Russia: Networked Economy

Russian developers stand out for their ability to handle complex projects based on core engineering. “They are extremely creative; they are imaginative; they are disciplined,” said Steve Chase, president of Intel Russia. “When it comes to solving mathematical algorithms, they are basically unbeatable.” They are also cheap, making only about 25% of what an American developer would make. Currently the main challenge for Russian software developers is differentiating themselves in the international markets. “One of the biggest struggles is that they are up against the dominant player in the industry India.”

ICT Employment Opportunities (Stage 2)

Supply and Demand of IT Professionals
“Russia is where India was 10 years ago,” said Steve Chase, president of Intel Russia, “Information Technology makes up only 1% of Russia’s gross domestic product. Although 1.3 million Russians have degrees in fields like computer science or engineering, only 70,000 currently work in information technology-related jobs.” In 2001, the Russian Offshore programming industry alone employed 5,000 to 8,000 programmers with totals for the industry ranging from 50,000 to 80,000 people.
Russians have one strength in particular that may prove to be their ticket to success – a well-educated, well-trained, and dynamic workforce focused on science, engineering and technology. But market growth, not only in the ICT market, but overall has been consistent. Russia’s IT spending has outperformed the global averages for the last three years running at about 20%. Spending in the ICT market is projected to reach almost $20 billion by 2005.
Of course, the major driver of growth in the ICT market is the budding software outsourcing market. Russia is working hard to develop a reputation in the global outsourcing market much like China or Vietnam.
Foreign investment of ICT in Russia has been relatively flat from US companies, including Intel, IBM, Sun, Dell, and HP. Russia has proven to be a high growth performer for several of these companies on an annual basis.

ICT Weaknesses
Major factors preventing Russia from fully capitalizing on its human capital strengths are software piracy, poor infrastructure, and poor image. Even though piracy rates have decreased significantly since the 1990s, Russia is currently the worst rated country in the world with a rate of 79%. Some legal reform has been enacted to significantly decrease this number but enforcement is key.
Slow implementation of governmental infrastructure reforms in industries including telecommunications, banking, postal, transport, and municipalities has kept Russia behind the curve from its counterparts in the West.

B2C Electronic Commerce (Stage 2)

1999 e-commerce retail-sales estimates range from $1 to 3 million. Russia’s population is spread over a vast distance of land, which could be quite receptive for using services online. Weak consumer purchasing power, low computer penetration rate, insufficient telecommunications infrastructure, and inadequate postal delivery systems significantly limits the B2C e-commerce potential.
Russians have no confidence in online transaction. It is also hard to buy online because debit and credit cards are rarely used outside Moscow and St. Petersburg. As of summer 2000, Russia has about 500 online stores. Most of the expert industries believe that B2C electronic commerce will become economically viable only when the Internet reaches about 10 percent of the population, or 15 million users.
Autobank launched an Internet Service Bank, which clients may use to pay utility bills and transfer money from one's bank account to a debit/credit card, and is planning to offer a full-line service in the future. Russia is still recovering from the collapse of the banking system in 1998. People lack confidence in domestic financial institutions and typically convert savings to U.S. dollars; US$40-60 billion are estimated to be kept "under mattresses."

B2B Electronic Commerce (Stage 3)

B2B sales totaled US$90 million in 1999 and are expected to grow exponentially over the next few years. Willing to capitalize on the potential benefits of electronic commerce, businesses have poured about US$50 million into acquisition of pioneering start-up companies, the leader being U.S.-owned Golden Telecom. Major industrial groups are going online and are launching e-commerce projects.
Some companies try to fully integrate their business processes; many have invested in the development of the virtual marketplace to trade commodities. For example, Surgutneftegas Oil Company is planning to build a site for corporate purchases. Oil pipeline monopoly Sibneft, Transneft, the Ministry of Railways, and Transtelecom announced the formation of the Energy Trading System, a US$100-million project to establish an electronic commodity exchange for oil, petroleum products, electricity, and natural gas.

E-government ( Stage 2)

In 2001, the level of government online usage was only 3%. The percentage of Internet users that thought use of government online was unsafe totalled 62%. In June 2000, the Ministry of Communications publicized a draft program on electronic commerce development for 2001-2006, with the final version to be presented to the government in September. The program, for which the government will commit $1.9 million, is targeted at the development of a regulatory framework for electronic transactions, including electronic signature legislation, establishment of an e-commerce innovation zone with B2B and B2C pilot projects for domestic and international trade, and certification centers for equipment and software.
Federal government is promoting the use of the Internet by its agencies. Most agencies have a web presence but many sites do not provide a wealth of information and are not regularly updated. The most recent e-government initiative in Russia was staff recruitment for the presidential envoy to the Volga Region, which drew over 5,000 applicants when 300 or so were expected.

Planned Capabilities
Now that the eRussia Program has passed the planning phase, it is well into several studies and pilot programs. The eRussia goal is that electronic interaction should account for 65% of internal communications and up to 40% of communications between federal, regional, and local governments by 2010. Also, as public Internet outlets increase they will provide a range of services to citizens including submitting tax declarations and electronic voting.

Recommendations:

The demand from Western markets and a strong government lead in the ICT market will make this industry’s future. A strengthening of Russian IT Industry Association (APKIT) will also have an impact on lobbying for further economic and political improvement for the ICT market. As mentioned above, Russia’s software outsourcing industry is plagued by a weak reputation. Stories about the Russian mafia don’t help the negative image that is many time associated with doing business in Russia. Companies trying to market themselves abroad must start by dispelling the rumors, and prove themselves to be reliable, hard-working, and well-educated problem-solvers.