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R 020739Z DEC 09
FM AMCONSUL YEKATERINBURG
TO RUEHC/SECSTATE WASHDC 1390
INFO RUEHMO/AMEMBASSY MOSCOW 1034
RUEHLN/AMCONSUL ST PETERSBURG 0613
RUEHVK/AMCONSUL VLADIVOSTOK 0623
RUEHYG/AMCONSUL YEKATERINBURG 1428
RUCPDOC/USDOC WASHDC 0013

UNCLAS SECTION 01 OF 03 YEKATERINBURG 000079 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN RS
SUBJECT: CONFERENCES HIGHLIGHT BARRIERS TO INNOVATION AND 
COMPETITIVENESS IN URALS REGION 
 
Sensitive But Unclassified.  Please Protect Accordingly. 
 
¶1. (U) Summary:  At recent events in Yekaterinburg, prominent 
government, business, and academic representatives discussed 
issues of the Greater Urals economy.  Several presenters from 
business and government noted signs of improvement in the 
Russian economy, but called for greater diversification of the 
Urals economy, modernization, and innovation.  It was left to 
the academic participants to note that modernization and 
innovation cannot be imposed by decree and that competitiveness 
must come through investment in research and modern production 
techniques.  The importance of "good" employment (e.g., in 
efficient, competitive enterprises) versus "bad" employment 
(mass employment in inefficient, non-competitive dinosaur 
enterprises) was also stressed. End summary. 
 
¶2. (U) Introduction:  The Fourth Annual Urals Conference devoted 
to the Greater Urals Economy, hosted by Ural Ekspert magazine 
and the oblast government, took place on November 13 in oblast 
government offices.  Guest from Moscow included Deputy Minister 
for Economic Development Andrey Klepach, Deputy Minister of 
Industry and Trade Stanislav Naumov, and Acting Director for 
Infrastructure of Rosnanotech Yevgeniy Yevdokimov.  Federal 
officials focused on statistics rather than actions federal and 
regional governments can take to stimulate innovation and 
modernization.  From Sverdlovsk oblast, Deputy Polpred Aleksandr 
Beletskiy and Prime Minister Viktor Koksharov spoke on the 
current state of the regional economy.  Sergey Afontsev, of the 
Institute of the World Economy and Foreign Relations, spoke 
critically about the situation in the regions and monocities. 
On November 19, a conference at the Urals Law Academy focused on 
IPR in the Innovative Economy.  Well-known economist Aleksandr 
Tatarkin, who is a member of the Russian Academy of Sciences and 
a Communist, demonstrated that despite President Medvedev's 
vision, Russia faces an uphill struggle as it tries to reset its 
economy.  End introduction. 
 
Regional Economy Recovering, Post Crisis Planning 
--------------------------------------------- ----------------- 
 
¶3. (U) Sverdlovsk Prime Minister Viktor Koksharov opened the 
Nov. 13 forum with news that the Sverdlovsk oblast economy is 
showing signs of recovery.  In January 2009, the oblast economy 
showed a drop of over 50 per cent compared to 2008; in October 
2009, however, the economy grew by 10-12 percent over September 
¶2009.  The oblast government is now working on a post-crisis 
development plan focused on industrial modernization.  He 
underlined that Sverdlovsk depends on the world market for 
metals and metallurgical products and would benefit from 
diversification.  Orders for machinery products have decreased 
significantly due to the slump in oil and gas production, and 
reduced road construction.  He said that forestry products 
constitute an underdeveloped sector and called for high end wood 
processing in the region.  The oblast plans to develop a new 
plant in Nizhniy Tagil to process gas into methanol and pitches. 
 This plant would develop out of the state-owned Khimplast 
plant.  Koksharov also mentioned the first 
medical/pharmaceutical cluster in Russia where artificial 
kidneys, insulin, anti-viral medicines, etc., are being 
developed and produced.  Finally, he said, Sverdlovsk oblast is 
one of the first regions of Russia to have digital TV 
broadcasting, which now extends to 25 percent of the population. 
 
Low Investment Hinders Modernization 
--------------------------------------------- 
 
¶4. (U) The Deputy Chief Editor of Ekspert magazine criticized 
Russian managers who think strictly in the short term and do not 
invest in modernization required to become competitive.  Andrey 
Klepach compared Russia to China, noting that Russia spends only 
1.3 per cent of GDP on research and development while China 
spends ten times more.  For businesses to be competitive, he 
said, they should invest at least 10 per cent of their income in 
R&D.  He added that infrastructure development is lagging, with 
Russia investing only 2-3 per cent of GDP in infrastructure 
while even Kazakhstan spends 4-7 per cent of GDP in this sector. 
 He called for new laws to allow construction of toll roads, 
which currently are not allowed if there is no state financed 
road serving the same route. 
 
Rosnano Leading the Way 
----------------------------- 
 
¶5. (U) Yevgeniy Yevdokimov, Managing Director of Rosnano's 
infrastructure department focused on Rosnanotech's plans for the 
Greater Urals.  Rosnano does not finance research, concentrating 
instead on commercialization of innovations.  In 2009 it 
financed 38 projects valued at RR 100 billion.  Yevdokimov 
 
YEKATERINB 00000079  002 OF 003 
 
 
stressed that almost all projects receiving support from Rosnano 
can be considered small- or medium-sized enterprises.  In 2010 
Rosnano plans to establish ten regional centers, each with RR 19 
billion to support innovative start ups.  He said major 
challenges for innovative companies are the absence of high-end 
equipment for research and production; lack of demand for 
leading edge products; and lack of financing for the full 
production cycle. 
 
Modernization Cannot Be Decreed 
---------------------------------------- 
 
¶6. (U) Sergey Afontsev of the Institute of World Economy and 
Foreign Relations created a stir when he criticized the 
government for its attitude towards business.  According to 
Afontsev, local officials regard businesses as tax-paying and 
employment machines, without regard for the efficiency or 
competitiveness of the enterprises.  He took government to task 
for supporting enterprises that are not competitive and 
instituting barriers to trade that limit consumers to locally 
manufactured goods and prop up failing industries which face 
inevitable bankruptcy unless they invest in modern technology. 
He said that government cannot impose modernization from above. 
Government should incentivize long-term planning by businesses 
with long-term loans.  According to Afontsev, the longest term 
loan available locally is limited to two years, which is not 
enough to recoup investment in modernization or innovation. 
Afontsev linked low salaries to support of "bad" jobs by 
government.  By continuing to support ineffective enterprises 
merely to maintain employment levels, low labor productivity 
will continue and keep salaries low.  He urged government to 
fund real retraining programs for employees of inefficient 
enterprises to prepare them for modern, high-tech jobs. 
 
E-Government Coming Soon 
----------------------------------- 
 
¶7. (U) A young Yekaterinburg city duma deputy who owns his own 
IT company, Leonid Volkov, spoke about the necessity of 
e-government which he said will increase transparency and 
minimize corruption.  He called on government at all levels to 
standardize documents and forms in preparation for greater use 
of computer technology.  He is currently developing the master 
plan for implementation of e-government in Yekaterinburg and has 
been invited to participate in a similar federal project. 
Volkov expects that e-government will result in layoffs of 
government employees. 
 
Russia Lags Behind 
---------------------- 
 
¶8. (U) Meanwhile, at the Urals Law Academy, Professor Aleksandr 
Ivanovich Tatarkin of the Russian Academy of Sciences took 
Russian government of all levels to task for not investing in 
R&D that would help develop innovative technologies and products 
as well as increase the competitiveness of Russian companies. 
Despite constant "reforms" in education and research since 1999, 
he finds that financing has decreased significantly since the 
era of the USSR.  He cited statistics showing that Russia lags 
behind the U.S. and China in R&D investment:  the U.S. spends 
about 7 percent of GDP on R&D; over 83 percent of Finland's GDP 
is based on innovative technologies; in the U.S., 80 percent of 
GDP is based on innovations; in China, 40 percent of GDP is 
based on innovative technologies.  In Russia, by contrast, only 
1 percent of GDP is attributed to innovation.  Tatarkin 
commented on survey results that highlighted the following 
challenges:  1) Russian consumers do not demand innovative 
products; 2) banks are afraid of lending to innovative 
companies, particularly start-ups; 3) there is almost no 
government support for innovative developments; and 4) the 
education system does not turn out innovators or employees with 
the skills to work in high-tech industries. 
 
Comment 
------------ 
¶9. (SBU) It seems that the academics are ahead of government and 
business.  In these two meetings we heard some frank criticisms 
of the Russian economy and government's role in stimulating 
development.  Academics also presented many suggestions for how 
to reshape the economy to promote entrepreneurism and 
competitiveness.  Business and government presenters, on the 
contrary, repeated the themes of President Medvedev but seemed 
to have no idea how to realize them.  "Innovation" is becoming 
the mantra of political leaders but there does not appear to be 
a common understanding of what this means.  Those in entrenched 
positions, whether business or political, pay lip service to 
ideas of the new economy but then impede measures that might aid 
restructuring.  The recent visit to Yekaterinburg of Defense 
 
YEKATERINB 00000079  003 OF 003 
 
 
Minister Serdyukov is a perfect example.  Serdyukov advised 
defense contractors to minimize new research projects.  As the 
military is a major investor in R&D, its de-emphasis of new 
research will likely dampen the effects of Medvedev's push for 
innovation, modernization, and competitiveness.  The first 
official actions of Governor Misharin provide another example. 
He visited a bankrupt production facility where power had been 
cut because the company, which owes power and wage arrears, 
cannot pay.  But the Governor has decreed that the factory will 
stay open and that it must have power.  This is a clear example 
of a non-competitive enterprise with "bad" jobs.  As the 
academics noted, command economy solutions have failed to lift 
the Urals regional economy out of its slump.  Without a change 
in strategy, the Urals economy has little chance to become 
competitive in the global market. 
SANDUSKY