RUSSIA: KAZAN FAIR VENTURES INTO INVESTMENT ARENA

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003530

SIPDIS

SIPDIS

DEPARTMENT FOR EB/BA (MERMOUD),EUR/RUS (GREENSTEIN)

E.O. 12958: DECL: 07/19/2017
TAGS: ECON EINT RS TNGD
SUBJECT: RUSSIA: KAZAN FAIR VENTURES INTO INVESTMENT ARENA

REF: A. MOSCOW 3354

B. MOSCOW 1148

Classified By: EST Counselor Daniel J. O'Grady. Reason 1.4 (b,d)


1. (C) SUMMARY: Tatarstan recently hosted a Regional
Venture Fair in the historic city of Kazan to showcase the
development of local innovative enterprises. The impressive
array of high technology companies at the fair and at the
regional technopark contrasted with the decaying condition of
the central city. Belying the modern face presented to the
outside world, cronyism and connections continue to influence
economic choices in the region, even in a purely cosmetic
contest to choose the "best" company in the fair. END SUMMARY


2. (SBU) Welcoming international venture capitalists to the
thousand-year old trading city of Kazan, the Republic of
Tatarstan and the Russian Federation Ministry of Education
and Science (MES) hosted the Second Regional Venture Fair
from July 10-11. Over 500 entrepreneurs and potential
investors -- some ten percent coming from Germany -- attended
the fair, which showcased more than 75 local enterprises
drawn mostly from the information technology (IT) and oil and
gas sectors. Underlining the importance attached to the
Venture Fair, MES Minister Andrey Fursenko keynoted the event
with a call to innovation, highlighting the new RF
nanotechnology initiative. The President of Tatarstan,
Mintimer Shaymiyev, attended the morning session on the
Investment Attractiveness of Tatarstan and contributed
off-the-cuff comments to the presentation by Tatarstan First
Deputy Prime Minister Ravil Muratov. Although Muratov
discussed the development of state-private partnerships for
innovation technology, Shaymiyev emphatically, if somewhat
Delphicly, said "The government must do everything, simply
everything."


3. (SBU) IBM's director for Global Engineering Solutions in
Eastern Europe emphasized that Tatarstan's economic growth
rate exceeded that of the Russian Federation: 6.9 percent
versus 6.7 percent. He also said that Tatarstan fit IBM's
development pattern of expanding from the local market to the
global market and noted that its political status had been
characterized as "stable" by the major ratings agencies.
(NOTE: Tatarstan has recently negotiated a measure of local
autonomy from Moscow. (Ref A) END NOTE) He also
characterized the region as "IT-ready" with collaboration
between business and scientific institutes and expansion of
technoparks and innovation zones. On the con side, he noted
that Russia has dropped from number 52 to number 57 in a
measure of "E-readiness" due to lack of government policy and
vision. He said Tatarstan was in dire need of public-private
partnerships and it lacked adequate transportation
infrastructure. On balance he concluded the reason to invest
in Tatarstan was that "others will invest if IBM does not."


4. (SBU) On the night of our arrival, EST joined a group of
foreign investors and international business consultants for
a tour of the Technopark "Ideya" located on the grounds of an
historic German factory established under the auspices of
Peter the Great. The director of the technopark Sergey
Yushko proudly showed us the newly renovated facilities that
housed 47 innovative enterprises, ranging from local software
developers for the oil and gas industry to regional offices
of IBM and Siemens. He said the park was launched in 2000 on
the basis of an "incubator" project and had been established
in its present configuration in 2004. He acknowledged that
the initial development had made some mistakes in selecting
participating companies, which impressed the consultants we
talked to who were familiar with a pattern of such officials
denying missteps. Yushkov showed us a model of a new and
impressively-modern building for expansion of the technopark
that he said would be built in the next few years at a cost
of 100 million rubles ($3.9 million).


5. (C) Most of the comments to EST from business
participants emphasized the strides local entrepreneurs had
made. The new American head of Gazprom's $60 million venture
investment fund, Joanne Walters, who had spent the last few
years in Chelyabinsk spotting potential targets for venture
projects, said the major weakness in startup companies and
scientific institutes was a lack of management skills. Her
previous experience in organizing the Georgia Tech
nanotechnology center led her to conclude that Tatarstan had
the requisite research facilities and creative scientific
personnel, but needed the ability to identify commercial
applications for discoveries and to leap from the local
market to the larger Russian market and, ultimately, to the
global market. Nevertheless, she planned to start from a
base of investments in the Moscow area and to seek
opportunities in Tatarstan. She was prepared for some slow

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starters, and her criteria -- not necessarily shared by her
employer Gazprom -- was a return from 0 percent up to 15
percent per year over a period of 5-7 years, with an equity
share of 30 to 50 percent.


6. (C) Despite the impressive display of innovative
companies at the fair, there was an underlying current of the
old way of doing business. Walters and an investment
consultant who had formerly been with the EBRD were part of
the judging contingent who evaluated the companies taking
part in the fair. The judges selected the companies with the
best proposals and prospects on the basis of their business
plans and ranked them accordingly for the organizers of the
fair. However, they said an official from the regional
investment office awarded the prize for the best participant
in the fair to a company with a weak business plan that had
not even ranked on their list. When they asked the official
to explain his choice, he disingenuosly said "They're good
people."


7. (C) COMMENT: Tatarstan has developed one of the best
technoparks that we have seen. (Ref B) In walking around
Kazan, however, it is apparent that progress is highly
uneven, with large areas of the center of the city in decay
amid pockets of luxury and high technology. The apartment
building of the long-serving (1954-78) Minister of the
Interior looked like it had fallen into disrepair since he
died in 1993. Regional governments will need to deal with
such spotty growth and avoid the pitfall of choosing business
partners, like beauty contestants, for non-economic reasons.
BURNS