Capitalist Spirit Sweeps Russia’s Silicon Valley

This once-secret military research center was born of Cold War tensions, but the post-Soviet scientists who aim to convert it into Russia’s Silicon Valley say it will be anything but a chip off the old bloc.

Weapons engineering is out. Consumerism is in. And with demand among up-and-coming Russians for high-end computers, video games and household gadgets described in terms such as “limitless” and “explosive,” market analysts and money people are bullish on Zelenograd’s prospects.

The electronics engineering firms of Zelenograd, or “Green Town,” have already outpaced most industrial enclaves in the former Soviet Union in weaning themselves from government orders and streamlining work forces to levels that can be supported by actual sales.

Indeed, the lean-and-mean capitalist spirit has swept this once-coddled scientific community with a vengeance. Heat has been turned down at many of the cavernous enterprises, unprofitable cafeterias and kindergartens have been closed, and layoffs have cut staffing at the most successful plants to a fraction of their Soviet-era levels.

While the steelmaking and machine-building centers of Russia’s vast Rust Belt between the Volga River and the Ural Mountains are floundering, Zelenograd’s redundant specialists are getting with the program.

“A lot of the engineers and technical workers have opened private businesses here, so we have less of a problem with unemployment than most areas where there have been huge layoffs,” said Ludmilla Sovdogarova, a literature professor now working as a manager at Mikron Corp., a chip-manufacturing company.

“It used to be a joke that you could build a missile system in our town but you couldn’t get your TV repaired. Now there are dozens of places where you can get anything fixed.”

This Silicon Valley, about an hour north of Moscow, remains a sad shadow of its American cousin, with its shabby brick apartment blocks, crooked concrete-slab fences and institutes built of gray cinder blocks and cloudy windows. Wages for the 200,000 residents average about $400 per month--four times the Russia-wide average, though still a pittance by U.S. standards.

But Zelenograd’s commercial center has come to life since the days when workers had plenty of money but nothing to buy. Grocery stores stock as wide an array of Russian and imported foods as those in central Moscow, and the kiosks manned by private traders hawking everything from beach towels to watches flank the main streets like booths at a county fair.

“I was eligible to retire three years ago, but I couldn’t afford to live only on my pension,” said 58-year-old Nina Chekina, who was laid off from a local factory when it closed its kindergarten last year and now sells satin undershorts she sews at home. “But I don’t want to become idle anyway, especially now that life is more interesting. We used to have more security, but it was also very boring.”

A defense industry town until the 1991 collapse of the Soviet Union, Zelenograd now produces consumer-oriented electronics for both the domestic and export markets. Mikron, according to deputy director Yevgeny S. Gornev, makes 250 million silicon chips a year.

“But we need to reorient our production to the Russian market,” said Gornev, whose firm currently exports 80% of its production. “The problem is that at present, Russian consumers don’t have the money to spend on microelectronics. But the desire is there, and with time living conditions will improve to allow them to buy more. It is our responsibility to create demand in Russia.”

At the nearby Kvant plant, 210 workers--a tenth of the staff a decade ago--turn out 10,000 personal computers per month under a component-assembly contract with IBM. General director Sergei B. Kabayev said output is just a drop in the bucket for a market that is both emerging and voracious.

In Moscow alone, 15,000 computers are purchased every month, said Kabayev, who predicts continued growth when and if investment in the provinces revitalizes other industries.

Russia remains gripped in a cash crisis brought on by the government’s drive to hold down inflation and compounded by excessive spending during last summer’s presidential campaign as well as shortfalls in tax collection and a plunge in earnings from privatization.

President Boris N. Yeltsin’s shaky health and the prospect of another distracting election have continued to dampen foreign enthusiasm for investing in Russia. Most locals who have done well in post-Communist Russia have shipped their wealth abroad rather than reinvest in an uncertain future--bleeding away the capital needed to restructure.

But if some of the estimated $50 billion in “flight capital” can be lured back, or if Western investors can learn to live with the political risks, market analysts say this microelectronics haven could become a trailblazer in satisfying the starving Russian consumer.

“There’s not a single instrument we pick up in our daily lives that doesn’t have a computer chip in it,” said Jack Barbanel, senior managing director of Sector Capital, a multinational consortium endowed with $50 million in seed capital to invest in Russia. “Our Silicon Valley now contributes more to the U.S. economy than does Detroit.”

Noting that electronics is the biggest growth industry in the world, Barbanel says Russia is the key missing player.

“There are good technical skills in Russia,” Barbanel said, “and when you combine that with a market of 150 million people with a literacy rate of 98% and high demand for improvement in their quality of life, this gives explosive potential for development of the microelectronics business in Russia.”

Per-capita spending on electronics in Russia is only $41 a year, compared with $850 in the Western world--one barometer of the potential demand once the resurgent middle class here emerges.

And such a class is indeed beginning to take shape. Real incomes have grown by 65% over the last four years, said Alexander Auzan, a professor of economics at Moscow State University, even though many pensioners and former state workers have struggled. Retail sales more than doubled from 1994 to 1995, and a similar exponential rise is forecast for this year.

Russian industrial output has shrunk every year since the economic antics of communism disappeared with the Comecon trading bloc five years ago. But with the first signs of stabilization recorded this year, some are optimistic about recovery in 1997--and they look hopefully to electronics.

“Global electronics equipment sales are growing at a rate of 11% a year and semiconductors at 14% a year. . . . It’s the biggest thing in the world and it’s only going to get bigger,” enthuses Malcolm Penn, director of Future Horizons, a British market research and support service.

He criticizes indecision and bureaucracy as the greatest obstacles to successful development of high-tech industries in Russia.

Major computer and component producers from Western and Asian countries are flocking to Russia to assess its opportunities, mostly as a sales outlet but also as a venue for investment.

“I would compare wafer fabrication here on a quality level with the United States,” said Jay Thomas, a sales development engineer for Santa Clara, Calif.-based Hewlett-Packard. “One way a partnership could be formed is for Hewlett-Packard to buy components here, because if they meet the quality standards, that would make the Russians more willing to buy our products.”

Trade regulations requiring domestic content exist in other countries, Thomas notes, and equipment providers such as HP need to be prepared for such practices in Russia. Local entrepreneurs, for their part, need Western partners since there’s virtually no credit available from Russian banks.

Angstrem, another local chip producer, exports 70% of its output, mostly to Southeast Asia, but company President Valery Dshkhunyan attributes that focus to a lack of domestic light industries producing the small appliances for which most of Angstrem’s components are intended.

As Russian salaries rise with the broadening of the bourgeoisie that until this year was virtually nonexistent, demand for the end products--from hand-held video games to home-security systems--is expected to foster the rise of domestic producers.

“I guarantee you that politics in Russia will sort itself out. I can’t say it will be this year or next year, but Russia has no choice but to become a participant in the global economic structure,” said Barbanel, who wants Sector Capital to become the investment banker to Russia’s Silicon Valley. “This [electronics] is the future heartbeat of the Russian economy.”