With sanctions biting, Moscow tries new tack: nurturing small business

Occupying the cavernous spaces of a former automobile factory in Moscow's industrial zone, Technopolis has been struggling for years.

The project, a brainchild of the city government, targeted Russia's long underperforming technology sector, providing a state-assisted leg up in a forbidding, oligarch-dominated marketplace. Yet it languished while Russia was rolling in oil wealth and had no quarrel with the West.

But now, amid tightening sanctions on Russia, Technopolis is benefiting from a political fair wind and promises of Kremlin cash. It's attracting dozens of mostly hi-tech start-ups who receive reliable premises, access to government assistance, and special customs and tax privileges. In return, they are to help Russia win the "import substitution" battle by producing goods formerly sourced from the West.

"Sometimes crisis is an opportunity. History shows that for Russians, the worse things are, the better they respond," says Igor Ischenko, the CEO of Technopolis. "We have a lot of energies and capacities in this country, and we could accomplish far more for ourselves than we've been doing."

Yet the biggest challenge may not be helping Technopolis flourish, but expanding its model to Russia's market as a whole amid formidable obstacles.

Slashing red tape – and graft

In a speech to parliament last December, President Vladimir Putin outlined what he called a "rational" program to wean Russia from its deep dependence on Western goods. That's where Technopolis, and a handful of other centers like it around the country, have become central to Kremlin plans. 

For most of the Putin era, Russian big businesses sold raw materials to the global market, and imported consumer goods. They made money coming and going on that model, and actively discouraged the emergence of domestic competitors.

But that's changing fast. Almost 30 companies have set up production in the vast, modern former AZLK plant, which once made Moskvich compact cars for the Soviet middle class. They produce everything from computer components to medical equipment to fiberglass piping. Mr. Ischenko says there will be 50 by year's end, and there's room for scores more in the 3.7 million square feet of floorspace. Some of the tenants are Russian companies, with original technology, but many are foreigners leaping over the growing wall of isolation to establish themselves in the Russian market.

Most of the tenants say the facilities are key to starting up – and getting established – in Russia. They avoid the pitfalls of trying to find industrial premises in Moscow, which can include high and constantly changing rents, capricious landlords, and the occasional visit from gangsters. Technopolis provides consulting services to slash ubiquitous red tape, and CEO Ischenko claims that it locks out corrupt bureaucrats entirely. It has an in-house customs office, and tenants get tax breaks. It offers direct connections with top Russian banks and skilled labor exchanges, and helps with market outreach.

"They come here with a list of issues that make it really hard to start up a business in Russia, and we help them to solve a lot of them," says Ischenko.

"Here we found reliable long-term premises, government support, various other kinds of assistance and patriotic approval," says Alex Elkind, manufacturing director for NeoPhotonics, a California-based firm that is establishing a production facility to make components for the next generation of photonic communications and wireless devices.

He says that since the revelations of former CIA contractor Edward Snowden, it's been a national security issue in Russia to lessen the country's reliance on the West in critical areas, although full independence is an impossibly tall order.

"In particular, Russia wants to become self-sufficient in terms of data storage and signals processing in telecommunications, and so there's a lot of attention to that."

Newly competitive

Mr. Elkind says his company doesn't fall under any existing sanctions, and that the move to Russia is purely business. "We have customers lined up in Russia and [former Soviet] countries; it's a big market. But, of course, we only produce components; most of the main equipment is still made in the West."

Another workshop here belongs to Amitech, which makes molded fiberglass pipes, seats, and bodies for cars and buses. Business development manager Anna Muravyeva says that 60 percent of plastic pipes for water and gas delivery systems were imported before the crisis. When production lines are fully running, Amitech will be able to replace all of that, she says.

"Technologies like this take a lot of capital investment," she says. "The [Russian] state is only now beginning to take an interest in helping to establish them."

Russia's economic downturn is a mixed blessing, many tenants say. On one hand, the market for all kinds of products is shrinking. On the other, the sharp devaluation of the ruble has lowered costs for Russian-made goods. For those who export, or who normally compete with foreign-made products, that's a boon.

"Before the crisis we had tough competition from foreign competitors, such as General Electric and Siemens, but now it's much better," says Maxim Voronkov, commercial director of Profotek, a Russian company that makes equipment for big electricity providers.

"In the past, even big Russian companies were inclined to give preference to the foreign products rather than take a chance on a small young Russian company. But now, our costs are half those of analogous foreign competitors, and our technology is just as good. And 'made in Russia' is suddenly in favor. So right now, we're the winners. Our production has doubled since last year," he says.

'Little sign of reform'

But Technopolis is a tiny island in Russia, and even within Moscow, a sprawling megalopolis of 18 million people.

"We're talking about the need to rebuild Russia's economy from the grassroots," says Alexei Devyatov, chief economist for UralSib, a Moscow-based investment firm. "There are enormous institutional obstacles – corruption, lack of infrastructure, bureaucracy, weak property rights – that stand in the way of business start-ups. Perhaps you can create a little oasis where these problems are mostly solved, but the task is to do that for the whole country."

And that, Mr. Devyatov says, looks to be a bridge too far.

"The state is paying more attention to the need to stimulate 'import substitution' capacities, and throwing some money at this, but as yet there is little sign of the systematic reforms that we need," he says. "I think Russian authorities are mostly sitting the crisis out, and waiting for the price of oil to go back up."