Russia expects big things from its nano industry

By bne IntelliNews June 21, 2007

Tim Gosling in Moscow -

It's been rare recently to make it through the week without one political heavyweight or another predicting great things for Russia's nanotechnology sector. While the Kremlin push looks to make sense in the context of its bid to develop a modern economy, the emergence of a commercial nanotech industry is thought to be some way off in the future, with investors unlikely to show much interest for at least half a decade.

The state's commitment to all things nano is anything but small. One of the stars of President Vladimir Putin's address to parliament earlier in the year, the Russian nanotechnology industry has been pledged some $7bn in state funding for its development over the next five years. Putin mentioned it the previous year's speech too, so obviously this is important to the Kremlin.

Earlier this month, a bill was introduced to the Duma to establish what Kommersant calls, "the largest non-profit organisation in Russia" - the new state-run corporation Rosnanotekh. The non-profit status will offer numerous benefits under tax and commercial legislation, while at the same time Rosnanotekh will be free to operate in virtually any commercial venture it likes.

On June 14, it was announced that Deputy Prime Minister Sergei Ivanov - reckoned to be the frontrunner to succeed Putin - will head the Nanotechnologies Council, on which he will be joined by a posse of industrialists and oligarchs, few of them with any obvious link to the subject. The body will provide expert evaluations on the development of nanotechnology in Russia. At June's St Petersburg Economic Forum, Ivanov reiterated the nanotechnology sector's role in pushing the Russian economy into the global top-five within the next 13 years.

To that end, the push makes sense, say analysts. Although sceptics dismiss nanotechnology variously as coldly calculated (harnessed for weapons technology), or wildly utopian (driven by the desire of oligarchs to enjoy their riches for eternity), it's generally acknowledged to be a key to unlock advances that will impact virtually every facet of the world.

"It's the obvious next frontier for any modern - and therefore high-tech - economy," says Artyom Yukhin, vice president of the venture capital team at Troika Capital Partners.

Just as the transistor was the making of Japan as a global economic leader, the powers that be evidently see a central role for nanotechnology in the grand plan to revolutionise the Russian economy. But it's a long play.

Nano-something or other

That isn't preventing the government push from prompting a rash of projects trading on the buzz, however. Yukhin laughs that up to 50% of opportunities he's offered these days "have nano-something tacked onto them. Those are not so attractive - we have other things to pursue right now. We are interested in businesses that could use advances in nano-scale science to make product improvements and innovations and could succeed within the typical investment cycle of a venture backed company, however."

This reflects the fact that there are "few market-led elements" in the Kremlin's nanotech dream right now, says Alexander Pankov, head of investor relations for Troika Capital Partners. Until now, what little research activity has taken place in Russia has been spread among fragmented and under-funded public institutions only.

While the aim of the strategic emphasis is grand - to make Russia a world leader in the production of technologies that should be the future of weapons, electronics, medicine, and just about every other manufactured item on the planet through advances in materials - the country has a lot of ground to make up, and joins a race that started some time ago in other parts of the world.

Russia isn't alone in recognising the immense potential for commercial applications, let alone the revolutionary impact sub-molecular sciences are likely to have on the globe, and the traditional leaders in the sector (the US, Japan and the EU) are all also increasing the cash supply. The EU, for instance, has dedicated ?3.5bn over the next six years, while the US - world leader in terms of funding - ploughs around $1bn each year into it. Meanwhile, the sector has not gone unnoticed in other emerging giants, with the rest of the so-called BRICs ? Brazil, India and China - also active.

While the new Russian push more than matches what is happening in the developed world, the country still faces two distinct disadvantages.

Firstly, the three traditional leaders in nanotech have established, centrally funded and organised nanotech activities, with former president Bill Clinton's National Nanotechnology Initiative, launched in the US in 2001, seen as accelerating the global race among them.

Secondly, these same countries also have private, commercially led industries, although an EU report from November 2006 expresses concern that while public financing is competitive, the level of private funding in Europe - around one third of the total in 2005 - will see nanotechnology lag, despite there being around 300 nanotech companies active in the EU. In Japan, meanwhile, almost two-thirds of R&D funding is from the private sector. The 54% share of funding that the private sector provided in the US in 2005 alone totalled around ?2bn, with the nanobiotechnology and nanodevice applications benefiting most over the years.

Yet it's not just a funding issue. The base on which Russian nanotechnology will build is extremely low, to say the least.

Many commentators are keen to point to the strength of the country's technical educational base, suggesting this could help accelerate the evolution of the sector - as in other high-tech industries - in the long run. Vladimir Zaluzhsky of Mint Capital points out that, "Today we see strong Russian telecoms with international ambitions. We can expect many other domestic industries to follow the same path. Some of these industries did not exist in Soviet times at all. They have been re-invented, so in that respect Russia can learn very quickly. Additionally, Russia has a colossal scientific background, and a huge domestic market, which provides a very good platform for training and preparing for subsequent establishment in international markets."

However, the number of Russian research institutions involved in nanotechnology is not only dwarfed by the global leaders, but even Bulgaria and Lichtenstein have more active centers.

In addition, says Troika's Yukhin, those that do exist are under-equipped and fragmented in terms of cooperation. The biggest challenge, he suggests, is the simple lack of knowledge capital in the country. Whether the many extremely able Russian nationals that are advancing the industry in facilities across the world could be tempted back home is a question that those leading the nano-push will need to investigate. The weakness of intellectual property rights in Russia is another potential drawback.

That is, of course, assuming the huge volume of state funding trickles down from state-run Rosnanotekh to the frontline.

"One advantage of the Soviet research system," wrote Yulia Latynina in The Moscow Times on Wednesday, June 20, "was that although huge sums were often spent to no purpose, it was impossible to actually steal anything. With state-owned corporations operating in a free market economy, it is a different story. It is like setting up bottomless money pits with direct lines to private accounts in Geneva banks."

"If even 10% of the budget actually finds it's way into equipping institutions and turning them into centres of excellence, then there is potential, but not for some years," says Yukhin. As those centers evolve, he suggests, the first steps of Russia's nanotech sector is likely to be via the expansion of outsourcing contracts with Western companies ? just as is happening in other high-tech sectors.

In other words, the first moves of the Russian nanotech sector towards commercial application - let alone a leading role in the world - will rely on the development of the industry in the West, with venture capital likely to wait some time before taking a punt on it directly.

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