secure congressional support for lifting the Jackson-Vanik Amendment next year. That repeal, the repeal of Jackson-Vanik, is long overdue on its own merits, but the reality is now it is absolutely essential to allow U.S. business to reap the full benefit of WTO membership for Russia.

In the Bilateral Presidential Commission and in other fora, the United States is committed to working with Russia on these and other issues to establish the conditions to promote U.S. business activity in Russia, and Russian business activity in the United States. I am also very encouraged by the interest on both sides in forging a true partnership in the innovation sector. The broad corporate participation at this event, as well as the expanding investment plans of many of today’s participants in Russia’s high-tech sector, are a real testament to the seriousness with which American firms take Russia’s modernization agenda.

As we translate that interest into results, we will help deepen Russia’s integration into the global economy. In such an enormous task, I think there is always the risk that we will fall into complacency — that reform will come at its own pace, and with its own characteristics peculiar to the Russian experience. But Russia is not modernizing in a vacuum.

It finds itself in direct competition with other rising economies, with China, with Brazil, with India. And in some areas, Russia does not have the luxury of a head start. To compete effectively for international credit and cooperation, the speed and success of reform in Russia are absolutely vital.

To sum it up, over the last 18 months, Russia and the United States have worked together to produce an impressive record of accomplishments — much more than many of us would have predicted 18 months ago. But the task before us, in many ways, is even greater.

We have to maintain the energy; we have to keep pushing forward, not just in the

pursuit of signature agreements, such as the WTO accession or the START Treaty, but also in order to build a new foundation for a fundamentally-changed U.S.-Russia relationship. There is no doubt that that foundation will have and must have at its core a vibrant bilateral economic relationship, because it is in the commercial sphere where interests most naturally align, regardless of the ever-changing winds of domestic politics and world events.

Expanding and reconstituting the bilateral relationship is an ambitious undertaking. But it is precisely the goal that we have set for ourselves. President Obama noted in June that the U.S.-Russia relationship has to be about more than just security and arms control. It has to be about our shared prosperity and what we can build together. I feel very fortunate to be the American Ambassador in Russia at this promising time. As I look out at this hall tonight, I have to tell you, I feel even more fortunate that at the start of my third year on the job, I can look out and see so many people that I know as colleagues and friends, even a few ‘tovarishch’, or comrades, in the crowd tonight. And I know that you all share with me that goal — increasing prosperity and a common, constructive agenda between our countries, because that is what has brought so many of us halfway around the world to be here in San Francisco tonight. So allow me, with a little help from Ed as always, to offer a toast — in Russian fashion, but with California’s most popular export to Russia, California wine — for our continued mutual success in this ambitious task we have ahead of us. To your health, and to our success!” n

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At the same time, we should be careful.

We should be careful not to overstate the immediate impact of Russia’s accession to WTO. We enthusiastically welcome the progress Russia has made in its laws and regulations as it prepares for WTO accession. But ultimately, the business environment in Russia will improve not because of the way laws are passed, but as a consequence of how they are implemented. You all know that much better than I do. The Russian market continues to pose challenges for American businesses. Most Russians and most Western business people that I talk to tell me frankly that corruption is worse now than it was three to four years ago.

I continue to hear that the Transparency International rankings, when they come out, will not show Russia moving up.

That is very discouraging if it is true.

But I have to say that I am encouraged by the consistent message we hear from Russia’s leadership about the urgent need to address root problems — not just regarding corruption, but also streamlining bureaucratic obstacles, securing investor rights and improving the overall investment climate. U.S. business representatives are key to reinforcing that message, as we saw in the recent delegations led by Governor Schwarzenegger and by the FIAC meeting that Klaus and other CEOs attended with Prime Minister Putin on Monday.

Peter L. Thoren, Executive Vice President of Access Industries, Inc., introduces Ambassador Beyrle at the Gala Dinner.

Annual Meeting

KEYNOTE ADDRESS: Arkady Dvorkovich Aide to the President of the Russian Federation October 21, 2010 •The Fairmont Hotel The following is an excerpt of Mr. Dvorkovich’s remarks at the USRBC Annual Meeting.

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“ ood morning everyone and thank you for this opportunity to be with you today.... Well, this week was quite busy for us and sorry I could not come physically to San Francisco to join you, but I will share with you some of the things we believe are important currently for Russia. Ed just mentioned we had meetings with a U.S. delegation this week and both First Deputy Prime Minister Igor Shuvalov and myself discussed with Larry Summers, Michael McFaul and David Lipton our joint priorities, both bilateral and multilateral. And the first priority we discussed, and you can certainly guess very easily, is Russia’s WTO accession.

Russia Business Watch Winter 2010-2011

Back in the summer when President Medvedev visited California and Washington, he and President Obama agreed that we will work to resolve all remaining disagreements between our countries on WTO by the end of September. On that day, the presidents called each other and shared the view that 95 percent of the disagreements were resolved. The remaining five percent are of a technical nature and will not require any intervention on the political level. So, it is a big success.

The promise was fulfilled.

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…So, we are quite optimistic right now that we can move quickly through the accession process.

The remaining technical difficulties are related to the linking and establishing of some kind of consistency between the Customs Union rules, where we are participants with Kazakhstan and Belarus, and WTO rules, and our experts and lawyers are saying it is possible. There is not a political problem here, and we will put on paper all required procedures to complete this work.

Also we have good potential to start working, after we finish WTO

negotiations, on specific projects and those projects would not require any individual decisions since WTO rules will apply to those projects as they would for any trade and investment activities.

What are we talking about? The first and the most important one for the next few months, especially when it concerns foreign investors, is the privatization project. Just yesterday Prime Minister Putin had a meeting with key members of the government and at the end of this meeting the proposals were approved to privatize stakes in almost all large companies where the government still has a substantial role.

We are talking about Rosneft, VTB, Sberbank, Sovkomflot, FSK (the federal grid company), Rushydro (the company that manages all hydropower energy projects), and a few others, including also Aeroflot and possibly our major airports, Sheremetyevo and others. So, it is a huge project.

We are talking about a few dozen billions of dollars that can be attracted to the Russian economy during the next three years or so. We welcome everyone to participate in this big project. Believe us, the main goal is to improve the efficiency and competitiveness of those companies and to create a more vibrant and dynamic environment in the sectors in which those companies are operating. This is closely linked to the overall program of modernization our president announced just a few months ago. We spent one year on formulating strategies and specific projects and are already implementing some of those projects. Many people who are involved in the implementation of those projects are present in the room now at the forum where we are all participating.

We welcome active participation of each particular company, each particular individual in our strategy. Since our success depends on the personal involvement of people who believe it is possible to achieve this success.

From left to right: Marthin De Beer, Mikhail Pakhomov and Greg Mayfield of Cisco Systems, Inc.

“We are quite optimistic right now that we can move quickly through the [WTO] accession process.”

"The first and the most important one for the next few months, especially when it concerns foreign investors, is the privatization project."

A formal approach will not bring any results. We have the experience of announcing initiatives and then facing bureaucratic resistance and formal implementations that could not bring any positive results for the Russian economy. It is quite different right now. What is different is that we have feedback from society. Direct feedback from people who use the internet, direct feedback from smalland medium-sized and big businesses, which announce their innovation plans and that rely on the political commitment of both the president and the government to implement those projects. We started creating new financial facilities; we started providing financial incentives and also administrative resources, in the good sense of this notion, to facilitate the implementation of those projects.

Our flagship project is the creation of the new innovation center in Skolkovo, near Moscow. One should understand our goal is not just to build good facilities and spend taxpayer money on the development of this good piece of land. The purpose is to create a window

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Ed Verona (foreground) introduces Arkady Dvorkovich (c.).

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with other development institutions that we created during the last few years, including Rusnano, the Russian Venture Company, Vneshekonombank, and others. We cannot allow ourselves just to forget about those resources and those facilities we created, we need to have synergy between all the institutions that are involved in the implementation of our strategy.

Many companies, including those companies who are present now, have agreed to participate in the Skolkovo project, both by physical presence in Skolkovo and also by expanding activity across Russia. It is important to understand that while the construction is underway we will be supporting projects that will be initiated not just in Skolkovo physically, but also across Russia. The only condition is that those projects should satisfy the criteria that are set for all these projects. The Board for Skolkovo just approved the key criteria for this assessment and procedures will start very soon.

Another key aspect of this project and all other projects that we are initiating right now is openness. Russia is still perceived as an opaque country. This is a legacy of the past and a reflection of some of the policies that were conducted during the last 15 to 20 years. Each project that we announced and started implementing during the last few months is connected to the active participation of either foreign universities or individuals or companies. We have alliances already with a number of European countries, and those countries are committed to providing their experience and expertise for our domestic purposes and to serve mutual interests….

We are also relying on active collaboration of the Skolkovo project team

What I would like to ask of you are two things. One is a personal commitment to working together. And this is not just about giving advice — we are past the period when we were happy with just advice. It is about the personal involvement of people, who are working in your companies and who you know are the best professionals in the world in their particular areas of expertise and areas that we have as priorities.

The second thing I would like to ask from you is to have a clear focus on what you would like to do and to understand what our interests are. Sometimes, people are happy just with putting an assembly factory in Russia to have just a few hundred new jobs in a particular region. New jobs is a very good thing, but what we would like to see is not just factories, not just new assembly, new products in Russia, but also innovative processes and research done in Russia in cooperation with major international centers. The purpose is to create the capacity to produce and commercialize innovation in Russia. It is not the same as saying we’re not going to cooperate with companies that will not shift

Russia Business Watch Winter 2010-2011

and a vehicle for driving innovations across Russia. This is a window for those people who are afraid maybe to go to other regions in the Russian Federation, who are afraid of Russian bureaucracy and corruption…, a window for people who did not believe it was possible to start doing real research and doing real innovation in Russia.

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"New jobs is a very good thing, but what we would like to see is not just factories, not just new assembly, new products in Russia, but also innovative processes and research done in Russia in cooperation with major international centers.

The purpose is to create the capacity to produce and commercialize innovation in Russia." >

their key R&D centers in Russia. It is a complementary thing. We would like to see new capacity created, and the Russian market and the markets of our neighbors have sufficient potential to create new business and provide for expansion in those markets. So, it is not a waste of money, it is taking both the risk and the opportunity of working with us. We are ready to take a risk and started this activity and we hope that you will take those risks as well. We will minimize risk for you and maximize opportunity. Thank you and I am ready to answer your questions.”

Question & Answer Session

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Q. You mentioned the privatization program — what sort of assurances can you give to minority investors in those enterprises that they will exercise investor control of their share of interest in those companies?

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“I will mention a few things. The first, and this is something that we started to introduce after the President came up with this initiative a couple of years ago, is the formation of Boards of Directors with not just representatives of the state, but also independent directors.

This already changed substantially the corporate governance practices within the large state companies. We have efficient and professional Boards of Directors in many of those companies where we have representatives of large investment banks and companies with an experience in a particular field.

The second one is the possibility of a shareholder agreement, if we are talking about the strategic involvement of new, including foreign, investors into the companies with a majority of state ownership. I think we can integrate the rules for conflict resolution and

dialogue between majority shareholder and minority shareholders into the shareholder agreement. This is the second one.

The third one is our ongoing work to improve corporate legislation and protection of minority shareholders and property rights in general. This was about putting new instruments into legislation and also improving transparency, and the efficiency and the professional level of the activity of the court system and the judicial system. This is the third pillar we have on our agenda.

What is important is constructive feedback from investors about what is going on in the companies. We need those signals from people and companies who invest in Russia. During the latest meeting that happened this week of the Foreign Investment Advisory Council, the Prime Minister announced that he appointed Igor Shuvalov, First Deputy Prime Minister, as an investors’ ombudsman to resolve potential issues and conflicts. He will serve as a contact point in the Ministry of Economy to support this activity to resolve problems if those problems will appear in practice.”

Q. A recent Rusnano study shows that innovative economies take anywhere between 10-25 years to reach maturity.

Can you talk about the balance of longterm goals and the commitment of the Russian government to this long-term process, to this transformation to a knowledge-based society?

“It is my personal opinion (we do not have any official document that describes this balance), but what I can say is that at this stage we would like to create a drive for innovation. We would like to make people believe that it is possible to create start-ups and become a success story. We know that innovation is a risky business and maybe one out of ten, or two out of ten will succeed…. But some people will succeed, and given the creative nature of the Russian people, maybe more than one out of ten will succeed.

It is very important to show the first success stories and to show that it is possible to succeed in Russia….

Also, at this initial stage it is very important to keep our promises.

We promised to provide broadband internet access across Russia in four to five years, so we have to do that.

We promised to provide digital TV

services across Russia over four years, so we have to do it. We promised to transform public services into an egovernment form, so we have to do it.

We promised to have at least one-third of critical pharmaceuticals produced in Russia by 2015, and we have to do this by attracting large foreign companies and creating Russian ones. We have to keep to our promises.

However, we understand that to achieve overall success, we need more than 3 to 5 years and I tend to agree with the assessment that we will require over 10 years. From this perspective, it is very important to show the first successful steps over the next one year, not just in three to five years.

We are trying to keep the momentum going, to change legislation quickly, to create a critical mass of capacity, in the Skolkovo project, in those Russian universities that were given new status and new resources, etc. We are trying to keep those things going as quickly as possible. If we lose one month, we lose the whole game. It is very important to achieve good results in the short term.

In this case, we will have good political momentum during the next six years.”

Q. Regarding the “virtual Skolkovo,” is there a framework that exists, or if it does not, then when will it be in place so that companies can go take advantage of its tax and financial benefits?

“I am sure the Skolkovo people present in the room will give you some more details, but there are two key things.

One is presence in Russia, so we are not going to finance companies that are not located in Russia. The second is the procedure of approving the project. I already mentioned the board of Skolkovo just approved general criteria. The management team of the Skolkovo Foundation is working on a document that will describe the procedure of approving the projects. I think this work will be over in a few weeks. We are pushing the Skolkovo management to complete the work no later than by mid-November so that starting in January next year all the procedures should be working….

The principle that is approved right now in the legislation is that after the construction is completed, the ‘main,’ or ‘key’ part of the activity should be moved to Skolkovo. But we will work out what the ‘key’ part of the activity is and we will think about how to do this a little bit later. It is important to start right now. Thank you.” n

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KEYNOTE ADDRESS: Viktor Vekselberg Chairman Renova Group October 21, 2010 •The Fairmont Hotel The following is an excerpted translation of Mr. Vekselberg’s speech to the USRBC Annual Meeting.

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…At these meetings, we regularly talk about the lack of normal contractual relations between our countries in business and investment. As of today, there is no agreement on investment protection between Russia and the

We will talk today about our countries’ economic relationship in the format of innovative initiatives and hightech transfers, but on the forefront of everyone’s mind is, how will these investments be protected? How will intellectual property rights be protected when country borders are crossed?

These questions remain open, and we certainly need to start working on the creation of practical legal grounds for our economic cooperation. This is an extremely important aspect. In the audience, we have both ambassadors of our countries and government

representatives. From this platform, I would like to appeal to them and emphasize the importance of these issues. We, business representatives, are ready to participate actively in this work, in drafting corresponding documents.

On the other hand, I would like to express an element of self-criticism.

Those forums that we organize are very useful and important; they allow us all to meet. But to meet two times a year and to listen to speeches made by important leaders, and then part ways again does not produce further practical, serious results. In the good old days, we had working groups that maintained these activities between sessions. They were articulating questions and finding answers, and at forums, they spoke from certain perspectives, with some recommendations to our countries’ governments. I think we need to resume such work in order to increase effectiveness of our joint forums as much as possible, to concentrate on solving the most pressing, most important tasks that impede our cooperation. >>

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“… would like to touch on several important, in my opinion, issues. First, I would like to touch on U.S.-Russia relations. We are all looking at what is happening on the political side and how business relations are developing.

Frankly speaking, while making me optimistic, it also gives me a feeling of unrest (we Russians are accustomed to criticizing things). We have had two meetings during the past year between our countries’ presidents, in both Russia and the United States.

During these meetings, we raised the sharpest and the most important, in our opinion, questions for our countries’ businesses. However, there is, unfortunately, no apparent trend that would facilitate resolving these questions.

United States. This is unprecedented: two large economies that have analogous agreements with nearly every country in the world do not have such an agreement between each other. We regularly talk about it, but there has not been a constructive political movement toward resolving this issue. We continue to work under the trade agreement that was signed during the Soviet period, in 1990. We had different countries, different people, different mentalities and different processes.

There are no agreements that would regulate our economic relations.

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in order to implement their knowledge and potential. Our task is to create such conditions in which we would be able to implement the knowledge and potential we have.

Marthin De Beer (r.), Senior Vice President/General Manager, Emerging Technology Group, Cisco Systems, Inc., introduces Mr. Vekselberg.

Russia Business Watch Winter 2010-2011

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Large companies are finding ways to solve this question on their own, but we can only achieve success when…a broad stratum of small- and mediumsized businesses will be able to invest and work in both of our countries’ markets. Only then can we say that we have succeeded. I would like to say that we need to look for new formats, new forms of work…. I think that heads of companies that work in both countries should get together and discuss existing problems in a normal, open-discussion format of exchange of opinions. This format is used all over the world and it is effective. It allows for the most important thing: to establish a level of understanding and trust. If we speak the same language and understand what goals we need to achieve, I think it significantly raises the effectiveness of our forum.

Second, I think we need to broaden participation in our forum in other initiatives. We could support different forms of student exchange, organizing other forums that would facilitate establishing working contacts. I would like to say that we have supported the initiative that was put forward by the Russian company RU-COM with regard to creating a Russian-American IT camp for children from 12 to 17 years of age. The camp will allow children to go to Russia as well as the United States during their summer and winter breaks in order to familiarize themselves with the most advanced IT technology and to attend lectures given by leading IT specialists. I think this is a good, healthy initiative that would, with support of our forum and possibly individual companies, produce a stream of people that would

be, from an early age, familiar with the international, global nature of economics in general. In the future, those people would create a basis for the culture of entrepreneurship in various industries….

I consider the Skolkovo project, which was created only six months ago, to be a dialectic addition to this process, a kind of transition from quantity to quality. I think our country has realized that today we do not have an alternative; today we have to move in the direction of innovation. The seemingly endless supply of energy resources may be exhausted at some point, and we as a country, as an economy, could end up in the outskirts of the global economy. This danger is acknowledged, and I think that today the government is taking various efforts in this direction, and a part of this is the Skolkovo project….

I would like briefly to touch on what the Skolkovo project is and what its goals and objectives are. The main task we want to solve with this project is the creation of an environment that would include a regulatory base and physical support with regard to providing access to infrastructure, for implementation of innovative processes. Russia today, I think, while still possessing high intellectual potential based on a high level of basic education and decent level of higher education, has virtually no technologies or resources for transferring science into practical applications. Unfortunately, there is a significant trend that people who bear new ideas and suggestions face multiple bureaucratic obstacles, and they are forced to emigrate elsewhere

The main, or at least one of the most important, elements of this project is its internationality. From the very beginning, we designed a requirement that we would support projects only if those projects have a clearly stated cooperation with leading international universities or research organizations. Thus, we hope to establish a connection with the global economy, maintain a level of research and development comparable with international standards and provide the necessary communication with the outside world that our Russian scientists often lack.

The second element is that we want to build all the processes as transparently as possible, so that everybody knows how the project works, how the decisions are made and who makes the decisions. In order to achieve this goal, we have already formed the organizational management structure. We have three Boards. The first is the Board of Trustees, led by President Dmitry Medvedev and including leading ministers and heads of agencies.

The second board is the Board of the Foundation, which makes the main decisions with regard to the project’s activities. It includes representatives of Russian as well as foreign businesses. The Board has two CoChairmen, me on the Russian side and, from the foreign side, is Craig Barrett, former Chairman of Intel. This Board also includes representatives of leading foreign companies with experience in innovation and high-tech areas….

Our goal is to represent as much knowledge, experience and intelligence as possible, which will help us move forward in, I emphasize it again, an absolutely transparent environment.

The last board, which has just been formed and last week met for the first time, is the Scientific Board, which is headed by two Nobel Prize laureates: from the Russian side, Mr. Alferov, and from the foreign side, Stanford University Professor Kornberg. This Board includes another 10 foreign specialists, four from the U.S. Having such a broad intellectual potential, we think we can correctly place priorities and properly organize the process of selection of innovative projects….” n

Annual Meeting

KEYNOTE ADDRESS: Anatoly Chubays Chairman and CEO, RUSNANO October 21, 2010 •The Fairmont Hotel

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“… n my opinion, we need to appreciate the fact that Russia has fallen behind because of some objective reasons. It so happens that, during the past 20 years, Russia has been dealing with some other problems — more specifically, Russia spent the 1990s building a market economy. I would like to remind you that Russia at the time did not have one, and it was during these years that it created a real market economy. Achieving this was very difficult, but you could hardly find

any serious businessperson or expert today who would argue that we did not succeed in building a market economy. …The average salary at the end of the 1990s was $35 a month, i.e. a dollar per day. A country with a population of 140 million, situated in Eurasia, cannot survive for any length of time with this kind of standard of living… Because of this, I consider the raising of the standard of living, as well as GDP growth, to be our most significant accomplishment. Of course, some may have different evaluations of the policies of this or that government, but the fact remains that in 2000, we set ourselves the goal

It is true that during these 20 years, from 1990 until 2010, tens of countries in the world followed the example and the unique experience of Silicon Valley.

For example, South Korea, Taiwan, Singapore, Finland, Israel, and today even China, managed to create excellent versions of their own innovation centers. It was exactly during these same 20 years that they radically changed the face of their countries, and shifted the foundations and driving forces of their economies. This took place during those same 20 years that we lost.

We need to recognize this fact, but we should not think that those years have been lost irretrievably.

In fact, I believe that there is a clear conclusion we need to make from this. We have to devote the next decade to changing the core of our economy. Instead of having growth based on oil and gas exports, we need to build an economy

Russia Business Watch Winter 2010-2011

The following is an excerpted translation of Mr. Chubays’ remarks at the USRBC Annual Meeting.

of doubling the GDP, and we reached that goal….

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"We are entering a new stage, where, in addition to the task of producing economists and construction specialists, there is an educational task to prepare technology entrepreneurs, or innovation entrepreneurs." >

driven by innovation. I am convinced that because of, again, historic reasons, we have no other alternative for the next decade. The choice for our country is stark and simple: innovation or degradation. There is no third option. That is why I think the political goals formulated by President Putin at the end of his term, and by President Medvedev at the beginning of his, are currently without an alternative. …Rusnano is another one of the development institutions created to solve the questions I just discussed. We are a rather young organization (only three years old), but we have received exceptional support from the government amounting to about $10 billion.

Our goal is relatively simple: in 2015, Russia needs to have a nanotechnology industry with yearly sales of over $30 billion.

Russia Business Watch Winter 2010-2011

I know that some of my friends, including Silicon Valley professionals, upon hearing this goal, have told me that this is ‘mission impossible.’ However, you know, the situation in Russia is becoming such that we have not been very successful at the ‘possible’ missions.

Because of this, we will see what comes out of this goal this time.

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Our company finances projects at an early stage, always remaining a minority shareholder. Being a minority shareholder for us is not just a matter of equity shares, it is a matter of principle.

We are not planning on replacing private strategists, but to support them in handling the key functions for each project.

Private companies have to remain the drivers of all our projects.

In addition to the financial assistance we provide for our partners, we also give non-financial support. We understand very well what it means to do business under real conditions in Russia, and because of this, we assure our partners that we are responsible for handling any attempts at corruption that may arise in relation to the projects on which we work with them. Fighting corruption is

our responsibility; we need to create normal conditions for the companies who decided to do business with us. This is an important part of the non-financial support we provide to our partners.

Another very important element of the support we give is the creation of a market for innovative products. We are responsible for creating the market in Russia, especially because a large part of this market in the country is related to state purchases, amounting to 5 trillion rubles per year. Creating a market and supporting our partners in areas such as technical regulations and standards, the removal of bans and restrictions (thousands of which currently exist in our economy), and the introduction of state standards that support the industry, are directly related to our side of the project….

What do we actually do? We have three areas in our portfolio.

The first one is what we call ‘industrial projects’: creating new businesses, mostly relating to industrial production. The main requirement is that the majority of the actual production has to take place in Russia. After all, we are sponsoring these projects with state money, so the government has the right to require that these projects take place in Russia. Currently, we have 83 industrial projects.

Then, we also work on creating financial infrastructure: venture funds and private equity funds. We are carrying out this work partly in cooperation with our partners here in California. Finally, the non-financial infrastructure is another very important branch, without which we cannot reach our goal. More specifically, nano-centers are a particularly important part of our strategy.

What kind of projects do we have? I will discuss several of the types of projects most interesting to us.

First, we have solar energy and photovoltaics: we have five such new technologies competing with each other. In the sphere of pharmaceutical production and biotechnology, we are only interested in innovative pharmaceuticals — we do not engage in generic medicine production. In this sphere, we have a lot of interesting projects both in Russia and abroad. One of these projects — a potential $900 million investment — could lay the groundwork for real large-scale pharmaceutical production in Russia.

Another branch includes optoelectronics and nanoelectronics. True, Russia has fallen behind in nanoelectronics development compared to world leaders such as Intel. At the same time, though, we believe that we need to move forward. Two years ago, we were told it is hopeless to focus on 90 nanometer (nm) microchip technology, but by mid-December of this year we will have the first sample of a Russian-produced 90nm chip. We are moving on to developing 65nm and 40nm chips, knowing that the commercial potential for these technologies will last for decades, if not longer.

However, we do not plan on stopping there. We believe there are fantastic opportunities for nano-structured materials, starting with classic materials for nanotechnology, including graphene, the same material that two Russian physicists, Geim and Novoselov, won the Nobel Prize for developing. The qualities of these materials are amazing: thousands of times stronger than steel, with electrical conductivity hundreds of times greater than that of copper. Because of this, we are working intently on developing these materials, knowing that, if today nano-structured materials are already replacing traditional construction materials in space and airplane construction, tomorrow they will be used in shipbuilding and car production. Meanwhile, we are also expecting a breakthrough in nano-composite construction materials and we are putting significant resources toward that end.

Nano-covering is another technology with a variety of potential applications, from food product wrapping to the treatment of metal-cutting machines.

We built a factory in Ruyben, Yaroslavl region, where, using iono-plasmic technology, we are putting a nano-covering on cutters and drills….

Let me say a few words about our cooperation with our U.S. friends. It seems to me that things are moving dynamically. We have some great projects with Americans involving the development of lasers. One of the leading companies in this sphere is working directly with us. We also have some very interesting projects in optoelectronics, including here in Silicon Valley….

In addition to working with high-tech companies in the U.S., we are also happy that we have been able to build positive relationships with venture investors and venture funds. As you know, President Medvedev has already invited a second delegation of venture fund

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representatives and venture investors to Russia. The most recent VC delegation managed over $100 billion in funds and included some of the founders of Silicon Valley. This is a great honor to us and I am presently holding negotiations that may result in significant joint projects. …I would like to add that we are cooperating also in some more traditional economic sectors, such as aluminum production. Who would have thought that aluminum can be developed at a very high technological level, but today, together with Klaus Kleinfeld, we are final-

Question & Answer Session Q. Do you agree that the main paradigm of the Skolkovo project and of Russian modernization is to invest first and foremost not in technologies, but in people; in other words, that modernization has to first happen in the educational system? “…I do not think this is what we need to start with. From what I have seen in my work at Rusnano, and this is a new sphere for me, there is a colossal number of viable, new projects that can be turned into real, living, serious business.

are 550 companies in a little over a year — the law was passed last summer….

The new decisions made in order to attract western instructors to Russian universities have received very serious financial support. The new decisions made on creating joint projects between businesses and universities have opened completely new opportunities.

In this sense, to be honest, I both agree and disagree with you. Some things are already taking place, and we are taking the first steps, steps I personally believe are positive. But I would agree with you that there is much restructuring still to be done….”

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Q. It is great that all these companies and businesses are opening in Russia, but how do you feel about the managerial link of the chain? What type of managers are you focusing on in Russia? “…I would like to comment briefly on a dilemma: the fact that, in the past 10 years, as well as during the 1990s, we were constantly educating economists and lawyers, and occasionally good mangers, but the latter was not a priority for our education system. Then, in the past five-seven years, the country realized that, in addition to economists and lawyers, it also needs engineers and construction specialists. It is obvious that today this is one of our priorities.

The result of all these projects will be the growth of the Russian nano-industrial market from practically zero, where it stands today, to $30 billion in 2015. We believe that we can only accomplish this through the partnership we have with America — one we are discussing and beginning here today. In this context, we do have things to offer to our American partners, including opportunities for real cooperation. I am not talking about discussions, about theories or fundamental scientific research; I am talking about actual business. This is what we can, should and will do. Thank you.”

There has been a significant pile-up of such projects. When I came to Rusnano, when we were starting its work in 2007, we were told that we only have enough projects to last us six months to a year…. Today we have 93 approved projects, with dedicated financing of $4 billion from our funding and another $6 billion of outside investment.

Still, this does not invalidate what you are talking about; it does not mean we should not invest in people. Of course, it is true that we need to do this. We have an enormous amount of work to do in education. However, at the same time, we should appreciate what has already been accomplished. For example, there were disagreements in relation to the innovation centers at universities.

The result today is 550 small, innovative companies at universities. And these

Moreover, I think that this also touches on the topic of changing the public image of entrepreneurs. According to the current popular perception among Russians, an entrepreneur is a person who, excuse my example, has stolen an oil field with Chubays’ help during the privatization period, and is now on TV telling us how we are supposed to live. These are stereotypes, of course, but a technology entrepreneur needs to be a business person of an entirely new type.” >>

Russia Business Watch Winter 2010-2011

izing discussions with Alcoa that may lead to some large-scale U.S.-Russian projects in this sphere. Klaus, we are grateful for the work we have been able to do together.

Still, it seems to me that we are entering a new stage, where, in addition to the task of producing economists and construction specialists, there is an educational task to prepare technology entrepreneurs, or innovation entrepreneurs….

Technology entrepreneurs require a completely new set of skills. Of course, there is also a discussion about whether it is possible at all to teach someone how to be an entrepreneur…. Russia can only have an innovation economy when we have hundreds, even thousands, of technology innovators, who can start and build new businesses.

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Q. How do you view Rusnano’s work to date in the healthcare sector, and what are the most effective and productive approaches for foreign pharmaceutical research companies for working with Rusnano and Russian partners? “…Regarding picking partners, this is precisely what our job entails. We, forgive my lack of modesty, understand which companies are serious technological partners, and which are not in the Russian pharmaceutical business and generally in the Russian health care system. We understand with whom one may work, and with whom one should not. We can recommend the right technology partners and help you create a real market….

Regarding priorities, we have several, but the most important ones are innovative medicine production — nuclear medicine and radiation therapy. We have tremendous technical capabilities in Russia and, because we have so many specialists, we can be very successful in developing these technologies, including in oncology and cancer treatment, as well as to treat less serious diseases.

state in the Russian economy is extremely high, beyond what is reasonable, both on the federal and on the regional level, especially in Moscow….

Take, for example, the draft budget for next year (while it has not been adopted yet, it is unlikely to change significantly): the projected revenue from privatization is around 860 billion rubles. This is a completely different scale of action.

Even if the number goes down, it is clear it will not be lower than $12-$14 billion, so this is a very serious project.

because the plan is that a part of the revenues would go to the state budget, but a part would be invested back into the company itself in the form of a capital injection. In this sense, I think this is a positive thing.

Thank you.”

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Initially, the conversation centered on some, in my opinion, not very serious ideas; for example, selling three percent of Transneft. Sure, one can do that, but what happens next? What I think is significant is that the government’s thinking about privatization has moved

Russia Business Watch Winter 2010-2011

Our second priority is regenerative stem cell treatment. In this sphere, we also have a lot of specialists. We can have technology that allows us to treat patients, for example, who have suffered burns to more than 70 percent of their bodies. Doctors generally consider this to be fatal, but, with the help of regenerative medicine and skin cells, we can save people’s lives….

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…In the United States, 80 percent of medicines produced are innovative, while only 20 percent are generic. In Russia, the balance is the exact opposite: 20 percent are innovative, and the other 80 percent are generic. However, the scale of the market opportunities in Russia is huge and we are looking to work with American partners on this.”

Q. Going back to privatization, do you have any thoughts about how the revenue for privatization should be used?

“Well, I am somewhat familiar with the topic of privatization. If you have been following the privatization process, you would know that, in the past 10 years, Russia has done nothing worthy of pride in this regard. Our yearly income from privatization has amounted to 715 billion rubles, which is very low and is essentially as good as nothing. In my opinion, the level of involvement of the

C. Cato Ealy, Senior Vice President, Corporate Development, International Paper, introduces Mr. Chubays.

beyond just getting state revenue and toward a qualitative change in the structure of leading Russian companies, getting them under private control so as to significantly improve their corporate culture. This is significant. I do not know what the final package will look like, but…these are major companies, and we are not talking about selling three percent of them but about selling serious share packages. We are talking about getting government control down to 51 percent or even lower. I think this is a very healthy approach, especially

delegation of young Russian entrepreneurs, led by The All Russia Public Organization Delovaya Rossiya (Business Russia), traveled to San Francisco for the Annual Meeting and participated in a number of meetings with innovative companies in Silicon Valley. The delegation, made possible through the support of Ernst & Young, attended a symposium at Stanford University organized by the USRBC, McKinsey & Company, Delovaya Rossiya, and the American Business Association of Russian-Speaking Professionals (AmBAR) and visited several prominent high-tech companies, including Google, Intel and Plug & Play. Members of the delegation were able to showcase their business proposals to Annual Meeting participants at an interactive booth at the conference.

Annual Meeting

Delovaya Rossiya Delegation of Russian Entrepreneurs

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Please visit our website at www.usrbc.org to read descriptions of the start-up projects presented in Silicon Valley by this group of young entrepreneurs. n

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KEYNOTE ADDRESS: The Honorable Arnold Schwarzenegger Governor of California

Russia Business Watch Winter 2010-2011

October 21, 2010 •The Fairmont Hotel

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The following is an excerpt of Governor Schwarzenegger’s address to the USRBC Annual Meeting.

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“… was asked to come here and to say a few words and I immediately said yes, I will come, because this, to me, is very important. When I became governor, it was very clear that something that we need to do was undertake trade missions to other countries. I became very interested in trade missions and we have had more trade missions since I became governor than any other governor in the history of California…. I think that it is all about reaching out

and acknowledging that the time of just doing business with your state or doing business with the neighboring states is over. It is now important to do business in the global marketplace.

California is known for having some of the most wonderful innovation and products — we are number one in biotechnology, high technology, nanotechnology, green technology and on and on. We have the greatest university system in the world. So why not go and take that abroad and form partnerships, not only to sell our goods but also to help other countries to do the same thing?

When President Medvedev was here in June, he made it very clear to me that he stopped in California first — not Washington or any other place, but California — because he was interested in high technology, he was interested in Silicon Valley, because he wants to do something similar in Russia. He wants to build this kind of a Silicon Valley in Skolkovo….

I thought that was a terrific idea and I was interested in helping to make this dream and this vision become a reality.

Of course, you never can do anything like this by yourself, believe me. Our Silicon Valley was created because people from around the world came together. As a matter of fact, anything that we do is always with the help of a lot of people. And so, of course, Russia needs help in that too.

This is why we brought together the high-tech community and the Silicon Valley community and business leaders and we went over to Russia. We acted immediately. As soon as President Medvedev went back to Russia, he sent us the formal invitation, we put our

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"When President Medvedev was here in June, he made it very clear to me that he stopped in California first — not Washington or any other place, but California — because he was interested in high technology…." >

team together and we went over there and had a wonderful visit. I think that you can see the kind of progress that was made, the kind of companies that already have connected because of that trip.

This is why I wanted to come here today, because what you are doing here is kind of a follow-up. It is now the Russian businesses coming over here.

This is terrific, because California has had such a great history with Russia.

It goes back to almost 200 years now.

Mr. Vekselberg is a big, big sponsor of Fort Ross and has put money into this project. Every single time I talk to the man he talks about the 200th anniversary in 2012. You see, without even looking down I remember those dates — that is how many times he has mentioned it to me.

I am going to be there and we are going to celebrate, even though I will not be governor then. It does not matter, because my belief in the California-Russia relationship is extremely important.

It has nothing to do with the office.

Offices you just pass through….

Before I left Moscow, I told President Medvedev, ‘I’ll be back.’ I will be there at the Olympics in 2014, which will be a great opportunity for Russians to show off the country. Billions of people will be watching that event, so it is a great opportunity….

I know there are challenges; it is not going to be that simple, because there are people in America and in California who are wondering about the Russian system, about the way things are done

over there. I know you are concerned about intellectual property rights. I know you are concerned about the trade policies that they have and about the corruption, but we have our own problems. Let’s not just think about someone else having problems. We have our own problems.

I have witnessed my fair share of problems here in California over the last seven years. I can tell you, after seven years we have now finally straightened out our budget system. We have made a decision to have a ‘rainy day fund’ set aside so that when we have economic downturns that we have those billions of dollars set aside, so we can go and help the university system, help our education system and help our most vulnerable citizens and so on.

There is also the pension problem. We have $500 billion in pension debt — a major problem. Luckily, we have now reformed that problem and lowered the debt burden, because we rolled back the pensions to the 1999 level. President Sarkozy is trying to do the same thing in France and they have protests all over the place because of that. We brought labor, Democrats and Republicans together and were able to get it done. Every country has problems….

I tell Californians that these problems should never discourage us from doing business in Russia because, as I said and I was quoted just earlier, it is a goldmine. Some people say that I do not understand how tough it is to do business there. Yes, things are tough.

What do you think, being a world champion in weightlifting is not tough or being a world champion in bodybuilding is not tough? Or, doing all the reforms that we have done here in California was not tough? I can show you the scars on my back. They were very, very tough to do. Yes, it is tough but it is a goldmine…. The potential is there.

I saw potential after potential after potential after potential there. I saw a goldmine. So it is all just up to us to form those partnerships and for us to work together. But, I see a great future there, and so I am looking forward to going back many, many more times.

Thank you very much.”

Question & Answer Session Q. Could you comment on the status and potential of the electricity smart grid deployment in California?

Russia Business Watch Winter 2010-2011

So now, what you are doing here is trying to form those partnerships and making one and one become three.

This is what those kinds of partnerships are all about and I am highly interested in that because, as I said, I am a big believer in partnerships and in working together.

From left to right: U.S. Ambassador John R. Beyrle, Governor Schwarzenegger, Russian Ambassador Sergei I. Kislyak and Vladimir Vinokurov, Consulate General of the Russian Federation in San Francisco

“Well, let me first say that I think that we are really way ahead of all the other states when it comes to those issues of climate change and of having an energy policy and having an environmental policy and having those laws in place.

We are very happy about the fact that we have made a decision in 2006 to reduce our greenhouse gases by 25 percent by the year 2020 — which is basically rolling it back to the 1990 level.

But in order to reach that kind of a goal we have to have renewables and so this is why I signed an executive order just

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we have just gotten the permits done for 3,500 megawatts of solar power in the Mojave Desert…. I promised when we had our last blackout in California that we will never, ever have a blackout under my administration and we have not for seven years. It was because we have an energy policy….”

Q. You have come back from Russia and obviously have this tremendous enthusiasm; you see something that a lot of other people in the Republican Party do not see. What has been your message to your fellow Republicans about the START Treaty, the 123 Agreement and Russia’s WTO accession?

William M. Sheedy, Visa Inc., introduces Governor Schwarzenegger.

> this year to make sure that 33 percent of the entire amount of energy that we produce has to be from renewables….

Russia Business Watch Winter 2010-2011

We have also worked very hard to create green transmission lines. It took six years to get the permits, because in California it is very hard to get those kind of transmission lines built, because it goes through forests and through hills and areas where environmentalists do not like you to build…. And we are very happy that

“…I am asking Congress to pass the agreement to reduce our nuclear weapons. This, I think, is the most important thing, because we can talk from here to eternity about doing business together, but if there are still a huge amount of missiles that are pointed at each other for no reason…. There are those in America that are trying to flex their muscles and pretend they’re ballsy by saying we have got to keep those nuclear weapons. They think it is very rugged when you say that. It is not rugged at all; it is an idiot that says that. It is stupid to say that.

So, I think Presidents Medvedev and Obama — and what Secretary George Shultz under Ronald Reagan has been

Center: Denis Gudym of Intel and Vanessa Stiffler-Claus of Deere listen to Governor Schwarzenegger’s presentation.

promoting for decades now — have done an extraordinary job in working on that. Now Congress has to go and agree with that and ratify it…. So I think that is the number one and most important thing. As soon as the [November 2nd mid-term] election is over, we have all got to push Congress to move the treaty forward so that we can live in a safer world. That is the most important thing.

Thank you very much….”

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SAVE THE DATE!

The U.S-Russia Business Council invites you to mark your calendars for the 19th Annual Meeting on October 3-4, 2011 in Chicago, IL. Chicago’s development from a commodity trading hub to an international commerce center provides useful parallels for Russia as it continues its efforts to integrate into international institutions and create a global financial center in Moscow. These and other themes will be discussed throughout the agenda of the USRBC’s first Annual Meeting in Chicago in 13 years.

October 3-4, 2011 Chicago, IL

Further information regarding the venue and the agenda will be available in the coming weeks.

Please visit our Annual Meeting page at https://www.usrbc.org/activities/am/ for updates.

USRBC’s Annual Meeting 2011

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KEYNOTE ADDRESS: Sergey I. Kislyak RF Ambassador to the United States October 21, 2010 •The Fairmont Hotel

The following is an excerpted translation of Ambassador Kislyak’s address at the USRBC Annual Meeting.

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On some of those issues we never stopped working even during the most difficult times, even two years ago.

During the most difficult period since the end of the Cold War, we worked on counter-terrorism and nonproliferation of nuclear weapons because it appeals to the deepest security interests of each of our states. But during this time, during the seven meetings between

However, not everything has been simple in its implementation. We could see from the very beginning that the bureaucracy was lagging behind in implementing the President’s orders.

We should have probably expected this. Over a year has passed since the Commission was created; all working groups have already held meetings and drafted work plans, but, so far, it is still in the initial stages. The results from this Commission will appear later,

when real contacts begin not between bureaucrats, but between you, people of action, for whom the conditions for interactions should be created.

Both presidents agree that, in the past, exclusive attention was given to cooperation in the military/strategic area of the U.S.-Russia dialogue.

Certainly, both Russia and the U.S. are nuclear powers, we are members of the Security Council, and thus we have special responsibilities for maintaining global security. The history of our countries’ relationship also dictates the necessity of serious work on these issues, from bilateral dialogue to our joint efforts on the international arena. By the way, much of what we do together is not always known. For example, in 2006, Russia and the U.S. together launched a joint program on prevention of nuclear terrorism. Not many people know about it, but the cause lives. The idea started by two countries is now supported by 78 states…. This is just one example, but it is an example of what Russia and the U.S. can do together when their interests coincide. Of course…, if our

Russia Business Watch Winter 2010-2011

“… see a lot of opportunities for the development of cooperation.

Like my colleague, John [Beyrle, U.S. Ambassador to Russia] said yesterday, I absolutely agree that the number of issues on which Russia and the U.S. agree greatly exceeds the number of issues where they differ….

These include international stability, counterterrorism, nonproliferation of weapons of mass destruction, narcotics, interracial difficulties, interreligious tension, and many others. I have to say, we are learning to work on these issues more effectively.

our presidents, a lot has been done to expand mutual understanding and to make this work more productive and as substantial as possible. The presidents have succeeded in creating the Bilateral Presidential Commission, a new institution that is quite unprecedented in its nature. The Commission consists of 16 Working Groups, each headed by high-level officials from both sides, which cover virtually the entire spectrum of the U.S.-Russia relationship, from national security to sports exchanges. More than half of those working groups deal with the economy in its various dimensions — energy, nuclear energy, trade.

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relationship always remains based on security issues, there will not be a wholesome, harmonic development of relations.

Moreover, I would like to emphasize that, without developing economic relations to a certain level, we will not achieve irreversibility of the positive trends we are seeing now. Today, trade between our countries, as of last year, was $24 billion in total. That number is seemingly impressive, but $24 billion is only one percent, if I am not mistaken, of total U.S. trade. I was talking to my colleagues here and I said, ‘Can you imagine — if tomorrow Russia disappears, the American economy most likely will not notice it.’ By the way, if the U.S. suddenly disappears, in Russia maybe a dozen companies will go through a rough cycle or re-orientation to other markets, but the economy will also keep going. So far, we do not sufficiently depend on each other. This makes our political dialogue vulnerable, because it largely depends on our leaders’ ability to negotiate. Without it, we cannot have unconditionally positive relations, but these relations need to have a more open, basic support, which must be based on mutual understanding of our countries and on good connections between those who define the countries’ development — first and foremost, business people.

These connections, in my opinion, are still lacking. Everything that can be done to expand contacts between the business communities is undoubtedly beneficial for the stability of our political relationship, as well as for the creation of positive trends….

I do not mean to say that everything launched by the presidents is still in its initial stages. Some important things have been done. The New START Treaty is one example. However, we are awaiting ratification, and we can see that here it will be difficult even though the treaty is objectively in accordance with both countries’ interests and is welcomed by virtually all countries in the world. I am not saying it is stuck, but it is undergoing a tough process of moving forward, because it is being discussed in a difficult atmosphere, both for domestic American issues and issues that are not connected to Russia. Unfortunately, Russia is still often defined by old perceptions as the successor of the Soviet Union, with a continuation of all stereotypes that existed in the Cold War…. We need to work on this together.

…I would also add some principal bilateral agreements with regard to the WTO. It is a significant issue, especially because we have negotiated for 17 years. During five of those years, I was Deputy Minister of Foreign Affairs responsible for relations with the United States. I remember that every year, my American colleagues and I drafted concluding documents for the presidents. Every year, we suggested that a proposition be inserted that would settle a deadline for completing our joint work with regard to Russia’s accession to the WTO. And every year, for many-many years, we limited ourselves to the sentence that the U.S.

four years ago, I did not believe that it could be done so easily, nor that it would work virtually impeccably.

We have improved our work with the U.S. on nuclear non-proliferation with regard to Iran and North Korea…. The degree of cooperation that we now have with the U.S. is also new, and we can see the results of this new mentality within the ‘reset’ framework.

I have worked on U.S.-Russia relations for a long time, and I have seen a lot.

Over the last two years, I think, a new opportunity has emerged to build new positive relations that can become a mutually complementary and mutually

Omar Vargas, Director, Global Policy and Government Affairs, PepsiCo, Inc., introduces Ambassador Kislyak.

welcomes Russia’s speedy accession to the WTO. What has changed? The presidents’ agreement on June 24 that outstanding bilateral issues must be resolved before September 30 provided new impetus. Few believed that it would actually be done, but Russia had honestly completed its part. We passed four laws and held serious negotiations with our American colleagues on solving controversial issues. I have to also say, to our colleagues’ honor, that starting with the presidents’ decision we have seen a different U.S. delegation — a delegation interested not in teaching us what to do, but in looking for solutions together. We appreciated this, and I hope that on that basis, together with the U.S., we can finish the multilateral consultations on this issue so that Russia becomes a WTO member — not in a distant future, but within months….

To touch upon other international problems, several new issues have emerged.

Our decision to provide transit into Afghanistan for American troops, which operate there based on a Security Council decision that we supported, is one example. We did it absolutely consciously, because we understand that it would help American troops resolve important issues on the international arena.

Only three or

dependent relationship. It would be a good thing….

By the way, I would like to remind you that Russia is the U.S.’s closest neighbor after Canada and Mexico. If you go to Alaska, most Alaskans look to the West, not to the East. The minimal distance between our countries there is only about three miles. There, people can walk on ice to each other — and I heard that the local population does. People think not about the Cold War, not about NATO expansion, but about their neighbors, who have the same humanitarian problems, the same technical problems of survival in the difficult conditions of the North, who also preserve the Aleutian culture…. This aspect — that we are neighbors and not only former Cold War enemies — is hardly visible in our country as well as in the U.S. We have mechanisms of dialogue, such as the Trans-Pacific Dialogue, that, unfortunately, have not become effective instruments of cooperation. We need to establish these types of tools in order to help us realize that we have been and always will be neighbors, and we need to live together as neighbors.

Thank you….”

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have an amazing amount of courage to risk everything, to go approach their vision, see what they can do with it, and, very importantly, all of these successful entrepreneurs have an amazing level of persistence, because most of them do not succeed the first time out.

They fail. They have to pick themselves up, they dust themselves off, and they do it again. I think this is a really, really important thing that everyone has got to understand, particularly as Russia is trying to embark on a culture change within that country through Skolkovo.

The other thing about these entrepreneurs is that they have an incredible can-do attitude. We saw this when, in the depths of the financial crisis, we decided to do a survey of literally hundreds of executives in mature multinationals around the world and hundreds of other entrepreneurs, and asked them the same pattern of questions. What we found is that, in the depth of the crisis, less than one in five of the mature multinationals were seeking opportunities. We experience this everywhere — crisis hits, what do you do? You turn inward, you hunker down, you worry more about what you have to lose than what you have to gain, and you are just not out there aggressively seeking opportunities. At the same time, fully two-thirds of the entrepreneurs were seeking opportunities. How can I gain share during this time? How can I roll up and consolidate our competitors and build a business here? How can I come out of the crisis stronger than I went in? So that can-do mindset is incredibly important.

October 21, 2010 •The Fairmont Hotel The following is an excerpt of Mr. Turley’s address to the USRBC Annual Meeting.

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“… couple of high-level observations about entrepreneurship and innovation.

Through this celebration of entrepreneurship, I have had the luxury of meeting literally hundreds of the best entrepreneurs all around the world and, to be blunt about it, there are a lot of very common characteristics. They are basically the same kind of folks — whether

they are in Russia, whether they are in the United States, whether they are in any country around the world. Almost every one of them starts by not thinking about themselves first. They look outside. This is not about the money for them, they look outside and they see the needs that exist in the world.

Then, unlike many of us, they have a vision to develop a solution, a product, an idea, some kind of service, to meet the need they have seen. They then

The previous panel talked a little bit about the importance of the local market, and yes, it is important to have a local market. However, as innovation gets more and more specific, especially as technology gets very niche-specific, the niches are global. So you cannot in any way bind yourself to the local market. If it was all local-market driven, you would not have seen the suc-

Russia Business Watch Winter 2010-2011

KEYNOTE ADDRESS: James Turley, Chairman and CEO, Ernst & Young

Now, from my perspective, the Russians are trying to build this kind of mindset, this kind of ecosystem to support that mindset in Russia. I have seen lots of places around the world try to do this, lots of societies that want to encourage entrepreneurship and innovation.

There are a few things that I have seen that are really important to making it successful. One thing is, committing yourself to being an open economy.

Nothing discourages innovation and entrepreneurship like something that is closed.

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cess that Israel has seen in its development as an innovation culture. So do not by any stretch think about this as just a domestic market play.

The second important thing is that any society that is going to have the kind of culture that I think Skolkovo wants to have has to make sure that they are not over-penalizing failure. I said earlier that most of these entrepreneurs failed the first time out. The penalization of failure can happen in many different ways. It can come through tax systems that discourage risking and failing; it can come through legal systems that over-penalize failure; it can come through cultures that actually make it better in some places not to have tried than to have tried and failed.

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I think one thing that is going to be interesting, and is sort of a wildcard factor in Skolkovo, is how the inclusion of state ownership affects the issue of not over-penalizing failure. In many places, if, at the end of the day, a government bureaucrat loses his or her job because some of these institutions in which they invested failed, then that is going to be a bad thing.

If there are governmental investigations of what happened, that is going to be a bad thing. When you are here in Silicon Valley, if something does not work, people lose investments and time. Most of the innovators actually pick up, move immediately from the failed project and latch onto a different project…. They just have this ability to go at it again and again and again. I think the involvement of state capital is going to make that a little bit more complex.

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Clearly, you need to have tax systems that support innovation, be that support in research and development or in the formation of capital and how capital gains or losses are treated. You have to have mature financial systems and capital markets and you must streamline regulation. Nothing is more discouraging for an entrepreneur and an innovator than excessive regulation.

If you need too many permits to open a plant, too many permits to get a patent, too many permits to do whatever; the entrepreneurs will just check out.

They do not have the staff or the ability to deal with that….

I guess the last thing I have seen is that in any society that is innovating, you have to bring a real diversity of thought to the table — diversity around gender,

around ethnicity, around nationality, and around religion. Any background you can think of is important because it brings ideas together and makes them better.

I was at a meeting a week ago, in Europe, and we had a Swedish professor speaking to largely Eastern and Western European partner groups. He made a comment that was quite interesting. He was telling a story about how many of the Eastern and Western European partners thought that maybe America had seen its better days. He did not believe that. He noted that most countries are nation-states, but that America is not a nation state. It is an idea. It is an idea built on the Constitution. It is the only place in the world where people from anywhere can go to and become Americans. As a Swede, he went to Finland. He said to a local Fin, ‘How long would it take till I could be viewed as being Finnish?’

The gentleman said, ‘Probably three or four generations.’ He said he went to Japan and asked a Japanese person, ‘How long will it take until I could become Japanese?’ The Japanese man said, ‘Oh, never.’ And so, the reality is that many, many people could come here and become Americans. This professor’s view is that, when you go down to Stanford, Cal or any of these universities, they are like the United Nations. You have people from all different stripes.

The last panel talked about how many people from all different nationalities are right here in Silicon Valley. The real challenge I think a lot of places have is that if you go to their leading universities, for example in Germany, they are mostly Germans, in France, mostly French. Trying to get that diversity of thought is going to be crucial for long-term success.

When I was in Russia this past week I picked up the Herald Tribune, and there was a very interesting op-ed written by Tom Friedman. It was about China, not Russia, but I think it is very relevant to what we are talking about today. It quoted an American CEO as saying, ‘In a world where so many people have access to education and cheap tools of innovation, innovation that happens from the bottom-up tends to be chaotic, but smart. Innovation that happens from the top down tends to be orderly, but dumb…. On balance, the sweet spot for innovation today is moving down, not up. And as such, governments’ job today is to inspire,

liberate, empower, and enable all that stuff coming up from below, while learning to live with and manage the chaos.’

It is a real change in mindset. I am optimistic that a lot of this change is taking place in Russia, having visited the Foreign Investment Advisory Council, visited with Viktor [Vekselberg] many times around Skolkovo, talked about the real commitment for change is taking place and so I am optimistic.” n

KEYNOTE ADDRESS: Mikhail Shvydkoi RF Special Presidential Envoy for International Cultural Cooperation October 21, 2010 •The Fairmont Hotel The following is an exerpted translation of Mr. Shvydkoi’s remarks at the USRBC Annual Meeting.

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“… oday, we have repeatedly heard two very important words — trust and development. I would like to say one very important thing from my point of view. When I was young, I received a diploma as a programmer. I know for certain that there has never been a scientific revolution in history without a union of science and culture. In that sense, if you look at what was happening at the end of the 19th to the beginning of the 20th century, you will be convinced — the scientific revolution was in parallel with, or complementary to, the cultural revolution and the revolution in arts. It is not a coincidence that Albert Einstein said that Dostoevsky’s novels gave him more than all the physicists of his time combined.

I grew up in the period when physics was a cult science, in the 1960s.

Nonetheless, we remember clearly that the 1960s were an explosion of culture and an explosion of new art. I only point this out to say that no development in principle is possible without

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The Annual Meeting Luncheon premiered a short educational film about Fort Ross developed through funding by USRBC member Chevron Corporation to be shown at the Park’s visitor center. The film was introduced at the luncheon by Mr. Jay Pryor, Chevron Corporation’s Vice President for Corporate Business Development.

USRBC member Renova Group’s Fort Ross Foundation signs agreements with the CA Department of Parks and Recreation and the Fort Ross Interpretive Association to cooperate on the continued operation, support and preservation of the Fort Ross State Historic Park.

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Fort Ross Film Presentation and Signing Ceremony

and Ambassador Kislyak — is presenting our culture to each other.

Our nations simply do not know each other well enough, and it is a significant problem for business development.

Without knowledge of the people, no small or medium business will go into another country. They will still be afraid and will not trust each other. That is why we think that, in connection with Fort Ross’s 200th anniversary, it is the perfect time to organize a considerable presentation of Russian culture in America, both here on the West Coast and on the East Coast, as well as a presentation of the American culture in Russia. Believe me, there have been some changes for the best in Russia for Americans. Today, the number of Russians who distrust Americans is significantly smaller than three years ago. In America, though, the number who distrust Russians is the same as before the reset. This is a major problem, because the business climate is, to some extent, a climate of trust. That is why two cross-cultural promotional programs — an American year in Russia and a Russian in America — could be helpful. the development of artistic, cultural life.

If you need creative people, they have to know about art history. It is not a coincidence that there is an excellent History of Visual Arts Department and an excellent Department of Theater at Stanford, where I had the honor to give lectures 20 years ago. The same was true at MIT. Any course at a modern university for people who want to work in development — economists, physicists, chemists, biotechnologists — is impossible without culture. This was the first.

The second is trust. You know, there is an old joke in Russia, about a woman

who stands at an intersection and does not cross the street. The light turns red — she stands still. The light turns yellow — she stands. The light turns green — she still does not move. And this goes on and on for a long time. Finally, a policeman (then they were called militiamen) approaches her and says, ‘Why don’t you cross the street? The light is green!’ She replies, ‘You cannot trust anything!’ I feel like our two peoples are standing at this intersection, looking at the light changing from red to yellow to green, and still do not trust each other.

I think that the easiest way — what we talked about with Ambassador Beyrle

Here in San Francisco, we have a shared symbol and a shared love — Fort Ross.

It is a very important symbol of how Americans and Russians lived together and trusted each other…. This is why I think that, as we share such a sacred place, we can make this effort that would help open our nations’ hearts to each other. You will now see a documentary film made by Chevron. It is also remarkable that an American company gave the money to make a film about a Russian settlement in America. I think it is a good sign….” n

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Russian Ambassador Sergei I. Kislyak (second from right) presents Governor Arnold Schwarzenegger (center) with a gift from Russian President Dmitry Medvedev, as Klaus Kleinfeld (left), U.S. Ambassador John R. Beyrle (second from left) and Ed Verona (right) look on.

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Russia Business Watch Winter 2010-2011

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KEYNOTE ADDRESS: John Watson Chairman and CEO, Chevron Corporation October 21, 2010 •The Fairmont Hotel The following is an excerpt of Mr. Watson’s address to the USRBC Annual Meeting.

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Russia Business Watch Winter 2010-2011

“… he title of this conference, ‘From Silicon Valley to Skolkovo,’ reflects how appropriate it is that we meet here in the San Francisco Bay area. Under the leadership of President Medvedev and Prime Minister Putin, technology, innovation and diversification have become themes for Russia’s economic development. And those are central themes for us in California as well, from the pure technology companies in the Silicon Valley to the state’s largest company, which I have the privilege to lead. In my view, Russia and California are very much poised to ride a very large wave of technology in building a more secure energy future and laying a foundation for sustained economic growth — the two are very much connected.

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Let’s set the context for that by understanding where we are today. U.S.Russia relations have a long and distinguished history, and they reach back to the early days of California…. The Russian-American Company established Russia’s southernmost settlement at Fort Ross in 1812, and we look forward to celebrating that 200th anniversary just two years from now….

Fort Ross never heard a shot in anger; in fact, it was a focal point for cooperation among Russian and American settlers and the local population. Today, that spirit of cooperation and collaboration characterize Chevron’s energy partnerships with Russia, and the broader partnerships between our two countries. In the energy sector, we have had a long partnership with Transneft in expanding the Caspian pipeline consortium, and we recently signed an agreement to partner with Rosneft to explore a deepwater opportunity in the Russian Black Sea. More broadly, U.S.-Russia partnerships include a wide range of economic initiatives, including energy, trade and investment, which are supported increasingly by the Bilateral Presidential Commission.

Both Presidents have made a commitment to resolve outstanding roadblocks to Russia’s accession to the World Trade Organization, and on September 30, both countries announced that major bilateral issues had been addressed.

President Obama confirmed to President Medvedev full U.S. support for Russia’s accession, and now Russia moves to the final multilateral negotiating phase in Geneva. As Co-Chair of a U.S.-Russia Working Group of CEOs supporting this effort, my partner, Alexei Mordashev, and I certainly welcome this development. We will now work with our fellow CEOs, Klaus Kleinfeld, the U.S.-Russia Business Council, the Russian Union of Industrialists and Entrepreneurs, and the American Chamber of Commerce in Russia, to support, at long last, WTO accession and permanent normal trade relations between our two countries.

The support for Russia reflects promising growth of partnerships between our two countries in business and diplomacy and increasingly in energy and technology development. As we look to the future, we should explore the powerful role that technology can play not just in developing energy, but also in advancing broader economies.

At Chevron, we know the importance that technology represents to the energy sector and to our energy partners in Russia. At the recent Rosneft signing ceremony in Moscow I was pleased that Prime Minister Putin and Rosneft’s Chairman, Deputy Prime Minister Sechin, highlighted Chevron’s technology and environmental record as reasons for choosing us as partners in the Black Sea development.

Despite the fact that most people see Chevron as an oil company, you can just as well say we are a technology company that produces energy…. Chevron is currently investing more than $21 billion a year in our major projects around the world, and technology is a critical component in advancing those projects.

We estimate the technology component

From left to right: James Turley, Karl Johansson, Alexander Ivlev and Alexander Levchenko of Ernst & Young; Diana Sedney, Chevron Corporation; Daniel Schein, S.P.P. Management Inc.; and C. Cato Ealy, International Paper Company

“In my view, Russia and the U.S. are natural partners in this effort going forward. From Silicon Valley to Skolkovo and beyond, the two countries can only gain from stronger energy partnerships in oil and gas, in efficiency, in clean coal, and advanced biofuels. ” alone is about $5 billion a year. The scale of our investment is immense, and so is the challenge of meeting the world’s energy demands. The International Energy Agency (IEA) forecast that global energy demand will rise 30 to 40 percent between now and 2030, and that is going to be driven by both population growth and, importantly, rising living standards around the world. To meet this projected growth, all sources of energy are going to be needed: oil, gas, coal, nuclear, and renewables.

There is not one solution, we are going to need all of these things to meet that demand and raise living standards. But fossil fuels, even under the most optimistic scenarios around the advancements of biofuels and other forms of renewables, will still count for almost 70 percent of global energy demand in 2030, according to IEA. To meet this demand, our industry is developing and applying new technology to find, develop and process oil and natural gas.

At Chevron, advances in technology have allowed us to compile one of the industry’s best exploration and

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From well development to gas liquefaction, to carbon storage and environmental management, technology is enabling virtually every aspect of the Gorgon project. Gorgon is an example of the kind of project we are looking forward to developing with our Russian partners, and it has some similar characteristics: world scale, reliable, responsible production utilizing the very best technology we can deliver. Interestingly enough, the Gorgon project operates in a nature reserve in Australia, and it continues to operate there with this big expansion because of the stewardship that we have exhibited there. So, technological innovation that we have witnessed over the past 50 years can have a huge impact on a broader economy by enabling efficiency, productivity and business growth.

At its best, technology spawns and generates whole new industries, as we have seen with personal computers and biotechnology. It can also help businesses and industries operate more efficiently, particularly in the use of energy….

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deepwater projects around the world rely upon an array of advanced technology to operate efficiently, safely and reliably.

At the same time, we are exploring the development of sustainable secondgeneration biofuels, partnering with a number of research institutions and innovative venture capital start-ups.

Wherever we operate, we are applying technology to operate more safely and reliably along the way, and advanced technologies combined with world class processes and a strong safety culture is very much critical as a component of those safe and reliable operations.

One of the best examples of integrated technology that I can share with you is the Gorgon project, a natural gas development off the Northwest coast of Australia. Gorgon represents a combined capital investment in the range of $37 billion. It is by far the largest capital project in Chevron’s history. Gorgon will create tens of thousands of jobs for Australians and others, and generate a long-term supply of low-carbon natural

Russia Business Watch Winter 2010-2011

production records in some of the most remote and challenging environments that we can find anywhere on Earth. The three-dimensional seismic data, for example, or high-performance computing technology and mathematical algorithms that we employ allow us to generate images of the subsurface more clearly and quickly despite reservoir depths that are several miles down. Digital sensing and processing technologies allow us to monitor the subsurface reservoir conditions in real time and guide the most accurate and mechanically complex wells that we’ve ever drilled. Our other leading technologies include the steam-flood process that we apply to heavy oil production. Steam-flooding is an enhanced oil technology, and it’s enabled us to have continued production in fields like those that I described in Southern California since the early 1900s….

Today we are testing advanced solar technology that generates the steam we use to produce that same heavy oil.

So we continue to advance right here in California with our technology. Our

Following President Medvedev’s vision for innovating, modernizing and diversifying the Russian economy, Russia is also moving to develop and apply technology in a very comprehensive manner. It is embarking on an ambitious project, which has been discussed widely at this conference, to create its own Silicon Valley near Moscow, at Skolkovo. Russia has enormous historical strength in science and technology, from mathematics to physics and engineering. We see that every day with our Russian partners and with our Russian employees in Moscow and elsewhere.

The United States has, of course, similar strengths, and we have learned how to apply these strengths effectively in business and in our economy. In my view, Russia and the U.S. are natural partners in this effort going forward.

From Silicon Valley to Skolkovo and beyond, the two countries can only gain from stronger energy partnerships in oil and gas, in efficiency, in clean coal, and advanced biofuels. At Chevron, we look forward to deepening our partnership with Russia. We all have a very strong stake in our mutual success.

Our economy needs it, the Russian economy needs it, and we look forward to ushering in new innovation, collaboration and partnership between Russia and the United States. Thank you for listening.” n

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gas for decades, primarily meeting Asian demand.

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KEYNOTE ADDRESS: Mikhail Margelov Chairman, International Affairs Committee Federation Council of the Russian Federation

ago, which is chaired by Senator Ben Nelson of Nebraska and myself. I think it is a unique mechanism, which allows us…to lock the doors, to roll up our sleeves, and to start discussing issues before they arise as problems in our bilateral relations. I would just like to mention one thing in order to illustrate

October 21, 2010 •The Fairmont Hotel The following is an excerpt of Senator Margelov’s remarks to the USRBC Annual Meeting.

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Russia Business Watch Winter 2010-2011

“… should say that I was pleasantly surprised by the spirit and the general atmosphere of this year’s U.S.-Russia Business Council Annual Meeting…. In my mind, it means that we have really started the ‘reset’. It is not just a nice word or a nice idea. It is the day-by-day work that is going on successfully. What is important for us, as legislators, is to create a solid legal basis for this reset.

There is an enormous amount of work to be done by both the U.S. Congress and the Russian Federal Assembly. We have a lot of work to do together.

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First, is the ratification of the New START Treaty. The two Presidents, Obama and Medvedev, agreed that the ratification will go on simultaneously. It is not easy to do it simultaneously, because the procedures are different. On Capitol Hill, you do it in the Senate; in the Russian Federal Assembly, you do it in both Houses — the Duma and the Federation Council. But, we are trying to do it in parallel. The unique part of the work, which we are doing together, is that, for the first time, we started pre-ratification consultations on Capitol Hill and in Moscow, and we hosted high-ranking Pentagon and State Department delegations in Moscow, which took part in the hearings in the Russian Duma and in the Russian Federation Council. Our experts visited Washington, and also worked very closely with our colleagues in the U.S. Senate.

I want to be optimistic. Dana [Rohrabacher] will probably tell more about domestic political issues here in the U.S., but I think that, irrespective of any results of the mid-term elections, the U.S. Senate will be able to ratify the treaty.

My firm belief is that any security issues have to be issues of national consensus, but not issues of political debate. …Ed Verona mentioned correctly all the dinosaurs of the political ‘Jurassic Park’

of the past, which we still have as topics of our bilateral relations. One of them is the famous Jackson–Vanik Amendment. The younger generation does not remember what it was all about. It was all about freedom of Jewish emigration from the Soviet Union to the other parts of the world. The Soviet Union does not exist anymore, the Cold War is over, the Berlin Wall fell 21 years ago, but the Jackson–Vanik Amendment is still in place. I think it will be interesting if I just give you some facts and figures, which, to my mind, are important to know.

The Jewish emigration fee that was introduced by the Soviet government in August 1972 was abolished in May 1991.

Jackson–Vanik is still here. Today, emigrants from Russia total 20 percent of all of those who arrive in Israel for permanent residence. Jackson–Vanik is still here…. I would like to add that Russia and Israel have a visa-free regime today, and more than 1000 Israeli citizens currently live and work in the Russian Federation. But Jackson–Vanik is still here. …I think it is important to mention Jackson–Vanik today because Russia and the United States have successfully concluded bilateral negotiations on Russia’s WTO accession. And after Russia’s accession — and I think it will happen successfully in 2011 — this will become an American problem, because American businessmen will have difficulty doing business with Russian companies. I should say that I highly appreciate the work that is being done by the Coalition for U.S.-Russia Trade and the U.S.-Russia Business Council headed

by Randi Levinas and Ed Verona respectively, which try to educate American legislators about this problem.…. It is important that we, as legislators, discuss all these issues.

The main instrument that we use in our work with the U.S. Senate is a Permanent Working Group, established seven years

this point. In August 2008, when the tragic events in the South Caucasus took place, Ben Nelson called me on my mobile phone and asked my opinion on what was happening in Georgia. It is really important that we have a unique opportunity to call each other, to write emails to each other and to communicate directly.

It is also important that we do not limit our work only to contacts between the Federation Council and the Senate, and to contacts between the Duma and the House of Representatives. I think that our friendship with Dana Rohrabacher, which has lasted for about 10 years, shows that we also are accustomed to cross-chamber communications.

We have really managed to establish an excellent working relationship between our two parliaments. Even during the days when bilateral relations were not in good shape, we were talking to each other and we were exchanging views. Thank you.”

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Annual Meeting Rep. Rohrabacher (l.) toasts with Senator Margelov (r.).

“The following is an excerpt of Rep. Rohrabacher’s address to the USRBC Annual Meeting.

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… hat did I do before I was elected to Congress? I did everything I could to defeat the Soviet Union, that is what I did. I was one of the few members of Congress who personally engaged with Soviet troops during the Cold War…, and I am going to tell you right now, the Cold War is over. Either Russia is going to be

our best friend, or we are going to lose the future. That is the bottom line of it. The Russians have made enormous changes in their society, and some people continue to treat the Russian people as if they were still being governed by Soviet Communism. That mindset is going to destroy our future unless we move forward. …Russia and the United States have to be friends, or neither of us will be

prosperous, and neither of us will be secure. I am here to tell you, one of the biggest problems we have to overcome in our society, if we are to create the world that will be beneficial for all of us, is to get over the Cold War. There are many of my right-wing friends who cannot get over the fact that Russia has every right to be concerned with the countries that are around it, just as we have every right to be concerned with what is going on in Latin America. Many of my right-wing friends continue to use the most ominous, horrible descriptions of anything that Russia is doing, because they themselves have achieved their personal status during the Cold War. We have got to get over that hurdle. Most of these people are my friends, and I have to be really frank with them, and what I tell you right now is what I tell them. …Now, how do we get Russia on our side? We have got to make sure that we treat the Russian people fairly. Since the fall of Communism, I do not believe that

Russia Business Watch Winter 2010-2011

KEYNOTE ADDRESS: Rep. Dana Rohrabacher (R – CA), Member, Foreign Affairs Committee; Ranking Member, Subcommittee on International Organizations, Human Rights and Oversight, U.S. House of Representatives

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the Unites States has treated the Russian people fairly. It is up to us, as Americans, as patriots, to make sure that we are treating the Russian people in a way that is honest, that will, indeed, prove to them that they should have an alliance of friendship with the United States.

aimed at the United States, at thwarting the United States, is wasted money. If we are going to succeed, if we are going to meet today’s global challenges…, we have got to make this clear to the American people. So I am very proud to stand here with you.

The Jackson–Vanik Amendment should have been eliminated years ago. It should be our embarrassment that we have not cleared that away yet. Every cent that we spend on military procurements aimed at thwarting Russia is wasted money. Every cent that they spend

…Look what happened after the fall of Communism. The Russian people went through a horrendous dislocation. We need to be sympathetic to that. We need to make sure that Russia obeys the rules of the game, they prosper and we prosper. There are some issues that we need

to address…. It is time for us now to make sure that we open our markets, so that our business people can have mutually beneficial investments and partnerships. That will be so beneficial for both of our countries. That is the challenge we have. What is getting in the way are some of my own Republican friends who cannot understand that the Cold War is over and the Russians need to be our best friends instead of being considered our enemies. That is what I am all about, that is what you are all about, and I am very proud to stand here with you….” n

PANEL: The Outlook for Russia and its Place in the Global Economy Moderator:

Charles Ryan Chairman UFG Asset Management

Panelists:

Evgeny Gavrilenkov Chief Economist Troika Dialog Group Vladimir Milov President Institute for Energy Policy Alexander Novak Deputy Minister of Finance of the Russian Federation

Russia Business Watch Winter 2010-2011

Alexander Torshin First Deputy Chairman RF Federation Council

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The

first panel session of the day, moderated by Charles Ryan, Chairman of UFG Asset Management and member of the USRBC Board of Directors, discussed the outlook for Russia’s economy and the country’s integration into the international economy.

Evgeny Gavrilenkov began by noting that Russia is positioned quite well for growth. When the prospects for the Russian economy seemed gloomy 18 months ago, Troika Dialog forecast 5 percent growth for 2010, which seems easily achievable now, especially if policies become more investor-friendly. Mr. Gavrilenkov mentioned several positive developments in the Russian economy this year, including decelerated inflation,

From left to right: Alexander Torshin, Charles Ryan, Evgeny Gavrilenkov, Vladimir Milov, and Alexander Novak

reduced borrowing costs and a diversified platform for economic growth.

However, there has been an upturn in inflation since August 2010, and the future trend depends on government policy. Mr. Gavrilenkov expressed his belief that Russia is poised for growth, but that some constraints exist as a result of suboptimal economic policies.

Mr. Gavrilenkov noted that he did not view the eight percent economic contraction in 2009 as worrisome because it came somewhat naturally after a period of overheated growth, characterized by easy money, generous capital inflows and the worldwide oil crisis that helped inflate domestic demand in the country.

However, the crisis in Russia was very

short-lived; it only lasted several months and reached its bottom in the first quarter of 2009. Since then, the Russian economy has enjoyed steady recovery.

Mr. Gavrilenkov emphasized that five percent is a reasonable growth rate for the future, provided that policies are reasonable. He noted that Russia’s nominal GDP (in dollar terms) correlates with the oil price, which means that GDP deflates when the oil price goes down.

However, in principle, Russia’s economy can grow at any oil price. Throughout the last decade, Russia’s annual economic growth was approximately seven percent irrespective of world oil prices; rising oil price and expanding foreign borrowing have not automatically

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resulted in accelerated economic growth for Russia. Other factors contribute to Russia’s economic growth, particularly exchange rate and economic policies.

Foreign debt is another important concept, and Russia’s foreign debt has been rapidly rising since 2005-06, encouraged by the Central Bank policy of deliberate appreciation of the currency in order to curb inflation. In 2005-06, Russia’s economy received massive capital inflows, which did not steeply accelerate economic growth but helped to maintain the stable rate of GDP growth and helped inflate domestic demand.

Now, Mr. Gavrilenkov said, Russia is trying to find ways for more balanced and moderate growth without “overheating” the economy.

Russia’s position in the world economy is quite favorable, but there are risks.

From left to right: Charles Ryan and Evgeny Gavrilenkov

Russia is truly poised for growth, but the problem is on the fiscal side, Mr. Gavrilenkov reiterated. He noted that the Russian government’s amendments to the 2011-12 budget have been disappointing, as the level of spending has been raised instead of being contained. The economy was doing quite well since 1999, but the government’s attempts to over-stimulate it were inflationary as public consumption shrank in real terms. Moreover, future government contributions are unlikely to be effective, because the returns will keep diminishing. Due to increased expenditures, the break even oil price climbed close to $100/bbl this year, which is a dangerous level, Mr. Gavrilenkov said.

He added that the continued increase in spending, planned by the Finance Ministry, is likely to complicate the situation further, making it harder to contain inflation and finance the deficit over the medium term. Mr. Gavrilenkov argued that current government fiscal policy is unsustainable, especially considering the plan to finance the deficit by net domestic borrowing. However, this does not present a serious challenge for Russia’s near-term economic growth, which can easily reach 4-5 percent, Mr. Gavrilenkov concluded.

Vladimir Milov presented a somewhat less optimistic view of the Russian economy, arguing that a serious realitycheck is needed for the government’s strategy. Mr. Milov argued that, contrary to the view that the Russian economy is undergoing a “U-turn” from a raw materials-based to a more innovation-based one, the Russian economy is instead making a very different turn. For the first time in a decade, there will be a significant increase in taxes, mostly imposed on small and medium-sized innovative businesses. The necessity for these taxes is dictated by the need to close the gaps in the pension system, which were produced by the failure of pension reform, Mr. Milov argued. The burden of the tax falls primarily on labor-intensive industries, such as the innovative industry, whereas the tax will be hardly visible in the raw-materials industry.

Mr. Milov expressed his doubt that such a strategy represents a true desire to stimulate innovative businesses. He compared the Skolkovo project to the previous governmental attempts to support innovation, and mentioned the

Government Investment Fund, special economic zones and techno-parks as examples of governmental projects to help businesses that never truly came to life. Mr. Milov also noted that the phrase “investment climate” is being used less and less often by government officials, and that this concept seems to have disappeared from the government’s agenda.

Russia differs from its BRIC counterparts because its growth in 2005-08 was largely based on cheap international credit, whereas in other BRIC countries money came from direct investments.

However, Russia can no longer rely on cheap international credit to stimulate its economy, Mr. Milov argued, expressing his doubt that the Russian government has alternative strategies for development. Unfavorable investment policies, the absence of an independent judiciary, the lack of intellectual property rights protection, and other problems further complicate the situation. Mr. Milov acknowledged that Russia is at a very important crossroads, but he argued that moving in the right direction might mean reversing recent economic policies in order to stimulate private investment and increase the economy’s efficiency.

Mr. Milov discussed the issue of Russia’s WTO accession, noting that Russia has lost over a decade in fruitless negotiations on secondary issues. He pointed out that one of the most important issues, repeal of the Jackson–Vanik amendment, has to be resolved by the American side. Russia needs to be removed from the Jackson–Vanik amendment, and those who oppose it in the United States need to remember that their opposition does not help Russia move forward, Mr. Milov argued.

Russia needs to stimulate private investment and to promote greater labor productivity in order to increase the efficiency of its economy and to ensure the sustainability of its economic growth, Mr. Milov concluded.

Alexander Novak spoke about the correlation between the Russian economy and oil prices, noting that Russia’s 2011 budget was developed in anticipation of an oil price of $109 per barrel, whereas current estimates set the price at approximately $80 per barrel. This means that Russia will need large amounts of investment to close the gap. Basic capital investments in Russia amount to 20 percent of GDP, whereas the necessary investment in basic capital in order to modernize the economy is 30 percent,

Russia Business Watch Winter 2010-2011

According to Mr. Gavrilenkov, one of the main risks for Russia comes from China.

The Chinese economy will not be able to continue grow by 9-10 percent annually.

Inefficient investments among the former Soviet countries in the 1960s–1980s were one of the macroeconomic reasons for the collapse of the Soviet Union, and many other countries, including China, are making similar mistakes today. He hypothesized that China might follow in the footsteps of South Korea, which went from 10 percent growth to a more natural 3-4 percent growth after the 19971998 crisis. While such a major crisis in the Chinese economy is difficult to predict, the deceleration of China’s growth to approximately 4-5 percent seems almost certain, Mr. Gavrilenkov noted,

pointing out the effect of such deceleration for world prices and the possible negative effect of this for Russia.

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governmental development policies and private investments in the development of the institutional environment, Mr. Novak predicted. He also noted that the Russian government plans to reduce the budget deficit by half in 2013 as compared to 2009 (when the budget deficit amounted to 5.9 percent of GDP), and to achieve a deficit-free budget by 2015 by using the funds of the Federal Reserve Fund, as well as borrowing and privatization sales. Mr. Novak mentioned that by 2013, the volume of Russia’s external debt will amount to 18 percent of GDP, compared to 8.3 percent in 2009 and an estimated 11 percent in 2011.

From left to right: Vladimir Milov, Alexander Novak and Alexander Torshin

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Mr. Novak observed. He cited a survey by the Higher School of Economics that noted that only 38 percent of enterprises possess equipment less than 10 years of age, while the remaining companies have equipment that is older than 10 and sometimes 20 years. The solution to this problem, Mr. Novak pointed out, is not only in renewing the equipment stock, but also in developing and implementing innovative technologies.

Russia Business Watch Winter 2010-2011

Only one percent of GDP is being invested in research and development in Russia, which is 2-3 times less than in other developed countries, where 2 to 3.5 percent of GDP is invested in R&D. Moreover, only one-third of this investment comes from Russia’s private sector, with the remaining two-thirds financed by the government. It is a major challenge for the Russian government to stimulate private sector investments in R&D, including projects such as Skolkovo.

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Speaking about the current state of the Russian economy, Mr. Novak pointed out that it has recovered more than half of the decline as a result of the government’s anti-crisis measures. It is now estimated that the economy will grow by four percent in 2010, based on consumer demand, increased income of the population and increased consumer lending. On the other hand, the main factors contributing to investment growth were oil and gas companies, underscoring the lack of diversification of the Russian economy.

Recovery from the current economic downturn is slower than that of the

1998 financial crisis, but it is important that growth be balanced rather than fast.

The recent financial crisis and unprecedented measures that were taken by many developed countries to overcome it have negatively affected the economies of these countries. The developed countries’ ability to solve the problems of state debt and budget deficits is also weakened by the overall “aging” of their populations. If serious measures are not taken, within a decade the ratio of state debt to GDP may exceed 300 percent in Japan, 200 percent in Great Britain, and 150 percent in the U.S., Germany, France, and Italy. He added that developing countries, while less burdened by state debt, may be hurt by increased interest rates and reduced amounts of credit and assistance from developed countries. Mr. Novak argued that the current priority should be to ensure global growth along with balanced budget consolidation in developed countries aimed at stabilizing the global financial system and improving conditions for competition.

Mr. Novak noted that in Russia, recovery of investment activity has slowed down in 2010. Internal demand is still growing, but inconsistently: in JanuaryAugust, investments grew by only 2.8 percent compared to the same period in 2009. Inflow of foreign direct investment is still low, and increased consumer demand is currently the main driver of Russia’s economic growth. Russia will not return to its pre-crisis levels of seven percent growth in the near term; for the next several years, the Russian economy will grow by approximately four percent, driven mainly by external factors,

In conclusion, Mr. Novak pointed out that Russia’s economic situation is more stable than that of many developed countries. He noted several positive developments in Russia’s banking system, low level of external debt, high quality workforce, and growing consumer demand. These factors, along with modernization-oriented policies, will contribute to Russia’s continued economic growth, improved investment climate, and will bring Russia closer to developed countries over the next 10-15 years.

Alexander Torshin spoke about the importance of the legislative framework of the concepts that other panelists had discussed. He noted that, given the political weight possessed by the United Russia party in the Russian parliament, laws can be passed very quickly, which contributes to the feeling of optimism among legislators. At the same time, it often produces laws that are not sufficiently thought through. Aside from the complicated nature of the Russian legal process, which includes legislative assemblies in 83 regions, Mr. Torshin estimated that the Federal Assembly must amend more than 115 federal laws.

With regard to innovation, Mr. Torshin noted that the problem is not the lack of funds, but rather the lack of demand for innovative products. He also noted the importance of intellectual assistance from other countries in efforts to reform the Russian legal system; currently, many fundamental concepts, such as innovation, are not adequately defined in the Russian legal system. In conclusion, Mr. Torshin called for some faith in Russia and its modernization and innovation efforts. n

Annual Meeting

Moderator:

Dorothy Dwoskin Senior Director for Global Trade Policy and Strategy Microsoft Corporation

Panelists:

Mike Gann Senior Director for Global Healthcare Intel Corporation Victoria Anashkina General Manager Amgen Russia John Steele Director for International Government Affairs Eli Lilly and Company

From left to right: Victoria Anashkina, Mike Gann, Nikolai Savchuk, and John Steele

Nikolai Savchuk President and CEO ChemDiv Inc.

PANEL: Innovation in Healthcare Technology Dorothy Dwoskin began the discussion

by pointing out that the topic of the panel allows the participants to explore the many crosswalks that exist between different industry sectors and their engagement in innovation and the IT sector. She pointed out that most people do not see IT as a factor in improving health care prevention or helping solve big medical problems, while in reality the opportunities for IT to contribute to these areas are great.

He then described Intel’s basic vision of healthcare as the “shift-left” approach: aiming to keep patients in hospitals for as short a time as possible and enabling

Mr. Gann underlined Intel’s commitment to open standards and interoperability and pointed out that there is a great opportunity for creating a public policy agenda in Russia that would push for removing barriers to the use of technology in healthcare. He also noted Intel’s desire to work locally, learn from best practices and to empower patients.

Victoria Anashkina focused on the importance of innovation for health care and pharmaceutical production. She said that innovation can have a direct impact on the quality and length of patients’ lives, as well as on disease treatment methods. In this context, Ms. Anashkina said that Russia has a significant gap to fill in updating and improving the quality

of treatment available, but she emphasized that innovation can contribute to both of these goals.

Greater integration of technology in the healthcare industry can help improve both the quality and success rates in healthcare. These would, in turn, bring economic benefits greatly exceeding the costs of investing in new technology. Ms. Anashkina described the Russian healthcare system as still influenced by the Soviet legacy of excessive preoccupation with health care processes, as opposed to results. She said that the system needs to shift its focus to outcomes and greater competition in the provision of services — both areas to which technology can contribute.

Russia Business Watch Winter 2010-2011

Mike Gann began his address by pointing out that Intel is typically not perceived as a company that engages in healthcare solutions, while in reality it is deeply involved in the healthcare industry. He identified what he considered the three main problems for Russian healthcare: an aging demographic (with 14-15 percent of the population over the age of 65); a shortage of healthcare workers (due to the emigration of specialists), as well as the rising cost of healthcare. While healthcare costs in Russia are not among the highest in the world, they still take up four to five percent of the country’s GDP. Mr. Gann concluded that there is an opportunity and a need for Russia to develop a new healthcare model.

them, their families and their caregivers to have more control over their treatment.

This approach has a number of advantages — it reduces the cost of health care (both to patients and to the government), as well as improves the patients’ quality of life. Mr. Gann pointed out that there is a lot that technology can do to help patients remain relatively autonomous and to receive treatment in their home.

He noted that Intel has been working on this issue since 1999 and has developed a number of products in this direction.

The company has even formed a separate joint venture focused on healthcare together with GE Healthcare.

Ms. Anashkina then focused specifically on the development of biotechnology in Russia. She pointed out that biotechnology is one of the leading spheres in pharmaceutical development and that Russia should try to learn from other countries that have already developed a strong biotechnology industry. She listed several factors that would contribute to the successful development of this industry in Russia.

First, she emphasized the importance of strong government support for science.

In the case of Russia, the government has demonstrated an appreciation for

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Program” and has invested in early-stage innovation both in Russia and abroad.

Another ChemDiv initiative together with the Russian government has been the establishment of an innovation company focusing on HIV treatment, as well as a public-private partnership with Novartis on developing collaboration in TB treatment research.

From left to right: Dorothy Dwoskin and Victoria Anashkina

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the importance of science, but it remains unclear how this commitment will be realized in practical terms.

Secondly, she noted the need for effective collaboration between industry members and academic institutions to allow for technology transfers and the commercialization of technology breakthroughs.

While Russia has started working in this direction, it has no experience in it and has, as of now, achieved minimal success in this area.

Third, Ms. Anashkina listed the need for a fast and transparent regulatory system to ensure success in its healthcare objectives. While she recognized that Russia has taken some steps in this direction, much remains to be done.

Russia Business Watch Winter 2010-2011

Finally, she listed both the size of the market, as well as its level of openness and transparency, as key factors in ensuring success in developing a biotechnology industry in Russia. Awarding innovation and developing clear and transparent rules can contribute to achieving this goal.

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Creating a biotechnology industry in Russia would also require that Russia foster partnerships between domestic and international private businesses together with the government. In particular, Ms. Anashkina commented on Russia’s goal to have domestic pharmaceutical companies hold 50 percent of the country’s overall pharmaceutical market by 2020 (the “Pharma 2020 Program”). She estimated this objective as a challenging one and argued that Russia can only achieve it in collaboration with Western partners.

John Steele took a more global perspective on the issue and pointed out that every emerging market economy is try-

ing to grow its life science sector. This increases competition for investment funding and makes it even more important for countries to introduce the right kinds of policies to foster innovation. Mr. Steele underlined the immense opportunities Russia has in the sphere of healthcare and pharmaceutical production, including in research and development, as well as in conducting clinical trials.

He then described Russia’s two options in moving forward. One is developing along a protectionist, import-substitution path; an approach he predicted would be unsuccessful. The other he described as the best model Russia can adopt in order to grow its pharmaceutical sector — creating an open investment environment where foreign innovation companies, local innovation firms and local generics producers are working together.

He argued that the second model would allow Russia to achieve its life science goals faster than any other approach.

Mr. Steele pointed out Eli Lilly’s investments of over $65 million in clinical trials in Russia as an example of a successful strategy for cooperation. Eli Lilly’s investment in Russia helps build infrastructure and capacity in the country while giving patients early access to new technologies. The attractiveness of this approach for foreign companies, according to Mr. Steele, lies in the sharing of risk with foreign partners. This is where cooperation with Russia may be most beneficial to both sides.

Nikolai Savchuk pointed to one of ChemDiv’s subsidiaries, Chemrar, as an example of the forms this type of cooperation between Western and local companies can take. Chemrar, an innovative business incubator company, was contracted by the Russian government for the execution of the “Pharma 2020

Mr. Savchuk added that ChemDiv is also working with Russia on developing new drug abuse therapies, as well as cooperating with the Russian Venture Company.

He noted that there is funding available for these types of initiatives and partnerships in helping to develop a domestic supply of innovation. This can best be done through successful collaboration with Western companies, which can provide management, funding and expertise to increase a project’s viability.

Mr. Savchuk said that since Russia still lacks a real biotechnology and big pharmaceutical industry, the process of creating those would take some time.

He added that Russia would have to start by first establishing pharmaceutical manufacturing, and then moving on to developing an innovative pharmaceutical industry. Finally, he noted that many Western companies are involved in supporting Russia’s goal and that the competition among them is relatively limited given the low saturation of the market.

Question & Answer Session Ms. Dwoskin pointed out that one other success factor had not been mentioned, likely because of its fundamental importance and thus self-explanatory nature — that of intellectual property rights protection. However, she also said that identifying all other factors for success helps move the focus away from intellectual property rights protection and on to a productive discussion of partnership and collaboration opportunities.

Ms. Dwoskin also brought up the point that Russia needs to strike a careful balance between setting up production targets and quotas and creating an open market, without developing an “imitative” economy or favoring national champions over foreign investors similar to China.

She emphasized that one of the main factors making the Russian market more open would be improved transparency and due process, as well as non-discriminatory treatment of foreigners.

Mr. Savchuk said that the pure pharmaceutical risk in Russia is the same as in any other country, including in the U.S.

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As for Russia-specific risks, he noted intellectual property rights protection as the most important, but added that Russia has adopted good laws and regulations, but falls short in implementing them. However, he expressed a conviction that through trial and error and the accumulation of administrative experience, Russia would apply these laws more successfully over time.

Mr.Gann disagreed with Mr. Savchuk on his last point, and said that Russia’s overall IP environment is very stable. He used the opportunity to congratulate Russia on passing the data exclusivity law and said that the law would likely help the country attract more foreign investment.

He mentioned that, as chairman of APEC in 2012, Russia has participated in an APEC task force study on growing life science markets. This task force has come up with a check list of innovationenablers that Russia may be able to use

as a helpful benchmark in developing its pharmaceutical industry.

In response to a question as to whether the necessary sales channels for selling new pharmaceutical technologies exist in Russia today, Ms. Anashkina answered that, while not yet optimal or sufficient, such channels are present in Russia.

She said that, while some imperfections — such as an overabundance of middlemen and sometimes unjustifiably high prices — persist, the development of proper sales channels takes time and has generally shown strong progress given Russia’s starting point. Moreover, she added that, because of the growing government participation in the pharmaceutical market, the size of the market is expected to grow several times over the course of the next five years.

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can focus on and offer solutions for to the Russian government, Mr. Savchuk listed areas such as cancer treatment, regenerative medicines, cardiovascular and metabolic diseases, as well as drug abuse issues. He said these are all spheres in which there is demand in Russia and innovative pharmaceuticals for their treatment would be popular.

Mr. Steele added that another acute need in Russia is that of extending healthcare beyond the hospital and allowing patients to receive treatment at home.

He also mentioned the development of a national health record as a key step in improving Russian healthcare.

Ms. Dwoskin noted that such a national health record could also help cut costs in hospitals. n

In response to a question about what areas Western pharmaceutical companies

PANEL: Supporting Entrepreneurship in Russia Moderator:

Peter Loukianoff Managing Partner Almaz Capital Partners

Panelists:

Igor Agamirzian Chairman and CEO Russian Venture Company Bo Parker Managing Director Center for Technology and Innovation PricewaterhouseCoopers

Boris Titov Chairman Delovaya Rossiya

Peter Loukianoff began the panel with

a brief discussion of Russia’s next phases in innovation development. He then posed a general question: what has changed in Russia that will make proposed innovations actually come to fruition this time?

Igor Agamirzian was the first to respond, saying that Russia still did not

Russia Business Watch Winter 2010-2011

Roman Simonov Venture Partner Siguler Guff & Company

Counterclockwise from top left: Peter Loukianoff, Igor Agamirzian, Roman Simonov and Boris Titov, Bo Parker

see the entrepreneur as a central figure in the economy, instead focusing on industry’s tangible assets and production capabilities.

The entrepreneur integrates the two forms of capital important to knowledge-based economies: traditional (financial) and human.

Russians are inherently entrepreneurial, as evidenced by the immense opportunities utilized in the 1990s after

the collapse of Communism. Of the IT companies started at that time, he pointed out that the majority of the top companies remain the industry leaders 17 years later. As to what had allowed such companies to get a hold on the market, Mr. Agamirzian identified the new opportunities available, the lack of government regulation, and beneficial economic conditions at the time as

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playing a major role in facilitating business development. These conditions, though, have changed into a more challenging environment, with more administrative regulations and barriers to entering the market.

Bo Parker continued the discussion by noting that, rather than looking for big stars to create a new high-tech innovation center in Russia, a network of cooperative business ventures that team up with innovators is a key to supporting entrepreneurship. Promoting “intrapreneurship” within companies, according to Mr. Parker, is the best way to solve the problems facing Russian business.

As for business development, Mr. Parker noted that many Russian startups do not do business in Russia. He identified 119 laws in Russia that need to be changed to create a more welcoming environment and to promote innovation within Russia’s businesses. A Russian “intrapreneurial” revolution could start through changes to management and the introduction of benchmarks.

Russia Business Watch Winter 2010-2011

Mr. Loukianoff then turned the conversation to the recent Delovaya Rossiya delegation trip to Silicon Valley [see page 19] and the competitiveness of Russian entrepreneurship, particularly in relation to China.

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As Chairman of Delovaya Rossiya, Boris Titov shared his unique perspective on entrepreneurship in Russia. He argued that Russia has an advantage by having so many raw materials and that the country is more capable of dealing with domestic problems thanks in part to exports. Despite the reliance on these resources, Mr. Titov observed that entrepreneurship was in Russians’ blood, which he supported with figures showing Russia’s ability to manufacture in the face of low prices on raw materials. Centralization, he said, has been a direct result of efforts to solve the current financial crisis.

Mr. Loukianoff next steered the conversation to the corporate level and Russia’s potential to become an entrepreneurial powerhouse.

Roman Simonov noted that, despite there being many entrepreneurs in Russia, the country lacks a culture of entrepreneurship. The lack of debt and equity financing inhibits business development in Russia, but access to capital and government support has helped companies invest. Things are changing though, and Mr. Simonov pointed to the increasing number of success stories

in the domestic market and entrepreneurs who are no longer afraid to step into the limelight. Even though there is no list or public appreciation of prominent startups, small Russian companies know that they can receive support for their endeavors.

Mr. Loukianoff agreed that the culture had changed and that entrepreneurs were more visible in today’s Russia. He also pointed to Cisco’s use of incentives to promote innovation and entrepreneurship as a sign of change, although a general appreciation of Russia’s potential for venture capitalists and entrepreneurs alike still needs to grow.

Mr. Agamirzian mentioned the success story of Russian Navigation Technologies, which he called the first case of a full venture capital investment cycle in Russia. Started in a garage by a team of graduates from the Physical Technical Institute and financed by venture capital, Russian Navigation Technologies was one of the first IPOs in the technology sector to reach $50 million. He agreed that the current environment in Russia was not supportive enough of entrepreneurs, and he also pointed out that new barriers to business were being erected, namely in customs. He noted that inefficient customs laws prevent the development of the type of international cooperation needed to spur technological innovation. The removal of these barriers is of utmost importance to business development in Russia.

Mr. Loukianoff added that college graduates’ aspirations of work in the government were also a major barrier facing Russian business, a point President Medvedev touched on in a meeting with venture capitalists in May. He then asked panelists to specifically name one company that was doing interesting work in the area of entrepreneurship.

Mr. Parker pointed out XJ Technologies, a company he discovered while conducting a technology forecasting project for PricewaterhouseCoopers. XJ Technologies of St. Petersburg, Russia, was founded in 1992 and designs modeling software. Despite its strong brand identity, there are still only 30 employees in the St. Petersburg operation. Mr. Parker compared the apparently stagnant firm to American companies, who would have sought ways to add capabilities and expand their business.

Mr. Loukianoff identified the inability to think beyond one’s borders as a major problem facing technology businesses.

Mr. Simonov pointed to Russians’ strength in code optimization, especially in the fields of video, antivirus and voice over IP (VoIP).

Mr. Titov said that the Russia’s ability to overcome trade obstacles and manufacture goods at home demonstrated the country’s entrepreneurial spirit.

He used the examples of furniture, poultry and electrical insulation, all of which had previously been imported but have now reached production levels >>

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sufficient to meet domestic demand and be exported as well. In accord with other panelists, Mr. Titov said that both the costs and risks for doing business in Russia are too high. He and Mr. Agamirzian agreed that domestic demand was crucial to Russian industry, perhaps with government help.

Question & Answer Session

Mr. Loukianoff then suggested the panel address the role of universities and “intrapreneurship� in Russia, but an audience member first posed the question of brain drain in Russian businesses.

Mr. Simonov was the first to answer, stating that the business environment in Russia lacked institutions and has

Mr. Agamirzian continued the discussion on brain drain, citing a World Bank study on diasporas and technology that shows that Russians in the United States are more successful in enterprise than in entrepreneurship. Nevertheless, he considers Russians in the global economy as beneficial to the domestic economy, provided they make partnerships in Russia and bring human and financial capital to the country.

Mr. Parker then returned to the topic of intrapreneurship in Russia. He sees the path to success in innovation within companies as lying in the major companies that dominate the Russian market.

According to him, the top 15 companies have 65 percent of the total market in Russia, and these companies, he says, have the opportunity to create intrapreneurship by reducing government involvement and reevaluating their structures.

In response to the question of whether Russia is really 20 years behind Silicon

Valley and how long will it take to catch up, Mr. Loukianoff said that he considered the internet a game-changer in terms of faster growth and innovation.

He predicted that Russia would experience faster growth potential presuming there was no government interference, and used the example of Quick, an application used by Sprint for mobile video. The company is run by a small team on two continents, and the Russian engineers are able to do their work with foreign companies while still living in Russia. Mr. Agamirzian agreed that he had seen more Russians integrating into the world economy and credited the internet for increased global communication.

A question about the role that universities play in innovation in Russia prompted Mr. Parker to note that he believes universities receive too much credit for their role in entrepreneurship in Silicon Valley and that instead, universities are valuable for their ability to populate innovative technology companies with well-educated, innovative employees.

Mr. Simonov added that he thought Russian universities could learn from American universities to start technology transfer offices on campus and reinvest the money to earn profits for further research and development.

He said that partnerships between American and Russian universities were taking place with this goal and that Russia would not need 20 years to make up for its deficiencies. n

Russia Business Watch Winter 2010-2011

In response to a question regarding the criteria for listing public companies in Russia, Mr. Agamirzian mentioned the new special sector for growing technology firms on the Moscow stock exchange, although there have only been a handful of IPOs since its creation last year. He also pointed to the development of niche domestic markets as a key area in which Russian entrepreneurs are working, using the example of a bicycle manufacturer started by avid cyclists that now commands 30 percent of the domestic market. When the company went public, it had revenues between $10 million and $15 million with more than 100 percent growth in its first year.

for a long time been and continues to be somewhat unsupportive of new ventures. Pointing to the Indian example of entrepreneurs working in the United States and later returning home, Mr. Simonov thought that Russians may follow suit. He sees creating a supportive business environment as crucial to the creation of a new innovation system in Russia, with which Mr. Loukianoff agreed and added that President Medvedev had focused on this issue.

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Annual Meeting

PANEL: Skolkovo: An Insider Perspective Alexei

Sitnikov opened the session with an overview of Skolkovo and how the private sector can participate in the innovation city. He first addressed the rationale behind the creation of Skolkovo, noting that the center will be developed as an innovation hub by focusing on talent development, globally competitive projects and innovative companies. In addition to businesses, the center will benefit Russian and international students, researchers, educators, consultants, startups, venture capitalists, and multinationals. There will be no manufacturing or production beyond the prototype phase at Skolkovo.

Russia Business Watch Winter 2010-2011

Mr. Sitnikov then addressed the popular misconception that Skolkovo is a government-run project.

While the government has provided initial funding and has promised future support, he points out, the project itself is overseen by an NGO with an independent board, protected by a special legal regime.

The role of the Skolkovo Foundation is to create an environment appealing to the private sector, who will populate the center and be responsible for most of its physical construction.

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Mr. Sitnikov stressed that Skolkovo should aim to attract world-class involvement and that the innovative environment created there should be self-sustaining over time.

The Foundation should strive to maximize private participation and only assume responsibility for that which private industry cannot achieve, while the physical and network-based aspects of Skolkovo should be developed simultaneously.

He noted that Skolkovo was conceived as an open and transparent project with support from Russian and multinational corporations, and that the Foundation was not the cornerstone of Skolkovo. Rather, the innograd will be about research-based innovation, divided between five interdisciplinary clusters (energy, biology, IT, space, and nuclear). The new Skolkovo Institute of Technology will be a major generator of this innovation.

In addition to the research that will be done at Skolkovo, there will also be business opportunities. Innovators

will find access to technology brokers, patent offices, consulting companies, professional educators and mentoring, and market research. Representative offices in Russia and abroad will help attract new companies and venture capital, while communication between companies and investors will be facilitated by a special investment board.

Mr. Sitnikov then outlined the Virtual Skolkovo plan and the ability of companies located elsewhere to have Skolkovo rules applied to them.

Starting in January 2011, companies registered at Skolkovo, but physically located elsewhere, will be able to take advantage of the special regulatory and fiscal regime. These include: no VAT or income tax for up to 10 years (if profit is less than $10 million per year and turnover is under $30 million per year) and a refund of import customs duties and VAT expenses paid on any imports to Russia. Additionally, OECD technology regulations will apply to Skolkovo.

According to Mr. Sitnikov, unlike the innovation centers built in the Soviet Union, Skolkovo will benefit from a new generation of entrepreneurs that was lacking even in the 1990s.

In November 2010, representative offices will be opening in Silicon Valley and Boston to attract and educate companies interested in participating in the project. Virtual resident status will be given out starting in January 2011, followed by the conceptual founding of the Skolkovo Institute for Technology (SIT) in February. Foundation officials understand that building a university takes time, but Mr. Sitnikov was confident that the SIT would successfully create a new type of university, with a different system of governance and relations with the faculty. Actual construction of the campus will take place between 2011 and 2015.

After the presentation, Mr. Turley asked Mr. Vekselberg what he feels is necessary for success at Skolkovo and how that success could be measured.

Mr. Vekselberg admitted that it will be a long process and that it will be difficult to measure the project’s success in the short-term. He said that Foundation board members were still considering ways to evaluate success,

Alexei Sitnikov

Moderator:

James Turley Chairman and CEO Ernst & Young

Special Guest:

Viktor Vekselberg Chairman, Renova Group; President, Skolkovo Foundation

Introduction by:

Alexei Sitnikov Head, Department of International Cooperation Skolkovo Foundation

but there would ideally be new companies, a functioning regulatory environment and independent institutions in 50 years. In the immediate future, intellectual property registration may be a good indicator of how well Skolkovo is working.

Mr. Turley next asked about a phenomenon brought up by another speaker during the Annual Meeting: why has the list of top Russian companies been stagnant, while the international list has changed so dramatically over the years?

With the creation of Skolkovo, Mr. Vekselberg sees that changing. He did, however, downplay his colleague’s prediction that Skolkovo would be producing a new Google every year. He then mentioned his recent experience in Singapore, which is also internationally recognized for its innovative business sector. The system in place — a balance of science and business — has only created 30 new companies in its 10 years. Mr. Vekselberg was at first underwhelmed by this number, but he noted that there are other outcomes

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Annual Meeting James Turley (l.) discusses Skolkovo’s future with Viktor Vekselber (r.).

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the collaboration and research done in addition to the formation of new companies.

Mr. Turley agreed that Singapore, as well as Israel, were good examples of science and business collaborating and producing new companies with government support. He then asked about the Russian government’s role in the Skolkovo project.

Mr. Vekselberg then answered Mr. Turley’s last question about domestic

Question & Answer Session Sergey Kravchenko, President of Boeing-Russia/CIS, pointed out that Skolkovo’s success also relies on the people upon whom it is being built.

The involvement of American companies will have a positive effect on Skolkovo’s development, he said, and he predicted that Skolkovo’s success would determine the future of Russia.

An audience member then asked Mr. Vekselberg to elaborate on the virtual resident status and the potential for abuse of customs and tax benefits. He answered that, in the future, there is the possibility of creating an offshore deal, but in the meantime, virtual resident status allowed for investment and innovation within Skolkovo. Multinationals would be a major component of the project, but Russian companies would be given preference.

In response to a question about creating mini-Skolkovos in other parts of Russia, Mr. Vekselberg called for at least 10 more such innovation centers to speed up the process of modernization. Companies doing work there need to be international in structure and focus so as to help Russians overcome their preconceived notions of how education, business and research are done.

Mr. Vekselberg concluded that, in the future, Skolkovo will be the perfect environment for doing business, including the easy exchange of ideas, the presence of major companies, a university, and numerous potential clients. n

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Mr. Vekselberg sees the government as having an interest in business, especially in Russia.

He admitted that nothing in Russia works without the government’s participation, but he added that President Medvedev’s prominent involvement has been helpful to Skolkovo’s development. Mr. Vekselberg credits President Medvedev with getting the special law on Skolkovo passed in an unprecedented four months, in addition to securing funding from the Ministry of Finance, cooperation with immigration officials on visas and help from customs officials.

and international markets for Skolkovo projects. He repeated that Skolkovo would have no production facilities on-site and that the Foundation board understood that the world is global.

Skolkovo needs to attract companies creating products for the global market, not just the domestic one. Here the government’s involvement is also beneficial, as government-backed industries would be more likely to contribute to the project. Even though Skolkovo will have funds 20 times less than those of Silicon Valley, Mr. Vekselberg is confident that the project will help create a new, competitive business development model.

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PANEL: The High-Tech Dimensions of Energy Moderator:

Lucian Pugliaresi President Energy Policy Research Foundation (EPRINC)

Panelists:

Piotr Galitzine Chairman TMK IPSCO Rod Nelson Vice President of Communications Schlumberger Ltd. William Schrader Chief Operating Officer TNK-BP

This

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panel explored the recent evolution of the traditional oil and gas sector into a high-technology area. Industry experts discussed, among other issues, the use of high-tech applications needed to unlock resources in difficult geologic locations and technological advances in the oil and gas sector as a possible driver of innovation in Russia as a whole.

In his introductory remarks, Lucian Pugliaresi noted how the perception of the oil and gas industry has changed over a short period of time. Five years ago, there was a widespread belief that largescale oil and gas shortages were near, that Latin America was fully explored, etc. However, these beliefs were largely overturned by the shale gas revolution, new discoveries, and, most importantly, by the marriage of art and science, which transformed the oil and gas sector into a high-tech industry. In Russia, new discoveries have been made in western Siberia, and oil production has continued to rise, while consumption has not kept pace.

Counterclockwise: Lucian Pugliaresi, William Schrader, Piotr Galitzine, and Rod Nelson

shift to unconventional gas and shale drilling, Mr. Galitzine said. Technology has also changed with improvements in rig machinery and directional drilling.

Technology now helps avoid drilling “dry holes” and allows companies to collect six times the initially estimated amount of oil from a given well. These technologies continue to develop, Mr. Galitzine noted.

For example, the depth of drilling now reaches 10,000 ft, whereas only recently 5,000 ft was considered to be the limit for drilling. Other areas of improvement include the radius of horizontal drilling; the pressure of hydro-fracturing; steam assisted gravity drained wells; and slotsawing (an approach to increase the flow pathways in the hydrocarbon recovery zone), Mr. Galitzine said.

Piotr Galitzine opened his remarks by noting that 53 percent of the world’s drilling is done by the U.S. and Russia today; the U.S. is drilling 1.5 times more wells than the rest of the world combined.

In the U.S., five states comprise 76 percent of rig count: Texas, Louisiana, Oklahoma, North Dakota, and Pennsylvania.

Mr. Galitzine predicted that oil and gas prices in 2011 will not substantially change compared to 2010. However, he noted that gas consumption is likely to rise as legislators work to reduce greenhouse gas emissions. In the near-term, renewables will not count for a major share in electric power consumption. According to the U.S. Energy Information Administration (EIA), coal will still comprise 22 percent of U.S. energy consumption by 2035, while the share of renewables will grow from 7 to 11 percent, Mr. Galitzine noted. Given the current political and economic climate, there is much incentive for increased use of natural gas as the “bridge fuel”.

The science of drilling for hydrocarbons has changed dramatically with the

He pointed out that TMK IPSCO has developed new technology for steel

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pipes that can better resist corrosion; the company is also involved in developing customized engineering solutions for its clients.

Rod Nelson noted that the energy industry in general and the oil and gas sector in particular are in need of continuous innovation as under current trends, the industry is spending more money while finding fewer reserves. Schlumberger currently has five research centers (Boston, MA; Cambridge, UK; Norway; Saudi Arabia; and Moscow) and 35 technology centers. More recently, the company has started developing regional tech centers focused on particular local problems; one such center is located in Moscow.

Mr. Nelson gave several examples of innovative developments that came to the oil and gas industry from elsewhere. For example, several MIT professors have invented a technology called “witricity”, which provides wireless electricity through walls. The technology was originally intended for hotel rooms, but a larger market for the invention might be charging electric cars; in the long-term, “witricity” can be used in the oil and gas industry for long-radius horizontal drilling, Mr. Nelson pointed out. Another area where innovation is needed is in developing more efficient batteries; work is being done in creating hightemperature, long-lasting batteries that are more efficient than lithium batteries. He also pointed out Schlumberger’s partnership with 3M, an expert on fiber and coating technologies, in finding a

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solution to the problem of pipe corrosion.

Mr. Nelson noted the importance of company culture and training procedures in fostering innovation. The future belongs to the people who are the most innovative and collaborative, and the oil and gas industry must attract the brightest young specialists by cooperating with universities and creating systems to stimulate innovation.

William Schrader started his remarks by saying that, even though technology does not necessarily come to mind when talking about the oil and gas industry, it is crucial for the sector, especially given Russia’s often difficult geology.

Mr. Schrader then turned his attention to the company’s greenfield project, Verkhnechonskoye, which is being explored in Eastern Siberia by TNK-BP subsidiary Verkhnechonskneftegaz (VCNG).

Verkhnechonskoye is a two billion barrel pre-Cambrian field that is over 600 million years old. The field poses enormous challenges due to its highly complex geology and remote location, Mr. Schrader observed.

Verkhnechonskoye is now producing 50,000 barrels a day, with a projected increase to 120,000 barrels a day by 2015. The technology used for the VCNG project includes completion design that avoids water ingress and better seismic models to improve understanding of the reservoir and development concepts, Mr. Schrader said.

TNK-BP is investing in technology development, Mr. Schrader said, noting that over 70 technology pilots are currently running, compared to 17 in 2009. In 2010, TNK-BP’s investment in technology pilots totaled $110 million, and the same level is planned for 2011. He also said that the company is building up capacity to deliver a new generation of greenfield

Question & Answer Session Lucian Pugliaresi noted the gap between the policy community and professionals in the oil and gas industry and asked what the U.S. and Russian governments could do in order to promote investment and dialogue between the two countries’ professionals in the service and technology sectors. In response, Rod Nelson acknowledged that much more needs to be done in that regard and that there is a misunderstanding in the U.S. about the importance of the oil and gas industry and a lack of economic appreciation for it, which does not exist in Russia.

In response to a question about the significance of the increased North America oil supply for Middle East oil imports, Piotr Galitzine noted that many Middle Eastern, and especially Saudi Arabian, fields are mature, and that the Saudi Arabians are interested in using North American technologies like horizontal and unconventional drilling to increase recovery rates. Mr. Galitzine forecast that the Canadian oil sands will somewhat displace Saudi Arabian oil imports, but not significantly, because consumption will keep on rising.

After a comment on the relatively low level of awareness with regard to the benefits of natural gas, Mr. Galitzine noted the disconnect between what oil and gas professionals know and what policymakers know, and acknowledged that the oil and gas industry has a lot of work to do with regard to providing policymakers with the full set of facts.

Mr. Pugliaresi added that, even though the U.S. overtook Russia as the world’s largest natural gas producer in 2009, the full potential of natural gas, which could replace 18 to 20 percent of coal, has not been realized because of the serious coal industry lobby. However, Mr. Pugliaresi expressed his hope that the political situation will become more balanced as more states start producing natural gas, contributing to the “energy revolution” in the U.S.

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Mr. Schrader gave a brief overview of TNK-BP, pointing out that the company is the third-largest oil producer in Russia and approximately the tenth-largest producer globally in terms of oil and gas production. TNK-BP’s position is somewhat unique, as it is 50 percent-owned by BP and 50 percent by a group of Russian investors. The company, which currently owns refineries in Russia and Ukraine, is about to make its first move outside of the CIS by acquiring BP’s assets in Venezuela and Vietnam. TNK-BP has a balanced greenfield and brownfield portfolio; while the company is rapidly building its greenfield production, most of its operations still come from brownfield assets, Mr. Schrader said. Technology has been a key factor in TNK-BP’s ability to sustain and increase production from mature fields.

Mr. Schrader noted that new technologies are helping the company to cope with the challenges at another, thin-bedded reservoir just above Samotlor called Ryabchek.

Ryabchek has limited economic potential due to a hard-rock structure that makes horizontal fracturing very difficult. However, due to a technology breakthrough, the Ryabchek reservoir is being drilled using long horizontal wells, multi-staged fractured completions and controls for fracture vertical height. He stressed that it is an extremely important development as it has allowed TNK-BP to access an additional 40 percent of Samotlor’s oil reserves.

projects such as the Yamal project in the Arctic, which could produce up to a million barrels per day by 2020. However, to implement these plans, the oil and gas industry will require economic stimuli and robust transportation infrastructure, Mr. Schrader concluded.

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Mr. Schrader spoke specifically about Samotlor, a Soviet-era field that was developed in 1969 and still produces oil (since 1969, Samotlor field has produced approximately 20 billion barrels of oil). However, he noted that increasing amounts of water are needed to maintain production. In order to deal with the problem, TNK-BP has established a water-flood management system and has implemented a water shut-off initiative that has specific engineering and technical elements. These measures have resulted in significant reduction of water production and have increased oil production in the field, Mr. Schrader noted.

He added that the company is using a new algorithm, “Stream-Line” seismic modeling, to target bypassed oil, which also helps to increase oil production.

Mr. Galitzine predicted that the United States will be exporting gas within the next 10 to 15 years. n

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Annual Meeting

Moderator:

Pat Hyek Global Technology Leader Ernst & Young

Panelists:

PANEL: Preparing the Next Generation of Innovative Thinkers

Sergey Kravchenko President Boeing-Russia/CIS James Collins Co-Chairman of the Board U.S. Russia Foundation for Economic Advancement and the Rule of Law Andrei Kortunov President New Eurasia Foundation Ellis Rubinstein President The New York Academy of Sciences

Pat

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Hyek opened the discussion by asking all participants to share their organization’s perspective and experience in working with educational institutions in Russia.

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Sergei Kravchenko noted Boeing’s emphasis on developing high technology and its early interest in investing in Russia. He described Boeing’s technology research center in Russia, where over 400 scientists are engaged in a wide variety of research, as well as Boeing’s Moscow Design Center, which opened in 1998 and currently has 1,200 engineers, making it Boeing’s largest engineering center outside of the U.S. Boeing not only benefits from the high quality of human capital in Russia, but also can cut cycle time by having virtual teams of engineers in the U.S. and Russia work together. Finally, Mr. Kravchenko commented on Boeing’s 2003 opening of a software engineering unit in Russia with 350-400 engineers, making Boeing’s total presence in Russia second only to that in the U.S. Boeing would like to continue tapping into Russia’s unique intellectual capacity and plans to invest $500 billion over the next few decades.

Ambassador James Collins gave an overview of the work of the U.S. Russia Foundation for Economic Advancement and the Rule of Law, noting the Foundation’s roots in the U.S.-Russia Enterprise Fund and its mission to continue supporting the development of Russia’s economy.

Its primary areas of focus are encouraging training and capacity to stimulate innovative entrepreneurial activity and helping to create a legal and regulatory environment to make that possible.

From left to right: Sergey Kravchenko, James Collins, Pat Hyek, Andrei Kortunov, and Ellis Rubinstein

The Foundation works with a number of Russian institutions, corporations, businesses, and universities on projects in which the U.S. can provide unique input and experience. In addition, the Foundation supports the U.S. Russia Center for Entrepreneurship, a young organization that helps small entrepreneurs acquire the skills and know-how to grow their businesses through networking, financial structuring information and best practices training.

Finally, the Foundation is working on bringing U.S. experience in the commercialization of intellectual property and research to Russian universities.

Andrei Kortunov began with a general overview of the number of educational institutions in Russia. He noted, in particular, that there are over 1,500 universities in Russia, 5 million students and about 70,000 schools. He said that, in theory, higher education in Russia should go hand in hand with the private sector to promote innovation and economic modernization. However, this has not been the case and both the private sector and educational institutions have had a number of problems working with each other. Mr. Kortunov said that Russian businesses often accuse universities of being inflexible, morally outdated and slow to adapt, while university administrators often feel that businesses are trying to work directly with professors, causing a brain drain to the private sector, while failing to invest in their own training programs.

Mr. Kortunov acknowledged that the Russian government has been trying to create additional financial incentives for universities to build stronger relations with the private sector. In addition, he noted the government’s efforts to change the legal foundation for cooperation between the private sector and universities, both by working to improve intellectual property rights protection, as well as by allowing universities to open their own small enterprises. Finally, Mr. Kortunov pointed out the government’s initiative to single out a group of leading universities and give them additional support in the form of funding and greater autonomy so that they can become flagships for increased cooperation between educational institutions and businesses.

It is in this sphere that the New Eurasia Foundation is also working on helping Russian universities capitalize on existing U.S. know-how on developing relationships with the private sector and how to set up business incubators and technoparks, as well as ways of working with local governments.

In this context, Mr. Kortunov mentioned that, because Russian universities are mostly funded by the government, they are naturally incentivized to focus their efforts on lobbying the Ministry of Education for additional funding, as opposed to building relations with the private sector. He expressed a belief that this situation will change as the Russian higher education market begins to consolidate and competition for scarce resources and students increases. In this more competitive environment, business connections

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From left to right: Pat Hyek and James Collins

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may become the decisive factor ensuring the survival of some educational institutions.

Mr. Kortunov concluded that U.S. companies with successful experience in working with Russian educational institutions should share their best practices and expressed satisfaction with the commitment of the Russian government to higher education reform.

Mr. Kravchenko commented on Mr. Kortunov’s analysis of Russian government initiatives by saying that, in earlier years, Boeing had been very successful in attracting talented Russian scientists, all of whom, however, had been educated under the Soviet system. Currently, he pointed out the reverse trend — the emergence of a large pool of excellent young scientists with a strong interest in high technology, engineering, fundamental physics, and mathematics. He concluded that the education policies of the Russian government during the past 10 years are starting to bear fruit.

Mr. Hyek asked Mr. Collins whether technology commercialization and business skills are likely to become a part of the Russian curriculum as they are in the U.S.

Mr. Hyek then asked Mr. Rubinstein to discuss how governments and businesses are collaborating from the point of view of The New York Academy of Sciences.

Mr. Rubinstein noted that Russia is better positioned today to leapfrog technologically than it might seem, and it should aim to avoid the mistakes of many other

Mr. Rubinstein noted that not only the private sector, but also governments have difficulty finding the best ways to work with academia. However, he said that cities and regions have become more prominent, and often more creative, actors than central governments in promoting innovation.

To illustrate creative ways of fostering cooperation, Mr. Rubinstein gave the example of the Chinese Academy of Sciences, which has set up a sophisticated system of support for young scientists, helping them commercialize their ideas. He also discussed GlaxoSmithKline’s experience of bringing together the best scientists of Britain’s four leading universities in a global medical excellence cluster. A third example was a trip by a group of Chinese mayors to the West Coast organized by Cisco Systems to acquaint them with Silicon Valley’s experience and best practices in fostering an innovation environment.

Finally, he also talked about PepsiCo’s Global Alliance on Nutrition Science as an example of a corporate idea that drives innovation by identifying young scientists around the world and fostering public-private partnerships on a large scale.

The common element Mr. Rubinstein highlighted in all these initiatives was the fact that companies are looking for partnerships that are scalable and global in their access to human capital.

Mr. Hyek commented that, according to studies, corporations are experiencing a shortage of soft skills — communications, problem-solving and decision-making skills — as opposed to pure technical ones. He asked Mr. Kravchenko whether soft skills could be incorporated in the university curriculum, or whether they

are better taught as a part of companies’ in-house training.

Mr. Kravchenko answered that his personal experience as a professor at a number of Russian, as well as Western, universities has given him a sense of the main differences between the Russian and the Western systems of higher education.

These differences, he said, mostly lie in the Russian emphasis on the in-depth study of fundamental sciences, while the West focuses more on case studies. In Russia, he said, students are taught the basics of math, physics and chemistry at a high level, which gives them greater freedom than their Western counterparts to identify and creatively tackle scientific problems.

On the other hand, he admitted that the Western educational system provides a better skill set in business, communications and entrepreneurship. Due to these differences, he advocated companies creating joint teams that would benefit from the other side’s strengths in dealing with new scientific challenges. This is the type of cooperation he hopes Skolkovo will bring about.

Mr. Kravchenko concluded that Russia would be well-advised to keep its current curriculum, but should add business skills, sales and entrepreneurship to it.

He said that the modernization of Russian education would be the key to Russia’s modernization agenda in the next decade and called on Western companies to support Russian educational institutions, including by sending their best specialists to share new technology, management skills and best practices with Russia’s next generation of entrepreneurs.

Mr. Hyek agreed, saying that one of the most effective practices he has seen is the two-way sharing of knowledge, with corporations giving back to universities by bringing experienced practitioners to share their perspective with students.

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Mr. Collins answered that business schools and entrepreneurship programs in general are a new phenomenon and are still in their early stages. However, he added that the U.S. Russia Foundation for Economic Advancement and the Rule of Law is sponsoring projects that teach business skills in Russia.

One of the biggest problems for the private sector is that of scaling such partnerships. According to Mr. Rubinstein, technology transfer offices at universities, set up to solve this problem, often only exacerbate it. In his opinion, Russia should learn how to create such partnerships without idealizing the American model, which is often ineffective.

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governments who have attempted innovation strategies and failed. Thus, Russia should be flexible in picking the innovative model most suited to its needs. Industry today is experiencing a period of remarkable change, with innovation becoming ever more important, but with the old inhouse industry innovation models falling apart. Businesses today are increasingly looking to partner with academia, even though in some cases they face significant obstacles in doing so.

Mr. Kravchenko then added that one of the biggest challenges for Russian science today is identifying the most important scientific and technological questions on which to work. In this context, he argued that Western companies can be particularly helpful in pointing out the biggest technological challenges and allowing Russian specialists to find solutions to them.

Mr. Kortunov gave another example of how Western companies can become catalysts for productive cooperation between the private sector and universities. He said that Daimler, upon acquiring shares

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serious weaknesses in the Russian firm’s HR strategy and convinced it to launch a joint program with Kazan Technical University to train engineers based on Russian, as well as American and German, best practices. Mr. Kortunov suggested that, if Russia continues with its privatization program, Western companies that acquire shares in Russian businesses can act as a catalyst for greater cooperation between Russian firms and local educational institutions.

Another example is that of Alcoa’s successful retraining of highly-educated Russian engineers in its factory in Samara, in particular teaching them Western management techniques. He argued that Western companies themselves can bring about change through their own programs.

Finally, he expressed hope that Virtual Skolkovo would entail creating a way for venture capital and multinationals to

identify the best minds in key strategic areas. If that is the case, he concluded, Skolkovo would be a truly valuable and unique initiative.

Question & Answer Session In response to a question from the audience regarding the future of the Russian Academy of Sciences (RAS) and that of the academy model in general, Mr. Kravchenko recognized the history of excellence the RAS represented but also acknowledged the deterioration it had experienced since the collapse of communism. He described the Academy as highly resistant to modernization and reform and said that the more important question is how to save the Russian tradition of excellence in fundamental sciences.

From the point of view of Boeing’s experience, Mr. Kravchenko said that the best way to work with the Academy is through ad-hoc projects with individual researchers or with the several remaining strong

institutions that are a part of it. He suggested that Western companies support such “islands” of excellence as those are one of the foundations of Russia’s continuing scientific prowess.

Mr. Kortunov agreed with Mr. Rubinstein’s statement that the world is entering a phase of globalized research, where competition for the best brains is also increasingly global. In this sense, if the Russian Academy of Science does not reform and find creative ways of attracting funding, he predicted it could lose some of its best scientists.

Mr. Collins noted that the Academy could be very successful only in a topdown system with strong government control and funding. He argued that in an environment of open, global competition, the academy system is doomed to extinction. While he did not predict what type of arrangement could replace it, he emphasized that it would be driven by a set of forces that go well beyond government priorities. n

PANEL: Infrastructure – Not Just Roads and Bridges Moderator:

Marthin De Beer Senior Vice President and General Manager Emerging Technology Group Cisco Systems, Inc

Panelists:

Russia Business Watch Winter 2010-2011

Mikhail Blinkin Research Director Transport and Road Engineering Institute

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Igor Kosov General Director OAO Special Economic Zones Steven Parker Group Country Manager Russia, CIS & South-East Europe VISA From left to right: Marthin De Beer, Mikhail Blinkin, Igor Kosov, and Steven Parker

Marthin De Beer opened the discussion

by describing Cisco’s vision of the future of infrastructure. In particular, he talked about the emergence of “smart and connected cities,” which are of special interest to emerging markets. These cities are based on ICT (information and communications technology) infrastructure, which

connects institutions, businesses and, ultimately, members of the community in profoundly new ways. This technological environment would allow public and private services — from healthcare to government services, to be administered electronically, creating a closely linked community and an ecosystem conducive

to innovation. Furthermore, this environment would allow a wide range of services, from basic ones to the overall running of the city, to be managed and delivered more efficiently. Mr. De Beer added that Cisco is already involved in creating such environments in 100 cities around the world. >>

In addition, Mr. De Beer pointed out the great potential this type of connectedness has for alleviating issues such as traffic problems. In a city as congested as Moscow, for example, creating virtual meeting centers could greatly contribute to easing city traffic.

Mr. De Beer then elaborated on the potential of networks to become platforms for services such as healthcare, transportation, security, and communications, linking them in a common network using the internet as a platform. Not only would this type of environment support service providers, but it would also promote the development of new business models and services within the community. Finally, Mr. De Beer noted the great potential of “smart and connected cities” in the medium term to become the basis for sustainability and innovation, as well as improving the quality of life and the environment in communities around the world.

Mikhail Blinkin started by saying that the biggest challenge for Russia’s infrastructure development today is the lack of a strategic vision. Even when new infrastructure is created, it is based on outdated Soviet infrastructure concepts.

Regarding potential sources of investment in Russian infrastructure, Mr. Blinkin said that these would mainly have to come from higher fees and taxes for the population. He emphasized that the bulk of infrastructure funding in Russia today comes from general taxes and is thus insufficient. In addition, he expressed skepticism that attracting greater investment in infrastructure through publicprivate partnerships could be a largescale strategy for Russia.

As a result, while more and more Russians are acquiring automobiles, infrastructure expenditures are far from catching up.

Even in the years of high GDP growth,

few additional roads or other types of infrastructure were built. While Mr. Blinkin acknowledged that there is some amount of construction taking place, it is based on heavily outdated technology and infrastructure concepts.

Moreover, while Russia has had several successful infrastructure building projects, the overall concept of Russia’s infrastructure policy has not changed. This

he attributed partly to the disconnect between the government bodies responsible for Russia’s infrastructure strategy and development and the research and educational institutions studying these issues. Consequently, he said that Russia is not only making its own mistakes in developing infrastructure, but is also repeating the mistakes that developed countries made after World War II without paying attention to existing literature discussing these mistakes.

While Mr. Blinkin remained optimistic about Russia’s ability to develop its infrastructure, he expressed disappointment with the lack of modern strategic thinking on the issue.

Igor Kosov started his address by agreeing with Mr. Blinking that it is essential that Russia improve its basic infrastructure. He expressed hope the country could potentially develop both the hightechnology ICT infrastructure described

by Mr. De Beer as well as its basic transportation networks, especially in cities with large populations such as Moscow, St. Petersburg and Nizhny Novgorod.

Mr. Kosov then proceeded to describe the work of OAO Special Economic Zones

(SEZ) as one of Russia’s most effective tools for attracting foreign direct investment (FDI). While the company is new compared to similar initiatives in other emerging markets, it helps respond to demand from foreign investors interested in Russia. SEZ has 23 special economic zones, categorized as industrial, port, tourist, or innovation zones. In all of them, SEZ works to create physical as well as administrative infrastructure

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In this context, the discussion around Skolkovo’s infrastructure is unusual in that planning is being done based on modern, forward-thinking approaches.

However, Skolkovo is an exception, rather than the rule, for Russia. Therefore, according to Mr. Blinkin, Russia’s first priority in developing infrastructure should be that of creating a normal road network, based on a modern estimate of Russia’s needs.

The second priority Mr. Blinkin listed was that of alleviating traffic congestion in Russia’s cities. The main reason for the heavy traffic in Russia, Mr. Blinkin argued, is the unbalanced transportation system and building policies, where the proportion of traffic infrastructure to the overall city area is insufficient. This results in extreme traffic congestion. For example, while there are twice as many cars per 1,000 people in San Francisco than there are in Moscow, the traffic in Moscow is significantly worse than that in San Francisco.

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that provides an attractive environment for foreign investment. These zones contribute not only to increasing international investment in Russia, but are often the backbone for regions that have few other options for development.

Mr. Kosov described SEZ as essentially a public-private partnership that is illustrative of ways in which PPPs can help develop Russian infrastructure. SEZs focus on attracting foreign investors with substantial input cost elements or ones that export products or services to customers outside of Russia. Using state funding, SEZ offers free basic utilities, no property or transportation tax, a low profit tax, a free customs regime, and a single-window communications channel for investors with various state authorities. In this context, Mr. Kosov reminded the audience that the legislative basis for Skolkovo was first created for the establishment of the Special Economic Zones.

In addition, broadband internet is a priority for all SEZs and thus the company takes care to provide an alternative supply of internet and telephony to all its zones. Mr. Kosov also mentioned SEZ’s cooperation with Rusnano in the Special Economic Zones in Tomsk, Zelenograd and Dubna, where together the two companies have created nanotechnology collective access centers that investors can use for a minimal fee to develop nanotechnologies.

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Mr. Kosov concluded his remarks by saying that SEZ aims to attract investors that could themselves provide modern infrastructure solutions for Russia and emphasized SEZ’s commitment to developing a competitive infrastructure and business environment to support the development of a knowledge-based economy in Russia.

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Steven Parker began by reminding the audience that VISA is not a credit card, but a brand and network with standards and services, and one that increasingly operates as a franchise. He noted that retail banking electronic payments are still very new in Russia and have only existed in a modern form for the past 10 years. While the industry is new, he acknowledged that the Russian government has made it a priority to create a modern financial services infrastructure in the country.

Mr. Parker then discussed the importance of electronic payment systems, saying that they foster economic growth

by promoting efficiency by reducing cash use and friction, as well as eliminating the black economy. It is for these reasons that governments are generally in favor of such services. A clear benefit of electronic payment systems is increased access to financial services for the population. In the case of Russia, where less than 50 percent of the population has a bank account, these benefits could have a large social impact.

Mr. Parker described the electronic financial services market in Russia as underdeveloped, with only two point-of-sale (POS) terminals per 1,000 people, compared to 35 in the U.S. Even more strikingly, 95 percent of personal expenditure in Russia is still conducted in cash. While the industry is clearly underdeveloped, it has been growing fast, with over 100 million cards in circulation by 2010. Similarly, acceptance rates are both extremely low — with just eight percent of merchants accepting card payments — but also growing very fast, having doubled over the last five years.

The main challenges Mr. Parker discussed for the industry come from the consumer and the merchant sides respectively.

Consumers in Russia have been wary of banks since the financial crash in 1998 and still strongly prefer to use cash. In addition, financial literacy is low and few customers understand the benefits that electronic financial services can bring them. Merchants, on the other hand, have an incentive to continue using cash because that allows them to hide their profits and evade taxes. Familiarity with electronic payments is a significant challenge on the merchant side as well.

Mr. Parker added that governments can help boost the use and acceptance of electronic payment infrastructure and listed several examples of successful strategies used by South Korea, Latin America and Hungary to accomplish that goal.

Question & Answer Session In response to a question from the audience about the performance standards for physical versus technological infrastructure in Russia, Mr. De Beer answered that today there is a great opportunity for Russia to improve its broadband access.

However, Russia is still ranked 80 out of 133 countries in “net readiness” and has, in fact, fallen behind in the past five years compared to other emerging markets. In addition, compared to physical

infrastructure, technological infrastructure is not only cheaper, but also brings a higher return in the long-term as well as faster returns on investment.

Mr. Blinkin added that the main criterion for physical infrastructure quality in Russia is its sustainability and the increase in mobility it brings. He also said that developing this infrastructure is the responsibility of the government on all levels — federal, regional and local.

In response to a question about the introduction of contactless point of sale terminals in Russia, Mr. Parker said that it could be challenging to break into the wider market with such systems, and that interested companies would need to focus on finding a strong point of entry, such as metro systems.

He also said that the Russian financial services sector has developed a greater variety than many other markets, for example with services such as kiosks, electronic money and the use of mobile phones. In this context, he said that Russia would likely develop differently from other markets, and predicted mobile phones could become increasingly more important as a financial services tool.

Mr. Blinkin then responded to a question on whether Russian construction companies have adopted modern road-building techniques, saying that some Russian road building companies, all privately owned, have purchased state-of-the art technology. However, demand for their services has been low. Mr. Kosov elaborated on the question by saying that the current road-building tender legislation places an excessive emphasis on low price, making it impossible for companies with better-quality and highercost projects to win government tenders.

This affects the overall quality of Russian infrastructure, making it less sustainable over the long term.

Finally, participants discussed the future of freight mobility in Russia. Mr. Blinkin said that Russia has modernized its port infrastructure but has not capitalized on a potentially huge market: the transit of exports goods from East Asia to Europe across its territory. He noted that, in addition to being a politically sensitive question, this opportunity has not been fully explored due to Russia’s poor railroad infrastructure and unfavorable customs legislation. n

The USRBC gratefully acknowledges the generosity of the 2010 Annual Meeting sponsors

АРДС глубоко признателен спонсорам Ежегодного Заседания 2010 года

The U.S.-Russia Business Council (USRBC) U.S. Headquarters 1110 Vermont Avenue, NW, Suite 350 Washington, DC 20005 Tel: +1 202-739-9180 Fax: +1 202-659-5920

Американо-Российский Деловой Совет (АРДС) Представительство в РФ Новинский бульвар 8, Офис 907 Москва 121099, Россия Тел.: + 7-495-228-5896 Факс: +7-495-228-5893

outlook

outlook Modernization of the Russian Economy: The Positive Role of Foreign Independent Directors

By Michael A. Tappan President & CEO of RSR Russia LLC.

Russia

Russia Business Watch Winter 2010-2011

has embarked on a serious long-term program, driven from the top of its government, to modernize its entire economy across the full industrial spectrum and from the largest companies down to small-to-mediumsized enterprises. Diversification away from dependence on commodities and the development of high-tech businesses are major goals. Russia needs to develop its own new technologies but also to seek access to technologies from abroad. To accomplish all this, a much higher level of investment from within Russia and from foreign investors is necessary.

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While the government can provide support for modernization by helping to create the right economic environment that encourages innovation and investment, the actual achievement of modernization, diversification and innovation can only be realized at the microeconomic level; that is, within each Russian company that dedicates itself to these goals. Diversification and innovation are the most difficult corporate strategies to execute successfully, and to succeed these companies must adopt the highest standards of corporate governance and business practices. Seasoned and highly accomplished foreign independent directors on the board of a Russian company can add value in many different ways to the strategic decision-making intended to take the company to the next level of excellence.

Benefits from Foreign Independent Directors We do not attempt here a precise definition of “independent director” because that has already been done many times by others for varying purposes. However, they generally provide that an independent director may not be a member of management or other employee of the company, a paid provider of services to the company, a controlling shareholder of the company, or under the direct or indirect control of any such party or parties.

We can summarize the major benefits to be gained from foreign independent directors as follows: • Improved corporate governance standards, including a better balance and a higher level of independence in the composition of the board; • Strategic advice from seasoned senior executives; • Enhanced credibility for raising equity and debt capital in foreign markets; • Better access to particular foreign markets for products and services; • Guidance from executives with many years of experience in a particular industry; • Guidance from experienced experts in functional specialties; • Input of needed technological knowledge and access to foreign technologies;

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Strategic advice and guidance on diversification of a company’s markets and products; Support to SME’s seeking to build a business plan and grow; Support in seeking foreign joint ventures, alliances, and other sources of foreign investment, knowledge, and technology.

Principles of a Successful Board However, the addition of foreign directors to a Russian board is a complex and challenging step. We believe that the following principles are essential to success: Commitment from the top. The dominant shareholder, the members of the board and management must all be committed to high standards of corporate governance. The controlling interests, whoever they may be, must believe that standards and ideas introduced by others can eventually work for the best interests of the company and therefore themselves.

From this prerequisite flow all the remaining principles.

A critical mass of independence.

Independent directors should eventually comprise around 60 percent of the board, though this is a goal that can be reached over time. At least half of these should be foreign. Why must they be foreign? That will become clear as we look at the next principle. >>

advice. Most Russian companies are run by very smart people who have either succeeded in converting a Soviet entity into a going concern or have built a successful enterprise from scratch.

However, by definition, they do not have decades of business experience and they may be unfamiliar with best practices that have been developed abroad over many years of competition. They can therefore gain much from the guidance and advice of foreign business people of unquestioned accomplishment.

Building the board as a strategic exercise.

It follows from the third principle that the board should be built with members who can directly and significantly contribute to the achievement of the company’s strategic goals. Their selection should be a deliberate and logical

process leading to a board team that will actively support the company’s achievement of well thought out objectives.

The Nominations Committee needs to have a high level of independence to maintain the quality and the diversity of the board.

Effective board committees.

Responsibility for risk oversight should go beyond the usually overburdened Audit Committee and be spread among several committees of the board.

Indeed, the whole board must explicitly assume this responsibility. Some of the independent board members should be chosen for their proven skills and experience in risk management. Direction of the Compensation Committee requires complete independence in mindset and in fact.

Executive pay packages should incentivize actions that support the longterm benefit of the company and its shareholders and discourage stepping beyond established risk boundaries.

Transparency and open communications.

The lead shareholder and the rest of the board must assure full disclosure and a free flow of all the necessary data and information to the independent directors. In many cases, language will pose serious problems, but these must be overcome. Equally, the independent directors must work to understand the Russian business environment and the company’s culture so as to be able to correctly interpret the information they are being given.

Steps Toward a Better Board The process to improve the composition of the board includes these important steps: • n

Examination of board policies, including:

Careful definition of policies on board composition, including the appropriate number of independent directors; Director terms, number of reappointments, age limits; Rules governing the board decision-making process; Number and timing of board meetings;

“Gap” analysis of the board

Analysis of the fit between the current board composition and the company’s strategic objectives; Determination of the specific skills and backgrounds that need to be added or strengthened;

Set the right tone for the board

Establishment of strong mutual trust and objectives between the lead shareholder, the directors, and management; Clear corporate governance standards; Clear understanding on mission and strategy; Clear statement of the role of the board; Establishment of independent committees with the appropriate leaders; Assumption of responsibility for educating the foreign directors on the Russian business environment and that of the company in particular; Solutions to the language and other communications problems; Provision of all the information the foreign directors will need to be effective; Limitation of the number of board meetings to a reasonable amount, possibly dividing the meetings between strategic and tactical issues to reduce the number that the foreign directors must attend; Occasional board meetings at more convenient venues than company sites;

Advisory board

This alternative offers a practical first step that gains foreign expertise, but avoids some legal ramifications and allows a trial period during which the company and its new foreign directors can get to know each other;

Appropriate board compensation

As high as international director compensation standards, if not higher; Consideration of stock grants or options; D&O insurance.

Attention to logistics. These include: a reasonable board meeting schedule, full and timely provision of data and information needed for each meeting, and comfortable travel and lodging arrangements for foreign directors.

Foreign Director Integration.

Companies must have a carefully planned and executed program to integrate the foreign director onto the board.

Much Work to Be Done Our study of the boards of Russian companies shows that many do not come close to meeting the necessary standards.

Typical shortcomings include: •

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Boards that are too small and too narrowly based; No non-executive directors at all; No or too few foreign independent directors; Foreign independent directors in some cases with less than impressive qualifications; Foreign directors whose qualifications do not match the strategic objectives of the company; Lack of adequate committee infrastructure and leadership; Poorly articulated philosophy of board structure, processes, and standards.

The correction of these and other shortcomings will take time, as will the building of a superior board. For most companies, a one-year program comprising 1) board analysis and restructuring and 2) director recruitment will be required to increase the probability of the company’s success in participating fully in the desired modernization of Russian business. n

Russia Business Watch Winter 2010-2011

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outlook

> Openness to seasoned strategic business

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new members

new USRBC members AEROLASE Aerolase Corporation is a fast-growing innovative company that has developed, manufactures and markets a new generation of unique and proprietary portable, highpower, solid-state lasers for medical applications. Founded in 1996 and headquartered in Tarrytown, New York, Aerolase now has an R&D, prototyping and manufacturing facility in Russia. The company’s revolutionary LightPod® laser platform technology transforms solid state medical lasers from an exotic instrument available to a few into a mass market medical instrument affordable to a much broader universe of general healthcare providers.

Initially, Aerolase has commercialized its LightPod compact laser technology for use in dermatological, cosmetic and wound healing applications.

Russia Business Watch Winter 2010-2011

ALMAZ CAPITAL PARTNERS Almaz Capital Partners is an early-stage venture capital firm, with offices in San Francisco and Moscow, focused on investments in technology, digital media and communications. The firm’s investors and strategic partners include Cisco, EBRD and UFG Asset Management. Almaz is one of the first, independent, Western-style, venture capital firms serving the Russian tech community. With its own extensive start-up experience and diverse network of relationships, Almaz is unique in its ability to bridge the cultures of Silicon Valley and Russia, enabling entrepreneurs to reach their maximum potential.

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AMBIQ TECHNOLOGY Ambiq Technology is a global provider of disruptive technologies and services designed to accelerate the worldwide adoption of Near Field Communication (NFC) and contactless payment and security systems. The company provides tools that bring the promise of security and convenience to consumers through a revolutionary and complete end-to-end solution. Ambiq is based in the heart of Silicon Valley in San Jose, California, with offices in China, Sri Lanka and Russia. The company’s founders have extensive operations, services and technology development experience, resulting in the creation of the only Unified Services Platform that enables a contactless and NFC Mobile Payment Infrastructure.

AMERICAN UNIVERSITY OF MOSCOW American University in Moscow promotes U.S.-Russia business, science, educational, and cultural cooperation by organizing conferences and networking seminars, identifying reliable partners on both sides, bringing decision makers together, facilitating negotiations, and assisting in the establishment of mutually beneficial business ventures. Through its offices in Washington, D.C., New York and Moscow, the university organizes the World Russian Forum — an annual convention in Washington, DC; the presentation of the Liberty Prize for outstanding contribution to U.S.-Russia cultural cooperation; and the bilingual site www.america-russia.net dedicated to the promotion of a U.S.-Russia political, military and economic alliance. >>

IR-LEASING IR-Leasing, one of the first Russian professional leasing companies, specializes in leasing deals with high-technology equipment and turn-key professional solutions of all relevant (legal, tax and finance, accounting, and logistics) issues throughout Russia. One of the top 10 largest Russian leasing companies, IR-Leasing has experience cooperating with the leading Russian corporations and banks. With reliable partners to provide the full range of services for delivery of any equipment and machines to any Russian region, including customs clearance, construction and installation works, IR-Leasing offers a wide range of leasing products. The company is also one of the founders of the Russian Association of Leasing Companies.

new members

HESS CORPORATION Hess Corporation is a strategic investor in Samara-Nafta, an independent exploration and production company operating primarily in the Volga-Urals region.

RESEARCH IN MOTION Research In Motion (RIM) is the designer and manufacturer of the award-winning BlackBerry® smartphone, used by millions of people around the world. The company also creates software for businesses and the operating system that allows the BlackBerry smartphone to provide mobile access to email, IM, apps, media files, the Internet, and more.

RUSSIAN TELECOM EQUIPMENT COMPANY Russian Telecom Equipment Company (RTEC) is Russia’s first company specializing in the manufacturing and development of trusted, world-class equipment for IT and telecommunications.

RTEC adapts technologies of the world’s IT-leaders to conform to the requirements of the Russian market. RTEC was founded in December 2007 and is a part of the Russian Technologies State Corporation. The company manufactures trusted equipment in accordance with the requirements of the Russian certification authorities.

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WILD SALMON CENTER The mission of the Wild Salmon Center is to identify and protect the best wild salmon ecosystems across the Pacific Rim. The organization works with business, government and the public in the U.S., Canada, Russia, and Japan to leverage resources and form partnerships on sustainable use and protection of wild salmon. Salmon is the foundation of the ecological, economic and social welfare of the North Pacific, supporting one in five jobs in the Russian Far East and contributing more than $3 billion annually to the economies of the North Pacific. Conservation of the freshwater ecosystems where salmon spawn helps preserve drinking water, reduce our carbon footprint and support sustainable livelihoods. n

Russia Business Watch Winter 2010-2011

TRIDENT CAPITAL Trident Capital is a leading venture capital and private equity firm committed to empowering entrepreneurs to build innovative and industry leading businesses. Founded in 1993, the firm has more than $1.9 billion of capital under management across seven funds. Trident has invested in more than 150 companies since inception, focusing on investments in the Enterprise Services and Software, Health Care IT, Internet, and CleanTech sectors. Within its targeted sectors, Trident invests across multiple stages, from early startup to expansion stage investment to growth capital and buyouts. Trident has investment offices in Palo Alto, CA and Westport, CT.

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www.dhl.ru

THE COUNTDOWN TO RUSSIA’S WTO ACCESSION HAS BEGUN… GET INVOLVED NOW!!!

Please join us in an historic campaign on Capitol Hill to support stronger U.S.-Russian economic ties

The Coalition for U.S.-Russia Trade, headquartered at the USRBC, is the U.S. business community’s engine for ensuring that U.S. firms and farmers will be able to compete on equal footing in the Russian market once Russia becomes a WTO member.

Sign up now to get involved in shaping the debate on the future of U.S. companies’ access to the Russian market!

For more information, please visit us at www.usrussiatrade.org or call or email TODAY:

Randi Levinas

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Kellen Moriarty

Program Coordinator Phone: (202) 222-0670 Email: kmoriarty@usrussiatrade.org

Special Room Rates for USRBC Members at Marriott Hotels in Moscow Marriott is pleased to provide members of the U.S.-Russia Business Council with favourable room rates at Marriott Moscow Royal Aurora, Marriott Moscow Grand and Marriott Moscow Tverskaya hotels.

With questions regarding this special room rates offer for members of the U.S.-Russia Business Council, please contact Marriott Moscow Cluster Reservations Department at reservation@marriott-moscow.ru or via phone +7 495 937 00 55.

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Moscow, 125047, Russia Tel.: +7 (495) 258 3000 Fax: +7 (495) 258 3099

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