Rosnano Head on State, Foreign Investment Role in Innovation Development

The company's head (comments ) on its present and future, foreign investments, and the state's role in creating an innovation economy. 

Rosnano, which was created as a state corporation, is following the path of reform that is customary for its chairman of the board Anatoliy Chubays. The corporation was converted into a joint-stock company, and it is preparing for a private offering of a 10% stake and dreaming about an IPO and privatization. In an interview with Vedomosti, Chubays shared his views on what the optimum structure of Rosnano's shareholders should be. At the same time, he spoke about preparing a new company strategy and about why he believes Russia is still standing at the fork of the innovation and traditional roads of development.

(Vedomosti) Since 2011, Rosnano has been a joint-stock company. Has the reform made it possible to increase efficiency, speed up the decision-making process, and so forth? 

(Chubays) It has made it possible -- of course, thus far to a lesser degree than needed. There have been a whole series of major events demanding that we take a new look at our strategy: conversion to a joint-stock company, separation from the Fund (the nonprofit Fund for Infrastructure and Educational Programs, which is a subsidiary of OAO Rosnano -- Vedomosti ), the appearance of borrowed money in addition to (state) money in our capital, and guarantees for those loans. We are now getting ready to sell 10% of our shares. All of this together is inevitably moving us from the logic of a state corporation handing out money for the sake of supporting business to a different logic: We will absolutely be expected to provide a return on our investments and hence to be an efficient business. We must begin seriously updating our strategy. And we are now in the middle of two parallel processes: rethinking Rosnano's existing strategy and taking the first steps in our new logic. Restructuring the company and cutting a number of structural subdivisions that are superfluous in a joint-stock company: 72 individuals have been dismissed since the beginning of 2012. The budget has been reviewed, and all kinds of costs have been cut significantly. The number of company vehicles has been cut by a factor about 5, and administrative costs have been cut by one-third. And we are now moving to the main and most difficult thing: restructuring our portfolio, which is to say changing our project policy and tightening it. We are shutting down inefficient projects and tightening the performance requirements for new projects. 

(Vedomosti) Have these new requirements already been formulated? 

(Chubays) Yes, but in a temporary version for now. We developed the draft of a new strategy and submitted to the board of directors for, as they say, a first reading. We were told that it was clear in principle but that we should work on it more and try to convince them that the direction is correct. I can describe the essence of what we will try to convince shareholders of. When making the transition from a state corporation that hands out money to a business company, it is important to keep the initial goals that I consider mandatory. This means the 900 billion rubles that the nanoindustry should earn in 2015. We were created so that we would create a nanoindustry. And we must create it. After doing this, we must assume greater responsibilities beyond the confines of this goal. They consist of significantly increasing Rosnano's efficiency as a business and returning the money invested with a high yield, which will make it possible to reinvest this money after 2015. Continuing the old strategy means that at some point, we would simply hand out all the money and close up shop -- even possibly after accomplishing the goal of "900 billion in 2015." In and of itself, however, this strategy is a dead end. It does not work over the long term. But if we transform ourselves into an efficient business company, the returns from projects will enable us to invest that money. 

(Vedomosti) In other words, is the focus on a new strategy -- increasing the return on investments? 

(Chubays) Yes, but without abandoning the goal of "900 billion."

(Chubays) There are Akhmatova's tender lines: "If only you knew from what trash/ Poems grow, not knowing any shame...." If only you knew what the outcome of a project would be.... (He laughs.) Often, its reasons are very complicated. But we have always said that we have a project (participation) time of 3 to 4 years and after that, we need to get out. In this sense, there is no violation of any principles. Take IPG Photonics, for example. We went and reached an agreement with (the company's president Valentin) Gapontsev that we would get out of the business. We invested $45 million in IBG Photonics, but we left with $55.4 million -- we received a dollar IRR (internal rate of return -- Vedomosti ) of 21%. During that time, in Frunze, we launched production of lasers that truly never existed before. Or take Moscow State University Professor (Igor) Yaminskiy's project to produce scanning probe microscopes and atomic scales: We invested 50 million rubles in it and got back 77 million rubles (an IRR of 30%). That is not bad at all. There was yet another exit recently -- from a (project to create) a warehouse for chemical reagents: In and of itself, the project was tiny, but the IRR was 27%. In all, we earned approximately 400 million rubles from these three projects. In this sense, we like our initial outcomes: We parted ways with all of them (so to speak) on good terms, and we even have stayed in two projects at the partner's request with a symbolic single share. 

(Vedomosti) Obviously, there are more rejected projects -- as, incidentally, in all venture investments.

(Chubays) Of course, this is normal. We shut down 29 previously approved projects. We had not begun funding any of them, and they are nearly painless stories. We parted ways either because the applicant did not fulfill the conditions or because he found another investor. Our target 900 billion rubles include 300 billion rubles that Rosnano must generate and 600 billion rubles that must be generated independently of us. (And when an applicant finds an outside investor,) for us, it means that he has moved from the "300" to the "600" -- nothing terrible. There are more critical situations involving quarrels: People sign up (for a partnership with Rosnano) and then say that they are not happy with us. But we will have projects that we have funded, and we shut them down. It is possible that we shut (some) down badly, perhaps even before the end after returning the money. We have four or five projects of this type that are "at the breaking point," and a difficult struggle is being waged for each of them. We are trying to devise some sort of solutions, radically cut the business' costs, or find an investor who would buy us out -- and perhaps we can "heal" someone. For example, I recently returned from Japan. To my surprise, the Japanese suddenly showed enormous interest in a project that we consider very difficult. But some things we cannot (fix), and we do not find an investor, lose money, and withdraw from the project. That is exactly what will happen. 

(Vedomosti) Will you not mention these sorts of problem projects by name? 

(Chubays) No, because there is a chance that their situation can be corrected. 

(Vedomosti) How many projects have been funded in all? 

(Chubays) There are approximately 100. 

(Vedomosti) In other words, just 4% to 5% are unsuccessful? That is a small amount. 

(Chubays) It is a small amount if you figure things based on the number of projects. Most regrettably, however, when you figure things based on money, they are almost always the larger projects. Guys, have you received so much as a ruble? 

(Vedomosti) Do you yourself think that by 2015 you will have reached the required 900 billion rubles? 

(Chubays) It is still too early to say for certain. In 2011, the government approved a decree defining what nanoproducts are. We do not like everything about it, but it did in fact define them. The Federal State Statistics Service is now learning to tally things up. We have gotten the first figures -- not our amateurish figures but their professional ones. The 300 billion and 600 billion rubles are (target) nanoproduct sales in 2015. In our strategy, however, these volumes have been spelled out for each year. According to our projections, we are already ahead of this plan: In 2010, 1 billion rubles worth of nanoproducts were produced; in 2011, 11 billion rubles worth were produced; and, our projected figure for 2012 is between 20 and 25 billion rubles (according to the plan, it is just 10 billion rubles). But with regard to the independent 600 billion, things are just the opposite. The figure anticipated this year is 195 billion rubles whereas the planned figure is larger: 330 billion rubles. Briefly and to the point, we are more than fulfilling our plans for products produced by our companies, but for now, the plans for production by independent companies are not being fulfilled.

(Vedomosti) How can the gap with regard to the figures that should be generated by the independent market be closed? 

(Chubays) There is no mechanism here for tackling things head-on, but there are not a lot of mechanisms for tackling things head-on. About a month ago, we held the first nanoindustry congress. These were not the directors of our portfolio companies whom we could call and suggest that they come, but people who are completely independent from us. We did not know whether they would come or what they need us for. They have been getting along without us, and they will continue to do so. But they filled the hall, worked all day, did not want to leave, and thanked us for gathering them. These people and their companies need to be lobbied, and they need to be helped. Go to any region and ask the governor or his deputy, "How are you supporting innovators?" He will inevitably tell you that they have approved a 5-year program, are stimulating demand, have provided property tax and profit tax exemptions, and have taken 150 additional steps. And then go and gather five innovative companies that are in that region and ask them, "Guys, have you received so much as a ruble?" "No." "But why not?" "They are not letting us, and we do not know how to obtain it. They are giving us tax breaks on profits, but my nearest profit will be in 2014, if then...." 

(Vedomosti) So why are you not lobbying them? 

(Chubays) That is precisely what we are doing. Only doing so throughout the entire country from my office is impossible. But I have already personally traveled to 20 regions, and I am continuing to travel. Nevertheless, however, lobbying them requires a self-regulated organization that helps ensure that, in a given region, they are not feeding us a bunch of malarkey about support programs but are actually providing real assistance. 

(Vedomosti) And your fund cannot get involved in this? 

(Chubays) That is precisely what our fund is doing. Just as it initiated the congress, it will also help create the self-regulated organization. (Innovators) need help with technical regulation, metrology, and public relations. In large part, this is also what the fund has been created for. The joint-stock company is responsible for the "300," and the fund is responsible for the independent "600." 

Cherished hope 

(Vedomosti) The government is expecting you to sell 10% of your shares to private investors this year. How are the preparations going? Will you make it in time? 

(Chubays) The talks (with potential investors) are in full swing, and they are very interesting and serious, which is precisely why I cannot say too much about them. There is a government decree, and we will comply with it. We may not comply in December, but we will a little bit later -- in January. The important thing in this story is not the date but the actual event and its quality. It is clear that this 90% to 10% is not the target model and that we need to go farther. The strategy that we will approve in December (in the board of directors) will tell us where to go. Our vision for today, which has not yet been approved by shareholders, is that we need to cut the state share to 51% -- or possibly go even farther. Right after holding the private placement, which we are now doing, we must certainly hold yet another such private placement or, perhaps, convert debts into property. But our cherished hope is to complete this whole episode with event called an IPO -- by 2015. I will emphasize that for now, these are our thoughts rather than Rosnano's strategy. But if we act in accordance with this logic, the first action should set the trend for the entire future ownership structure. In this sense, we would of course like to have investors with a reputation. Having them include authoritative international financial organizations and Russian investors alike is one balance that I would like to strike. I would like for there to be financial and banking structures and technology companies with names -- and for different geographic regions of the world to be represented because we have an ambitious vision for ourselves in 2015. Three balances -- and that is already a minimum of six investors but just 10%. Therefore, this attaching Ivan Ivanovich's nose to Petr Sergeyevich's eyes will be anything but simple for us, and of course, some of the things that I have mentioned now will not come to pass. But some of them will nevertheless come to pass. 

(Vedomosti) Is Rosnano's cost estimate ready? 

(Chubays) We are conducting in-depth due diligence, and every one of our projects is being drawn up every which way. For now, however, I cannot mention any figures. 

(Vedomosti) But what total are you yourself estimating? 

(Chubays) I will not say. 

(Vedomosti) One method of estimating assets is to look at how many comparable companies there are. Are there any companies similar to Rosnano in the world? 

(Chubays) Yes and no. We cannot be compared with a venture fund or with a private equity fund for a whole series of reasons. But there is a history of state-created investment structures on the same scale that were gradually converted to private ones. In Great Britain, for example, we discovered such a structure, and quite recently (already after us), a similar structure was created in Japan -- Innovative Network Corporation of Japan. Each is simply top-notch. They were given $10 billion with the mission of investing in innovative businesses. As in our country, the return is important, but for Japan, the main thing was to be profitable. They were created just 3 years ago; therefore, they are not yet all that well known. Listen, what do you need us for? 

(Vedomosti) The scale of Rosnano's investments in American projects is impressive. If I am not mistaken, more than $1.3 billion has already been invested in them. Why are the Americans taking you on as investors? 

(Chubays) From a geography standpoint, 76% of Rosnano's investments (are being made) in Russia, and 16% are in the United States. In other words, it is our second biggest market. With regard to leading innovative countries, the United States is of course No. 1. Why are we investing there? With each of these investments, we are accomplishing the objective of transferring technology to Russia. There one can find absolutely amazing projects to which we are being added at the minimum as a Russian R&D center and at the maximum as a serious production facility here in our country. For example, how are the latest data transfer systems engineered? As a rule, it is optic fiber along which a signal is transmitted, followed by a converter (that is, electronics), and then by optic fiber again. One serious technology trend is that of replacing electronics by an optical chip, and this requires a serious business manufacturing optoelectronics at the level of the electronic component base. The best company in the world in this sphere is NeoPhotonics, which is located in Silicon Valley. We were in talks with them for 4 years, and we tried every way of getting in to see them. Once we almost got in, but they said "No, we would be better off holding an IPO." But then the NASDAQ crashed, and their shares "went away." When this happened, we invited them and asked if they happened to need money. They needed a little.... All told, the deal consisted of us buying a parcel of their shares, and what is more, creating a production facility in Russia. We negotiated with leading Russian telecom companies that even asked us to give them lectures on optoelectronics, including for drawing up purchase specifications. In America, there is a guru in the field of oncology. His name is Robert Langer. He has a set of ideas related to new-generation pharmaceuticals. One of them is being implemented by the company Bind Biosciences. Briefly speaking, it is targeted delivery of a drug to an affected cell plus packaging of the drug in a nano-size capsule. This technology was initially brought to the preclinical trial stage and later to the clinical trial stage. I saw two x-ray films with my own eyes: In one, the malignant tumor of a female patient who took part in the clinical trials is visible. In the other, the tumor has completely disappeared on her 43d day of taking the drug. Most specialists in this field believe that this is a breakthrough item, especially because it treats a wide range of oncologic diseases. We (a) are a shareholder in this company, (b) have created R&D support for it in Russia, and (c) are gearing toward a production facility and manufacture of (this drug) in Russia and toward sharing of the markets. At the very least, Russia and the CIS (should be) for us. 

(Vedomosti) Why are American companies agreeing to a partnership with a Russian investor? 

(Chubays) As astonishing as it may seem, it is not only for the sake of money. In many cases, when already in the "earnest" stage of talks, I ask the question "Listen, what do you need us for? Explain it to me." They seriously name one of the same three or four arguments. Argument No. 1 is R&D support in Russia: "In Russia, we will find research support that we will not always find in the United States." Argument No. 2 is the size of the Russian market and Rosnano's ability to open it. And the possibility of opening the Russian market is something important to them. In a whole series of cases, they are interested in a Russian technology partner. A specific example from practice is the following: A new chip has been created -- a photodetector that radically increases the quality of photographic and video cameras in mobile equipment. The company that produced this chip tells me, "We want to manufacture photographic and video cameras in Russia." I ask, "But why? You are making a chip and selling it to Sony, which is making a camera and selling it to Apple. Why do you need Russia?" They answer, "Your technology level is such that we believe it possible to create an alternative to Sony, and having an alternative supplier is very healthy for the end user." Such examples actually exist. 

(Vedomosti) You and Yegor Gaydar wrote a book called Razvilki noveyshey istorii Rossii (Fork in Modern History of Russia). But is Russia not still standing at a fork where it could turn toward an innovation economy? 

(Chubays) What the government and president have done for an innovation economy is absolutely sensible, correct, and timely. I fully support the policy of the party and government on this matter. (He laughs.) That is the first thing. Second is that at the same time, it (the policy) has not yet solved the main problem, without which the country cannot truly be transformed: It has not been able to launch a process in business that is independent from it. Everything that Rosnano is heroically doing is being done with money from the budget. Everything that Skolkovo is doing is good -- only it is being done by a state structure. The same applies to Rossiyskaya Venchurnaya Kompaniya (Russian Venture Company). But it cannot be said that Russian business has turned toward the direction of innovations -- that is incorrect. 

(Vedomosti) Is the problem perhaps that the institutional environment is lacking in Russia? In this sense, things are only getting worse, and the state is engineering state capitalism by leaps and bounds. 

(Chubays) There is such a country. It is South Korea. There, generally speaking, everything is going very well with regard to the state's influence on the economy -- with the chaebols, with the seating of each successive chaebol president after a change in the country's president, and so forth. Nevertheless, it is obviously one of the world's innovation leaders. South Korea is clearly beginning to pass Japan by from the standpoint of technological potential. But with what has South Korea's technological potential been created? With market methods alone? No. 

(Vedomosti) You were always a proponent of marketization! Do you wish to say that you have moved to the other camp? 

(Chubays) At my age, it is a little late to be changing camps. The idea that state intervention is always bad for an innovation economy is false. Real policy is always much more complicated that a black-and-white picture. Speaking seriously, I believe that state intervention is absolutely necessary in an innovation economy. For example, what are Euro-1, Euro-2, Euro-3, and Euro-4? They are state intervention in its pure form. But in an innovation economy, the quality requirements of this intervention are extremely high. Euro-1 and Euro-2 are correct, and the ban on incandescent bulbs with a power higher than 100 W is correct. But the attempt to use the state to create innovative business where the government invests money invests money in the market directly rather than through companies is always incorrect. Renewable energy would not have appeared in the world had it not been for states' 20-year policy of supporting it. Thus, state support has created entire sectors of the innovation economy -- social and wind energy. In this sense, the libertarian ideas that the market should not ever allow state intervention anywhere is naive and superficial. And now, as far as forks are concerned, I believe that what has been done to support an innovation economy is correct, but it still has not truly started the ball rolling. In any major process, there is a point of no return. In creation of a Russian innovation economy, it has not yet been crossed.