Ben Aris in Moscow -

One of the few things that Communism in Russia got right was education. Russia is home to some of the best scientists in the world, but over the last two decades the boffins have been unable to turn their ideas into products because of the lack of capital.

Vladimir Putin personally initiated the creation of a venture capital sector in 2006 when he was president and earmarked hundreds of billions of rubles to seed funds that could eventually capitalise on Russia's intellectual potential.

But it has been slow going. Alexander Kondrashov, managing director of The Russian Corporation of Nanotechnologies (Rusnano), the state-owned agency that has been tasked with developing business that can capitalise on Russia's intellectual potential, says that despite all the progress, the state continues to dominate the nascent venture capital business. "There are up to 80 venture capital funds registered [in Russia], but in reality only about 25 are actually doing deals - and some of those are not investing into Russia at all," says the youthful Kondrashov, who sports the long hair and stubble typical of the high-tech sector.

The government set up the Russian Venture Company (RVK) to oversee the distribution of state funds. The idea is that privately managed funds pitch ideas to RVK, which then takes a 49% of a sub-fund worth about $50m and leaves the management to the professionals. "RVK has become a fund of funds to invest only into other funds," says Kondrashov. "We set up 10 funds to do private equity. We never take a management position in those funds, but invite private managers to manage the funds.

Hurdles

The problem is that the private equity business in Russia is still in its infancy and despite the attractive conditions set up by the government, little private capital has got involved. "There is every condition you could wish for, but there is still no impetus to make the [privately managed funds] become very active. The venture capital sector is almost 100% owned by the government. Rusnano has a total of $130bn to invest, but most of this money raised is actually owned by the government," says Kondrashov.

Even with lots of money available, there are still several major hurdles to overcome. One of the biggest problems with creating a new financial sector from scratch is that few have any experience. "Who is going to manage these funds?" asks Kondrashov. "The most pressing current problem is the absence of strong management teams. There are a handful of well-known names, but these add up to perhaps 10 people in all [Russia]. There have been no big success stories (or even failures), so we can't assess the performance of the industry nor the mangers. In this situation it is important that the state is strong."

Rusnano is actively working to solve all these problems. Kondrashov says the next task is to create the legal basis that would allow funds to work: for example venture capital funds are still governed by the same laws that regulate mutual funds; limited liability partnerships, which are legal preference for most venture capital funds, do not exist in Russia yet. All the groundwork has been done and Kondrashov believes that deals will start appearing this year. "2009 was the year of the government. 2010 will be the year of the management companies," says Kondrashov.