Russian IT Industry bounces back, rides high on cloud

Hardware continues to dominate the Russian IT market, making up more than 50 percent of the sector. Source: ITAR-TASS

Hardware continues to dominate the Russian IT market, making up more than 50 percent of the sector. Source: ITAR-TASS

The Russian IT market is growing fast, but the number of problems that have come to the forefront are proving to be a serious threat.

It seems clear to both financial institutions and independent analysts that the Russian information technologies market has recovered completely from the 2008 financial crisis. Russian Minister of Communications Igor Shchegolev has reported that the country’s information technologies market saw a growth spurt of 14.6% in 2011, and the Ministry of Economic Development predicts that the market will grow by 15.8% in 2012, and by 18.1% in 2013.

The stock analysis center Infin wrote in a recent analytical report entitled “Targeting the IT Market” that the market could very soon return to the volumes and growth rates witnessed before the crisis hit, as long as nominal GDP grows by 18.5% annually and the ruble continues to strengthen.

Currently Russian IT companies control 1% of the global market for information technology product and services, worth roughly $16 to 20 billion. The Ministry of Economic Development forecasts that the volume of the Russian IT market will hit $32 million by 2013. But behind these positive numbers are questions about the sector’s overall potential. The World Economic Forum rates Russia 77th in the world for growth in the information and communications technologies sector and 3rd among resource-oriented countries. Today Russia exports at most $1.5 billion of IT services, and no more than 300,000 people work in the country’s IT industry.

Hardware continues to dominate the Russian IT market, making up more than 50% of the sector. The rest of the segment there belongs to IT services (50%) and software (20%).

“This is the heritage of the past,” said Konstantin Chernyshov, a chief analyst at Uralsib financial corporation, discussing the situation in Russia. “Many Russian companies started making or assembling hardware, but this share is shrinking gradually as more and more companies are switching to making software and other high marginal segments.”

One place Russian companies hope to compete with international players is in cloud technology.

Structure of the IT market in Russia and

in Western Europe. Click to see the

big picture

Although this sector is fairly small at the moment, Chernyshov believes its growth rates will blow away similar figures across the entire IT services market in the period up to 2015. The Russian government is a major promoter of cloud technology. One project in the works is a national cloud service for organizing inter-departmental computerized interaction. It will also provide state and municipal services to the public. Market intelligence firm IDC predicts that the value of the cloud services market in Russia in 2015 will reach $1.2 billion. In 2010, the market was valued at just $35 million.

Cloud technology is one of 15 priority areas supported by the Skolkovo Innovation Center, the government’s “Silicon Valley” rising outside of Moscow. Cloud technology is part of Skolkovo’s information technologies cluster along with multimedia search systems, video and audio processing and recognition, mobile applications, complex engineering solutions, green information technologies, wireless sensor networks and more.

But because the Russian government has suddenly become the biggest customer on the IT market, many companies are being created to serve governmental purposes, which has both positive and negative consequences: it makes the sector much more sensitive to changes in the state budget. Many governmental programs have given disappointing results.

“Officials just need a tick in the documents while business is focused on the profit,” said Ilya Rachenkov, an analyst with InvestCafe. But government support is needed to make any positive developments in the system and even skeptics admit that its influence is not all bad.

Rachenkov confirms that he has heard good opinions on Skolkovo from businesses of all sizes. “For them it’s a place where they can come and get real investment without long bureaucratic procedures. Everybody is surprised because start-ups are traditionally supported by investment angels, not government.”

Nevertheless, both Rachenkov and Chernyshov believe the private sector would do a better job in developing the IT industry than the government. Even here, however, there are barriers to entry.

Volume of IT market (% of GDP). Click

to see the big picture

Russia’s IT market is dominated by several big companies. The top 10 Russian IT firms accounted for 70% of all revenue earned by Russia’s top 30 IT companies. These top 10 control 54% of the Russian IT market – 5% more than in 2009.

For companies willing to pay the labor costs, there are other problems. Foreign competitors such as Apple, HP, Foxconn and TrendMicro are entering the Russian IT market in droves, and this expansion will only increase after Russia joins the World Trade Organization. These companies have notable financial resources and leading technologies to attract Russia’s top IT specialists.

“Many foreign software companies already have Russian specialists on staff,” said Rachenkov, and this is likely to increase as these companies establish themselves on Russian territory. But  despite the country’s reputation as a source of top software designers and engineers, the reality is that the pool of actually qualified specialists is limited. Experts believe that the future of the IT market is in the Russian regions, whereas at the moment it is concentrated in Moscow and St. Petersburg.

But overall growth in the IT sector, like in the rest of Russia’s economy, will depend on real economic growth, an increase in investment activity, stabilization of the country’s financial and political situation, an increase in personal incomes, a stable exchange rate, moderate inflation and benefits that can encourage new enterprises to form.

“Now it’s a land of opportunities,” - said Konstantin Chernyshov.

All rights reserved by Rossiyskaya Gazeta.

This website uses cookies. Click here to find out more.

Accept cookies