Russian IT market growing despite problems

Russia may still lag behind IT-outsourcing powerhouse India, but its programmers are seeing foreign contracts roll in

The phrase "the Russians are coming" was popular with then-U.S. President Ronald Reagan’s anti-communist hawks throughout most of the 1980s. Now, the warning is coming true, but not in the sense of threats of destruction. Instead, the Russians in question are bearing advanced skills in programming and other IT areas. And, what is more, Western companies and institutes are waiting with open arms.

The technical skills of Russian programmers and scientists are so advanced and inexpensive that they are already leaving footprints in space research, Silicon Valley and cyberspace, where Russian teenagers won the World Cyber Games Championship in South Korea in 2002.

Several global corporate giants, including Microsoft, Siemens, Samsung, Boeing, Intel and several other IT-related firms, have already set up offices in Russia, with Intel even promising to triple its workforce here.

Not all publicity around Russian programming has been good, though. Dmitry Sklyarov, a programmer with ElcomSoft Co. in Moscow, was arrested by the FBI in 2001 in the United States for allegedly violating the U.S. Digital Millennium Copyright Act – a law enacted in 1998 to fight copyright violations in software development.

Sklyarov, then just 26, had demonstrated at a hackers’ conference in Las Vegas how Adobe Systems’ e-Books, which are encrypted to prevent copying by unauthorized persons, could be decoded into Adobe’s highly reproducible portable-document format, thus circumventing the built-in copyright-protection mechanism – a system the makers had said could not be infiltrated. A U.S. court later acquitted him.

A unique industry

With an army of IT experts anxious to make an impact, it is no wonder that the Russian IT industry has been fast-tracked into global prominence.

Indeed, as one of the very few safe IT oases in the current economic climate, the aggressively growing industry has not only continued to defy global negative trends, but has even posted a double-digit growth rate for the past two consecutive years – to the envy of CEOs of foreign IT companies with limited capital to outsource.

Both local and international experts say the galloping growth has yet to reach its apex. Jason Horowitz, manager of program development at Sun Microsystems, said current events on the market reflect the huge potential of Russia’s IT industry, while Viktor Vainshtein, general director of Aplana Software, noted that the ability of Russian companies to solve "non-standard tasks" is already being reflected in the creation of new, effective models of delivery services with long-term perspectives.

David Lee, deputy CEO in charge of revenue and business-development strategy at Comstar Telecommunications Co., agreed, saying that the Russian market is in a "very unique position." Unlike in weak Western markets, the Russian telecoms industry is booming. "In fact, it’s probably the biggest potential market in Europe and possibly one of the two or three largest in the world," he said.

Statistical data released at the Second U.S.-Russia ICT Roundtable in February 2003 in San Mateo, California, lend credence to this line of thought. According to these figures, the size of the Russian ICT market, which was only $12.55 billion in 2001, is expected to hit $20 billion by 2005.

Consequently, Russia’s IT sector is setting records in terms of growth. For instance, its software segment has grown at about 80 percent a year over the past two years. Revenues from offshore software development have also increased, reaching an estimated $300 million in 2002, and are expected to grow annually by about 25 percent in the near future.

Plenty of success stories

At an outsourcing summit held recently in St. Petersburg, Daniel Satinsky, board president of the U.S.-Russia Chamber of Commerce of New England, noted that the percentage of problem-solving projects being entrusted to Russian providers is significantly higher than what is obtainable in other offshore outsourcing locations.

The percentage of those satisfied with Russian products and the technical skills of their Russian producers is also high – at over 85 percent.

Stephen Lane, the author of a report refered to by Satinsky, "Software Development in Russia: A Buyer’s Guide to the Russian Software Development and Services Export Industry," said that users are attracted to "Russia’s large, highly skilled science, mathematics and engineering-talent pool."

The boom has spread to the consumer segment, with Russian non-IT companies spending over $1.2 billion on IT products and services in 2002, up from $850 million in 2001.

Several Russia-based IT companies have already become major players, not only on the home turf, but also on the global arena.

According to an Ernst & Young IT-market report, Abbyy Software Co. is the second-largest optical character-recognition producer, with a 10-20 percent share on some European markets, while Kapersky Lab. is eyeing a 5 percent share of the global $2 billion anti-virus-software market.

Experts say they expect Russia to play a bigger role in software outsourcing in the future. Offshore outsourcing by Western European companies is growing at about 40 percent annually, said Ian Marriott, research director at Gartner Research. He added that, "With the share of this market controlled by India – the leader in the outsourcing industry – expected to decline, countries like Russia will have an opportunity to increase their share."

Problems still holding the sector hostage

Nevertheless, Russian IT-company CEOs have listed Western "snobbism," lack of government support, a bad image and a dearth of easily accessible sources of investment as major factors limiting their progress in the industry.

These were also among key issues tabled at the St. Petersburg IT summit organized by Fort-Ross and the Russian Association of Software Developers (Russoft).

Russoft President Valentin Makarov said the scope of the summit has changed and the agenda broadened to include key issues such as cultural differences and legal aspects of software development.

On the subject of Western "snobbism," several Russian CEOs said Westerners simply are unaware that a Russian IT segment exists. The West sees Russia’s IT as "something peculiar, with a minus sign put in front of it," said Anatoly Gaverdovsky, CEO of VDI, a software developer. "However, I would like the West to see us as something special, with a plus sign."

Andrew Sviridenko, CEO of software firm Spirit, attributed Russia’s bad image in the West to the aftereffects of Cold War political propaganda. "This image is pretty strong in the United States, where Russia is still not seen as a good source of high technology and good-quality software products," he said.

Intellectual-property-rights infringements are also holding the sector hostage. According to the latest reports, the piracy penetration rate in Russia is about 85-89 percent, the third-highest in the world. Citing reports, Stephen Chase, Intel’s president in Russia, said that up to 90 percent of Russian IT’s gross output is siphoned off by pirates, costing U.S. high-tech companies alone approximately $500 million every year.

Nikolai Punktikov, CEO of Star Software, denounced the government for its lack of support, imperfect legislation and difficulties in export operations and recovery of value-added taxes. "This is because the IT industry is not a priority for the Russian government like oil and gas are," he added.

Vera Semyonova, Fort-Ross executive director, said that the local IT industry needs actions and practical assistance, instead of a barrage of official promises to help.

Solutions offered

Fortunately, Russian companies are now aware of the weight of problems inflicting the sector and, more importantly, are investing money to address them, Punktikov said.

He also argued that the sector’s bad image stems partly from research companies’ contradictory data on Russian companies. "Even reports by the largest market research firms, such as Gartner Research, omit some crucial facts about the Russian IT sector. This is particularly disturbing because such studies influence most foreigners’ perceptions of the Russian IT industry at the global level."

Spirit’s Sviridenko called on the government to adopt the Israeli IT investment model, in which both government and private investors pool funds together to launch companies with the investors later buying the government out, as a way of solving the financial problems in the sector.

Focusing delegates’ attention on modern marketing strategies, Jost Hoppermann, vice president of Forrester & Giga Information Group, called on Russian software developers to learn the art of marketing their businesses to potential clients in foreign countries. Therefore, Russian IT company-marketing executives need to find out what their potential clients really want, he said. Otherwise, there is a big risk of losing clients even before physically meeting them, he added.

Dmitry Loshinin, general director of Luxoft, said he sees bridging cultural differences as one of the sector’s priorities. To facilitate cultural integration, Luxoft at times invites its U.S. employees to Russia for conferences and other programs, he added.

Russia’s top IT companies
• Abbyy Software House
• Aplana Software
• Arcadia, Inc.
• Artezio
• Astrosoft Development
• ATAPY Software
• Auriga, Inc.
• Business Computer Center (BCC)
• Constant
• DATA FORT
• DataArt Enterprises, Inc.
• Digital Design
• Documentum Services
• EPAM Systems
• E-Style Software House
• eVelopers Corporation
• FORS SPb
• IBS
• Interface LTD
• IT Co.
• Information Business Support
• Kaspersky Lab.
• LANIT
• Luxoft
• NAUMEN
• Northern TerraByte Laboratories (NTB Labs)
• NTR Lab
• Optima
• PHYSICON / OpenTeach Group
• RealEast
• Reksoft
• Samara Information Technology
• SoftJoys
• Softline
• SPIRIT
• STAR Software
• Sterling Group
• Tecom
• Telma Ltd.
• TopS BI
• V6 Technologies
• VDI