‘Russian Silicon Valley’ Skolkovo Misused £620 Million, Executives Implicated

The image of Skolkovo, the international innovation hub under completion on the outskirts of Moscow, has been severely damaged by a report from the Russian Prosecutor General’s Office following an across-the-board investigation into the Skolkovo Foundation, the nonprofit organization in charge of the project.

The report states that 50 billion rubles (around £1b) were allocated for Skolkovo development between 2010 and 2012 “in the absence of budget control and approved performance indicators,” and that neglect or violations of the 2010 law on Skolkovo by the Foundation affected nearly 30 billion rubles (over £600m at 2012 exchange rate) of the total, leading to “serious detriment” to the state.

Daylight robbery

More than 22 billion rubles (about £435m) were reportedly invested in securities or deposited at a commercial bank with abnormally low interest rates.

The lion’s share of misuse has been allegedly conducted as part of  the Foundation’s core activity – the awarding of R&D-related grants and support of market-driven scientific research. Substantial amounts of would-be grant money were funneled to the accounts of what prosecutors have identified as ‘fly-by-night’ operators in both Russia and offshore. In other instances, top managers of grantees or affiliated entities reportedly received funds from the Foundation into their personal accounts.

No less than 5.7 billion rubles (£114m) were offered to 102 resident companies even before the Foundation had established grant distribution rules, giving an unfair advantage to some of the residents.

The Foundation granted 3.6 billion rubles (£72m) to 17 projects that had undergone no viability scrutiny at all. The prosecutors clam that some Grant Committee members, including the Foundation’s president Viktor Vekselberg, had vested interests in at least three of these.

A reported 2.1 billion rubles (£42m) in no-interest loans were diverted by startups from R&D activities – later appearing to yield interest rates in the bank accounts of affiliated companies, in violation of Skolkovo’s grant attribution rules.

Another 1.7 billion rubles (£32m) went to a legal entity that was not a Skolkovo resident.

A comparatively modest 91 million ruble (almost £1.8m) second grant was allegedly offered to a company before its expense report for the first grant had been validated by the Foundation. Another resident company received a 21.5 million ruble (£429,000) grant despite serious doubts about the recipient’s market potential. The prosecutors maintain that the grantee was affiliated with an advisor to Vekselberg.

Such irregularities and violations occurred as Skolkovo was checking the accounts of “only 0.6 percent” of its grant recipients – yet another violation of the law.

In addition, the Foundation compensated generously for consulting and marketing services, paying substantially above market prices.

For example, it spent 54 million rubles (£1m) on video ads that typically cost about 10 percent of that amount, the prosecutors said. Another 16 million rubles (about £311,000) in heavily inflated service contracts reportedly trickled down to individuals holding training sessions and seminars for the Foundation. A handsome 2.7 million ruble (£54,000) fee was evidently paid out to a company for conducting a study of “Skolkovo’s social environment.”

An array of violations reportedly occurred in construction contracts, under which Skolkovo real estate projects were paid for before any property paperwork and/or government permits were in place.

A number of other smaller expenditures were also apparently left completely unaccounted for or misrepresented on the books.

Past mistakes

This is not the first time Skolkovo has come under serious fire. A part of the above mentioned violations had already been highlighted in an earlier report of the Prosecutor’s Office released in March 2013, a few months after the Foundation had been exposed to criticism from President Putin in person.

In at least one case, however, prosecutors failed to corroborate allegations of fund misuse and eventually dropped the case. The scandal had broken out in February 2013 when Kirill Lugovtsev and Vladimir Khokhlov, two former Skolkovo Foundation executives, were accused of having wired 23.8 million rubles (approximately £500,000) to a company belonging to Lugovstev’s relatives in payment for rental services. These services had allegedly never been provided. However, prosecutors eventually dropped the case in August, reinstating Khoklov in his position and discharging Lugovtsev.

Political infighting VS innovation

The Russian government has invested considerable sums of money and political capital in the project. So far Skolkovo has attracted more than 1,000 resident companies – including a few dozen foreign firms – as well as an impressive array of Russian and international tech giants, research institutions and investment funds.

The latest example came only days ago with the announcement of the forthcoming signing of a memorandum of cooperation in the field of research and business development between the Skolkovo Foundation and the Korea Research Council for Industrial Science and Technology (KRCSIT).

A few months ago, the government confirmed further financing for the project, with a 135.6 billion ruble (about £2.55b at 2013 exchange rate) allotment to be disbursed from government coffers between now and 2020.

However, with their serious legal and political implications, the series of scandals that has affected Skolkovo since late 2012 suggests that the government’s attitude towards the project is being defined by contradictory forces.

“Corruption has long been a scourge limiting Russian potential,” said former Skolkovo COO Steven Geiger – who resigned in late 2012 – in an exchange with East-West Digital News earlier this year. “Yes, projects like Skolkovo have problems; but solutions exist. My concern is that political infighting may lead to their scuttling,” the US specialist warned.

This article originally appeared on East-West Digital News.

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