The image of Skolkovo, the international innovation hub under completion on the outskirts of Moscow, has been severely damaged by a report from the 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 $1.6 billion) 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 $960 million at 2012 exchange rate) of the total, leading to “serious detriment” to the state.

“More than 22 billion rubles” (about $700 million) were reportedly invested in securities or deposited at a commercial bank with abnormally low interest rates.

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

  • No less than 5.7 billion rubles ($183 million) were offered to 102 resident companies even before the Foundation had established grant distribution rules, which illegitimately favored some of these residents.
  • The Foundation gave the go-head to granting 3.6 billion rubles ($116 million) to 17 projects that had undergone no viability scrutiny at all. In three of these, some Grant Committee members, “including the Foundation’s president” Viktor Vekselberg, had vested interests, the prosecutors claim.
  • A reported 2.1 billion rubles ($68 million) in no-interest loans were diverted by startups from R&D activities – later to reappear yielding interest rates in the bank accounts of affiliated companies, in violation of Skolkovo’s grant attribution rules.
  • Another 1.7 billion rubles ($52 million) went to a legal entity that was not a Skolkovo resident.
  • A comparatively modest 91 million ruble (almost $3 million) second grant was offered to a company even before its expense report for its first grant had been validated by the Foundation. Another resident company received a 21.5 million ruble ($690,000) grant despite experts’ doubts about the recipient’s innovation and 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%” of its grant recipients – itself another violation of the law.

In addition, the Foundation compensated generously for consulting and marketing services, paying substantially above market prices. From more than 200 contracts totaling 600 million rubles ($20 million) over the two-year period, Russian taxpayers lost more than two-thirds, or 400 million rubles ($13 million).

For example, the Foundation spent 54 million rubles ($1.6 million) on video ads that typically cost average customers in aggregate about 10% of that amount, the prosecutors charged. Another 16 million rubles (about $500,000) in heavily inflated service contracts reportedly trickled away illegally to individuals holding training sessions and seminars for the Foundation. A handsome 2.7 million ruble ($87,000) fee was evidently paid out to a company for conducting a study of “Skolkovo’s social environment.” This sociological analysis had already been written, in its basic form and substance, as an academic thesis.

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.

125 billion rubles under mystery “threat”

In addition to these past violations, a through-the-ceiling 125 billion rubles – almost $3.8 billion – may now be under “threat” of potential misuse, according to converging reports from serious Russian media (example) that cite the Prosecutor’s Office.

Despite repeated requests, East-West Digital News could not secure either an explanation or a disavowal of this figure from the Prosecutor’s Office. No sign of the alleged “threat” could be found on the organization’s website.

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 $800,000) 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 $4.1 billion 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.

Update Nov. 18, 2013

A reported 211 managers and senior employees of the Skolkovo Foundation have been fined following a major scrutiny of the Foundation by the Accounts Chamber of Russia, the Chamber announced on its website.

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