Business Trip

What Medvedev's U.S. visit was really about.


"My goal is to see how everything works here," Russian President Dmitry Medvedev said on his arrival in the United States this week, referring to his plans to build a Russian analog of Silicon Valley in Skolkovo, just outside of Moscow. "This is not a tour."

It often seemed like one — like a delirious good-will mission. On arrival, Medvedev met with California’s action hero turned governor, Arnold Schwarzenegger. "Many residents of our country know you from an earlier stage of your career and of course it generates interest in you," Medvedev told the governor in a looser version of his usual legalese. He had dinner with George Shultz, secretary of state under Ronald Reagan, who greeted a laughing, romping Medvedev on the tarmac in San Francisco, in Russian. He visited Cisco Systems, which waited for his visit to sign a $1 billion agreement to provide networking equipment to Skolkovo. He went to the headquarters of Twitter, where the founders, Evan Williams and Biz Stone, helped him set up his own Twitter feed. With the cameras rolling, he entered his first tweet: "Hello everyone! I am on Twitter, and this my first tweet." The Russian had a typo in it, which, Williams said, made the tweet especially authentic. Everyone applauded.

Medevedev then went to the headquarters of Apple, where Steve Jobs gave him a personal tour — and the new iPhone, a day before it went on sale. (Back home, Russians joked that this was the sole purpose of the visit.) He visited the American outpost of Yandex, the biggest Russian search engine and darling of the Russian tech industry. He met with native Russians working in the Valley. With characteristically Russian largesse, he had oilman Viktor Vekselberg, head of Skolkovo, agree to pay the $1 million per year necessary for the upkeep of Fort Ross, an early 19th-century Russian fort that is now a state park north of the Bay Area. At Stanford, dressed in jeans, he read his warm remarks off an iPad. He sopped up the San Francisco scenery, tweeting a picture of the view from his hotel room and telling Schwarzenegger, "It’s hard to work in such a city."

And the city welcomed him with open arms, applauding, toasting, and smiling at the Russian president. Even with the Belarus gas crisis unfolding in the background, the trip was a lovefest, and the coverage of it in Russia portrayed it as such. Russia Today, the Kremlin’s propaganda channel for Western consumption, which often takes a dim view of America, spoke of "the enduring nature of the U.S.-Russian relationship."

The visit to Washington was equally delightful. The State Department sent an early welcome present, finally putting Chechen militant Doku Umarov — who claimed responsibility for the recent Moscow subway bombings — on its list of designated terrorists. "We stand in solidarity with the Russian people," Daniel Benjamin, in charge of counterterrorism at the State Department, said in a statement. The two presidents agreed to speed along Russia’s long-stalled bid to join the World Trade Organization and closed a deal that would allow the United States to resume poultry exports to Russia. And Obama took Medvedev out for burgers, a testament to their vibrant relationship. (At this writing, Medvedev was only following three people on his new Twitter account: himself, the White House, and Obama.)

"The meeting of two presidents is always a big event," says Masha Lipman, a longtime political observer with the Carnegie Moscow Center. "But this one was planned and talked up in advance as a successful one. There are still lots of divisive issues, just as there are between any two countries, but they were not discussed.

So what, exactly, was the point of this three-day blitz?

One word: investment.

The trip’s laid-back tenor, the image of a laughing Russian president that struck such a contrast to his earlier, shyer self and to that of his slouching, snarling predecessor, and the swirl of news back home about an avalanche of new reforms, was there to show international investors one thing: that this was a new Russia. In fact, that’s exactly what Medvedev told thousands of Western and Russian business leaders who gathered last weekend for the St. Petersburg International Economic Forum, the Russian analog of Davos. "Russia has changed," he said.

The depth of the world economic crisis has come as a massive shock to the Kremlin, which had been buoyed for years by high oil prices and cash from risk-tolerant foreign investors. Back in 2005, with oil prices at $60 a barrel, the Kremlin — and foreign investors — barely blinked at the troubling signs, such as when rogue elements inside the federal tax service forced William Browder and his Hermitage Fund, the biggest foreign investor in Russia, out of the country in a suspicious and violent campaign at the time There was simply too much money sloshing around. The Kremlin was drawing up budgets based on $160 barrels of oil and Russia, then President Vladimir Putin said, was "an island of stability" in a financial world that was already coming apart at the seams.

Those were different times. When world markets collapsed in the fall of 2008, so did oil prices and foreign investment in Russia. GDP growth went from 8 percent to nearly -10 percent. And though Russia managed to steer through the dark days of the crisis with impressive deftness, the depth of the fall — and the fact that oil still hasn’t bounced much above $70 a barrel — has left leaders in Moscow jittery. "The crisis really opened our eyes," says Ivan Ivanchenko, the global head of investment strategy for VTB, a banking behemoth owned mostly by the Russian government. "It showed us that all these gains were the doing of external factors."

In an effort to get foreign investment flowing again, modernization and innovation became the new buzzwords, and Medvedev’s speeches began to focus on diversifying the economy away from oil. But the projects that the Kremlin was dreaming of — a government search engine, nanotechnology, even a homegrown Silicon Valley — were all extremely capital intensive (industry insiders say that the $100 million the Kremlin wanted to dump into the search engine wouldn’t be nearly enough). "Russia needs a real investment boom" in order to achieve its modernization goals, Medvedev says, reflecting the new, frank tone when the Kremlin speaks to the West. But oil is still relatively cheap and the tens of billions of dollars of foreign capital that left the country in 2008 have yet to return. (In fact, foreign investment in Russia fell by over 40 percent last year alone.)

And so, for the last several months, the Kremlin has been trotting out its young liberals to speak frankly to foreigners about Russia’s challenges — the endemic corruption, the layers of bureaucracy, the government interference — as well as its potential and its human capital. At the St. Petersburg Forum, Anatoly Chubais, the man who privatized the Soviet Union’s massive holdings in the 1990s and now heads Rusnano, the state nanotechnology investment fund, exemplified the stance. "It’s well known that consistency, obedience, and aptitude for long and tedious work aren’t our strong points," Chubais told the Wall Street Journal. "Maybe you find those qualities in Europe, in Germany or in China, but definitely not in Russia. Instead, we have creativity — the ability to think up and implement the most unlikely solutions in the most difficult situations. In that sense, I disagree with people who say that the Russian mentality means innovation can’t work here."

At the conference, which in 2007 Putin had used to call for an alternate WTO, Medvedev and his young liberals announced a raft of changes: slashing the number of "strategic" — i.e., crucial to Russian economic security — companies by a factor of five. (Foreign companies have been reluctant to invest in sectors where the state is more likely to interfere. ) Finance Minister Alexei Kudrin suggested purging the bloated bureaucratic corps of 20 percent of its staff, a change he said would save the Kremlin nearly $1.2 billion annually. And, with the world financial system on firmer ground and the appetite for investment increasing, according to attendees, the foreign investors ate it up.

But while much of Medvedev’s modernization agenda is still in the planning phases and tangible changes are still scant, the atmosphere has become a bit freer. Arbitration has become more fair. The Kremlin has eased up on companies like Yandex, once seen as outsiders because of their fiercely apolitical stance. "I feel a thaw," Arkady Volozh, Yandex’s CEO, told me. "They are finally proud of us."

"Maybe I’m breathing the same pixie dust, but there’s real momentum for this," says Esther Dyson, a longtime tech investor in Russia, and one-time member of the Skolkovo advisory board. She was present at some of the events in Silicon Valley and was struck by Medvedev’s level of engagement and bonhomie. "He is so sensible, he understands the issues," she said. "He’s responsive, thoughtful, not at all bombastic. He gets the culture. You could stick him in a cubicle at Google, and no one would notice. But the issues persist, so the question is, can his mentality be expanded to everyone?"

And the issues are plentiful. There are no longer direct flights from Moscow to San Francsico, making cross-pollination difficult. The strict visa requirements that United States and Russia impose on each other’s travelers don’t help either. There is still rampant corruption, lack of transparency in both government and business, and the specter of businessmen ruined by the state, like jailed oil tycoon Mikhail Khodorkovsky and Evgeny Chichvarkin, the self-made cell phone king now hiding out in London whose mother was found beaten to death in Moscow on Easter morning.

There is also the question of whether a thriving sector based on human creativity can exist without an open political system, and whether Medvedev’s enthusiasm and competence can translate into real and effective decisions. He is, after all, still part of a diumvirate. "Medvedev is perfect for this [Silicon Valley] audience; Putin’s perfect for the old audience," Dyson says. "But when the decisions are made, who makes them?" (Unfortunately for the Silicon Valley hopeful, most everyone is sure that, while  decisions are made together, Putin still has final say.) 

And can something like Silicon Valley and an innovation-based economy be copied, imported, and implemented from the top? Russians are deeply skeptical, seeing this as yet another boondoggle for the Kremlin elite. The Western and Russian press are no more optimistic about what is, in essence, a government campaign to change the worldview of its citizens.

"I think you’ll find a lot of skepticism because in Russia, every time they’ve taken on a project of this size, they’ve fucked it up," says Ivanchenko, the banker, who got his MBA in London. "So often, it ended up with people just stealing dough, so there is little faith in this."

But, he adds, that doesn’t mean that all hope is lost. "They’ve posed the right questions, found good people, they’re moving in the right direction," Ivanchenko says. "Without a doubt, we will still have lots of Potemkin villages. We don’t know how do things efficiently in Russia, but maybe we’ll get some of it right. Peter the Great was a despot, and building St. Petersburg was a highly inefficient project. It was built on a swamp, on bones and blood. But it still became a global cultural capital. Even if Skolkovo is imperfect, even if we just learn how to build low quality cars for own citizens, or learn to produce substitute imports, that’s also modernization. It’s still moving the country forward."

There is still a lot of defiant talk of Kremlin-led modernization as well as strident skepticism for much of the population, but more muted — and more informed — voices are starting to emerge, reminding the public that even with waste, graft, and inefficiency, the end result, however far from its quixotic goals, even if it is yet another incarnation of the old Russian archetype of reform-oriented and mild autocracy,  it might still be a better alternative to the present.

In Callifornia, the doubts, if there were any, were kept far from the public cheeriness. Everyone was just too happy to have a friendly Russian president in town, a president who seemed as into their techie lifestyle as they were. When he bid Schwarzenegger a good night, Medvedev did so with the man’s own lines. "I’ll be back," Medvedev laughed. "Hasta la vista." He winked. "Baby," he added. "Hasta la vista," the governor replied, and promptly tweeted it.

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