Russian vanity projects lose luster

SKOLKOVO, Russia Thu May 22, 2014 6:33am EDT

1 of 8. A man stands on a balcony of the Skolkovo Hypercube at the Skolkovo Innovation Center on the outskirts of Moscow May 20, 2014.

Credit: Reuters/Maxim Shemetov

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SKOLKOVO, Russia (Reuters) - Students at Moscow's new science-focused university crowded into a lecture theatre outside the capital earlier this month to hear Canadian-born Nobel prizewinning molecular biologist Sidney Altman speak.

The students at Skoltech are yet to have their own campus because it is still under construction, so the lecture was held at the Moscow School of Management, a long dreary journey from Moscow city centre by metro and then bus up a traffic-clogged road.

"By the spring of 2015 we will have some major laboratories working here at Skolkovo in all of our disciplinary areas," said Skoltech President Edward Crawley, who is leading efforts to develop a university at Skolkovo, Russia's answer to Silicon Valley, with partners such as U.S. college Massachusetts Institute of Technology (MIT).

Russian President Vladimir Putin and other officials point to projects like Skolkovo as an example of how Russia is diversifying its economy away from energy. Other projects include Russia's effort to develop Moscow as an international financial center and to launch a state-backed private equity fund.

But at the start of Russia's annual investment forum in St Petersburg, from May 22-24, the environment for projects such as the Skolkovo tech park is deteriorating. Western sanctions over Ukraine are exacerbating Russia's economic slowdown and giving foreign investors pause for thought.

For decades Russia has failed to deliver on promises to modernize an economy that is focused on extracting and exporting oil, metals and other commodities.

The chill in relations with the West following Russia's annexation of Ukraine's Crimean peninsula make a difficult task even harder.

"All these institutions and initiatives could only work as part of the broader Russian effort to become more integrated with the West," said Steven Dashevsky, founder of hedge fund Dashevsky & Partners in London. "We've seen that movement grind to a halt effectively now."

BIG DREAMS

For Skoltech students, the university is a gateway to the world, offering the chance to do placements with MIT and other colleges.

"Even a month at MIT is enough to open your eyes," said Jelena Nadj, an IT masters student from Serbia speaking at Skolkovo's Hypercube by the campus construction site, where tractors heave mounds of earth. "You change your attitude."

The collaboration with MIT was launched in 2011. The U.S. university is helping Skoltech to conceive and launch its graduate research university, which now has 63 masters students.

MIT said the Ukraine crisis had not affected the alliance.

"When diplomatic and political dialog becomes difficult, the importance of educational and academic research collaborations becomes even greater," said Professor Bruce Tidor, Faculty Lead at MIT Skoltech Initiative, in an emailed statement.

That view is echoed by other Skoltech and Skolkovo partners contacted by Reuters. The risk for Russia is that attracting new money becomes difficult, however.

The Russian government has pledged 170 billion rubles ($4.9 billion) to Skolkovo, its press office said. The project has also attracted commercial partners including U.S. chip maker Intel, which said Skolkovo remains an important strategic partner.

Skoltech's international partnerships, which alongside MIT include London's Imperial College, Zurich's ETH and the Hong Kong University of Science and Technology, are a major draw for students.

"The international experience is one of the biggest achievements of this place," said Skoltech energy masters student Dmitry Smirnov, from Rybinsk, Russia. "Russia really needs international experience and to build to Europe and the Western world."

Analysts say that Russia's increasingly difficult relations with the West could result in reduced access to Western technology for projects such as Skolkovo.

"The chill between Russia and Western countries will undoubtedly diminish further the viability of the Skolkovo project," said MIT Professor of the History of Science, Loren Graham.

In emailed remarks Graham also identified the typically Russian 'top-down government-controlled' nature of the project as an obstacle to progress.

"The real problem with Skolkovo is not based on Western connections but with the nature of the enterprise from the beginning," Graham said.

SANCTIONS BACKLASH

The deterioration of relations with the West has led to predictions that Russia may increase business with Asia or become more isolationist. China and Russia on Wednesday signed a $400-billion gas supply deal, opening up a new market for Moscow as it risks losing European customers.

In response to the West's outcry over Ukraine, Russia has shown it is prepared to go it alone. It plans to set up a credit card payment system to rival Visa and Mastercard and is threatening to close U.S. GPS satellite navigation system sites.

"The worst case is we end up with isolationism and these organizations become sidelined and irrelevant and have a less clear future," said Chris Weafer, senior partner with Moscow-based Macro-Advisory.

"You can get plenty of money in the Middle East and Asia but Russia needs partnerships with established companies with expertise and technology and those are mainly Western companies."

The bulk of foreign funds to state-backed private equity fund the Russian Direct Investment Fund comes from the Middle East and Asia.

The U.S. government is asking U.S. firms to steer clear of Russia. Washington has told executives it is inappropriate to visit the St Petersburg forum this week. The event is closely associated with Putin, who usually delivers a keynote speech promoting Russia as a place to invest.

One U.S. executive whose firm is involved in major Russian state projects said his company was "caught between a rock and a hard place" and "laying low until the situation becomes clearer."

Several Russian state-backed schemes have international ties. London has partnered in a project aimed at turning Moscow into an international financial centre.

An annual trip to Moscow associated with the project and scheduled for June by the Lord Mayor of London is now uncertain to go ahead, said one financial source. The City of London's press office said no final decision had been made on the trip.

"It is a sign of the times that even at this late juncture, clarity is not available," said the source.

TheCityUK, an organization working on the project, said it would continue to review its activity in the light of "the evolving circumstances in the relationship between the UK and Russia and assess how these might impact on the project." ($1 = 34.5447 Russian rubles)

(Additional reporting by Marc Jones in Warsaw, Mark Felsenthal in Washington and Polina Devitt and Maria Kiselyova in Moscow; editing by Janet McBride)

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