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 MOSCOW 00003530 002 OF 002 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