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IN THIS ISSUE

After assuming the G20 presiden-cy for 2013, Russia has been grab-bing international headlines with differing scenarios over its devel-opment, and with some exuberant parties at the World Economic Forum in Davos.

In his introductory remarks, Sber-bank CEO German Gref referred to three pessimistic scenarios for

Globalization Economic thinkers call for Russia’s full integration into the world economy

Global economic thinkers and

business leaders in Davos and

Moscow nudged Russia forward in

its reform of economic institutions

globally and at home.

ELENA SHIPILOVARUSSIAN BUSINESS INSIGHT

Oskar Hartmann was born in Ka-zakhstan, a vast land of steppes in Central Asia, but raised in Germa-ny, where he had his fi rst experi-ence of e-commerce – selling health foods to bodybuilders. It was when he came to Moscow in 2007 that he spotted a huge market opportuni-ty: no one was selling designer-la-bel-clothes online to fashion-con-scious Russian women.

“I wanted to go into business and I was looking for something that could become big, that could be de-veloped over the next 20 years,” he says. “I was looking for something I could get emotional about, not some-thing connected to official bureau-cracy. I wanted something that would lift the public.”

Raising just €100,000 ($133,000) from his friends and family mem-bers he launched KupiVIP, which

according to research fi rm TNS Gal-lup, just short of the 70%-80% Mr. Hartmann estimates is the satura-tion point for all markets. This is well up from the 24% online in 2006, according to pollster VTsIOM.

This fast growth has piqued the curiosity of Russian angel investors, or wealthy individuals, and raising the fi rst $100,000 to $1 million for start-ups is relatively easy, as Mos-cow has the highest concentration of billionaires in the world. Kupi-VIP’s rival KupiKupon is also a daily discounter and its four Uzbek found-ers, all in their 20s, raised $1 million from an Uzbek billionaire after only a few weeks of hunting for fi nanc-ing. However, getting the next round of investment, between $5 million and $50 million, is the tricky bit.

Today there are only a handful of private equity or venture capital funds operating on the Russian mar-ket. By far the biggest is Baring Vostok Capital Partners, which raised a new $1.5 billion fund at the end of 2012 and stands behind some of Russia’s best-known Internet companies, such as Yandex, Russia’s answer to Google.

Russia Partners is another domes-tic fund that has been active in the e-commerce space. These two funds together account for the lion’s share of domestic investments by profes-sional funds into e-commerce.

Start-ups Angel investors and venture capitalists are showing great interest in Russian innovation

There is no shortage of great new

business ideas coming out of

Russia, offering good ground-level

opportunities for savvy investors.

Getting a Piece of the Next Big E-Commerce Idea

BEN ARISSPECIAL TO RUSSIAN BUSINESS INSIGHT

Sberbank CEO German Gref: ‘In our heads, we are still not in the WTO.’ In Davos and Moscow, Mr. Gref stressed the urgency of Mr. Putin’s reform plan.

PAGE 3

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CONTINUED ON PAGE 5

BUSINESS & POLITICS

POLITICS & BUSINESS

FEATURE

Business ChampionOmbudsman Boris Titov Stands Up for Judicial Rights

Russians Sobering Up New Alcohol Laws Could Help To Boost Russia’s Economy

An Island of InnovationCool Ideas at Red October

added economic growth.The strong message from the

Russians in Davos reinforced sim-ilar calls a week earlier by foreign and Russian experts at an econom-ic forum in Moscow.

“You have the institutions, peo-ple and capital,” Pascal Lamy, Di-rector-General of the World Trade Organization, told delegates at the Gaidar Economic Forum, named for the late Yegor Gaidar, a leading economic reformer in the 1990s. “You just have to combine these three elements into an effective eco-nomic model.”

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Medvedev in Davos: Making Russia’s Investment Case

SPECIAL REPORT

MONEY & MARKETS

New Rating for Russia’s Top 50 Start-Ups

Expanding Tech Horizons

RBTH.RU/BUSINESS

quickly became Russia’s premier on-line fashion retailer. The company fl ourished and, ironically, the eco-nomic crisis that hit in its fi rst year of operation was a boon: Mr. Hart-mann says high-end retailers who saw sales plummet in the depths of the crisis were desperate for new distribution channels. For all of 2009 KupiVIP was signing up a brand a day. And sales soared. The company

clocked up turnover of $50 million last year and expects to be selling hundreds of millions of dollars of goods within a few years, as Rus-sia’s nascent e-commerce business reaches maturity.

Russia’s Internet is on fi re, but rais-ing money to launch a company re-mains a hurdle. In December 2012, 67% of Russians aged 12-54 were online, or some 95 million people,

KupiVIP’s Oskar Hartmann is bringing designer labels to online customers.

This supplement is produced and published by Rossiyskaya Gazeta (Russia) and did not involve the news or editorial departments of The Wall Street Journal

Saturday, February 9, 2013

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Russia through 2030 developed by the Davos forum’s experts. The sce-narios are possible only “when noth-ing is done in the country, when it is developing as it is developing,” Mr. Gref said.

The Davos scenarios are not in line with a fourth, optimistic sce-nario of institutional reform pre-sented by Russia’s prime minister, Dmitry Medvedev, who was speak-ing at Davos for the third time in fi ve years. Medvedev stressed that Russia’s growing integration into the global economy, including through its accession to the WTO, “requires a considerable increase in the competitive power of Rus-

sian companies,” in labor produc-tivity and energy costs.

Several top Russian business lead-ers at Davos also made strong calls for reform, underpinning President Vladimir Putin’s ambitious agenda to jump 100 places in the World Bank’s Ease of Doing Business index and to diversify its economy.

Ruben Vardanian, co-head of Sberbank-CIB, the bank’s invest-ment banking arm, lamented: “[Foreigners still] can’t understand the rules of the game [in Russia].”

Meanwhile, billionaire Oleg De-ripaska lamented Russia’s high lending rates, which he said un-dermined investment and value-

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WWW.RBTH.RUPolitics & Business

NEWS IN BRIEF

• Russians are split over the efficacy of the

Kremlin’s anti-corruption campaign. Around 45% said it would not amount to anything, while a sim-ilar percentage said it would make a difference.

• Russian gay activists were beaten up by Russian Orthodox protesters during a rally against a proposed federal law banning gay propaganda outside the State Duma, the country’s lower house of parliament. The vote on the bill was subsequent-ly delayed.

• One in three economically active Russians

works in the shadow economy, the Federal State Statistics Service said this week. The crisis has seen the size of the shadow economy increase from a low of 20%-25% through the boom years.

• The number of Russians willing to keep their

savings in banks is up to two-thirds from one-quarter a decade ago, according to the Central Bank of Russia. However, investment in securities or mutual funds remains extremely low, it says. Only 28% of the population have any savings.

• Credit cards have taken off in Russia with the number of loans issued using plastic cards up 74.8% in 2012, the National Credit History Bureau reports. The growth of auto and consumer loans was half as rapid (37%).

• Four miners died in a coal mine in Siberia when it was filled with smoke. The authorities have opened a criminal investigation for negligence at the Kemerovo Region mine. The accident follows a broader campaign to improve safety in the coun-try’s mines following the deadly Ulyanovskaya ac-cident of 2007 which gained national attention and resulted in over 100 deaths.

• Russian billionaire Alexander Lebedev’s Na-

tional Reserve Bank has nixed a plan to issue

Alexei Navalny plastic cards, named for a leading opposition activist. Mr. Lebedev, the owner of the London Evening Standard newspaper, has been divesting from his Russian assets, claiming official pressure. He also faces a possible jail sentence after punching a fellow guest on live TV last year.

• Russia refused to register the Pirate Party

because it has nothing to do with water. The party is a local version of the Swedish group that promotes e-democracy and freedom of informa-tion. The ministry said that “pirates” only exist on seas and rivers and refused the registration on the grounds that these pirates are landlubbers.

• Russia’s response to the ‘Magnitsky Act’

has led to a ban on Americans adopting Rus-

sian children, prompting thousands to demon-strate in Moscow. The Magnitsky Act bars Russian officials connected with the death of hedge fund lawyer Sergei Magnitsky from travel to, or eco-nomic activity in, the U.S.

• An ex-EBRD official has been charged with

bribery for the first time by the Russian authori-ties. Yelena Kotova is accused of trying to extract a $1.4 million bribe to facilitate a $95 million loan to a Canadian oil and gas company. The EBRD pulled Ms. Kotova’s diplomatic immunity after the Russian authorities presented their evidence.

• A crack has appeared in the Ukraine’s stone-

wall against Russian pressure to join the Cus-

toms Union. With its economy looking increas-ingly wobbly, Kyiv said that it was studying conditions under which it could join Eastern Eu-rope’s new trade bloc. The government also sug-gested it may accept a Russian deal to cut gas prices as part of its negotiation with the IMF to re-start a $15.2 billion stand-by loan program.

• Russia has delivered the first tanker of Eu-

ropean LNG to Japan via the ‘northern route’ – crossing the Arctic north of Russia instead of sailing around Africa. The ice-encrusted route sig-nificantly cuts the time, and cost, of shipping en-ergy to East Asia.

• Russian agricultural land is the cheapest in

the world due to low demand. The most expen-sive land in Russia is in Krasnodar, at $1,700 per hectare, well below the $4,500 average per hect-are in Argentina and $11,300 in Germany.

• Russia’s economy may overtake Germany’s

by 2020 to become the world’s fifth largest, says PricewaterhouseCoopers, adding that it will fall to sixth place in 2050 due to demographic problems.

02

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Putin’s Anti-Graft Campaign Begins to Bite

In November, the Kremlin’s anti-corruption drive went up a gear when Defense Minister Anatoly Serdyukov was fi red amid an inves-tigation into the misappropriation of $97 million worth of state assets.

Serdyukov’s dismissal was a se-rious escalation in the Kremlin’s ef-forts to tackle the endemic graft that has been getting worse in recent years. In November alone, the au-thorities initiated several high pro-fi le anticorruption actions, includ-ing arrests, investigations and sackings of senior officials and boss-es of state-owned enterprises.

Corruption costs the Russian state hundreds of billions of dollars a year, by some estimates – money it can no longer afford to lose.

A tidal wave of petrodollars has meant the government could pre-viously turn a blind eye to much of the stealing, but since the 2008 cri-sis economic growth has slowed, to an estimated 2.2% in the fourth quarter of 2012. The country’s twin trade and budget surpluses are also expected to evaporate in the com-ing years, despite the fact that oil remains at over $100 a barrel.

Boris Titov, the presidential com-missioner for entrepreneurs’ rights, argues that the torrent of cash fl ow-ing into the state’s coffers is actu-ally responsible for the growth of corruption. Russia went from a mid-80s ranking on Transparency Inter-national’s Corruption Perception Index to a peak of 154 in 2010, out of 182 countries.

During his 2008-12 term in of-fi ce, then-President Dmitry Medve-dev launched the first concerted crackdown on graft. The tide was apparently turned, as Russia fell to 143 in the Transparency ranking in 2011 and again to 133 in Novem-ber 2012 (but a change in method-ology means the last result can’t be directly compared).

After Putin’s reinauguration last May, the Kremlin stepped up its an-ticorruption efforts, with a series of laws to increase the transparency of government.

In late October, Dmitry Gudzhoy-an, the CEO of MRSK, a state elec-tricity fi rm, was sacked after an in-vestigation into its procurement deals revealed suspected kickbacks

to company insiders. The investiga-tion was ordered by Deputy Prime Minister Arkady Dvorkovich.

“Dvorkovich ordered that the facts be checked and – if they were confi rmed – asked the company to ‘make staffing decisions at the cor-porate level,’” says Vladimir Skylar,

a utilities analyst with Moscow in-vestment bank Renaissance Capi-tal.

The same week, ex-Agricultural Minister Yelena Skrynnik was called in by the Interior Ministry for ques-tioning after she was linked in a state TV documentary to a $1.3 bil-lion fraud while running RosAgro-Leasing, where she worked before becoming a minister in 2009. Mrs. Skrynnik has denied the charges and threatened to sue the TV sta-tion.

Then in November, Yury Urlich-ich, the designer of satellite navi-gation system Glonass, Russia’s an-swer to GPS, was fired amid allegations that $200 million had been embezzled. Two weeks later he stepped down as CEO of Rus-sian Space Systems, a key Glonass contractor.

The same month, the head of Ro-savtodor, the state agency in charge of Russia’s road system, was sacked over the alleged misuse of state funds, while the home of Alexan-der Provotorov, the CEO of the state fi xed-line telecoms operator Ros-telecom, was raided by police in a graft investigation.

And fi nally that month, the fi rst arrests were made over the misuse of funds allocated for the Asia-Pa-cifi c Economic Cooperation sum-mit, which Russia hosted in Vladi-

vostok in September. The government invested over $20 billion into fancy new infrastructure for the Pacifi c port, including a state-of-the-art $1 billion suspension bridge. Officials are suspected of creaming off mil-lions in backhanders and other scams.

One senior Moscow banker says the anticorruption crackdown could well be for real. “I know that all of this could be mainly noise from the local press, but fi rings and arrests

have taken place, so it’s not purely noise,” he says, speaking on condi-tion of anonymity.

The state has also begun to insti-tutionalize its antigraft measures.

A year ago, Putin forbade state-owned companies in the power sec-tor to subcontract companies where the ultimate benefi cial ownership was not known.The government has also passed laws forcing members of parliament and state officials to declare their incomes and assets. And similar laws have been passed for state enterprises.

Dismissed Defense Minister Anatoly Serdyukov (second right) came under scrutiny over questionable contracts.

Mr. Titov, whose SVL Group pro-duces Abrau-Durso sparkling wines in Krasnodar, on Russia’s Black Sea coast, says he was once the victim of an unjustifi ed “raid-er attack” by people trying to take his business away from him.

“I had some problems in my life, I was attacked,” Mr. Titov says, talk-ing to Russia Business Insight in the modest offices of Delovaya Ros-siya, a business association, at Moscow’s World Trade Center. “I was questioned by prosecutors and even had to stay out of the coun-try for some time.”

At that time Mr. Titov was helped out by his friends, he says. “Not all businessmen have friends that can help, so [for them the commis-sioner’s office] will be a friend.”

The problems Mr. Titov is try-ing to solve – when businessmen face problems created by corrupt officials – are very real, according to a recent survey by Opora, an-other business association.

Some 13% of Russian business-men admit to paying kickbacks to officials, while 29% refuse to even

Corruption A series of arrests and firings may have less to do with politics than economics

Judicial Reform Using influence against raiders

A wave of firings at state firms is

prompting investors to believe that

the crackdown may be for real.

perts who work on a pro bono basis, examines a case to fi nd out if a business has been unfairly per-secuted. “We are here to help, but we can help only those who we 100% know are right. If we un-derstand we can help, we do our own work on each case to under-stand what to do, with whom to work,” Mr. Titov says.

“If it’s a criminal case, we need to work with the police or the pros-ecution office or with the courts.”

The commissioner’s office has considered more than half the ap-peals it has received to date. Ex-perts have ruled in favor of busi-nessmen in 30 cases so far, and after the commissioner intervened, seven prosecutions were dropped.

It is planned to have local om-budsmen in each of Russia’s 83 regions, with their offices to be funded from regional budgets.

“Of course, we will not be able to fi ght 100% of corruption,” Mr. Titov admits.

“But we will be able to help in-dividual businessmen – and that alone will be a success.”

BEN ARISSPECIAL TO RUSSIAN BUSINESS INSIGHT

TIM WALLRUSSIAN BUSINESS INSIGHT

speak about the issue, the survey showed. One-third of respondents complained that it was the police who “created problems” for their business – higher even than the 21% who said so about the mafi a.

Last summer Mr. Titov, the head of Delovaya Rossiya, was tapped by President Vladimir Putin to be-come Russia’s first presidential commissioner for entrepreneurs’ rights.

“The business climate is the main requisite for increasing the fl ow of investment,” Mr. Putin stat-ed last October. “Without that, we’ll be unable to develop our economy and secure the main thing – maintain the pace of economic growth.”

The relevance of the commis-sioner’s office can’t be overesti-mated, Mr. Titov says. “Russian businessmen are attacked by raid-ers, who sometimes use the power of officials, or the raiders are of-fi cials. They try to start criminal investigations and use this as an instrument to make businesses [pay] big bribes [to stop an inves-tigation] or even to sell their busi-nesses to them for a cheap price.”

According to Mr. Titov’s office, at the end of last year some 13,600 Russian businessmen were serv-ing sentences in jail on economic charges, and about 5,000 were being held in pre-trial detention. The total number of owners of small and medium-size business-es stood at some three million in

2010, according to Russia’s Fed-eral Statistics Service.

So far, about 300 businessmen have turned to the commissioner’s office for help, Mr. Titov says. Seven appeals came from non-Russians. “For foreigners, our raiders are still warier of attacking them than Rus-sian companies,” Mr. Titov says.

His office, consisting of 20 ex-

The Kremlin has stepped up its anti-graft efforts, with a series of laws to increase the transparency of government.

A Champion for Entrepreneurs’ Rights

HIS STORY

Boris Titov

In 2004, Mr. Titov was elected chairman of Delovaya Rossiya. Two years later, his SVL Group bought a majority stake in Abrau-Durso, a famous Russian-French vineyard commissioned by Tsar Alexander II in 1870, and he invested more than $20 million to modernize production there.

PRESIDENTIAL COMMISSIONER FOR ENTREPRENEURS’ RIGHTS

" Don’t cheer so soon, you might not like what I am going to say next... The law must regulate

the activities of government mem-bers, presidential administration of-ficials and also the deputies of the up-per and lower houses of parliament.”

IN HIS OWN WORDS

Vladimir PutinPRESIDENTRUSSIAN FEDERATION

Boris Titov, Russia’s foremost

producer of sparkling wines, knows

all too well what it’s like to face

pressure from officials. But now, as

presidential commissioner for

entrepreneurs’ rights, he is helping

businessmen successfully fight

such cases through the courts.

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RUSSIAN BUSINESS INSIGHTADVERTISING SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

WWW.RBTH.RU Business & Politics

NEWS IN BRIEF

• A corporate dispute between the major

shareholders of Norilsk Nickel has ended, after Oleg Deripaska’s aluminum producer, Rusal, and Vladimir Potanin’s Interros agreed to allow Roman Abramovich’s Millhouse Capital to buy a minority stake and join the board of directors. The deal is seen by some observers as part of a wider Krem-lin campaign to improve Russia’s investment cli-mate and sort out some big corporate disputes.

• McDonald’s is set to open its first outlets in

Siberia, with five restaurants in Novosibirsk. The company plans to open a total of 10 restaurants in the region this year before continuing its expan-sion on into Russia’s Far East.

• President Putin wants to revive the presti-

gious Soviet-era ‘Hero of Labor’ title to promote improved productivity. This would go down well with his core, blue-collar constituents, who would be the main candidates for the medal.

• The government has floated a plan to make

mobile-phone frequencies tradable as part of ongoing attempts to diversify the Russian econ-omy. A secondary market for trading in frequen-cies, set up this spring, would let operators share frequencies, contributing them to joint ventures.

• Russian unemployment has hit an all-time

low of 5.2% of the total workforce of around 75 million people.

• The Russian economy hit a soft patch in

last quarter of 2012, slowing to 2.2% annualized growth, and is expected to score only 1.9% in the first three months of this year. However, the con-sensus forecast predicts that growth will pick up in the spring and the economy is expected to grow by about 3.5% overall in 2013.

• Meter-high snow dumps have seen power

consumption in Russia reaching new record lev-

els. Demand for electricity hit 156.3 gigawatts at the start of December, more than the previous re-cord set in February 2012. Temperatures were run-ning 10 degrees below the long-run level for the period.

• The Kremlin’s efforts to improve Russia’s

investment climate continue to gather momen-

tum. The number of independent seats on Rus-sian state companies’ boards is to be boosted by 45% in 2013, to 123.

• Russia may cut the upper limit of the Re-

serve Fund, from 7% to 5% of GDP. The threshold is important, as any extra oil revenues over the limit can now be used for government spending.

• Gazprom tops the list of ‘dream’ employ-

ers, according to pollster VTsIOM. Around 44% of Russians would like a job with the state gas giant. State-owned oil major Rosneft came in second, with 29% wishing to work there. Lukoil was the only private company to feature in the top five.

• The Russian government plans to double

its support for the agriculture sector in 2013 with an extra $6.6 billion a year of spending. Rus-sia took in about 73 million tonnes of grain this past year – enough to cover domestic consump-tion, plus about 10 million for export. The Agricul-ture Ministry predicts 100 million tonnes for next year, if the weather is good. Russia is already the third-largest grain exporter in the world.

• Russia needs immigrants to avoid labor

shortages, Federal Migration Service Head Kon-stantin Romodanovsky announced in a recent in-terview. The official said he had been ordered to keep the number of legal immigrants coming into Russia at 300,000 a year, with a focus on ethnic Russians and highly-qualified foreign specialists. Millions are estimated to work in the country ille-gally each year.

• Consolidation in Russia’s rail business con-

tinues with yet another deal. Last month, leading freight operator Globaltrans bought control of MMK-trans for $335 million. Russia has thousands of tiny rail freight operators, but thanks to reforms a few commercial operators are now emerging.

• Russia’s Federal Space Agency says it will

send an unmanned spacecraft to the moon in 2015, from the new Vostochny Cosmodrome in the Amur region in Russia’s Far East. Vladimir Putin promised to invest $1 billion in the replacement for the Baikonur Cosmodrome in Kazakhstan, which Russia currently uses for space missions. Russia’s last unmanned moon mission was in 1976.

Health The Kremlin is targeting high alcohol consumption to avert a possible demographic disaster

Regulation A draft law banning smoking in public places could help to cut smoking-related deaths

Faced with Russia’s alarming de-mographic decline, the govern-ment is getting serious about tack-ling the country’s legendary love of strong liquor. This January, stiff new taxes saw the cost of vodka soar, while harsh restrictions on retailers banned over-the-counter alcohol sales after 10pm.

Vodka consumption has been falling in recent years, although contradictory forces mean the fall has not been even. Over the past four years, Russians’ consumption of vodka has officially fallen by 7%, to 417 million gallons in 2012 from 449 million gallons in 2009. That still leaves the average at 3.2 gallons per person annually – put-ting Russians among the hardest drinkers in the world. However, consumption is forecast to fall faster this year, to some 365 mil-lion gallons (2.6 gallons per per-son).

Alcohol and smoking are the two biggest killers in Russia, ac-counting for about half of all deaths according to the World Health Organization. The govern-ment, increasingly worried about the impact on economic develop-ment, is stepping up its campaign.

Not that you would necessarily notice. There has been no public awareness campaign: reducing drinking has been a risky politi-cal issue ever since Soviet leader Mikhail Gorbachev’s 1980s anti-alcohol campaign was widely de-rided, following draconian rules that limited sales to between 2pm and 7pm. (It briefl y led to a fall in alcohol-related deaths, but later this rose after people turned to bootleg vodka and even worse homemade alternatives. To this day, Mr. Gorbachev is perhaps most hated by ordinary Russians because of his dry laws.)

The government’s most effective measure so far has been to shut down many moonshine factories, which accounted for an estimat-ed third of vodka production, ac-cording to Vadim Drobiz, director of Russia’s Research Center for Alcohol Markets.

“The [authorities] have gotten serious about illegal production of alcohol, and a lot of illegal plants have been closed by the regulator recently,” agrees Daria Khaltourina, co-chair of the Rus-sian Coalition for Alcohol Con-trol, who estimates that the con-sumption of hard liquor began to fall in 2005. “Also, there is a ban on selling alcohol at night, so there are fewer opportunities to buy it whenever you want. All in

all, the government’s alcohol pol-icies may be more spontaneous than well thought-out, but they’re working.”

But while Russia’s middle class is becoming increasingly health conscious and switching to low-er-alcohol drinks, such as wine

and beer, rising incomes have led some Russians to drink more.

“The emerging middle class in-deed drinks less, but the richest and the poorest drink more as their incomes rise,” says Mr. Drobiz. “The government has be-come increasingly concerned about the public’s health, as it has realized that population decline is a serious threat to the long-term development of the economy.”

Many Russians’ incomes have continued to rise since the 2008 economic crisis, due to high en-ergy revenues and increased gov-ernment spending, and while over-all vodka consumption has been falling, the change is not smooth: consumption rose again between 2010 and 2012 by 6%, which is part of the reason why the gov-ernment has decided to act so forcefully.

However, some underlying changes in society could help. The changing work ethic has already had a big impact on drinking hab-its: in Soviet times, a regional manager who needed extra re-sources from the state would sim-ply turn up in Moscow to meet with officials, armed with a bot-tle of vodka and some sausage.

“There is an emerging class of young professionals who are changing the work ethic,” says Ms. Khaltourina, a 34-year-old soci-ologist who is a strong advocate of healthy lifestyles and educa-tion as a way of improving eco-

Russians’ legendary capacity for

hard drinking is finally being

challenged – by a changing work

ethic and a Kremlin crackdown.

A new law is set to send Russian

smokers out into the cold, while

leaving big tobacco players and

retailers largely unscathed.

BEN ARISSPECIAL TO RUSSIAN BUSINESS INSIGHT

DENIS PUZIREVSPECIAL TO RUSSIAN BUSINESS INSIGHT

Smoking Ban Divides Health, Tobacco Lobbies

Business travelers and tourists vis-iting Russia are often struck at the impunity of the country’s 40 mil-lion smokers – they can be seen lighting up in practically any res-taurant, government building or office. Even hospitals offer desig-nated smoking areas.

That may well change with new legislation, backed by Russia’s par-liament in January by 442 votes to 1 in a crucial second reading, which seeks to reduce the harmful effects of smoking on Russians’ health by banning smoking in many public areas. The other plank of the gov-ernment’s strategy is to ramp up taxes on cigarettes.

The government is urgently seek-ing to cut the number of smoking-related deaths, which stands at 400,000, or 0.3% of the population, annually, according to Prime Min-ister Dmitry Medvedev. Smoking also costs Russia, the world’s sec-ond-largest tobacco market after

China, an estimated $50 billion an-nually in health care and lost work days.

The country’s tobacco industry, more than 90% of which is con-trolled by international players Phillip Morris, British American Tobacco, Japan Tobacco and Im-perial Tobacco, has been success-ful in watering down the bill in a “multi-million dollar campaign,” according to one lawmaker, result-ing in Russia’s parliament drop-ping restrictions on cigarette sales.

The law aims to phase in a ban on smoking in public places, start-ing with hospitals, workplaces, commuter trains and government buildings in June 2013; and hotels, restaurants, bars, long-distance trains and ships a year later.

Not only will smokers be unable to light up in the standing sections between compartments, but also during stops along the way, since smoking at train stations (and air-ports) will also be off-limits.

Under the government’s original proposals, small retailers would be hit by bans on the sale of cigarettes at outlets less than 50 square me-ters in area and on the open dis-play of tobacco products. But after

claims that many small stores and kiosks would be forced out of busi-ness, these restrictions were dropped.

The government has previously been reluctant to adopt drastic measures, but Health and Social Development Minister Veronika Skortsova says that the overall health benefi ts took priority over retail profi ts.

“If small business lives off beer and cigarettes, Russia does not need it,” she says.

But doubts remain about how

Under the law, smoking in Russian restaurants will be banned from 2014.

strictly the new rules will be en-forced.

“If the fine is 100 rubles [just over $3], smoking in bars will con-tinue as usual,” Ivan Kotov, direc-tor of A. T. Kearney in Russia, told Kommersant-Dengi, a business magazine. “But if it’s a few thou-sand [rubles], we’ll see a faster turn-around.”

The restaurant and bar trade also gave a mixed reception to the bill, with the Russian Federation of Res-taurateurs and Hotel Owners say-ing that requiring restaurants to provide special isolated smokers’ corners would be prohibitively ex-pensive.

But some restaurant owners are welcoming the move, saying that they will be able to shoo custom-ers outdoors and save money on expensive ventilation systems.

nomic development. “In the past it was a common thing to drink at the workplace, to discuss busi-ness over a drink. Now it’s banned in most offices.”

There is also a big difference between the sophisticated urban populations of Moscow and St. Petersburg, which lead the way in lifestyle changes, and the rest of the country, where Soviet-era habits have persisted.

“People in big cities are richer and better educated and overall have a different lifestyle,” says Ms. Khaltourina. “In Moscow the level of alcohol intake, health problems and deaths caused by alcohol are very close to the European aver-age. But provinces still have the horrible drinking habits typically found in northern countries: binge-ing on huge amounts of alcohol.”

While an overt anti-alcohol campaign may be unpopular, the government has to stick to its guns if it wants to avert a demograph-ic disaster. Since 1991, Russia’s population has shrunk by 5 mil-lion people to 143 million, and last year was the fi rst time in two de-cades that the number of births exceeded the number of deaths, if only by a small amount.

The government has for sever-al years been trying to address this by investing more into pre-natal and maternity healthcare, and the new rules on vodka represent the next phase in a campaign to im-prove public health.

Young professionals in Moscow and St. Petersburg are increasingly switching from vodka to wine and beer.

Why Russians Are Sobering

Up (One Drink at a Time)

03

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was the average consumption of vod-ka per person in Russia in 2012. The government predicts this will fall to about 2.6 gallons this year.

of deaths of Russians aged between 15 and 54 were alcohol-related between 1990 and 2001, a survey found, compared to 4% worldwide.

is the average amount spent by Russians on alcohol during the New Year holidays, according to the Research Center for Alcohol Markets.

3.2 gallons

52%

$400

IN FIGURES

“If small business lives off beer and cigarettes, Russia does not need it,” says Health Minister Veronika Skortsova.

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Winners of the Start-Up of the Year Award at Digital October, Moscow’s leading high-tech events center.

The technology is based on traffic monitoring.

Wildfires crippled Russia’s crops

and destroyed billions of dollars of

property in 2010. An innovative

entrepreneur is helping to prevent

this from happening again.

SERGEI TITOVSPECIAL TO RUSSIAN BUSINESS INSIGHT

Forest Watch: A Smart Idea Spreads Like Wildfire

What is Digital October, and how does it help

Russian start-ups?

Since its inception just two years ago, Digital Oc-tober has become de facto at the center of Rus-sia’s start-ups ecosystem. Our center, in the former Red October chocolate factory, is a place for glob-ally minded technology entrepreneurs: where great content meets great people. We host international conferences devoted to new technologies and entre-preneurship, host presentations of new technology products, and present a weekly show on Business FM, a Moscow radio station. Our flagship event is TechCrunch Moscow, which we hosted in December, and our next big event is Demo Europe in June.We check out start-ups to make sure there’s no com-promise on quality and content, and aim for them to be the best of the best by world standards. We are trying to create a meritocracy in the technology community. Start-ups should be supported by for-eign investors. We seek to bring entrepreneurs to-gether with angel investors and venture capitalists. These foreign investors often become our evangelists around the world.What should foreign investors look for when

choosing a Russian start-up to get involved with?

Several years ago, it was much riskier for foreign investors. But traditional businesses, such as puri-fied water or dry cleaners, were profitable because the market was wide open. Now it’s less risky, but the simple opportunities have gone. The obstacles are different from those in a country like the Unit-ed States. There’s no single sector investors should focus on – it’s better to look case by case. For ex-ample, Russia is the No. 1 Internet market in Eu-rope now, bigger than Germany. E-commerce is a big growth area, but it’s a huge challenge to deliver goods bought online. It’s interesting: if you look at the leading e-commerce firms here, they all have U.S. investors. There are basically two kinds of companies to invest in: efficient companies going after the lo-cal market and doing something different; and good companies serving the global market. Russian start-ups have done well in computer gaming, for exam-ple, with such success stories as Zeptolab (the maker of the game “Cut the Rope”).What are Russia’s competitive advantages when

it comes to technology start-ups?

Russia still has incredible brain power in its soft-ware engineers. In the outsourcing world, Russia still has the edge over India and China when it comes to things like financial services and travel websites, because they require complex mathematical algo-rithms, something at which Russian specialists are very skilled.What are the biggest problems facing start-ups

in Russia?

They face the same universal problems facing Rus-sian companies in general: poor enforcement of laws, an uneven legal environment. They are often over-loaded with paperwork. Also, start-ups here often need to structure their financing outside Russian ju-risdiction. Other hurdles are that the large compa-nies B2B start-ups serve here often don’t respond to innovations very well. And it’s hard to find a good product manager here.Is the brain drain going one way - out of Russia?

Technologically, yes, the brain drain is still outbound. But managerially, there is a reverse trend – more managers are coming back. I’m an example of this, as I worked in Boston for eight years as a senior re-searcher at MIT. Later I came back and taught at Skolkovo, and then I came to Digital October.Is it important for Digital October to have a

trendy location?

Yes – Red October is a cool, trendy place. The Strel-ka Institute for Media, Architecture and Design next door contributes to this image. Many of us geeks are kind of boring, but if you add in design, art and busi-ness, it becomes a cooler place, a better mix.

Q&A

Digital October: Where Start-Ups & Investors Meet

It was in 2009 that Ivan Shishalov - a graduate of the Radiophysics Faculty of Nizhny Novgorod State University and now CEO of DiSi-Con (DSC) - was working on a sys-tem for monitoring traffic jams in a Nizhny Novgorod accelerator and was approached by officials from the local Forestry Ministry asking for help in setting up a system to detect wildfi res.

Mr. Shishalov and his fellow stu-dent, Yaroslav Solovyov, thought they could make it work and came up with a system similar to traffic-jam monitoring. The idea was to locate video cameras at cell sites and towers to track outbreaks of fi re, using software developed by Messrs. Shishalov and Solovyov. Of-fi cials approved of the idea.

It became clear to Mr. Shishalov and Mr. Solovyov that fi re-detec-tion systems could become a prof-itable business and so they set up

in up to $2.3 million in 2013. “We are effectively selling access to the system,” Mr. Shishalov says. The company’s customers are mostly government agencies responsible for wildfi re protection, including forestry departments in various parts of Russia.

The company now aims to tap foreign markets. Potential custom-ers in the CIS, Eastern Europe, Spain and Latin America have shown interest. According to Les-noi Dozor’s founder, no signifi cant competition has been identifi ed.

“Obviously, there are video sur-veillance systems for safety and se-curity purposes on the market but, as far as accurate detection of wild-fi res goes, we are among the world’s best providers,” Mr. Shishalov says.

The solution is unique in many respects and has no high-tech ri-vals, says Elena Alexeyeva, head of Softline Venture Partners.

In addition to fire prevention, DSC is also considering other de-velopment options. “Our patents could be used for other video sur-veillance projects,” DSC says. The company currently owns two pat-ents and four copyrighted software solutions.

To go ahead with its foreign ex-pansion while maintaining control of the market it has already won, the company needs fi nance. Lesnoi Dozor recently moved into Russia’s own Silicon Valley, the Skolkovo In-novation Center near Moscow. This could translate into tax relief and government grants, but the project still needs more investment.

Dmitry Chikhachev, managing partner of the venture fund Runa Capital, says potential investors will focus above all on the risks involved in the business model. While the government is certainly a generous client, a wave of government spend-ing cuts could hurt the order books. It remains to be seen whether the company will be able to fi nd more customers on the market to take the government’s place, Mr. Chikh-achev says.

Kirill Veselov, investment direc-tor at Mint Capital, agrees that there are government contract-related risks. It would be unreasonable to “expect 100% consistency and eco-nomic logic from such a customer,” he says. But if we look at the tech-nology “without the constraints of the existing business, the idea could have a great future,” Mr. Veselov says.

DSC, a company for remote sur-veillance systems, and branded the project Lesnoi Dozor (Forest Watch). Even though the disastrous sum-mer of 2010 made the project’s rel-evance obvious, Lesnoi Dozor was not swamped with orders. Officials delayed in responding to their pro-posals, and mobile-communications providers, whose towers were to be used to deploy cameras and sen-sors, were reluctant to cooperate. DSC then decided they would take part in all tenders and bids for in-novative companies and start-ups to make their brand known. “When your project is getting expert as-sessments from everywhere, selling it to both investors and customers becomes easier,” Mr. Shishalov says.

After then-President Dmitry Medvedev took a personal interest in the company in 2011, its portfo-lio of government contracts expand-ed signifi cantly, as did its brand.

Lesnoi Dozor coverage expand-ed from fi ve to 20 regions of Rus-sia. The company even received calls from customers in Belarus, Kazakh-stan and Ukraine, where potential customers had found them online.

With revenues of $290,000 in 2011, the company expects to take

START-UPS INVESTMENT

Russia’s high-tech investment field

looks much more like its foreign

counterparts as Western funds have

flocked to reap its benefits.

ADRIEN HENNISPECIAL TO RUSSIAN BUSINESS INSIGHT

The Russian start-up scene is look-ing more and more like its Ameri-can, European and Asian counter-parts. The stereotype of innovative Russian boffins disconnected from market realities, working in Sovi-et-style research centers, has been replaced by globally connected and modern-minded entrepreneurs and engineers. They follow Facebook’s latest moves, dream of getting train-ing sessions in Californian start-up accelerators, and are busy prepar-ing pitches to Russian or Western investors.

“The fundamental criteria for in-vesting are the same in Russia [as elsewhere],” says Igor Taber, of Intel Capital, a pioneer in Western ven-ture investment in Russia. “An ex-cellent management team, a large market, high barriers to entry, dis-ruption potential, in particular, are just as valid here as anywhere else in the world.”

But there are things that are dif-ferent. Ironically, these issues are not always what many foreign in-vestors imagine they are.

1. How to identify investment targets?

A number of tech-oriented con-tests, media and databases have emerged in recent years to navigate the Russian start-up ecosystem. Some of them use the English lan-guage, providing foreign investors with efficient sourcing instruments.

Another option is to work or co-invest with local funds. Fast Lane Ventures, a Western-style serial In-ternet start-up developer, is one of these, cooperating with a range of Western funds that do not have a permanent team in Moscow.

2. Should I work with incubators and

technoparks?

Technoparks, incubators and ac-celerators have sprung up in the past few years, with dozens of such structures now competing in Mos-cow alone. Many of them seek to attract foreign investors, solving the sourcing issue and offering co-in-vestment opportunities.

Among internationally connect-ed accelerators are Farminers, which brings its start-ups to San Francis-co’s RocketSpace; the Moscow Plug and Play Tech Center, which oper-ates jointly with the famous Cali-fornian accelerator of the same name; and TexDrive, co-founded by U.K. start-up accelerator veteran Jon Bradford.

Russia’s technoparks are also an option. With its massive subsidies and tax cuts for innovative proj-ects, Skolkovo, the giant tech hub nearing completion in southwest Moscow, has already attracted doz-ens of global venture funds and high tech fi rms.

There is also innovation poten-tial to tap outside Moscow. Ingria, a prominent St. Petersburg tech-nopark, includes 70 resident com-panies, employing more than 500 people in various technological fi elds. In Kazan, the capital of the autonomous Republic of Tatarstan, IT Park stands as one of the larg-

est technoparks in Eastern Europe. IT Park opened a business incuba-tor last year, while a delegation of 25 leading European venture cap-italists visited the city.

3. Should I co-invest with a Russian

fund?

The Russian venture scene looked

like a desert only a couple of years ago, but at least 60 Russian funds have been involved in at least one IT sector deal in the past year. And there is now more money in Mos-cow than in many other innovation spots on the global map – “the big-gest pile of money I have ever seen,”

says U.S. tech veteran Steve Blank, who visited Moscow last year.

Most of these funds operate to international standards, presenting no particular risk for partnering foreign funds. “With their serial ap-proach and strong exposure to in-ternational markets, local business angels and venture funds care about their reputation,” says Arkady Mo-reynis, general manager of the Mos-cow Plug & Play Tech Center.

4. How to deal with Russian teams?

Even though Russian entrepre-neurs are Westernizing at a fast pace, there are some things that are different. One issue is their relative lack of experience. “While most U.S. start-up entrepreneurs have an ex-isting start-up background, most Russians are doing this for the fi rst time,” Mr. Moreynis says.

“In Russia, I tend to trust found-ers that are a bit older, say 30, and more experienced, versus 25-year-

THE NEW HORIZON IN TECH

“There are video surveillance systems for security, but [for wildfire detection] we are the best,” says Mr. Shishalov.

“It is critical to invest in segment leaders, as exit options for #2 players are even more difficult,” says Intel Capital’s Mr. Taber.

A NEW RATING OFFERS INVESTORS A

GUIDE TO THE TOP 50 RUSSIAN START-UPS

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WWW.RBTH.RU Special Report

Displair can enhance gaming experience.

A science fair project from Southern

Russia may revolutionize the

gaming and computer market with

its screenless 3D images projected

on to water vapor.

KIRILL RUDENKORUSSIAN BUSINESS INSIGHT

3D Penetrable Images Made Out of Fog and Light

Maxim Kamanin, CEO of Displair, got the idea of making a display with images projected into the air with the help of water particles in 2010, when he was coming to the end of his studies of programming at Astrakhan State Technical Uni-versity. Having studied physical the-ories, Maxim was convinced that the technology required to put his project into practice existed.

He made the first functional model in just a couple of weeks, with the help of his father and brother, and took it to the Seliger 2010 Youth forum, not far from Mos-cow. The fi rst Displair was a com-bination of a projector and a screen-less display that allowed images to be projected from the computer.

Kamanin then enlisted the help of some friends, who worked fever-ishly to produce the fi rst success-ful test sample of the display by 2011. The display had multi-touch

display with picture quality suffi-cient to read texts.

Finland’s Fog Screen produced the fi rst prototype of a screenless display in the early 2000s. The sys-tem uses airfl ow with water parti-cles as a screen. Its limited inter-activity, however, is a major drawback – the Finnish developers have to make use of Kinect (Micro-soft’s development for the Xbox game console), which has certain shortcomings.

Some American and Russian de-velopers are also working on “air screens,” but Displair doesn’t re-gard them as competitors for now. “Their products are much bulkier – the devices weigh between 80 ki-lograms and 200 kilograms, where-as ours weighs a mere 10 kilograms,” Mr. Melnikov says.

“Another important aspect is their interactive capability. None of them has the multi-touch option. Final-ly, there is the core audience. Of all the companies developing the air screen, only Displair caters for mass consumers, whereas the others focus on business, especially showbiz and advertisements.”

When it comes to what it regards as its real competitors, Displair is

concerned mostly about the mak-ers of LCD, LED and touchscreen solutions. “There are other factors that show this, besides our desire to enter the consumer market with this technology.

“In Japan, touchscreen terminals that are used to pay for services or to buy tickets are not very popular. They [the Japanese] are obsessed with hygiene, which is a feature of their mentality; however, in this sit-uation, like in any other [that re-quires] touching something, the air-display solution will come in quite handy,” Mr. Melnikov says.

The company is preparing the fi rst commercial model of the device for production, while also pursuing fur-ther upgrades of its technology and extension within the product range. Displair systems will be produced in the special economic zone of Zelenograd, near Moscow, and the fi rst commercial batch is expected to be completed this spring.

Displair has been approached by Samsung and LG about develop-ing the technology together. But the Russian entrepreneurs are in no hurry to share their secrets, prefer-ring to keep control of their prod-uct and their business.

functionality for controlling imag-es using gestures.

The system is capable of regis-tering up to 1,500 touches simul-taneously, with a response rate of less than 0.2 seconds, making the number of users operating the sys-tem at the same time virtually un-limited. Images are projected on to a four-millimeter-thick stream of air with water particles so small that they remain intact even when the image is penetrated by a hand or other object.

“Once TechCrunch and Mashable wrote about the Russian project, our inbox almost exploded,” says Andrei Melnikov, Displair’s opera-tional director. “We were inundat-ed with letters from investors, well-wishers and people wanting to know when the new device would be available.”

The company has since received over $1 million in investment, which it has used in hiring 50+ staff, prod-uct development and marketing. “You need an international network for a completely new product to have more than just sporadic sales in your own region,” Mr. Kamanin says.

The device generates a 30-inch

Getting a piece of the next big thingIn addition to the privately owned funds, state-backed lenders are be-coming increasingly active. Lead-ing investment bank VTB Capital expanded its private equity divi-sion in 2012 and also bought a stake in Fast Lane Ventures, an Internet incubator that has supported sev-eral successful start-ups in the past couple of years.

Finally, there are two government-backed funds to provide money to start-ups. The Russian Venture Com-pany has $1.5 billion of federal money to co-invest with privately run funds as the minority partner. And state-owned high-tech agency Rusnano has also managed to bring in several deals.

The big break for high-tech start-ups came with the successful IPOs of Mail.ru, which raised $912 mil-lion in London in November 2010, and Yandex, which listed on Nas-daq in May 2011 with a valuation of $11.2 billion. Russian online re-tailer Ozon.ru, Russia’s “Amazon”, was raising money at the time.

“When we were fundraising in 2010, at fi rst investors were not very interested in Russia, but following the Mail.ru IPO things changed,” says Ozon’s French CEO, Maelle Gavet, who was cited by Forbes as one of the “Women to Watch” in its 2012 survey of the World’s Most Powerful Women. “After that, they were a lot better prepared. They knew a lot more about the Russian Internet and we started to get peo-ple calling us,” Ms. Gavet says.

Now the institutional money is starting to arrive. Investments into Russian high-tech fi rms more than doubled in value to $550 million in 2011, up from $220 million the year before, according to data from Fast Lane Ventures. Among the big ones were Rakuten, a Japanese venture capital fi rm, which took a $100 mil-lion stake in Ozon.ru; Northwest’s $70 million stake in Avito, an eBay-like website; and a $55 million in-

vestment by Bessmer and Russia Partners in KupiVIP.

Ozon’s $100 million was almost immediately spent on buying Sa-pato.ru, an online shoe store set up by Fast Lane Ventures – the fi rst big exit for the incubator – to add to Ozon’s burgeoning e-commerce business.

In December, U.S. venture capi-tal firm Domain Associates an-nounced a $93 million co-invest-ment with Rusnano subsidiary RusnanoMedInvest (RMI), into Rus-sian pharmaceutical fi rms Marinus Pharmaceuticals, Lithera and Re-gado Biosciences. These companies have several new drugs in the ad-vanced stages of clinical trials for the Russian and U.S. markets, in-cluding a treatment for epilepsy.

But the fastest growth is prob-ably still ahead. Revenues from Rus-sia’s Internet business are growing

at 30% a year and the volume of e-commerce is growing even fast-er: Russians spent an estimated $18 billion on goods bought from on-line stores, according to a survey by the Russian Association of Elec-tronic Communications and Mos-cow’s Higher School of Economics.

Mr. Hartmann, the KupiVIP CEO, estimates this will rise to $50 bil-lion to $80 billion over the next fi ve years.

“Typically, people start to buy things after they have been online for about three years, and they buy things like fashion after seven years,” Mr. Hartmann says. “But Rus-sia’s online population is so young that that seven-year wall has yet to hit. When it does, in the next few years, the market here will become the largest in Europe.”

The big break for high-tech start-ups came with Mail.ru’s $912 million London IPO and Yandex’s NASDAQ offering.

The Displair product differs from competitors in its low mass, multi-touch capability and target audience.

Dnevnik.ru was established in 2009 as a free school network. The site currently serves 35,000 Russian and Ukrainian schools. Dnevnik offers a comprehensive IT solution, including a school man-agement system, online tests and the school’s web-site. After attracting $5 million from Runa Capital last year, it is now collaborating with schools in Hungary, Poland and Israel and is targeting the U.S. and China.

Myapps.com allows users to create their own mo-bile application. Soon to be available in the App-Store, it currently has a few hundred individual users and a dozen corporate subscribers, including a Jap-anese restaurant that used it to create its takeaway menu, leading to a seven-fold increase in sales.

ViEye, the flagship product of Computer Vision Systems, works by recognizing regular human ges-tures that can be used to control various devices. Similar solutions are used in game consoles (such as Kinect for Microsoft Xbox), but ViEye can be used for a range of applications in electronics, medicine and the automotive industry. It’s also cheaper, more precise and works in any weather conditions.

What’s Hot in Russian TechTHE TOP 50 RUSSIAN STARTUPS PROJECT OFFERS

GLIMPSES OF THE HOTTEST COMPANIES ON RUSSIA’S

TECH SCENE. SEE THE FULL LIST AT RBTH.RU/STARTUPS

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05

olds with just college degrees in the U.S.,” says Fabrice Grinda, a West-ern business angel who has invest-ed in Wikimart.ru, Oktogo.ru, Mall-street.ru and Hipclub.ru.

And labor costs are less than in many other high-tech areas. A typ-ical software engineer in Moscow makes $40,000-$60,000 a year, com-pared with $180,000 in Silicon Val-ley. In a city like Tomsk, in Siberia – where every fourth inhabitant is a student, researcher, university lec-turer or employee of the Russian Academy of Sciences – a modest $2,500 per month can attract the cream of the crop.

5. Are Russian start-ups fully trans-

parent?

Threats from aggressive local businessmen or corrupt courts un-deniably exist in Russia, but so far these do not seem to have impact-ed tech entrepreneurs and inves-tors. Esther Dyson, a U.S. business angel who has invested in 15 Rus-sian start-ups as well as in search giant Yandex, says she has never witnessed any serious threats.

“Tech companies tend to be more transparent, with value that de-pends on the people who work there rather than on natural resources or assets that depend on some favor-able regulatory conditions,” she says.

The Russian start-up scene seems largely to have been spared the scourge of corruption. “In the dig-ital sphere, greedy civil servants don’t know what to look for – or where,” says Gleb Davidyuk, man-aging partner at iTech Capital, a Moscow-based venture fund.

However, many investors tend to have their start-ups incorporated under a Western jurisdiction, which they feel will better guarantee the protection of intellectual property as well as shareholders’ rights.

6. What are the exit options?

In this still very young market, insufficient exits are an issue. In e-commerce, for example, just four exits have taken place so far, an in-dustry report by East-West Digital News revealed recently.

“It is critical to invest in segment leaders, as exit options for #2 play-ers are even more difficult,” says Intel Capital’s Mr. Taber.

7. What if I operate from abroad and

don’t speak Russian?

Investors in Russia do not neces-sarily have to speak Russian, since many start-up entrepreneurs and local partners speak English. But intervening directly in the market defi nitely requires a physical pres-ence in the country.

While some international funds, from Intel Capital to Germany’s e.ventures to Japan’s UMJ, have an office in Moscow, others such as Mangrove Capital Partners and Ven-tech have representatives who trav-el to Russia frequently.

8. Should I invest in Russian start-

ups?

These are the key benefi ts:- Russia is now the largest Inter-

net and mobile market in Europe.- There are opportunities in many

Russian high-tech industries, from innovative software to nanotech-nologies and clean tech to biomed-icine.

- Russia has a large and fast-growing consumer market.

- High-quality science and tech-nology skills.

- Lower labor costs.- More start-ups, stronger entre-

preneurs, a quickly developing eco-system.

- Abundant funding.- Strong government commitment

and support for innovation.

CONTINUED FROM PAGE 1

Top 50 Russian Start-Ups

Skolkovo, the tech hub in

southwest Moscow, has signed

up dozens of global venture

funds and high-tech firms.

Russia Beyond the Headlines has teamed up with Digital October and PwC to compile a groundbreaking rating of the top Russian start-ups (to be updat-ed twice annually) in three categories - IT (191 companies), High-tech (22) and Lifescience (10). The rating uses criteria such as the amount of investment capi-tal attracted, corporate legal protection, presence in the media and team to as-sign a grade from AAA (highest) to CC (lowest). All companies must be incor-porated in Russia, employ no more than 100 people and be no older than four, five or six years (in IT, high-tech and life sciences, respectively). For a complete description of methodology, visit rbth.ru/startups/methodology.

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Russia Bets On Its ‘Pacific Vegas’

Investors Should Harbor No Illusions

AHEAD OF THE CURVE

STATE MATTERS

While President Barack Obama has spo-ken often of an American “pivot to-ward Asia,” this has been a central plank of Russian geopolitics for a decade.

Amid multi-billion dollar energy deals and growing security cooperation with Beijing, a significant role may also be played by plans to establish a Las Ve-gas-style gambling complex outside Vladivostok, Russia’s biggest city in the Far East.

The proposals date back to 2009, when President Vladimir Putin’s government banned organized gam-bling across Russia, except for four regions: Vladi-vostok, Kaliningrad to the west, Azov City on the Black Sea and Altai in Central Asia. They are all close to Russia’s borders, with an eye to attracting foreign tourism and investment.

Priority is being given to Vladivostok, chosen to cater for a fast-growing Asian gaming market. While Russia’s Far East is under-populated, it is close to China: an estimated 400 million people live within a one-hour flight.

The first five casino hotels are planned to be built by 2016, and by 2022, there will be 16 new hotels, a yacht club, shopping malls, golf links, artificial beach-es and all the other glitzy accessories of a new “Pa-cific Vegas.” Some $2 billion in federal funding has been allocated, and $625 million in investment cap-ital has reportedly already been raised. Generous tax breaks have also attracted the interest of five international casino groups so far.

The casinos could help diversify Russia’s Far East away from its dependence on energy, fishing and industry, and may rake in as much as an estimated $5.2 billion a year, with spinoffs such as amusement parks and shopping centers. The resort hopes to at-tract 10 million tourists a year, around one-quarter the number of Las Vegas’s visitors.

As with Las Vegas, however, it may also attract the underworld. Fraud in construction can give way to laundering money in casinos, loan-sharking to desperate gamblers and the selling of sex and drugs to visitors on the side. There have already been con-tacts between Russian gangs and their counterparts in Las Vegas, but the Chinese gangsters who dom-inate nearby Macao have been less helpful. Macao (with $33.5 billion in revenues in 2011) has overtak-en Las Vegas as the world’s gaming capital, and its gangsters are reluctant to share their best practice with new competitors.

Developing the Far East, Russia will find itself com-peting with powerful economic interests in the Asia-Pacific region. Mr. Putin’s administration is just as much a gambler there as the punters he hopes will flock to the new “Pacific Vegas.”

Mark Galeotti is Professor of Global Affairs at New York University.

Last year, privatization delivered around $7 bil-lion for the Russian budget — more than in the previous decade. The government has stated its intention in 2013 to sell state assets

worth at least $10 billion, but international investors should not harbor any illusions.

After years of hanging in the air, privatization got a sudden boost in 2009: oil prices were low and the Russian treasury was short of cash. That was when the aggressive plan to sell off the country’s major assets to the tune of $10 billion per year was framed. But soon after, the oil situation and budget revenues returned to normal, and privatization was shelved. Prime Minister Dmitri Medvedev, however, insisted on pursuing it, because he saw it as a way to im-prove Russia’s economic performance, by reducing the state’s share in the economy. But there is no consensus within President Vladimir Putin’s team: some favor continuing privatization; others propose leaving key assets in state hands.

From that perspective, the $5 billion secondary public offering of Russia’s largest bank, Sberbank, which last year accounted for the lion’s share of priva-tization revenues, should not be seen as a victory for advocates of reducing the state’s slice of the economy. Banks, in contrast to oil and gas, have never been considered by Russia’s current leaders as a strategic resource. VTB is in need of capital, so more privatization this year is likely. Authorities were planning to sell 10% of the bank’s stock last year, but delayed the placement.

Among the other assets up for sale this year, the world’s largest tanker company, Sovcomflot, and diamond giant Alrosa are of most interest. A stock flotation by Sovcomflot has been in the offing since 2010, but has been persistently delayed. Alrosa’s privatization has been hindered by wrangling be-tween the federal government and that of Yakutia, the region that also owns a stake in the diamond business, and does not want to lower it. The fed-eral government, which owns around 51%, fears los-ing control and insists on a parity reduction of stock. Privatization of other natural resource companies is even more unlikely. Although this year will see closure of a $50 billion deal between Rosneft and BP, involving the sale of Rosneft stock, in reality this “exchange with a surcharge” resembles nation-alization.

The authorities plan the sale this year of 5% of Russian Railways, one of the world’s largest trans-port companies. However, the deal is so fraught with technical difficulties that its timely completion is less likely than Rosneft becoming fully privatized in 2016.

Yulia Tseplyaeva is chief economist at BNP Paribas Russia.

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Genuine capital fl ight is only half the official fi gure, according to a new study by Ernst & Young, to-gether with the Russian Direct In-vestment Fund and Moscow State University’s Intelligent Reserve Cen-ter. Instead of $80 billion leaving Russia in 2011, the report says, when various accounting quirks, offshore M&A deals and errors and omis-sions are taken into account, the real outfl ow was $40 billion.

The backstory of Russia’s capital flight comes from the notorious 1990s, when businessmen simply grabbed as much cash as they could

and whisked it away to an offshore haven. Hundreds of billions of dol-lars fl ed Russia, but began to re-turn during the boom years of the 2000s, when entrepreneurs realised they could make handsome profi ts from domestic investments. With the 2008 crisis, capital fl ight began again. It peaked at $134 billion in 2008, but fell to $56 billion in 2009 and $34 billion in 2010, after the economy bounced back. The fi gure grew again in 2011 on fears trig-gered by the Eurozone crisis, reach-ing $80 billion.

Last year the outflows slowed

again, to $57 billion, according to Central Bank estimates. Most ex-perts see outfl ows falling slightly again in 2013, to about $50 billion.

Capital fl ight now is also very dif-ferent from in the 1990s.

“You have to remember that, in proportion, the current capital fl ight is a much smaller proportion to the size of the economy than in the 1990s,” says Ivan Tchakarov, chief economist at Moscow investment bank Renaissance Capital.

Russia’s GDP had grown to just under $2 trillion last year - around twentyfold since the 1990s - while capital fl ight has stayed approxi-mately the same.

Not all the capital leaving is ac-tually Russian, either. In 2011 the biggest outfl ows came from Rus-sian subsidiaries of foreign banks,

making loans to their parent banks in the West, says Andrei Klepach, a deputy economic development minister. A legal quirk means that foreign banks can’t set up branch-es in Russia, but have to incorpo-rate local subsidiaries. The same problem in 2008 led the Central Bank to warn foreign banks to curb this kind of lending.

Another big source of capital fl ight is the profi ts of Russian over-seas holdings that are reinvested into that foreign holding, or Rus-sian companies paying off foreign loans. These profi ts are made abroad

and reinvested abroad, but because the parent company is Russian an accounting peculiarity counts this money as capital fl ight. Analysts have been arguing for years that Russian companies making money overseas and growing their busi-nesses there should be viewed as a positive, like with corporates pay-ing off foreign debts. Analysts es-timate another $20 billion of capi-tal flight is actually reinvested foreign earnings.

Even when the accounting quirks and other distortions are taken into account, however, $40 billion in out-fl ows is still a lot of money, and it is mostly leaving because of the poor investment climate, corruption and uncertainty over Russia’s future.

Central Bank chairman Sergei Ignatiev said in January there are twin factors driving capital outfl ows from Russia: aggravation of the Eu-rozone crisis and the poor invest-ment climate at home.

Ernst & Young’s report argues the poor investment climate doesn’t play a big role in driving capital fl ight, however: “There is no statis-tical relationship between invest-ment climate indicators and the es-timated real capital outfl ow fi gures,” the report says.

Alexei Devyatov, an economist with Moscow investment bank Uralsib, estimates that a one per-centage point decrease in the Eu-rozone composite industrial pro-duction index leads to an extra $300 million to $500 million of capital outfl ows from Russia.

Another big change is that high-er oil prices lead to bigger outfl ows, while in the past more petrodollars meant more economic growth. “Ex-pensive oil is no longer viewed as

Mr. Gref also warned Russia’s of-fi cials that they were not taking full advantage of the opportunities of-fered to Russia by its membership of the WTO since its accession last year. “In our heads we are still not in the WTO,” he said, comparing Russian officials to a hockey team playing without knowing the rules of the game.

“Today we are only losing out on global markets,” Mr. Gref added. “We [are winning] only in oil and gas exports. [But] falling growth rates show that we can’t continue to increase oil and natural gas ex-traction at these rates.”

A day later at the Gaidar Forum, Mr. Lamy backed Mr. Gref’s criti-cisms: “I’m a little surprised that Russian officials still discuss the WTO as something in the future. You’re already in the WTO. It’s time to realize this and not discuss whether or not you should abide by the rules. You have to abide by them.”

John Goldstone, Professor of Public Policy at George Mason University, pointed out that an abundance of cheap energy in the U.S. will hurt the Russian econo-my in the near future. “Manufac-turing that is driven by the search for low-cost energy will increas-ingly move back to the United States. This will be difficult for the Russian economy, which has de-pended on high-volume but rela-tively high-cost production of nat-

Finance A new report by Ernst & Young says genuine outflows are only half the official figures

Some $350 billion has fled Russia

since the 2008 global crisis. But

things aren’t as bad as they seem.

Mr. Medvedev was more upbeat about Russia’s progress, pointing to the country gaining eight places in the Doing Business ranking last year. “The 112th place is good, but we need to do more,” Mr. Medvedev said.

He set the goal of maintaining 5% annual GDP growth in the com-ing years, but was criticized by for-mer Finance Minister Alexei Ku-drin, who said that such growth could be achieved only after exten-sive institutional reforms and no sooner than fi ve years from now.

Russia’s economy came in for praise from Niall Ferguson, of Har-vard University, who compared Rus-sia favorably with some Western countries over its fi nances.

“In fact, [Russia] looks pretty good,” said Mr. Ferguson. “If the gross debt measured by the IMF is 11% of GDP, a tenth of what it is in many South European countries, and if the defi cit last year was in fact a small surplus...

“The West is in a stationary state because of its laws and institutions...The excessively complex regulation has come to be the disease of which it purports to be the cure,” he said.

“There are problems [in Russia],” Mr. Ferguson said. “The question of the rule of law is something that goes far beyond the ease of doing business, and here unquestionably Russia has a long way to go. [But] there’s something to celebrate in the rapid improvement we see in insti-tutional quality in countries like Russia.”

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ural gas and oil, as the global market... is increasingly saturated by expanding outside of Russia. Russia will have to greatly diver-sify its economy and change its core economic relationships,” Mr. Gold-stone said.

“The rule of law goes beyond the ease of doing business, and here Russia has a long way to go,” said Mr. Ferguson.

“We can expect capital flight to persist over the next several years,” says Alexei Devyatov, of Moscow’s Uralsib Bank.

“Capital flight is now much smaller compared to the size of the economy,” says RenCap’s Ivan Tchakarov

Economic Thinkers Urge Reform

The Truth About Capital Flight

is the official total of capital outflow leaving Russia in 2011 that is widely cited in international media.

is the actual figure that should be cited, according to a new study by Ernst & Young.

of the original figure is estimated to be Russian companies reinvesting their foreign earnings.

$80 billion

$40 billion

$20 billion

IN FIGURES

Former Finance Minister Alexei Kudrin called for reforms to be speeded up.

a growth catalyst,” says Mr. Devy-atov. “Given the economic weakness in Europe and slow progress with institutional reforms in Russia, we expect capital fl ight to persist over the next several years.”

Uralsib remains pessimistic, fore-seeing capital outfl ows reaching $50 billion-$60 billion in 2013 and $40 billion-$50 billion in 2014-15, ver-sus the official forecast of zero cap-ital outfl ows in 2013 and $30 bil-lion-$40 billion in 2014-15.

Commodities are primarily re-sponsible for capital outfl ows, says Alexander Ivlev, Ernst & Young’s managing partner in Russia.

“Russia’s capital outfl ow situa-tion is comparable to that of the many export-oriented economies, such as Kuwait, Norway and Japan,” he says.

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'The twin factors driving capital outfl ows from

Russia are an aggravation of the Eurozone crisis

and the poor investment climate at home.' CENTRAL BANK CHAIRMAN SERGEI IGNATIEV

UTE

07

President Vladimir Putin’s initial response to the Magnitsky Act was right on the money: to accuse the U.S. government of monumental hypocrisy by focusing

attention on Washington’s record of torture and illegal rendition of terrorism suspects. That re-action also had the tit-for-tat structural sym-metry that is standard in such cases.

More important, it allowed the Kremlin to take territory it had not occupied since Soviet days: the moral high ground. Back then, Sovi-et officials would counter U.S. criticism of human rights violations with the standard question, “And what about your blacks?” Historian Mar-tin Kenner even contends that progress in the civil rights movement was accelerated by the criticism from Moscow, a sort of social-justice race running parallel to the arms and space races.

Apart from symmetry and high ground, there was also an excellent contextual reason to at-tack the U.S. for its practices of torture and rendition. The subject is very much in the air again because U.S. President Barack Obama has nominated John Brennan, currently his chief counter-terrorism adviser, to be the new CIA director. Four years ago, that nomination proved impossible because of Mr. Brennan’s favorable remarks about rendition and waterboarding. In addition, the new fi lm “Zero Dark Thirty”, detailing the manhunt for Osama bin Laden, was controversial even before its recent release because its violent opening scenes of water-boarding suggest that this torture led to action-able intelligence.

This was an ideal moment for Mr. Putin’s at-tack to resonate with U.S. popular culture as well as on Capitol Hill.

A signifi cant percentage of Americans, espe-cially among those who voted for Obama in November, are still angered by the damage that former President George W. Bush and Vice Pres-ident Dick Cheney caused to the U.S. global image. If Mr. Putin’s idea was to stick it to the U.S., he couldn’t have found a better means and moment to do it.

Yet Mr. Putin’s big mistake was when he turned his initial symmetric response into a

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WWW.RBTH.RU Comment & Analysis

A MAKE-OR-BREAK YEAR FOR REFORM

IS A NEW COLD WAR COMING?

Sergei Guriev,

Oleg TsyvinskyECONOMISTS

Andrei

TsygankovECONOMIST

Richard

Lourie AUTHOR

If 2013 slips through the country’s fi ngers, Russia will fail to fulfi ll President Vladimir Putin’s promise to gain a slot as one of the top 20 countries for best business climate.

This year looks set to be a decisive one for Mr. Putin’s pre-election promises on economic policy. Chief among these was a pledge that Russia would have one of the top 20 business climates in the world by 2018. Plenty of time, it seems. However, unless 2013 is utilized prop-erly, Russia will struggle to meet this objective.

Why does it matter so much? First, the tar-get is measurable and the ranking is determined by a body independent of the Russian govern-ment. Second, the promise cannot be fulfi lled without improving the performance of the coun-try’s institutions. Third, improving the business climate will spur economic growth.

A year ago, Mr. Putin set out his economic reform priorities in an an article entitled “We

The recent crisis between Russia and the U.S. over the Magnitsky Act has pro-voked speculation of a new Cold War. Congress led the way by passing the act,

named for Hermitage Capital lawyer Sergei Magnitsky, who died in pre-trial detention in Russia in 2009, which denies visas to Russian officials presumed responsible for human rights violations and freezes their U.S. assets.

The Russian State Duma retaliated by pass-ing the “Anti-Magnitsky Act,” which targets U.S. citizens who Russia considers to be violators of human rights. They include officials linked to torture and other violations at the Guanta-namo Bay prison and judges who acquitted or gave light sentences to U.S. parents who abused or committed involuntary manslaughter against children adopted from Russia. In addition, dep-uties banned the adoption of Russian children by U.S. citizens.

U.S. policy toward Russia continues to be shaped by the anti-Russia lobby. It views the U.S. as the leading democracy in the world and Russia as one of the main global obstacles to this world order. The Magnitsky Act not only punishes Russian officials without any proper investigation or trial, but also targets Russia exclusively as if it were the world’s worst vio-lator of human rights. This confi rms that the anti-Russia lobby’s main goal is to isolate and discredit Moscow, cynically using human rights as a cover for geopolitical strategy. Hermitage Capital CEO William Browder, the main lob-byist for the Magnitsky Act, and Senator Ben-jamin Cardin, its main champion in Congress, were primarily driven by the desire to humili-ate and shame Russia.

As was the case under former U.S. President George W. Bush, the success of the anti-Russia lobby is predicated on a weak presidency and Russia’s careless attitude toward its image abroad. U.S. President Barack Obama showed his desire to work with Russia on a number of issues of mutual importance, from missile de-fense to counterterrorism, nonproliferation and economic development. Mr. Obama did not ini-tially support the Magnitsky Act, but he was all but forced to sign it because the repeal of

need a new economy.” They were formalized in a decree signed May 7, immediately after his reinauguration, which instructed the govern-ment to “take steps to achieve, in particular, the following objectives: improve Russia’s position in the World Bank’s ‘Doing Business’ index, from 120th in 2011, to 50th in 2015 and 20th in 2018.”

The clock is ticking. The 2013 Doing Busi-ness rating, published in fall 2012, put Russia in 112th place. According to a Kremlin direc-tive in November, the gap between 50th and 112th places is to be overcome in just two jumps — in 2014, Russia needs to reach 81st.

The 2014 Doing Business rating will be pub-lished this fall, and while the legal framework is in place, no laws were passed last year to im-prove the business climate. Parliament was busy with other important matters: regulating the Internet and NGOs, increasing fi nes for attend-ing rallies and slander, and its response to the U.S. Magnitsky Act. As a result, the directive is likely to remain in the fi ling cabinet.

Last year was not completely devoid of ac-tion, however. The government drafted a set of

roadmaps to improve the business climate, with the aim of raising Russia’s position in the 2015 rating. Another key promise is the exact time frame set for the privatization of state proper-ty. Mr. Putin instructed the government to draw up, by last November, a privatization plan to

provide for “the government’s complete with-drawal by 2016 from the capital of companies in the ‘non-raw materials sector’ that are not natural monopolies or related to the defense industry.” Specifi cally, this means the full priva-

tization of all banking assets and transporta-tion assets in competitive sectors.

The implementation of this ambitious pro-gram will improve the managerial performance of the privatized companies and raise the level of economic competition. The only question is whether the program will actually be imple-mented, since previous privatizations have been systematically discarded. Unlike the push to move up the Doing Business index, in this case even the preparatory work remains untouched.

If 2013 does not see the publication of a 2014-16 asset privatization program, then all hope of implementing Mr. Putin’s decree on sched-ule will be lost. What is the likelihood that Mr. Putin’s campaign promises to improve the busi-ness climate and to privatize assets will be kept? We believe it is perfectly feasible, but in order for it to happen 2013 must be a year of deeds, not words.

THIS COMMENT, BY SERGEI GURIEV, RECTOR OF THE NEW ECONOMIC SCHOOL IN MOSCOW, AND OLEG TSYVINKSY, PROFESSOR AT YALE UNIVERSITY, FIRST APPEARED IN THE RUSSIAN BUSINESS NEWSPAPER VEDOMOSTI.

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THE DANGER OF ASYMMETRY

the Jackson-Vanik amendment, something Mr. Obama overwhelmingly supported, was attached to the Magnitsky Act. At the same time, how-ever, Russia’s response was clearly foolish. For all the talk about the importance of soft power, the Kremlin chose a retaliation that will shape Russia’s negative image in the West for years to come. From a reputational standpoint, pe-nalizing U.S. adoptive parents, the overwhelm-ing majority of whom are law-abiding, loving and caring, and punishing Russian children, many of whom are disabled and waiting for adoption, was the worst possible choice.

Russia’s anti-U.S. campaign remains largely reactive. The Kremlin’s retaliation by support-ing the anti-Magnitsky act has little to do with

foolish asymmetric one. By denying Americans the right to adopt Russian children, the reason-ing must have been some combination of “The Americans are sentimental, this’ll hurt them!” and “Who do they think they are, coming here and shopping for our blond, blue-eyed darlings?”

In the end, of course, it is Russia’s own or-phans who will suffer the most. The old Rus-sian saying, “Beat your own so others will fear you,” was probably not designed with kids in mind.

Patriarch Kirill, the head of the Russian Or-thodox Church, has called on Russians to adopt more children. It’s a good idea. This is also a moment where the opposition or spontaneous groups that are changing Russia slowly, from

Mr. Obama needs to control the agenda and not let the anti-Russia lobby dictate terms and conditions.

Mr. Putin’s big mistake was when he turned his initial symmetric response into an asymmetric one.

We believe it is perfectly feasible to fulfill Mr. Putin’s promises to improve the business climate and to privatize assets. But for this to happen, 2013 must be a year of deeds, not words.

ANTI-RUSSIA LOBBY CONTROLS OBAMA

human rights and is almost exclusively about protecting Russia’s sovereignty. The official re-action to the Magnitsky Act may only be the prelude of other blunders to follow. The emo-tional side of such a reaction is frustration and anger, and it is notoriously difficult to success-fully channel anger into moderate policies. Rus-sia and the West have been through this before and are still recovering from its consequences.

If European countries adopt their own ver-sions of the Magnitsky Act, or if Mr. Obama eventually agrees to expand the Magnitsky list to include senior Russian officials, the crisis in U.S.-Russian relations has the potential to es-calate.

To resolve this crisis in U.S.-Russian rela-tions, Mr. Obama needs to control the Russian agenda and not let the anti-Russia lobby dic-tate its terms and conditions.

At the same time, the Kremlin should learn to control its emotions and not allow them to shape the country’s foreign policy.

Andrei Tsygankov is professor of international relations and political science at San Francisco State University.

This article was first published in The Moscow Times.

the bottom up, could come forward with a mass-adoption program. But it seems that they, like Mr. Putin, are also letting a rare and valuable opportunity slip by.

What makes this whole business even odder is how adroitly Mr. Putin dealt with French actor Gerard Depardieu, grabbing world head-lines and changing the perception of Russia as a place where artists like the punk group Pussy Riot are persecuted to making it a rather safe haven for international movie stars fi ghting for reasonable income-tax rates.

Yet only time will tell whether Mr. Putin’s play on Mr. Depardieu was smart. It may turn out that, like many post-Soviet people, Putin has thrown out the dialectical baby with the Marxist bath water. Dialectics stressed that things inevitably turned into their opposite.

As a Russian citizen, Mr. Depardieu may yet end up on Red Square protesting the arrest of some fellow “Russian” artist, a sight the world media would gobble up. Stay tuned.

Richard Lourie is the author of “Sakharov: A Biogra-phy” and “The Autobiography of Joseph Stalin.”

This article was first published in The Moscow Times.

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Kazan: a Fusion of Europe and Asia

TOBY FISHERSPECIAL TO RUSSIAN BUSINESS INSIGHT

The best place to see a clash of Russia’s varying

cultures and religions lies a 90-minute flight

from Moscow - on the banks of the Volga River.

A trip to the city of Kazan, on the Volga River some 600 miles east of Moscow, is almost like visiting another country. The city, which will host the 2013 World Student Olympics, or Uni-versiade, July 6-17, is the capital of the Repub-lic of Tatarstan – whose population is almost evenly split between the Muslim Tatar and Or-thodox Russian communities. Kazan’s appeal is rooted in this mix of cultures, which is re-fl ected in the city’s architecture and cultural offerings.

Dominating the city skyline is the kremlin, Kazan’s ancient fortress. There is a large mosque as well as a Russian Orthodox cathedral – Ta-tarstan became part of Russia during the reign of Ivan IV (the Terrible), whose forces put the city under siege in 1552. Next to the mosque, the Annunciation Cathedral is revered by Or-thodox believers as the home of the icon of Our Lady of Kazan, one of the holiest in Russian Orthodoxy, built between 1554-62. As well as the religious sites, the kremlin also features the Söyembikä Tower, which leans on its side. Eng-lish-language tours are available.

The Kazanka River joins the Volga at Kazan and gives a good view of the city’s modern face, including Millennium Bridge, built in 2005 for

the 1,000th anniversary of the city’s founding. Heading back into the city from the river, you

see its Russian heritage. The Kazan Theater of Opera and Ballet dominates Liberty Square, and closer to the city center is Kazan Federal University, near Bauman Street, a long pedes-trian walk at the heart of the city. Here the sou-venir shops alternate with restaurants, many offering Turkish cuisine – a testament to the

ethnic ties between Tatar and Turkic cultures. You’ll also fi nd traditional Tatar dishes – the honey-coated fried dough known as chak-chak, served with tea, comes highly recommended.

Across the Bulak canal is Kazan’s central market, which is not on the tourist trail but shouldn’t be missed. The vendors are primar-ily Tatar or central Asian, and it’s a good start-ing point for exploring the Tatar district.

Culture Taste the best of the capital at the cool converted Red October chocolate factory

Travel A single city combines rich history, religious tolerance and a peek into Russia’s large Muslim community

Older Russians still recall the smell of chocolate that wafted from the factory’s red-brick build-ings, which date from the late-19th century. In the Soviet era, Krasny Oktyabr (Red October) became the country’s most popular candy. In re-cent years, old factory fl oors have transformed into galleries, clubs, lofts and offices for hot media outlets such as liberal online TV station Dozhd.

Despite being associated with the arty media set, Krasny Oktyabr’s diverse attractions draw all types. At Strelka Bar, bureaucrats rub elbows with independent fi lmmakers, while business-men and backpackers alike can be found at Lum-iere Brothers. Krasny Oktyabr offers a good day out in Moscow all by itself. Take in an art exhi-bition, snack on smoked haddock and dance at a rooftop club – all without having to hail a cab.

Culture

The Lumiere Brothers Center for Photography hosts the city’s fi nest photo exhibitions. Many shows draw from the center’s extensive Russian photo archive. Others feature big contemporary names from Russia and abroad, such as a recent show of New York nightlife chronicler Wendy Paton. The gallery also has an excellent shop, with black-and-white prints of 20th-century Mos-cow that make for elegant souvenirs.

www.lumiere.ru

Food

Strelka, the island’s best restaurant, is affiliated with the Strelka Institute of Media, Architecture and Design. Velvet banquettes and curtains cre-ate a funky retro vibe, while in summer the out-door terrace draws constant crowds. Its new Dan-ish chef, Yves Le Lay, has infused the Russian-European menu with Scandinavian fl air, with dishes like smorrebrod topped with smoked haddock and horseradish. During the day, tête-à-têtes take place over eggs or a three-course business lunch at 380 rubles ($12); at night, the cocktails fl ow freely as the creative intelligentsia assembles. www.strelka.com/bar

For a relaxed meal, a cup of coffee or a beer in arty surroundings, Art-Akademiya is a peren-nial favorite. Opened by artists Yevgeny Mitta and Vladimir Dubosarsky, the restaurant boasts a long bar, comfortable cracked-leather sofas, as well as paintings by Pavel Pepperstein and other contemporary artists. The reasonably priced menu offers pasta and pizza starting at 280 rubles ($9), along with classic Russian favorites such as borscht for 390 rubles ($13).

www.academiya.ru

Nightlife

Krasny Oktyabr’s nightlife scene was once ruled by the glittery Rai, known for its long lines, snooty bouncers and fl exible dancers. But after Rai closed its doors last year, Krasny Oktyabr’s most popular spot for drinking and dancing is the younger, more democratic Gipsy. In warm weather, it boasts the island’s most popular open-air terrace. Year-round, there’s a pop-centric main fl oor and a more house-music and tech-no-heavy upper level. On the menu are Indian-infl uenced appetizers.

www.bargipsy.ru

For a night that’s rowdy but pretension-free, head next door to Rolling Stone Bar, where the age range and sartorial infl uences vary widely. Covers of the Russian version of the eponymous magazine hang on the walls, though they’re usu-ally obscured by the crowds and smoke. Rolling Stone DJs favor rock over techno.

www.facebook.com/BarRollingStone

An Island of Innovation and Hipsters A chocolate factory-turned-culture mecca on the

Moscow River, Krasny Oktyabr packs the city’s

best galleries, dining, nightlife and views onto

one tiny island.

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A varied audience of students, young professionals and hipsters attend the Strelka Institute’s events.

Kremlin (formerly Lenin) Street in Kazan. Kazan’s strikingly beautiful Kul Sharif mosque.

The newest addition to the island’s art scene, Red October got off to a strong start last fall with a Soviet-themed installation by concep-tualist duo Ilya and Emilia Kabakov. High ceil-ings and iron columns recall the gallery’s past as a factory fl oor.

www.redoctobergallery.com

Shopping

Bra-shaped pendants and a gold-and-sapphire bracelet that appears to be made of pencils are among the unusual works of jewelry designer Vladimir Markin. Markin’s playful (and pricey) designs have been featured in Elle and Vogue Russia; call or e-mail ahead to make an appoint-ment.

www.vladimirmarkin.com

If diamonds are too bling, then the designer T-shirts at T-SHKA (located on the central facto-ry’s fourth fl oor) make colorful gifts and sell for a mere 800 rubles ($25). To really feel like one of the in-crowd, hang around to drink an espresso and peruse the electronic music selection.

www.t-shka.com

Business

Business travelers temporarily bereft of a work-place should consider a membership at Digital October, a hot co-working site that offers month-long access to meeting rooms, a hip restaurant and more, at individual and corporate rates (in-dividual memberships begin at 7,000 rubles, or $230). Finish a presentation, meet with an inves-tor or just plow through your e-mails, then head out for more fun after dark.

www.digitaloctober.ru

The former chocolate factory on the banks of the Moscow River is home to art, design, media and high-tech projects, plus great restaurants and clubs.

If you go:

Kazan is an easy weekend trip from Moscow. Flights are available all day and a round-trip ticket runs to about $250.

It is also possible to take an overnight train from Moscow’s aptly named Kazan Railway Station, for about $150 for a place in a four-person cabin, or $280 for a place in a two-person cabin.

The centrally located Hotel Guiseppe is a popular mid-range choice. Located just steps from the kremlin, rooms in the co-

zy, Italian-themed hotel go for between $100 and $250, depending on the type of room and number of occupants. The hotel also features a popular piz-za place.

Giuseppe.ru

Across the river from the kremlin, a more upscale choice is the Hotel Mirage. The rooms here, which feature minimalist furnishings and fluffy white du-vets, range from $125 to $400.

Mirage-hotel.ru

In addition to the pizzas at Guiseppe, locals recommend Pashmir, which features Central Asian/Turkish cuisine, which has highly in-

fluenced local food. Pashmir.ru

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$6.5 millionwas invested by tycoon Alexander Mamut in 2009 into the Strelka Institute for Media, Ar-chitecture and Design, named by Domus mag-azine in January 2013 as one of Europe’s Top 100 Architecture and Design Schools.

IN FIGURES

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