Page 131 - IFR Opportunities in Russian capital markets

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ifrintelligence reports/Opportunities in: Russian Capital Markets
Russian companies have been very active in software development and a sizable chunk of the research departments of leading global software companies, such as Microsoft, are staffed with Russians.
The Russian company Paragraph is a world leader in technology to read handwriting, and AB software has produced some of the best software for optical character recognition. And much of the software that runs mobile phones around the world is now developed in Russia.
According to First Deputy Prime Minister, Dmitry Medvedev, the Russian software market was worth RUB361bn (US$13.8bn) at the end of 2006, of which hardware accounted for RUB212bn (US$8.16bn) and services for RUB91bn (US$3.5bn).
"The offshore software market is now worth about US$2bn and grows by 70–80% a year", Medvedev said in March 2007. “At the same time, Russia's domestic software market is worth about US$30bn."
More recently, Russian entrepreneurs have been moving into biosciences, where the Soviet Union was also a world leader thanks to the efforts it put into germ warfare.
Early funds
Venture capitalism is a new idea in Russia. The problem is not that Russian science is not an eligible candidate for venture capital – it is – but that there is more opportunity than money in Russia’s increasingly vibrant economy.
“The main problem for Russian venture capitalism is you can still get much better returns from private equity investments. Why take on the technology risks if you can still earn 80–90% a year from more certain private equity investments?” says Dmitriev.
Mint Capital is probably the first true venture capital to set up in Russia, focusing on high-tech start-ups in 2000 with US$21m under management.
The biggest Russian venture capital fund is probably Alfa Group’s Russkiye Tekhnologii (Russia Technologies), which teamed up with the Israeli Infinity Venture Capital to form RT-Infinity Venture Partners in July 2006 to look for opportunities in Russian high-tech start-ups and small firms.
Russkiye Tekhnologii has only been around for three years and looked at 500 projects in the high- tech sector but invested in only eight projects. However, it provides a rare example of a Russian technological development that has been turned into a commercial project when it began exporting a new highly efficient motor to India for use in mopeds.
Russian Venture Company
Russia will launch a series of state-backed venture capital funds in 2007, as part of the Kremlin’s efforts to revive the intellectual might that made the Soviet Union a superpower.
President Putin has personally spearheaded the effort and told government officials at the end of last year to “create a venture fund, any fund, just do it quickly.”
The project to set up the Russian Venture Company (RVC) was formally announced in January 2006 and since then industry the government has roped in professionals to make sure that the US$800m earmarked for the effort by the Kremlin is not squandered.
The RVC is the third major fund set up by the Russian government in the last two years and, rather than start from scratch, the Kremlin decided to base the fund on the assets of Construction Division 1 of the Federal Atomic Energy Agency, which is (if you think about it for a minute) probably the closest thing the Russian government has to a venture capital structure.
After the fall of the Soviet Union, Russia’s well-financed defence-oriented programmes have collapsed. Most of Russia’s scientists were employed in the military-industrial complex and, while the country still has a lot of gifted and experienced scientists, there is a total lack of market mechanisms for identifying promising projects and providing them with capital to bring products to the market.
"The Russian Venture Company will become a Fund of Funds which will accumulate RUB15bn (US$560m). Up to RUB5bn will be allocated to the company in 2006, up to RUB10bn will be allocated (to the company) in 2007", Gref said in August. "We aim to attract more than RUB30bn (US$1.12bn) to the Russian high-tech sector by the end of 2007.”
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