After the financial turmoil of 2008 it became evident that Russia's resource based economic model is not working anymore and the country desperately needs to find new growth drivers. The government came up with a strategy to develop high technology sectors such as pharmaceuticals, electronics, nanotechnology and others. Dedicated federal programmes targeting these specific industries have been adopted while a general Strategy for Innovative Development until 2020 was introduced to address common issues of the innovative business in Russia.
During the first three years of Strategy's implementation (2011-2013), the key objective for the government was to introduce the concept of “innovations as a means of competitive advantage” for businesses and society. The Russian government has invested heavily in developing service infrastructure, such as technology and industrial parks, business incubators, development institutions, centres of technology transfer and collective. For example, in 2007-2013, seven technology parks were created in Russian regions and in 2014 alone, the record number of five technology parks has been launched.
Companies have received access to a variety of instruments, including infrastructure and equipment access as well as different incentives (tax, customs) and financing mechanisms. A so-called “innovations lift” comprising dozens of development institutions (Russian Corporation of Nanotechnologies — RUSNANO, Russian Venture Company — RVC) has been created to provide funding to innovative companies at every stage (from pre-seed to maturity).
Venture capital market development was another notable achievement. It should be noted that it was practically nonexistent in the country until 2006 when the state-run Russian Venture Company was created. The Russian venture capital market is among the largest in Europe, dozens of funds are active, investing primarily in IT startups (94% of venture capital), but as well as biotech, power generation technologies and other areas. To bridge such imbalance is the next priority of the Strategy.
Initial progress was achieved in increasing efficiency of R&D at the universities and research institutions as well as in enhancing cooperation between business and research community. A critical change was made in developing mechanisms for commercialising new products and services. As a result a number of universities across Russia managed to form 'innovation belts' that include hundreds of small companies that emerged from the universities' research, some of them already launching production.
The government has also been encouraging international cooperation, providing grants for students and researchers to study abroad as well as inviting renowned foreign scientists to Russia. To this end, work permits acquisition process was simplified for international researchers.
The market participants have positively estimated the results of implementation of the Strategy's first stage. In a survey conducted in April 2014, 40% of respondents indicated the environment for the emergence and commercialisation of innovations in Russia has become more favourable.
However, the situation is far from ideal. 67% of respondents still believe that foreign countries offer broader opportunities for self-fulfillment of R&D personnel. Intellectual property rights protection, red tape, expensive credit are some of the few critical issues that Russian innovators face.
With its sluggish economy, the chances of R&D spending increases in 2015 are slim. The country is currently the 9th biggest R&D spender (Source: Battelle Memorial Institute) with $40bn in 2014. This is more than 10 times lower than in the US and seven times less than in China.
Yet one of the most troubling points for Russia's innovation is its tremendously low entrepreneurial activity level. The Russians with entrepreneurial intentions rank among the lowest in the world. In 2013, not more than 2.6% of respondents from Russia planned to start their own business in the next 3 years versus 27.2% in Brazil; 14.4% in China; 12.2% in the United States; 24.0% in Israel.
The second stage (2014-2020) of the Strategy envisages the considerable increase of private investment in technology.
However, the economic sanctions imposed on Russia by the West in retaliation to crisis in Ukraine coupled with falling oil prices can bring to naught all the government efforts to develop domestic innovation. Most analysts predict a decline of GDP in 2015 by 4-5% and a minimal economic growth in the years ahead.
With foreseen huge investment requirements for another portion of Russian mega projects (FIFA World CUP 2018, Kerch Strait Bridge), as well as increasing burden of social expenditures, there is a risk that the state budget will not support sufficient R&D spending.
The pharmaceutical market was one of the bright spots in Russian economy recently and have demonstrated resilience in times of political and economic instability.
The key imperative for the industry is import substitution. By 2018, up to 90% of drugs from the Vital and Essential drugs should be produced locally (in 2014 - 60%) as outlined in the Pharma-2020 strategy.
The government has been supporting local and attracting multinational companies. This has borne fruit. In the last five years the volume of domestic manufacturing has more than doubled.
The multinationals are embracing the Strategy and actively building up their operations in Russian pharmaceutical clusters. Such clusters are already functioning in St. Petersburg, Kaluga, Yaroslavl. The list of investors is encouraging and include AstraZeneca, Berlin Chemie, Novo Nordisk, Teva, Takeda, Novartis. In turbulent 2014 Abbott acquired Russian company Veropharm for an estimated $400m, which signifies the long-term importance of the Russian market.
The next stage of the Pharma-2020 strategy is the development of innovations and securing 50% of all drugs manufacturing locally.
Biotechnology along with IT and nanotechnology was identified as key to economic modernisation of Russia. The Russian biotech sector is in a nascent stage with high untapped market potential. Frost & Sullivan valued the biotech market at $2.8bn in 2013 with CAGR 12.7% up to 2018.
The national Ministry of Industry supported more than 20 import substitution products, namely interferons, insulins, hormones, monoclonal antibodies (mAbs), antihaemophilic factors. The first domestic products are expected to be launched in 2015-2016.
BIOCAD, R-Pharm, Generium, and Human Stem Cells Institute (HSCI) are emerging as national biotechnology leaders, and are actively investing in biosimilars and original products.
For example, in autumn 2014, BIOCAD fully pushed out Roche's Mabthera (rituximab) from public procurement. BIOCAD has already signed 8 international contracts worth $500m to supply its products on global markets and it plans to build an R&D biotechnology complex in Brazil.
Generium is now of the few companies in the world that has all key antihaemophilic factors (VII, VIII, IX) in its portfolio while R-Pharm is to become the largest Russian producer. It acquired Pfizer's plant in Germany to expand in the international markets and set up joint venture capital fund with RVC.
HSCI is probably one of the most innovative biotech companies in Russia and is engaged in gene therapy (Neovasculgen), cell therapy and regenerative medicine. The company is expected to launch its products in the US and China.
«Russia's biotech sector has high untapped potential»
Russian economy has entered a period of stagnation and it is becoming increasingly difficult to reach the targets in the Innovations Strategy as well as in other industry-specific strategies. Correspondingly, the risks for investors are rising.
However, as the prime minister Dmitry Medvedev stated in his speech at major annual economic conference Gaidar Forum in January 2015, Russian economy is not going to isolate itself from the global markets while international companies showed interest in continuing their operations in Russia.
The Innovations Strategy laid the solid foundation for developing and commercialising R&D efforts. However, Russia will have to come up with a new approach on how to better use the achievements of the first stage in the current political and economic realities.