Tuesday, 23 June 2015

Russian Hypernnovation: Bears at the Gate.

'Isolation' of ideas not only impedes innovation; it also clearly obstructs the communication of big ideas!

So, it is with no surprise that stacks of first to the world discoveries, ideas and technological inventions went on during the Soviet Union’s epoch that the Far East and West did not get to hear about.

In the journal Carbon, an editorial written by Marc Monthioux and Vladimir Kuznetsov (c.2006) described the origin and discovery of the Carbon Nanotube; currently attributed to Sumio Iijima working at NEC in 1991.

However, in 1952, clear images of 50 nanometer diameter tubes made of carbon atoms were published in the Soviet Journal of Physical Chemistry. Back then, Soviet technical publications were severally limited during the Cold War and mostly published in the Russian tongue. This only again underlines the importance of Hyperinnovation.

Russia is known for its pioneering culture; and has an account of archetype innovation that is revolutionary and radical. For a start, Russia was the first to introduce decimalised currency in 1704. Then there is Punch Card Informatics; Centrifugal Fan; Electroplating; Domestic Heating Radiator; Periodic Table; Cathode Ray Tube; Light Emitting Diodes; Space Rockets; Zero-Gravity Instruments; Sputnik Satellite; Vostok 1 and the first Cosmonaut Yuri Gagarin;  the first Space Station Salyut 1; and a few more that we in the West said we invented; but definitely did not: the Portable Mobile and Pocket Phone; Space Tourism; the Portable Nuclear Power Station; and the elucidation of the interrelation of Mass-and-Energy in terms of the Umov-Poynting vector E=Kmc2, published as early as 1873 (was Albert Einstein really the first to elucidate and describe the interrelation of mass and energy? This I will explore in a later post?)!

A truly audacious chronicle; but will the Russian people maintain this courageous trajectory in the coming future? Economically, it is clear that the Big Bear is making headway. Russia holds the tenth largest free market system at $1.175 trillion Norminal Gross Domestic Product (N-GDP) in 2015; $3.458 trillion Purchasing Price Parity GDP (PPP-GDP) $1.885 trillion in 2015; in 2012 imports were in excess of $322 billion; exports were some $530 billion. The oil and natural gas sector contributes a lion’s share of the country’s exports and makes up a majority of its nominal gross domestic product.  Gross external debt was at ~$519 billion in 2012; and norminal productivity is roughly equivalent to 3 percent of the world’s economy. As I said, Russian economic activity has come long way in such a short period.

The underlying saga can perhaps be seen more acutely in terms of private wealth, because just before the fall of the wall there were no official personal riches. Just over 25 years ago, not one indigenous private Russian millionaire, let alone billionaire existed. Now there are 53 billionaires, with a combined worth of $282 billion.

As an insight here, one GigaAire sampling the trappings of billionairedom is Yuri Milner, an investor in Facebook, Groupon and Zynga, has recently purchased a lavish 25,500-square-foot mansion in Silicon Valley for $100 million, believed to be the most ever paid for a single-family home in the United States.

It is true to say that the Russian billion dollar moguls, as we know them, emerged under some controversy. Particularly the inscrutable ‘Russian Oligarch,’ describing the vast, fast-wealth of Russian entrepreneurs acquired from the transfer of Soviet owned industries into the hands of the private sector. This rapid privatisation process was imaginative to say the least, involving large scale buyouts by politically connected oligarchs of major state-owned firms vis-à-vis loans-for-shares which left highly concentric equity ownership. As of 2012, Moscow has the second highest billionaire populace of any city on the planet (London is first).

And as with many a revolutionary economic kick-start program, there was bound to be difficulties; even troubled times. Here, Russia underwent tremendous stress as it moved from a centrally planned economy to a free market system. Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998.

Lower prices for Russia's export earners (oil and minerals) and a loss of investor confidence due, in part, to the Asian financial crisis at the time exacerbated financial problems. The result was a rapid decline in the value of the Ruble; flight of foreign investment; delayed payments on sovereign and private debts; a breakdown of commercial transactions through the banking system; and the threat of runaway inflation: a long-winded storm that Russia had no choice but to navigate.

10 years on, Russia was on more than a stable footing, weathering the 2008 banking calamity extraordinarily well. By 2009 N-GDP increased to 8.1 percent growth, the highest percentage since the disbandment of the Soviet Union. Monthly retail sales in Russia averaged about $50 billion, while the industry recorded revenues of ~$470 billion. In turn, both direct foreign and domestic investment increased, inflation moderated, and relatively stable exchange rate for the Ruble made way for durable economy. The World Bank declared that the Russian economy accomplished ‘unprecedented macroeconomic stability.’

The one attribute that few would deny, is that the Russian people are smart (hence the innovations above). Russia has a higher proportion of university and college graduates in working age than any other country per capita. Higher, in fact, than Japan and the United States. Russia also has a greater proportion of science researchers in its workforce than both the Netherlands and Italy (which are both relatively high in ratio). Hence, while China is a global leader in manufacturing and India in the export of services, Russian intellect and advanced skills are creating opportunities for the nation to become a technological innovation powerhouse. Got a tech-quandary? Go to Russian!

At this early stage of Russia’s modern technological development, the federation has a number of high-profile initiatives already attracting global attention. Perhaps the best known is the work of the Skolkovo Foundation: a non-profit organization established by the Russian Government to accelerate the transformation of Russia from a resource-based to an innovation-based economy. Its flagship project is the ‘Skolkovo Innovation Centre’ in Moscow, which is growing as a major hub for the dissemination of both explicit and tacit knowledge about innovation being embedded within Russian culture as a systemic phenomena. Supporting ‘open innovation’ conferences, pioneer festivals, foreign insight expeditions, inter-nation-expertise partnerships, ‘Technopark’ development, and promotion of popular science and science-in-society initiatives.

One gauge here in terms of both intellect and innovation capacity is Russia’s regular triumphs at the ‘Battle of the Brains’ programming contest held in Warsaw. In 2012 three Russian students from St. Petersburg State University were named world programming champions. And this was no lucky trend spike, as different teams from the same University have won the contest three times in the past over 5 years solving some of the world’s most demanding programming challenges. Many Battle of the Brains contestants from St. Petersburg University have since gone on to found winning businesses.

One out crops is VK. Short for VKontakte.ru, Russia’s equivalent to Facebook. A Russian language social networking service popular in Kazakhstan, Ukraine, Moldova, Belarus, Israel and America. Set up by Pavel Durov (another smart St Petersburg Graduate) in 2010. Recognized as the second largest player in Russia's nascent social network market. VK has been able to hold off Facebook in its core countries, despite the American network's efforts. As of September 2015[update], VK had at least 100 million accounts, with ~37 million daily users. As with most other social networks, the site's core functionality is based around private messaging and sharing photos, status updates and links with friends. VK also has tools for managing online communities and celebrity pages.

Yota, another St.Petersburg prodigy, is a 4G commercial maintenance network provided in Novosibirsk, Krasnodar, Moscow, Sochi, Samara, Vladivostok, Ufa, Kazan and St. Petersburg. Yota new venture is Long Term Evolution (LTE) an innovative technology of data transfer for 4G wireless communication and fast mobile Internet service. In 2014, Yota reached 180 Russian cities, providing the speed of up to 100 Mbit\s.

Kaspersky Lab is perhaps Russia’s best IT success story, specialising in computer security and antivirus company. A developer of secure content and threat management systems, holding the world’s largest privately held vendor of software security products. Kaspersky is working with almost 200 countries; providing protection for over 300 million users and more than 200,000 corporate clients.

Not surprising that the ITC industry has seen high growth concentration in high-end niches such as algorithm design and sub-microelectronics. And no surprise that Russia is now the third largest destination for outsourcing software behind India and China. In sync, Russia's telecommunications industry is rapidly growing in size and maturity. By 2012, there were an estimated 4,900,000 broadband lines, and a mobile subscriber base of 215 million; the largest in Europe.

While the early stages of ITC communications development across Russia are largely related to the implementation of basic infrastructure, the infusion of hi-tech skills paves the way for the development of smarter pan-Russian systems that will enable step change communications improvements across transportation, healthcare, utilities and education

And this kind of core-technological stimulus seems ripe at this time, as Russia’s population of 142 million people have suddenly turned into the largest single consumer market in Europe. Now couple this to fastest rising new middle class in all the emerging nations, and then compound with other neighbouring countries and Russia has on the order of 300 million Russian speaking consumers on and within its doorstep. Worldwide, High-Net-Income middle class consumers are forecast to grow from ~300 million in 2012 to ~1.2 billion in 2030, according to The World Bank. Russia is set to capture a large percentage of this market demographic.

Among the many consumer sectors, retail sits as the chief market. Considering the legacy over the last century, the Russian people were hardly known as a nation of spenders. But free markets plus low cost housing and utilities plus political stability put consumer behaviour and consumer confidence into orbit.

The Russian consumer exhibits one of the highest disposable incomes in the world at around 70 percent in 2012. Luxury goods feature high on the list of purchase, as well as fast-moving consumer goods, not to mention food and beverage products, makes for a very lucrative consumer market. Food retailers contributed about half of the total industry turnover last year. The past decade saw the sector growing at a scorching pace, with revenues increasing six-fold, creating five million new jobs.

McDonald’s was the first taste of retail brand consumerism back in 1990. Back then, the presence of multinational brands was limited to magazine clipping and under the counter transactions, and then only in metropolitan zones like Moscow and St. Petersburg. But this was the beginning.

Despite the bureaucratic hassles involved in setting-up and establishing new businesses, Russia is too big a market to be ignored.

PepsiCo’s, for one example, $3.8 billion takeover of Wimm-Bill-Dann, Russia’s largest juice and dairy product firm. And these kind of deals are an important signal as far as foreign direct investment in Russia is concerned. The transition was an eye-opener for foreign investors, highlighting that the consumer sector is a burgeoning subdivision for overseas investment. The deal also made Russia Pepsi’s top international market, replacing Mexico.

The Limited, known for its lingerie brand Victoria’s Secret and Japanese fast fashion apparel retailer Uniqlo expect to open more stores in the country. Consumer giants Kimberly-Clark and Unilever also intend to expand their presence in Russian. In addition to retailing, foreign automobile brands have made direct investments. French car maker Renault has a quarter share stake in Russian AvtoVAZ, known the Lada brand. Daimler plan to collaborate with GAZ to produce Mercedes-Benz Sprinter vans. Along with a minority stake in Russian truck manufacturer Kamaz.

Then of course there are Russia’s ultra-vast natural resources, amongst the largest deposits in the world. Precious metals, raw engineering and construction materials, oil, coal and gas set Russia’s future in good stead.  Presently, western Siberian reserves supplies two-thirds of Russian oil. But Russian arctic waters are expected to contain 100 billion tons of oil and gas; and another 4.7 billion barrels in oil exist in East Asian Russia. 

Currently Russia is in a mini-recession. Inflation is high as one result of lowered oil prices. However, as long-term global demand for oil doubles by 2030, higher world oil prices will only cement Russia’s prosperity. 

Clearly the Russian Bears are at the Gate.

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