Dominic Fache, interview with Pavlul Koshkin

Dominic Fache, interview with Pavlul Koshkin

Dominique Fache, the administrator of Sophia Antipolis Foundation, a prominent French technological park, talked to Russia Direct about Western sanctions on Russia and the Kremlin’s struggle to modernize and diversify its economy.

By Pavel Koshkin

Dominique Fache, the administrator of Sophia Antipolis Foundation, a prominent French technological park, is well aware of how to do business in Russia as well as the unique aspects of the Russian mentality. Fache has been doing business in Russia more than 20 years, focusing on investment in innovation, science, education and energy.

Fache has also been one of the most influential foreign experts in Russia’s energy sector over the last 15 years, based on his executive and management experience at Schlumberger, SUEK (Russia’s largest coal producing company) and Enel (the Russian power generation company).

Fache talked to Russia Direct about Western sanctions, Russia’s struggle to modernize its economy, challenges facing Russia’s energy sector, and ways that Russia can improve its image for Western investors.

Russia Direct: Last month the EU prolonged its sanctions on Russia. From your point of view, what are the implications for Russian and European businesses?

Dominique Fache: I think that the sanctions are not the appropriate way to manage the situation for several reasons. The first reason is a simple psychological reason, because sanctions are perceived by many Russians as not appropriate, not the right ones.

Russians prefer to be very emotional on this issue and I think you should put sanctions in another way, which would be to increase cooperation and open doors, especially, for the young people. And the real “sanction” [for the Kremlin] would be to get the door more open for Russian young people, so that they could understand what is really democracy, what is really freedom, what is really a possibility to start a business. So, we are really on the wrong path.

And the second reason is that the sanctions are impacting ourselves, we are probably [affecting] our own businesses. Again, it is a sort of backlash on European business. And it is not good at all. The metaphor I usually use is the example of the bridge: It is easy and very quick—it takes two seconds—to blow up a bridge, but it will take two years to build it again.

RD: What are the chances of Russia to innovate its economy during a period of economic isolation from the West’s leading countries, the extended sanctions and the plight of its sciences (underfunding, little global exposure, brain drain)?

D.F.: Basically, if you remember what Albert Einstein said, innovation is invented by getting out of the usual world: “We cannot solve a problem by using the same kind of thinking we used when we created them.” So, usually people, who are inventing, they are people who have different approaches to the existing society. And it is very difficult for Russian society, which is based on vertical and very strong power to go for innovation, because innovation needs what Russia’s former President Dmitry Medvedev described as raskreposchenie [“unchaining” in English].

There is no modernization, no innovation without raskreposchenie. And this is not really present in Russian society. The Russian economy is based on big companies, which are really not ready for innovation, because innovation is appearing in the world, where the rules of the game are different. If you take the Red October center, it is a good example: It is not innovation coming from the government. That’s the reason why the Skolkovo project is not very effective.

RD: Regarding Skolkovo, 54 million rubles were allocated for Skolkovo’s three short promotional videos with time frames of 60 seconds, 30 seconds and 10 seconds. Some raised eyebrows at such expenditures because the market price of the videos is no more than 5 million rubles. So, is it worthwhile to waste the government coffers and taxpayers money to fund this project, given a lot of controversies around it and accusations of inefficiency (if not worse)?

D.F.: In the beginning I was involved in the Skolkovo project. I invited Anatoly Chubais [the head of Rusnano Corporation, which deals with nanotechnology projects] to visit Sophia Antipolis to show how things are done in technoparks, because it is better to show than to talk. And I was a member of the Kremlin’s famous presidential commission for the Skolkovo project. In a few months I resigned, because it looked rather like a Potemkin village [The Potemkin village is derived from an anecdotal episode in Russian history and is primarily used to describe a fake portable village, built only to impress. – Editor’s note].

My position was the following one. First, there had been too much money in Moscow already. Second, you have to go to the regions, because you have the possibility to develop them and development of the regions should neither be centralized, nor controlled by the state. I can give the examples of Kazan, Kaluga, Novosibirsk or Tomsk and you should use the potential of these regions. And, finally, you should ask yourselves what you are going to do afterwards.

And after Crimea’s incorporation in Russia, I asked the same question what you are going to do with Crimea. Actually, there is the potential of Crimea to introduce innovation. So, I have been not in favor of Skolkovo.

RD: You offered to develop high-tech in Crimea because you saw there a lot of potential, but given the fact that on June 19 the EU imposed investment and trade sanctions on Crimea, do you think it is the best strategy to invest in this region today?

D.F.: I introduced this idea at the very beginning, about a year ago. Crimea today is like the Côte d’Azur 50 years ago [Côte d’Azur is the Mediterranean coastline of the southeast corner of France, the place where Sophia Antipolis Foundation is located—Editor’s note]. Unfortunately, the initial planning of Crimea is about establishing a casino zone. But it is the wrong priority and wrong direction.

I am not going to discuss the problem who is right, who is wrong in the Ukrainian crisis. I just mean that Crimea has potential: beautiful climate, beautiful landscape and a huge potential in tourism. But the potential can be implemented only in the future and it has to take a lot of time.

RD: Russia is struggling to improve its image abroad and investment climate, but most of its domestic and foreign initiatives hamper these attempts—as former Finance Minister Alexei Kudrin said at the St. Petersburg International Economic Forum—“We are in the situation when one hand does one thing, the other does the opposite.” So, how can Russia improve its worsening image amidst withering criticism from the West?

D.F.: The problem is there is no marketing of Russia. Nobody is selling Russia. Yes, Russia has potential, but you have to market it. If you look at the world, you will see, for example, in France, Ireland or in Bavaria, Catalonia, in California, there is a professional marketing of the region. And even in the time of crisis right now, that’s the right time to prepare the tools to do that.

This is one of the ideas, which I introduced during the St. Petersburg International Economic Forum. Who is marketing Russia? Is there any agency that is doing the job well? This is what Russia needs right now when the things are bad, when the crisis is long. So, you have to prepare these tools to invigorate the potential of marketing Russia.

RD: Sanctions have produced a sort of chilling effect on American and European business and brought about hesitation among many entrepreneurs. Some think about leaving the country. How do you assess the current state of investment climate in Russia and what would you recommend to those investors who are going to leave Russia?

D.F.: There is a famous joke about the guy who wanted to sell shoes in Africa. The pessimistic guy told him that there is no market, because all the people are going barefoot. The optimistic one told that there is a huge market because they are barefoot.

So, in my opinion, the paradox is that one goes to Russia in a crisis moment because of the Russian mentality: a Russian guy would be full of respect for you if you were with him in bad moments. And I think that it is the right moment to prepare good deals. Normal business takes place despite the sanctions. For example, Total, a French energy company, is making deals with Rosneft.

RD: What is your assessment of energy sanctions on Russia? Do you agree that they are effective and reached their goal?

D.F.: The key issue is technology. Only investment in science and innovation will help Russia to get rid of technologies coming from the West and will be helpful for the Arctic exploration of the oil and gas, new shale gas and oil in some fields. It requires new technologies, which are basically controlled by the Western companies. This is the first point.

The second point is the price and transportation. At the end of the day, there is double dependence. On the one hand, Western customers are depending on Gazprom, Russia’s largest gas company. On the other hand, Gazprom also depends on sources coming from the West, from the level of price that I pay in France for the gas.

So, this is the double dependence. And we, basically, have to cut a deal and say: I am not trying to blackmail you, I am not trying to cut the gas supply, but we have to come up with a compromise. And it is a part of the solution of the Ukraine story [Russia-Ukraine gas wars in 2005-2006, when Russia cut gas to Ukraine, which affected the gas supply to Europe – Editor’s note].

The situation is very dangerous in Europe, because the consumption was bigger in Ukraine than in Germany during the first gas crisis between Russia and Ukraine. And today it is very difficult to bypass gas flow for Ukraine 100 percent. People have to reduce their consumption and have to come back to normal control of energy intensity. You have to regulate your own balance and this is also the problem for Russia.

RD: In one of your interviews, you said that energy won’t be cheap anymore. What does it mean for Russia?

D.F.: We are in the middle of the maelstrom. We are basically coming from the century of cheap energy in the world, including Russia [It was started in 1920, when the State Commission for Electrification of Russia (GOELRO) prepared a plan for the fundamental reconstruction of the national economy based on electrification – Editor’s note]. Actually, there has been a huge industrial development in Russia based on cheap energy. But that’s over. And that’s doubly over for Russia. The Soviet model is dead.

And everybody understands that it is necessary to move to another model. But the problem is that the country’s infrastructure is not ready to accept this model. This control, the vertical [power] coming from the Soviet Union, which is still in place in Russia, is not exactly fitting the potential model of the global development of the new economy.

Today we are moving to the second—more democratic and decentralized— model and we are in the middle of the river now. We don’t know now what is going on exactly right now. But we know exactly what the problem is: central power and big companies. And the next step we have to do is to try to think what is going to be the future, what I am going to do in 50 years.

RD: What are the major characteristics of this second model you are talking about?

D.F.: If you look at the map of energy generating in Denmark, we are on the eve of major changes of the business model that will have an impact on our lives, energy and lead to decentralization. And this implies the reduction of electricity power, if you look at the map of Denmark 30 years ago, you will see probably 20 units, if you look at the map today, you will see 3,000 units. So, there is some kind of decentralization.