Medvedev in Silicon Valley: Luring investors will be harder than a Russia-US reset

One of the first owners of an iPhone in Russia was President Dmitry Medvedev. Today, he’s visiting the phone’s birthplace, California’s Silicon Valley, where he hopes to build on a “reset” in relations with the United States by also improving economic ties.

That task may be tougher than improving ties with official Washington, which began last year with the US blinking first.

Relations had become so frosty, that a new Obama administration announced it wanted to start over, then it altered its plans for an anti-Iranian missile shield in Europe – an irritant to Moscow. That paved the way for a nuclear arms reduction treaty between the two countries, for Russia’s backing of sanctions on Iran, and for increased cooperation in Afghanistan.

When Mr. Medvedev meets with President Obama on Thursday, the two leaders are expected to issue a joint statement on troubled Kyrgyzstan – another welcome sign of geopolitical cooperation. Kyrgyzstan has been the scene of bloody ethnic tensions, as well as tensions between Russia and the US over the presence of a US military base there (Russia also has a base in this Central Asian country).

But furthering economic ties will be much more challenging for Russia, because it will require real reforms on Moscow’s part. If Medvedev wants to lure Western investors to build up technology and innovation in Russia – and that’s the purpose of his California pilgrimage – he’ll need to do more than promise tax breaks or build a Russian version of Silicon Valley called Skolkovo.

Russians themselves are not investing in Russia. Up to 80 percent of investment comes from the government, which under Vladimir Putin significantly beefed up state ownership of the gas and oil sector. Now Medvedev wants to “modernize” Russia’s economy so that it no longer depends heavily on energy exports – a dependency that contributed to an 8 percent contraction of the economy last year (the worst among the world’s biggest economies).

Russians are not investing at home for the same reasons outsiders aren’t: rampant lawlessness and corruption, and questions about whether an entrepreneur will be able to hold on to his or her earnings. Russia has a history of importing Western ideas and technology, but it has maintained tight control, stifling innovation. It’s telling that Skolkovo will be a gated community surrounded by guards.

Certainly American investors would like to get at the Russian market. And several US companies – Boeing, Cisco, Intel – are responding to Medvedev’s invitation.

The young president seems sincere about modernizing Russia, publicly recognizing its corruption and law enforcement problems. He seems to get that a top-down approach to the economy won’t breed risk takers – as evidenced by making Craig Barrett, former CEO of Intel, co-chair of the Skolkovo project.

But building a just and reliable judiciary, reducing red tape and bribes, and reining in lawlessness will be much harder than importing a Western CEO. If Medvedev can do all that, he will have done much more than improve the climate for Western investment. He will have improved Russia itself.