Quotes of the Day

When he was 17 years old, Alexei Terentev, then a bookish high school student in Moscow, created what the Russian government has been desperately trying to engineer — a start-up with some of that Silicon Valley–style magic. It was innovative, cleverly marketed and could be run out of his parents' apartment. By June of last year, when Terentev got his diploma from one of Moscow's elite universities, his company was on its way to making him a millionaire. But it was also getting big enough, he says, "to get the wrong kind of attention from officials." So Terentev, now 22, took no chances. One day after graduation, he packed up his laptop and emigrated to the Czech Republic, taking his company with him. He doubts he will ever return.

The reasons for his move, as well as his haste, are the typical worries of the young entrepreneurs Russia is currently hemorrhaging: corruption and bureaucracy, the forces that are driving the biggest exodus since the fall of the Soviet Union. In the past three years, 1.25 million Russians have emigrated, most of them young businesspeople and members of the middle class, according to data released in February by the head of the state's Audit Chamber. That is about a quarter million more than left the country during the first few years after the Soviet collapse, when Russia was a political and economic basket case. Now the country is stable and the cities are thriving. But small-business owners seem to feel less safe than ever.

For those just starting out, the most common fear is not competition or bankruptcy but a visit from corrupt officials, who go around soliciting bribes or offering paid protection, which is known as a krysha, or roof. Last month, the Economy Ministry said that in 2010 alone, Russians paid $581 million in bribes to authorities for "security provisions," an incredible 13 times more than in 2005. As dozens of cases have shown in the past, a business owner who declines to have a krysha can expect to get visits from fire inspectors, tax auditors or the police until the company is overwhelmed with fines and red tape. If the owner still does not cooperate, a minor criminal case can be opened, often under the vague law forbidding "illegal entrepreneurship." A brief stint behind bars then usually does the trick.

Against the most stubborn businesspeople, often the type whose firm is coveted by a well-connected competitor, a corporate raid is a favorite weapon. These have become so common in Russia that a cute nickname for them has entered the vernacular: maski-shou, or "mask show," a twist on the name of an old sitcom. It is when gunmen, usually masked private security or special forces, enter a business and literally take it over, seizing documents and locking the management out. This tactic has been used in politically tainted cases, such as the government takeover of NTV television in 2000, and the 2003 raids against Mikhail Khodorkovsky, the oil tycoon now serving 14 years for fraud and other charges. Smaller mask shows rarely meet the threshold anymore for news in the national media.

But by word of mouth and articles in the online press, such stories spread fast in business circles. For Terentev, the wake-up call came last February, when one of the data centers of Agava, a leading Russian Internet-hosting company, was raided by police on suspicion of hosting an unlicensed video game. Six weeks later, the company's server farm was raided by another police unit, this time on suspicion that one of its servers was hosting child pornography. Instead of taking the server in question, the police shut down all of them, forcing many of Agava's clients off-line. The news caused such an outcry that President Dmitri Medvedev, who styles himself as a techie crusader for the rule of law, personally intervened the next day. The servers were quickly switched on.

But the damage to the industry's confidence had been done, says Terentev. "The Agava case shook everyone awake." Even before that, he says, "it was becoming clear to people in our industry that websites are being very actively shut down. Anyone can do this. A competitor can pay police to take your server and pass on your entire database." Terentev's hosting company, NKVD.pro (whose name is a wink at Stalin's secret police, the NKVD), has tried to innovate around that problem. All of its servers are housed abroad.

And the way things are going, the same may soon be true for much of Russia's middle class. A survey released June 10 by the state-run pollster VTSIOM found that 21% of Russians want to emigrate, up from 5% in 1991, the year the Soviet Union collapsed. The largest portion of them were found to be young, educated and Internet-savvy — exactly the kind of people Medvedev has been counting on to help develop a Russian version of Silicon Valley. Known as Skolkovo, the planned technology hub has been the center of Medvedev's economic policy, but it has struggled to mimic the alchemy of the original Silicon Valley. The problem? Finding enough start-ups to populate the place.

So far, the state has created three huge corporations to help fill that void, like Rosnano, which focuses on nanotechnology. This year, the corporations even set up a joint office in California's Menlo Park, down the road from Stanford University, to attract young talent and technology back to Skolkovo. But that has been a hard sell. "You need an entire ecosystem to support innovation," says Alexandra Johnson, a venture capitalist in Silicon Valley who has been advising the Russian corporations. "You need [business] incubators, entrepreneurship, managers to run the businesses. You need the rule of law. Many elements of this ecosystem are still missing in Russia," she told TIME in San Francisco.

In theory, Skolkovo is supposed to create this ecosystem. It could provide, among other things, a kind of super-krysha to guard young businesses from the protection rackets of corrupt officials. "It's no secret," says Alexei Sitnikov, the head of international development at the Skolkovo Foundation. "Police [are] often more of a threat than protection in Russia." So the new innovation hub is working with the Ministry of Interior to hire and train a "separate" police force for the center, and similar plans are in place for its sanitary inspectors and other rent-seeking bureaucrats. "They will not be able to come in and say, 'O.K., shut down your business,'" Sitnikov says.

But even when Skolkovo is completed (so far it is an empty field near the Skolkovo School of Management), it will still be a very exclusive club, big enough to house only the couple of hundred ventures now being handpicked by a team of experts. So far about 120 have been chosen, while many others, like Terentev's, are fleeing to the West. And they seldom look back.

Last year, the Russian émigré Andre Geim, who won the Nobel Prize in physics in 2010, was asked by a Russian reporter what it would take for him to return to work in the motherland. He answered: Reincarnation. Terentev says he agrees. "Maybe by the time I'm 30 the system will have changed. The risks will be different. But who knows? The Soviet Union lasted 70 years. Our country does not obey the laws of logic." Nor of Silicon Valley.

• Simon Shuster / Moscow
• Moscow wants to create a high-tech industry, but a combination of corrupt bureaucracy and strong-arm tactics is scaring away the very people it needs to create its own Silicon Valley