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Russia's Hyperloop Dream Stalls

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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President Vladimir Putin and other Russian officials dream of a technological leap that could immediately close the gap between Russia and more advanced economies, as Sputnik did for the Soviet Union. The hyperloop, a kind of train in a tube that can reach speeds of up to 700 miles per hour, fits that dream, and a well-connected Russian businessman has invested in it -- only to see the project become embroiled in a lawsuit involving a Silicon Valley startup's founders and claims of financial mismanagement.

Elon Musk, Tesla's chief executive, proposed the hyperloop four years ago. This "fifth mode of transport" would involve a system of practically airless tubes through which magnetically levitated pods could carry passengers and cargo. Musk has not set up a company to bring the project to reality, but others have. For example, Hyperloop Transportation Technologies, wants to build a system in Slovakia. Another, Hyperloop One, offered a public demonstration of some elements of its technology in May.

Hyperloop One has seemed the most advanced project, and Russian investors showed an interest from the start. The state-owned Russian Direct Investment Fund took a small stake in the company, but Ziyavudin Magomedov, head of Summa Capital, was the most enthusiastic Russian investor, putting up money for both of the company's funding rounds.

In June, the Hyperloop One co-founder Shervin Pishevar -- an early investor in Uber and other tech companies -- attended the St. Petersburg Economic Forum, a high-profile Putin-sponsored business conference, to sell the new mode of transport to Russian officials. The gathering featured "18 heads of sovereign funds and President Putin. $10 trillion in the room. Largest collection of sovereigns in history," Pishevar reported breathlessly. "Then Putin called on me as last word to talk and then responded. Spoke on Sherpa, Uber and Hyperloop One. Putin said Hyperloop will fundamentally change the global economy."

Soon after, Pishevar signed a letter of intent with Moscow Mayor Sergei Sobyanin to work on a hyperloop project for the Russian capital. And the Kremlin confirmed Putin's promise of support to Pishevar. 

There's a compelling reason for the ardor. It stings when Russia, with its commodity-based economy, is mocked as "a gas station masquerading as a country." The country with the world's biggest territory has a population smaller than that of Bangladesh, and the huge distances make it difficult to control areas in eastern Siberia and the Far East from the center. Putin, who fears the country will disintegrate, is preoccupied with making the Far East closer. He even spent days to drive 1,400 miles (in a Lada) between the Siberian city of Chita and Khabarovsk, near the Chinese border, to test the quality of a new highway and promote his plans for huge government investment in the region.

The dream of a transport corridor between China and Europe through Russia is central to Putin's desire to strengthen ties between Russia's European and Asian parts. Yet Russia's railroads are painfully inefficient: Freight trains travel at about 10 miles per hour, half the average speed of Chinese railroads. Only 1 percent of global freight volumes goes through Russia now.

High-speed railroads would be a solution, and the Russian railroad monopoly is working on some joint projects with Chinese companies, but high-speed rail is expensive and doesn't pay for itself, even in China, which has relatively low construction costs of $17 million to $21 million per kilometer. 

That's where the hyperloop would come in. Hyperloop One's goal is to bring costs to $10 million per kilometer, and freight would travel along the tubes three to four times faster than it would with high-speed rail. If Magomedov, who owns ports and who has built major pipelines, manages to bring the revolutionary technology to Russia, his standing in the fierce struggle for government contracts -- the biggest source of wealth in the country today -- will be dramatically improved.

In other words, Magomedov and the Russian state are ideal partners for Pishevar. Hyperloop offers a way to harness Russia's biggest advantage -- its size and position -- by building a new type of pipeline, the kind of project Putin and his circle know well. 

Hyperloop One has made an economic case, calculating that a 300-mile hyperloop between Stockholm and Helsinki would cost 19 billion euros ($21 billion) to build and would generate 800 million euros a year in net income. The numbers would be much bigger on the gigantic Russian scale.

The officials and investors have a problem, though. Hyperloop One is not a secret laboratory in a closed military city of the kind that produced Sputnik. It's a Silicon Valley startup, and its way of doing things is difficult to reconcile with Russian state projects.

Hyperloop One's former chief technology officer, Brogan BamBrogan -- who had come to the company from SpaceX -- is suing Pishevar and others in the company for alleged mismanagement. As the plaintiffs put it, these were efforts "to augment their personal brands, enhance their romantic lives, and line their pockets (and those of their family members)." BamBrogan and a group of other company employees had demanded more control over the company for the engineers but were rebuffed. The lawsuit, in which the the respondents are described only as the project's "Russian investors," says that Pishevar

complained to the Board and the entire team of Hyperloop One employees that BamBrogan's discussions with the Russian investors had put Shervin's safety at risk -- suggesting that the investors (whom Shervin had brought into the company) were the type of people capable of physical violence. This absurd characterization of the Russian investors was far from reality, and merely a weak attempt to justify subsequent retaliation against BamBrogan.

Magomedov has a history: He was co-owner of a bank that was stripped of its license for money laundering in 2001. Russia's shadow financial business was not for the faint of heart in those days. Perhaps Pishevar is right to be worried about not taking good care of Magomedov's investment.

Officially, Magomedov's Summa Capital is viewing the conflict at Hyperloop One as "the company's internal affair." After all, the investment of both Summa and the Russian government is small change: Hyperloop One's second round only raised $80 million. And yet it must be painful to see dreams disintegrate. Magomedov and fellow dreamers in the Kremlin undoubtedly wish the technology could be developed in Russia, yet there's a reason they have to go to Silicon Valley to seek technological breakthroughs.

The St. Petersburg forum where Pishevar met Putin also featured Loren Graham, a Massachusetts Institute of Technology professor and author of a book about brilliant Russian innovations that were never commercialized. Graham said:

The contradictory and strange fact is that Russians are excellent inventors and very poor innovators. The answer to this is the failure of Russia to develop a society in which the brilliance of its citizens can find fulfillment in economic development. All the leaders of Russia, from the time of the tsars to the present, have believed that the answer to the problem of modernization is technology itself rather than the social and economic environment that promotes the development and commercialization of technology. Ideas by themselves are not enough.

The hyperloop idea is based on technology that has long been available. And yet the mammoth Russian state and its favored contractors are forced to seek help in California -- because the engineers there are comfortable with commercial applications and speak the language that investors and officials want to hear. That's even sadder than what's happening at Hyperloop One.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net