Russia seeks technology investment to diversify economy

Russia seeks technology investment to diversify economy
BOSTON — Investors remain bullish about Russia's technology sector despite the perceived setback to democratic institutions with the government's recent arrest of an energy mogul on fraud and tax evasion charges. The positive assessment of the Russian economic landscape was evident at U.S.-Russian investment symposium here last week.

"The arrest of Mikhail Khodorkovsky has of course clouded investment perspectives," said Eugene Lawson, president, U.S.-Russia Business Council. "But I believe it is a bump in the road when you take into account Russia's past and the coming elections."

While investment in oil and other natural resources continues to play a central role, panel sessions and the keynote address emphasized investment in other sectors such as telecommunications and information technology. Indeed, the conference theme, "Toward Diversification of the Russian Economy," sought to generate investment in Russia's technology infrastructure.

"Sixty percent of Russian IT companies are from the private sector," said keynoter Leonid Reiman, Minister for Communications and IT. "This sector is growing at from 15 to 40 percent each year. There are even three Russian telecom companies on the New York Stock Exchange."

Intel Capital invested in a Russian company for the first time this year. "We want to help make Russia more competitive globally. It's good for Russia, for us and the world," said Steve Chase, president of Intel Russia.

According to industry estimates, penetration of the Russian PC market is 12 percent, less than 15 percent for Internet penetration and less than 25 percent for telephones.

Intel, a sponsor of the symposium, wants to take advantage of Russia's highly educated professional workforce. It has some 400 software developers in Nijnyi Novgorod and Sarov who share their design work with Intel's labs in California, North Carolina and Israel. It has also placed computer equipment in the hands of some 20,000 Russian teachers. The machines are used to distribute school cirriculum to teachers around the country. "There are some 2 million teachers in Russia, so we need to scale this pretty quickly," said Chase.

The investments bode well for Dmitry Milovantsev, who is in the midst of implementing the "Electronic Russia" program. The goal is to "connect" Russia's vast regions and the outside world. "We have the enormous task of bridging modern IT with antiquated telecom — it's a real world challenge of the computer/communications convergence phenomenon," said Milovantsev.

Some relief is coming on Jan.1 when a new Russian communications law takes effect that deregulates the mostly government-owned telecom infrastructure. "While not ideal yet, the law will let Russia follow in the steps taken by the U.S. telecom industry when it deregulated AT&T," said Milovantsev.

Chase said Intel's technology could help foster competition in Russia by helping to forge a wireless infrastructure. "We can connect Russia to the world like Peter the Great only wished he could," said Chase, referring to the Russian czar who modernized Russia in the 17th century and built St.Petersburg.

"There are some 35,000, and by some counts some 50,000 villages, without telephones," said Chase, quoting statistics from UBS Russia on telephone penetration in Russia. The chart showed Moscow and St.Petersburg, the two largest and most modern cities in Russia, at 50 and 40 percent penetration, and other regions at only 20 percent.

Chase cited Gartner statistics that 70 percent of phones globally (about 1.5 billion units) will be data-capable by 2010. "We need to make sure Russia is part of that market," he said. "Today most of their phones are for voice only." By the end of 2003, both Moscow and St. Petersburg will have several hundred hotspots for wireless connections.

Three Russian telecom companies solicited investments at the conference. SJLabs is developing proprietary algorithms for voice-over-IP services. All intellectual property was developed internally and the U.S.-registered company (Solon, Ohio) will start to develop software for Russian equipment. So far the company has targeted Western companies and has already licensed technology to ViewSonic, and MCI, among others, according to Alexander Andreyev, President and chief technology officer.

ComSet Telecommunications is a wireless ISP provider in St. Petersburg. Intel recently certified the first hotspot supported by Comset, following the first commercial launch of WLAN service in Moscow and St. Petersburg. The pace of WLAN rollout in St. Petersburg was faster than in Moscow. One reason is that St. Petersburg attracts some 5 million domestic and foreign tourists annually, especially for this year's 300th Jubilee celebrations.

Unlike Western Europe where WLANs are being deployed, Russian fixed service providers are pushing newer technologies like WiMax. Intel is lobbying for global acceptance of the WiMax 802.16a standard as the "grown-up" brother to Wi-Fi, capable of high data rates at up to 70 km.

With a typical range of up to 30 miles and data rates up to 70Mb/s, WiMax is expected to help bring broadband access to rural areas and developing countries where it isn't economical to deploy traditional last-mile connections. Two broadband wireless equipment makers have announced plans to use Intel's chips in their 802.16a products. Aperto Networks and Airspan Networks said they will develop equipment based on Intel's 802.16a-compliant silicon and Intel expects to have WiMax-certified silicon in the second half of 2004.

The WiMax Forum is expected to test 802.16a products for interoperability. "WiMax is expected to open broadband penetration in Russia from the current less than 1 percent to 10, 20 and even 30 percent very fast if all the stars line up in Russia," according to Comset's spokesperson.

Meanwhile the third Russian vendor, InfiNet is developing wireless routers for the Russian fixed wireless market with more than 80 percent of all networks built there using InfiNet products as a backbone element, according to the company. The routers are designed for wireless fixed broadband metropolitan area networks operating in the 2.4 to 2.483 GHz and 5.25-5.35 GHz frequency ranges.

InfiNet worked with ArtCommunications Company, one of Russia's largest wireless carriers to design and deploy a fixed wireless access network in Moscow. The network consists of 22 base stations connected by optical backbone. It covers the city of Moscow and up to 60 km in its suburbs and rural areas.

With Russian banking and tax reforms on the horizon, these and other companies hope to attract investment for expansion despite the challenges in the Russian economy. "We now have $1.5 billion in Russia," said Philip Merrill, president and chairman of Washington-based Export-Import Bank of the United States. "There needs to be diversification outside the oil industry."

Investment is growing, with the U.S. currently "the largest foreign investor in Russia," according to U.S. Commerce Secretary Donald Evans. "Moody's recent upgrade for Russian securities is certainly a good sign for attracting capital."

German Gref, Russia's Minister for Economic Development, acknowledged that many economic hurdles must be overcome, but "there is no turning back. President Putin's inner barometer is to be liberal in economic matters," said Gref.