Alexander Belyaev, BRICS meeting, April 2007

1. State University – Higher School of Economics Institute for Statistical Studies and Economics of Knowledge ICT Sector in Russia • Alexander Belyaev, BRICS meeting, April 2007

2. Contents • ICT sector in Russia • IT Market • Software development for Export Market (case) • Barriers to Growth & State IT Promotion policy

3. ICT sector – general statistics: 2005 115thousand enterprises over 1,3 million employees Structure of main performance indicators (per cent of total) Sales = $50 bill. (130% growth of 2004) Enterprises Personnel

4. Share of ICT sector in gross value added of business enterprise sector (%)

5. Export and import ICT goods: 2005 mln. $ Import ≈ 29-foldexport

6. ICT specialists: supply and demand Total annual demand for ICT specialists – 350 thsd (expert assessment) Annual ICT related graduates – 83 thsd

7. Training of students in ICT-related specialties: 2005/2006

8. Employment of graduates

9. Use of computers by enterprises (% of total) Use of the Internet for e-commerce by enterprises 2002 – 26,2% 2004 – 33,5%

10. Availability of ICT in households

11. Used the Internet at least once Active users 1998 7 1 2003 13 9 2006 21 13 Access to the Internet in Russia A per cent of surveyed

12. Use of PC and Internet The frequency of use of personal computer The frequency of use of the Internet

13. E-Commerce

14. E-Skills

15. Barriers to use (more intensive use) of the Internet (per cent of respondents)

16. IT Market in Russia

17. Volume of IT Market of Russia - Total Volume of IT Market in Russia (2004) - $9,2 bill. Growth about 30% - Total Volume of IT Market in Russian (2005) - $11,22 bill. Growth about 22,1% (Source: Ministry of IT and Communications Russia, IDC) To compare: The global Growth Rate of IT Market: about 6%

18. Share of ITSector in GDP / Russia Despite of impressive Growth Rate, the Russian IT Sector remains relatively small: 1) Share of IT Sector in GDP of Russia – just 1,4% To compare: Share of IT Sector in U.S.A. - 5% Volume of IT Market – more than $500 bill. 2) Export share is about 14% of total IT Market Russia. To compare: Israel: IT Export – 70% of IT Market India: IT Export – 80% of IT Market

19. Features of IT Market in Russia • Strong shift towards foreign imported Hardware and technologies • (Russian) IT Services –30% of IT Market • Software development –14% of IT Market • 2) Average yearly Benefit of Russian IT Companies is • - 10-fold less than average Indian IT Company ($570 Mio.) • 5-fold less than average Irish IT Company ($350 Mio.) • - Immature market, software piracy

20. Software Development for Export Market

21. Features of Software Export Market • - Exists for more than 10 years • More than 500 Companies active • Most companies are SMEs - annual turnover not more than $1 Mio. Biggest Companies Turnover is about $20-40 Mio. • - Increases rapidly; Annual Growth 2005 is approx. 30% • - Despite that (IDC, IBS): “Main Growth driver is market underdevelopment rather than growth of demand”.

22. Software export Volume - 2005 Total Software export market volume exceeded $1 Bln. To compare: - Automotive export - $380 Mio. - Nuclear energy technologies export - $850 Mio.

23. Market Achievements • Russia entered firstly the Offshore100rating (Luxoft, CTGroup). • 2. 2006 two Russian IT-companies entered Technology Fast 500 Rating: 500 most fastest growing IT-companies of Europe • Aplana – Income Growth of 1779% in 5 years • Progresstech LLC – Income Growth of 747% in 5 years. • 3. 2004-2005 - 4 leading TNCs established Centres for software Development in Russia (in the first line – high knowledge intensive software incl. R&D) • - Intel, establishing most biggest (outside U.S.A.) software development center • - Sun Microsystems • - Alcatel • - Siemens. • 4) Already established centers include: Motorola, LG Electronics, Dell, Samsung и Borland.

24. Advantages for IT Software Oursourcing in Russia • Advantages of IT Software outsourcing in Russia: • Geographical proximity to U.S.A., Europe (working time, personal contacts). Moscow to London is a 3-hours flight. • 2. More familiar cultural Framework for Clients from Europe, U.S.A. (compared to India, China). • 3. Infrastructure is rated a bit higher than other outsourcing States (Economist — Economist Intelligence Unit, Russia —59, India — 75, China, Philippines — 66. • To compare: Infrastructure of U.S.A. is rated at 16.

25. Market Segment for Russian IT Companies • Given that: • - Deficit of qualified IT labor-force in Russia • - Relatively high labor costs, growth of wages • - High share of post-graduated • - High State Regulation Burden • The Market Segment for Russian IT-Companies would be • Software Development projects, that are: • - Relatively small • Relatively high R&D share • Require relatively much Client contacts (geographical Advantages)

26. Barriers for Growth & State IT Promotion Policy

27. Underdevelopment of law - Underdevelopment of Information technology related law in general: e.g. Electronic Signature Act: enacted but not functioning. - Intellectual property rights law: not functioning - Tax law not adopted according to needs of IT accounting: uncertainity in tax accounting leads to more risks and expences for IT companies.

28. Barriers, impeding internal IT Market development 1) Not sufficient qualified demandfrom State 2) Not sufficient demand from population (lowincome, no need in IT Technologies) 3) Not-stable business environment – big companies aren’t willing to invest in long-term IT projects 4) Many administrative and tax barriers in general e.g. - High import Taxes for Hardware - High Share of Labor Expenses increase Tax Burden (Social Tax 26%, Income Tax 13%), leads to decreasing of Attractivity for Investors - High Depreciation Rate for Hardware - Uncertainty with Tax regulation for Software, Depreciation terms of software

29. Barriers, impeding IT export development 1) Licensing: complicated but obligatory 2) Complicated customs clearance procedures The Specifics of Software Export isn’t codified in Law. 3) Given that, the most Software export goes over Internet, what leads to: - Most export-import operations of Russian IT Companies stay in “Grey zone” (half legal) - Value Added Tax Return in Case of Software export doesn’t work 4) Wages are being paid in most cases using “Tax Reduction schemas” 5) Using of “Grey Zone” Business Schemas leads to Difficulties in: - Credit using - Venture financing - Building Partnerships with West Xompanies

30. Overview: IT Market State policy • In general: • 1) Consistent IT Promotion Policy, facing real Challenges, not emerged. • 2) IT Promotion Policy answers just some of IT Sector Development Challenges • 2003-2005 – a unique case for Russia: unter patronage of IT-Association (APKIT) Business along with Ministry of Communication developed a IT Market development Program. • Allthough, this Program remains a concept (not enacted). • Reason: there are some Contradictions between Needs of IT Sector Development and “Real state policy”: • Orientation on Oil, Gas, Metal Industries (most biggest and state-dependent Taxpayers) • Official Goal for Tax Authorities: increase Taxes

31. Programs for IT Promotion State IT Promotion Programs : 1) Development of Techno-parks (2006-2010) 2) Direct Federal Program “Electronic Russia” (2002-2010) – mainly faces Problems of State IT Development, State Reform 3) Special economic Zones – Dubna (Luxsoft)

32. Thank you! abelyaev@hse.ru