News / Economy

High Risk for Venture Capital in Russia

Russian President Dmitri Medvedev met Tuesday with a group of American venture fund managers in a bid to increase foreign investment in his country's fledgling high-tech industry. The Kremlin leader spoke frankly about the risks facing investors in Russia, including a less than ideal tax system, ineffective legal safeguards, and a meddling bureaucracy.

Speaking with 22 managers of American venture funds at his residence outside of Moscow, Russian President Dmitri Medvedev said the venture capital market in Russia is very poorly developed.

The Kremlin leader says there is a clear tendency in Russia of spending government funds on research and scientific development, and a shortage of venture capital. Mr. Medvedev notes there are about 20 venture funds in the country with combined assets of roughly $2 billion. He says that is virtually nothing compared to the United States and other countries.

Mr. Medvedev criticized Russia's top-down management approach, noting that many of the country's development projects traditionally have prospects only if they are undertaken by the country's top leader. He proposed a flat tax for investors, but cautioned the country's tax system is less than ideal.

The president said Russia has good business legislation, but noted it is not often observed, particularly in the courts. Mr. Medvedev also criticized the Russia bureaucracy for meddling in business affairs.

But business is demanding more. The director of the Rus Rating firm in Moscow, Richard Hainsworth, told VOA Mr. Medvedev needs to back his words with action.

"I think there needs to be some significant movement in actually punishing some of the bureaucrats who are working against the well-being of the Russian businessman," he said.

Corrupt Russian bureaucrats have a reputation for demanding bribes and conspiring with courts to steal business firms.

Richard Hainsworth says the inherent risk in the venture capital world is compounded by a heavy bureaucratic reporting burden in Russia.

"The next risk that a business runs in this country is that if you demonstrate that you are successful and that you have an extremely good business, you begin to attract the attention of the business sharks, who then want to have a piece of the action," added Hainsworth.

Corrupt bureaucrats are suspected in last November's death of attorney Sergei Magnitsky, who died in pre-trial detention after allegedly being denied urgent medical attention for pancreatitis. He was held for tax evasion, charges seen by human-rights activists as trumped up.

Magnitsky represented the London-based Hermitage Capital Management Fund, formerly the largest foreign investor on the Russian stock market. Its chief executive, William Browder, alleged Russian Interior Ministry officials colluded with tax authorities to steal $230 million from the national treasury. President Medvedev sacked 20 prison officials after Magnitsky's death, but no one has been prosecuted.

Russia is seeking venture capital to build its own version of Silicon Valley, the high-tech innovation center in California. The Kremlin is encouraging construction in the town of Skolkovo outside the Russian capital.

Professor Natalya Volchkova, of the New Economic School in Moscow, notes that innovation involves intellectual property, which she says does not enjoy adequate legal protection in Russia.

Volchkova says there are innovative Russian companies, but they sell most of their products abroad. These companies, she says, have foreign investments and foreign management, but few sales in Russia, so in this regard, intellectual property rights are not much of an issue; the owners are concerned how their rights are protected elsewhere.

But Volchkova concedes the problem of pirated intellectual property is a problem for American companies that sell their goods in Russia.

Mr. Medvedev told the U.S. venture fund managers that businesspeople create jobs, provide products for the economy and generally serve as the foundation of a flourishing society. But he said many Russians maintain a negative image businesspeople that has carried over from Soviet times.

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