Moscow -- By pumping the proceeds of its oil and natural-resources boom into the high-tech industry, Russia is creating an electronics bonanza and an unprecedented mood of optimism. But the country has a history of failed intervention in its semiconductor and electronics industries, which until the last couple of years had stagnated for more than a decade. So some observers continue to take a cautious position on the prospects for the Russian market and its players.

At an exhibition and two-day conference here organized by the Semiconductor Equipment and Materials International (SEMI) industry trade body, Alexander Kalinin, deputy chairman of the Russian Federal Fund for Electronics, announced that $3 billion would be invested in electronics from 2007 to 2011. That does not include investments in nanotechnology research, Kalinin said.

That $3 billion does include some big-ticket items, such as $700 million in support of a proposed 300-mm wafer fab in Nizhny Novgorod and $500 million to help move JSC Mikron (Zelenograd) down to 90-nanometer manufacturing over the next three years. Nonetheless, Kalinin said, "our focus is in design." He went on to itemize 2007 spending in support of a number of design houses.

But the Russian bureaucracy appears to have learned some lessons from watching the European Commission at work. Thanks to the economic boom and the revenue flowing into government coffers, it at last has some real money to dole out, but it is doing so on the basis of matching funds. That means that a project should have some sort of business case.

See our Energy section for companies http://www.ceeindustrial.com/en/index/index/id/1126

It is hard to overestimate the strength of the current boom in Russia, driven by the supply of oil and gas to Europe. Alex Freedland, chairman and CEO of Mirantis Inc. (Foster City, Calif.), a supplier of offshoring services and consultancy in Russia, pointed out that Russian central bank reserves have grown rapidly to become the third largest in the world, exceeded only by those of China and Japan.

The Russian stock market, valued at less than the capitalization of a single U.S. company--Cisco Systems Inc.--12 years ago, is now worth more than $1 trillion, Freedland said. Oil-and-gas giant Gazprom competes with Microsoft Corp. for the honor of being the world's most highly valued company.

"Russia has a population of 140 million people, the largest national population in Europe," said Freedland, who also made the point that those Russians with newfound wealth tend to spend it conspicuously. On average, Russians spend much more and save much less of their income than citizens in other countries.

JSC Sitronics, Russia's first technology-based initial public offering, provides another measure of the boom. Launched in December 2002 to bring together a portfolio of Russian and eastern European enterprises, Sitronics provides telecom-infrastructure and consumer gear, and owns chip maker JSC Mikron.

The company has been growing fast; in 2006, Sitronics' revenue expanded 69 percent, to $1.61 billion. Not surprisingly, the company was able to raise $350 million in an IPO conducted on the London Stock Exchange in February. And under Sitronics' ownership, Mikron, a chip maker that had languished for many years, more than doubled its annual sales, to $122.6 million, from 2005 to 2006.

It is seen as a healthy change that the likes of Mikron and JSC Angstrem are now viewed as the means to implement applications rather than produce chips for reasons of national prestige. As a result, Mikron and Angstrem increasingly must compete with Southeast Asian foundries to get work from the Russian design centers.

Laurent Bosson, corporate vice president responsible for front-end manufacturing at STMicroelectronics NV and a keynote speaker at the SEMI conference, said that there was room for Russian design houses to do things differently.

"There has been a consumerization of the semiconductor industry, which has resulted in seasonality," Bosson said. "Russia is a good place to get that balance between finance and industry. I am very optimistic about the semiconductor industry in Russia."

STMicroelectronics has cut a deal with Mikron and Sitronics to provide an 0.18-micron CMOS E2PROM process, the starting point for Mikron's road map down to 90 nm. Angstrem is working with Advanced Micro Devices Inc. to implement a 130-nm CMOS process. They may not be leading edge, but these processes are an opportunity to get Russian chip companies moving again.

What is not yet in evidence, however, is cooperation in IC design between Russian companies and their global counterparts. Almost all of the outsourcing and inward investment that goes on--by companies such as Motorola, Intel, Sun and HP--focuses on software. "The Israeli business model is much better than the Indian model. Russia is not a low-cost market," said Freedland of Mirantis.

"The misconception that Russia's wealth is only in oil and gas is going. There is a second wave of secondary industries," said Jack Barbanel, chairman of Moscow-based Strategic Investment Group. "Ignoring Russia over the next five years would be a mistake--a business mistake."

Malcolm Penn, founder and principal analyst at market research firm Future Horizons (Sevenoaks, England), has studied the Russian electronics environment for many years. "You must remember that most of these design centers were getting state funding anyway. It could be that the federal fund is just repackaging state support," Penn said. "I think there is a fresh attitude, and it is healthy that they are using overseas foundries. However, I think in too many cases, a business plan is still lacking."