24 december 2012

Meeting of the Presidium of the Presidential Council for Economic Modernisation and Innovative Development

The meeting took place on the premises of Yandex where Prime Minister Dmitry Medvedev viewed a presentation of the company's search engine and the world’s first 3D pixel-free screen designed by Russian engineers.

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Transcript of the meeting:

Dmitry Medvedev: It is beautiful here. We have chosen a wonderful place. Ladies and gentlemen, today we are holding a meeting of the Presidium of the Council for Economic Modernisation and Innovative Development devoted to information and communication technology – one of our most dynamic and promising branches.

I have looked at the expert estimates. I don’t know how correct they are, but they state that our IT market had a volume of 650 billion roubles last year. The experts who are present here can likely comment in this regard. The forecast for this year is more than 700 billion roubles. So, the market is growing. It is not as fantastic as in other countries, but it is increasing and already producing substantial revenues.

Generally, Russia has a good reputation on the global IT market. Our experts are highly valued. They are working to resolve complicated cyber security-linked algorithmic problems that concern mathematical simulation and data procession. Our software school is well-known and is one of the best in the world. Our software experts are fairly competitive globally. I am glad to say that Russia performs well in global student contests. Our teams have repeatedly won software engineering contests of this kind, such as the St. Petersburg University of IT, Mechanics and Optics team. I have met with the team on more than one occasion.

This year Russian schoolchildren were awarded four gold medals at the International Olympiad in Informatics (IOI); they shared first place with the Chinese national team. In fact, we have great potential, it remains strong, but we should make every effort to realise the potential of the talent of the young people of our country. Nobody is setting unrealistic goals. In any case, the exchange of people will continue, people will leave to study and do business; however our country should have a system of support for such activity.

The intense development of information technology determines the sustainability of growth in practically every economic sector; that’s why the IT sector was and will remain a national priority. The current state and federal targeted programmes include allocations of 21 billion roubles for the support of new research and development. Almost 2.5 billion roubles are earmarked for institutes to invite leading IT scientists and implement joint projects with industry. And finally our national development institutes have invested over 73 billion roubles in this sector in recent years. Vnesheconombank (VEB) has financed five large projects in the development of an elementary base and the creation of a data transmission infrastructure with almost 45 billion roubles. The Skolkovo fund has created that IT centre. It has 238 registered participants, and 35 venture funds are accredited there. Rosnano has approved the funding of 13 projects for considerable amounts as well. Thirty-five projects under the Russian Venture Company have received support. Overall, the development institutes are making their contribution, and it’s considerable.

The programmes for the innovative development of infrastructure companies with a public stake – I mean all companies including our large companies, such as Rostelecom and Pochta Rossii – are yet another factor in the demand for high-tech research and development. The total funds planned by these companies for relevant objectives until 2015 are considerable, over 300 billion roubles. Last year, over 1.5 billion roubles were invested in research and experimental construction. In effect, the sector has funds, but it is necessary to decide what to focus on. It is necessary to have a concept of the future of the industry. This future hardly has clear outlines; various people see it differently. But it’s necessary to feel the pulse; it’s necessary to see the areas of this development. This includes mobile applications, and Big Data processing, and cloud technology, and bioinformatics, and artificial intelligence, and other areas. It would be interesting to listen to the professionals who are here.  

Our joint objective is to create conditions for strengthening the competitive position of our country on the global market. One of the features of the sector is low capital intensity and an absolutely determining role of the intellectual work in creating products and services. In this context it is important to ensure an efficient patent protection system, and marketing support for research and development. Market leaders are known to spend more for this than for the development of new products.

Finally, training personnel for the sector remains an absolute priority – I mentioned this earlier.

The data I have here shows that the current proportion of IT employees is 0.6% of Russia’s gainfully employed population. Of course, it depends on how you count, but still this is the figure I have. In developed economies, this indicator stands at 4-5%, while IT companies estimate their additional need for highly skilled personnel at anywhere between 20 and 30% of the total number of college graduates per year.

I think this is enough to get the ball rolling. Let us now give the floor to our colleagues. I call upon Minister of Communications and Mass Media Nikolai Nikiforov.

Nikolai Nikiforov (Minister of Communications and Mass Media): Mr Medvedev, colleagues, target-setting is a highly important component of any work. We at the Ministry began by formulating five simple groups of targets that would be clear to any resident of this country. Please turn on the slides. I think it important to specify them because these targets are at the core of our modernisation and innovation agenda.

Number one is developing communications. We have set ourselves an ambitious task to annually connect five million households, or about 20 million people, to a 4G high-speed wireless technology. The screen shows a web page we have created to discuss the targets with the public. People could even vote for them and choose priorities. So, they have been through a public trial run of this kind.

Number two is developing postal services. The post should become the key commodity conduit and the growing online commerce imposes on it additional tasks. Besides, with its 42,000 offices the post is, in effect, the most distributed office network which ought to start providing a wide range of services, including online and new services.

Number three is developing the media environment. Symbolically, Channel One has launched its HD project earlier today, and there is a high consumer demand for this kind of innovations. The demand is also high for more TV channels and more radio shows. So, this modernisation is already in progress in the satellite and cable networks.

Number four is, properly speaking, developing IT as an industry. The task here is to achieve an outrunning growth. Our goal is to have the IT industry as an independent part of the economy average thrice as fast a growth as the GDP does before 2018. The number of IT employees should be doubled in comparison with what we have now. You have mentioned the figure in your opening remarks.

And, lastly, number five is providing online services. On the one hand, we are used to seeing online services as predominantly those rendered by the government authorities or local self-governments. At the same time there is a huge stratum of social and commercial services, such as buying air tickets, and so on and so forth. In this area, as we think, the key role will be played by our encouraging online payments and by a new type of ID card. Today I would like to dwell on certain priority proposals we have mapped out with experts. These proposals are about advances in three key areas: the IT industry, communications and online payments, a crucial component of online services.

So, let us look at several IT development indices. The industry’s contribution to the GDP is 1.2%, given that its workforce makes up just 0.6% of the gainfully employed population. This means that one programmer’s contribution is higher than the average in the Russian Federation. About 10 billion roubles is what we see as an important indicator in deals involving venture financing. But there is a significant untapped potential. This figure is rather low and we expect a surge in growth in the coming years. We have an estimate of export revenues amounting to about $3.5 billion. It also demonstrates some rather positive trends.

If we compare the Russian IT industry with its counterparts in other countries, what leaps out is that the employees are sufficiently young (under 30 years old on average) and that the yield or rate of production  per one employee can be anywhere between 80 and 90% lower. Thus, we have something to think about. One reason is that we are not using our product development potential to the full. I mean we should create intellectual property at home and duplicate it globally rather than just provide services or sell the time of our programmers and engineers. This slide shows certain well-known brands of Russian IT companies, including some enjoying an international reputation. But the big question is what should we regard as a Russian IT company? Business is globalising; many companies operate in jurisdictions other than Russian. This problem, therefore, is about statistical and legal accounting. Of course, we have a mind to develop a separate programme whereby to make the Russian jurisdiction more attractive for IT business. And it must certainly be implemented. Let me repeat it once again: one of the key problems, as we see it, is the low rate of production per employee in comparison with other countries, although the cost of workforce at home is not generally the highest in the world. What I mean is that we have good potential for growth that we must use.

Dmitry Medvedev: Do you know how to make our jurisdiction more attractive for IT business?

Nikolai Nikiforov: Mr Medvedev, I think IT business here is no different from business in general anywhere else: same agendas.

Dmitry Medvedev: I see.

Nikolai Nikiforov: Various corporate…

Dmitry Medvedev: I see, I see, if they have the same agendas.

Nikolai Nikiforov: Of course, they do. We can hardly…

Dmitry Medvedev: Insurance contributions.

Nikolai Nikiforov: Yes, insurance contributions are the third point of our proposals. While preparing for this meeting, our experts tried to identify the first priorities and found that there were three.

First, a center for breakthrough research. In fact, Russia conducts a lot of research, but IT has been undeservedly kept on the sidelines. We believe we can formulate a clear and intelligible programme for promising investigations in this field on the basis of the existing development institutions without inventing anything new. This, incidentally, also answers your question about what is to be done and where our key resources have to be focused.

Second, foundations and development institutions ought to emphasise precisely the seed and pre-seed financing stage. Currently there are about 100 seed investments per year in this country. Many of these are invisible because they are made at the level of small business. As we believe, we must, with the help of the government and the existing development institutions, create the conditions for boosting the number of these deals – to 1,000 or even 10,000. This is a target of sorts and we should keep in mind that activities of this sort are on the rise in the regions and that technological park networks are being built. In short, we will have a fairly good infrastructure that ought to be filled with this content.

Third, there is an issue of social deductions. They have been reduced every year and a deadline has been established to repeal them. However, we still think it would be worthwhile to levy them on companies with more than ten employees whereas now they apply only to businesses with thirty or more.

I’ll move to my second theme, Russian telecommunications – an essential part of the national economy. Here are its macroeconomic parameters: We estimate this market to be worth 1.3 trillion roubles. It accounts for 2% of the gross domestic product. Overall annual investment averages 320 billion roubles, and the five leading companies’ capitalisation is two trillion roubles. Russia takes pride in leading Europe in the number of internet users. There’s a lesser known but no less indicative fact – this country ranks fourth in the world for the number of generation four net users, and this number is rapidly growing. Essential decisions have been made for massive radio frequency conversion, and operators are working at it.

Mobile telephone service is developing fast. The graph on the screen shows annual penetration growth, which has reached 160%, outrunning many European countries. Mobile phone use will be greatly promoted by the recently endorsed law on phone number transferability. All operators must implement this programme by December 1, 2013. Regrettably, this law was necessitated by the bad state of communications in some parts of Russia. We also have a problem with BBA – broadband access. That’s an industry abbreviation. Here, Russia lags behind Europe, unlike with mobile phones. Importantly, mobile penetration is counted only in areas with proper ground infrastructure because quality mobile communication, at least data transmission, is impossible without fibre optic cable. As you can see, the greatest problems with digital penetration are in the Far Eastern, the Siberian and the Southern federal districts, and the Central, Moscow being the exception.

Dmitry Medvedev: What does “200% penetration” mean?

Nikolai Nikiforov: An average of two SIM cards per capita.

Dmitry Medvedev: I see.

Nikolai Nikiforov: We opened a fibre optic line in Yakutsk yesterday. It’s the first fibre optic line in Yakutsk though Yakutia is Russia’s largest region. Some of our big cities with a huge potential for BBA don’t have fibre optic lines yet –Norilsk and Magadan for example. It’s a major problem because broadband access has a direct economic impact. It enhances the efficiency of small and other businesses. Analysts say the GDP increases by 1.4% with a 10% growth in BBA. There are many figures on communications in this graph. The ones pertaining to broadband are the most eloquent of all. Fibre optic cables provide the speed and quality that satisfy users today. System access costs 12,000 roubles at the cheapest. It’s impossible to reduce the cost for technological reasons. If we were starting the grid from scratch in the whole country, it would cost roughly 650 billion roubles without consideration for areas with difficult access, which have greater costs.

If we really mean it when we talk about modernisation and innovation, we should join hands with our foreign partners for an urgent technical breakthrough to reduce access costs to $100, or 3,000 roubles, and thus save tremendous resources in the unique market that is Russia. So you see, the elimination of digital inequality and the development of broadband access boil down to the determination of the state’s role in public-private partnerships, where we have to promote demand, show operators that these territories are a lucrative investment, and introduce capital-saving technology.

The national BBA development plan should include a methodology for the determination of territories in need of state support. There are three sources of funding for such projects: 15-20 billion roubles from the generic service fund, 15 billion as operators’ fees for the radio frequency spectrum, and another 20 billion from federal allocations for the introduction of IT. In a word, it’s a serious project and we shouldn’t expect windfall allocations. However, even if we make do with the sums I mentioned, Russia will become much more efficient with the project.

We’ll hear a special report today with details on access cost reduction. It will be a keystone decision if we make it – it will provide a breakthrough in a matter of a year or two to acquire BBA and bridge the digital gap.

The last theme of my report concerns the development of e-payments. We regard this as a key to developing online services. A comparison of many national statistics with their Russian analogues proves our point. The volume of our online services is two to three times smaller. The slide shows the figures: electronic payment, primarily debit cards, currently make up about 8% of all remittances, Moscow and its environs being much further ahead of the regions. Russia also lags behind in terms of the per capita number of cash dispensers and even more for the number of online payments.

Other statistics show dramatic changes in the mobile telephone market. Only recently, mobile phones simply transmitted voice calls. Now they are essentially computers based on a wide range of technologies. Evidently, the introduction of NFC technology, which allows short-distance e-payments, will usher in another revolutionary market redistribution, which Russia must anticipate with its programmes and standards.

Slide No 24 shows American statistical forecasts of the use of smart phones for e-payments until 2015. Evidently, when smart phone penetration reaches 60%, 75% of them will be used for e-payments and 50% will be used for online shopping. This is a major trend that warrants the attention of the Government and public agencies. If we are to formulate proposals for the presidium, we think this country requires national technological standards for the interaction of e-payment devices. Regulatory acts must be endorsed to guarantee the acceptance of e-payments throughout Russia. Wireless equipment for e-payments must be promoted, possibly through state regulation. The same is true for imports.

In conclusion, I would like to ask the other speakers on the proposed themes to be explicit and concise in formulating proposals for the Government, because our meeting should bring about a set of practical instructions to implement these ideas as urgent breakthrough projects. We must be very quick about this work, and its goals are quite attainable. It is clear that everything depends on the efficiency and smooth teamwork of public services and industries. The venue of this meeting is symbolic: It is the office of an iconic IT company. We pin great hopes on such cooperation. Thank you very much.

Dmitry Medvedev: Thank you. Thank you for the invitation. We as guests would like to ask the host company’s leader to speak. Mr Volozh, if you please.

Arkady Volozh (Yandex CEO): Thank you. Data processing is what IT is all about, so I would like to talk about data and their openness. Look at any computer or telephone service, and you will see a simple interface. Hidden behind it are huge data processing efforts. Take the most popular of our services, Yandex.Maps: what you see is a simple screen that shows buses and taxis on the move, traffic jams, their addresses, etc. A huge amount of information from thousands of sources is processed before these data become accessible. There are GLONASS and GPS tracks to process, and bus, train and airline timetables from all parts of the country to analyse. These data, concealed from the user, come from a vast number of sources. Some come online, others are faxed, and some don’t come at all.

Private businesses easily cope with data processing for even the most popular online services, while data are all too often obtained and circulated at the federal or, at the lowest, municipal level. Thousands of companies engage in practical activities – some treat patients, others sweep the streets, drive public transport, do paperwork, etc. One way to provide information is to make all these businesses maintain their own information websites. The other way is to make them provide information for a giant network of businesses to process and circulate it.

For that, information must become generally accessible. This point concerns a wide variety of data – it might be geological information or a list of industrial plants or, again, a public transport timetable. Such information comes from hundreds of sources. Requirements for this have been specified many times: it must be comprehensive, regularly updated, and so on. It is clear, more or less, what should be done to bring such information to the public at large. To begin with, its openness must get on a legislative footing. What I mean is that information transparency must be stipulated by regulatory acts. There is much left to do in this field, though much has been done already. Many industries have legal acts demanding open information. It is not enough, however, to endorse a law on information openness. What we need is practical access to it. Even unclassified data might be shelved and forgotten, even if they are digitised.

Information is truly open when any business, including start-ups, has online access to it, as well as an opportunity to base a consumer service on it. Our goal is to go down the path from formal openness to practical access. This job has already begun. I would like to see it centralised. We propose the establishment of an expert team or committee that would discuss everything that pertains to open data with spokesmen of the Government and the industry, and with other experts. I think it will be possible to use these data everywhere in a year or two. That’s what we are proposing.

Dmitry Medvedev: Thank you, Mr Volozh. I’ve made a note of it.


Dmitry Medvedev: Mr Dvorkovich, you wanted to say a few words, right?

Arkady Dvorkovich: Yes, very briefly. There was a presentation concerning the conditions for IT businesses, particularly the effect of reduced insurance premiums paid to the Pension Fund and other mandatory insurance funds. Only major companies really benefited from them. Besides, reducing premiums is a preferential measure that does not concern all companies. It is not indefinite, either, and will end someday. When the reduction in premiums was introduced, we were not sure it would have any notable effect. However, experience has shown since that beneficiaries were efficient enough. I think we should now extend the list of beneficiaries and postpone the end of the reduction.

The location of the profit centre is essential. It’s probably correct to regard it as the principal factor. Still, we would like to see new jobs appearing in Russia and involved companies creating jobs in this country. This is impossible, however, with present-day insurance premiums and profits making up 50-60% or even 70% of the wage pool. This business is mobile, and it can easily shift to neighbouring East European countries, so we’ll lose the jobs. The profit centre might survive to leave us partly competitive – but there will be no Russian employees, and we will gradually grow less and less competitive.

Dmitry Medvedev: And we will see “Designed in California” or “Made in China” printed on products, like on the back of Apple products. Thank you.

Ladies and gentlemen, I think we should conclude this meeting as we have discussed almost the entire range of issues. I will sum up each now, and later this will all be generalised and take the form of instructions. Colleagues mentioned bringing broadband access to every household within a fixed time frame. I think it is a vitally important target – it will hardly be possible to attain the goals mentioned here today without universal broadband access. We should determine how to achieve it and who will fund the job.

I think we should return to the idea of an international competence research centre. Colleagues who spoke about rates also mentioned it.

Patents and legal support are really extremely important. It is a thorny matter, especially in this country. Patents involve huge costs and, by all appearances, there is no way to reduce them drastically. Meanwhile, no one has tackled this issue seriously due to our lack of legal culture and financial constrains. Perhaps we should create a patent protection fund. We must think about how and on what principles it will function, what the costs of applications will be, complete with formatting and legal support. If all this is done at the government’s expense, we must also think about accounting. Patents are a subtle matter – but then, we must think about protecting our intellectual property. The state should create some tools for this, as inventors can’t afford to.

As regards medicine and the legal validity of medical databases, this is an interesting issue. We should think whether these databases demand legal amendments.

Equipment imports and customs procedures are an extremely complex matter. Regrettably, it concerns not only IT but also our entire economy. As you know, we have a customs regulation roadmap from which we will proceed. We will change the rules, but there are too many interconnected factors there. Anyway, shortening customs procedures should be our goal.

As for university research, I am enthusiastic about this idea though there are all kinds of universities, and only those that can really generate some product deserve support. We are analysing universities despite some rectors’ objections, and we know that not all will be able to handle research work. We see this, so we are interested in strong universities, university mergers, and new transnational universities.

The digitisation of cultural heritage is also a worthy objective. We should think how to accelerate this process. It is much discussed, but it’s easier said than done. When we see what’s being done abroad we realise how far behind we are. Russia is not so backward technology-wise, but incomparably more is being done in other countries. I recently saw digitised ancient documents on university websites in Cambridge and in some other places. It is not so much the value of these documents that matters as the fact that universities are placing them on the internet independently while in Russia a multitude of precious historical documents are collecting dust in archives. This is a cause not only for universities but also for other educational and cultural establishments.

There was a discussion here on which was better – grants or venture funding. Someone said that it all depends on the stage the project is in. I think that’s right. Grants are better when the project needs a jumpstart while venture financing is more suitable later, and determines the project’s future.

As for reduced insurance premiums, and the criteria and time limits for reducing them, it is a hard thing to do for the Government, considering the present situation. However, I will certainly issue an instruction to take another look at this issue and analyse it thoroughly because, as I see it, the people present here believe that not all beneficiaries really gained from the reduction. We will think what to do about it all.

Ladies and gentlemen, thank you for your attendance.

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