Ethereum could change Russia
Russian President Vladimir Putin and his economic team have long been under the impression that, to wean the country off its oil dependence, they needed a major leap in some specific area of technology that wasn’t yet dominated by Western, Chinese or Japanese tech giants. Their latest hopes are being pegged to the Ethereum blockchain platform.
At last week’s St Petersburg Economic Forum, Putin talked to Vitalik Buterin, the founder of Ethereum. Buterin’s family emigrated from Russia to Canada when he was 6. There, the math whiz got interested in Bitcoin while still in his teens. A $100,000 fellowship from Peter Thiel’s foundation launched him on the Ethereum project.
Though Buterin’s platform does host the ether currency, which has risen in value to more than $260 from $8 so far this year, it’s far more ambitious than that. Buterin thinks of his project as the safe medium for all sorts of transactions that can be validated through a distributed system, the way Bitcoin transactions are. This includes bets, option deals, insurance contracts, the government registration of property rights and copyright—pretty much any kind of deal that requires validation or that can be automatically executed when certain conditions become right. Ethereum provides a universal blockchain upon which various projects can be built.
Russia has brilliant engineering brains, and it could try to bring back talented Russians like Buterin and those who work in Silicon Valley. But it’s not easy to find the “blue ocean” areas not infested with international sharks like Apple, Google and Alibaba. In the past decade, technological bets placed by Russian leaders have suffered from being overly audacious or too far behind the competition.
In 2007, Putin thought it would be nanotechnology. In typical style, he set up a giant state company to develop the tech and put former Kremlin chief of staff Anatoly Chubais, reputed to be one of the country’s best managers, at its helm. It didn’t work. Rosnano, as the company was called, struggled to find relevant projects to invest in, and the ones in which it did invest haven’t delivered the kind of breakthrough that could have propelled the Russian economy forward. Last year, Rosnano posted a steep revenue drop and a loss of 17.4 billion rubles ($307 million).
During Dmitri Medvedev’s interim presidency, the Kremlin attempted a different tack, diving in with the sharks. It made a feeble attempt to create a Silicon Valley clone near Moscow in partnership with global tech companies and the Massachusetts Institute of Technology. Oligarchs and state companies were forced to invest. Though the Skolkovo project still exists, and so do its ambitious plans, it hasn’t delivered, either, because it attracted more attention from Russian law enforcement than from actual innovators and private investors.
The search for a promising moonshot resumed when Putin became president again. Last year, he hit on Elon Musk’s hyperloop idea as something Russia could put into practice. Russia’s expanse, after all, calls for a hyperloop-style solution. At the 2016 St. Petersburg Economic Forum, Putin promised support to a company called Hyperloop One, and indeed, Kremlin-linked investors soon arrived for the start-up. Then the project ran into trouble amid bitter recriminations between co-founder Shervin Pishevar and former chief technology officer Brogan BamBrogan. The company still exists and proposes projects in a number of countries but Russia doesn’t appear to be a priority for the US firm despite the Russian investment.
Lately, Ethereum has become the arena for a boom in capital-raising through the sale of digital tokens which can be used within a certain application, such as the Gnosis prediction market, which raised $12 million in 15 minutes in that way.
Though large global companies got there first—the Enterprise Ethereum Alliance, formed to promote the technology in various business environments, includes UBS, JP Morgan, Microsoft, Intel and other giants—Russia has a chance to be ahead of others.
Like other central banks, the Russian one is testing blockchain technology: Last year, a consortium of large Russian banks it formed for the purpose processed the first transactions through the Etherium platform. With Putin’s support, the central bank can more aggressively move the country’s financial sector to the blockchain.
Buterin has also offered his platform to Russia’s vast government sector, stressing its anti-corruption potential: The system is inherently transparent. I’m not sure the Putin elite is excited about this aspect of the blockchain, but Putin himself might be interested in the potential for greater control that it creates. The brief meeting between Putin and Buterin last week might open exciting prospects for the latter. His country of birth is the most impressive field for controlled experiments any techie could dream of; in Putin’s system, decisions can be made fast, and mistakes can be forgiven in the name of Russia’s great leap forward.
I doubt Putin will ever have the courage to give 23-year-old Buterin a free hand to redesign Russia’s financial system or massive bureaucracy. Powerful interests will lobby against it, too. But, stuck in the 20th century both politically and economically, Russia does need a leap to remain relevant. A giant blockchain experiment might be another wrong turn—but, more likely, it would give the country a powerful modernizing impulse. Bloomberg
Leonid Bershidsky is a Bloomberg View columnist.