Will Russia Become Leader of IT Industry?

Russia is destined to be a global leader in the IT industry. Two factors show in this direction: the presence of strong national players and huge, largely unoccupied local market.

WHAT WE THINK
Wisdom, wrote Saint John of Damascus, is the ability to see things as they are.

Old talk that Russia "doesn't produce anything that anybody wants to buy, except oil, gas and arms” may still continue but it is a distraction for the unwary. It blinds the mind and hinders the adequate perception of reality.

The truth is that Russian internet companies are remarkably good and odds are Russia is going to become one of the leaders in the global IT industry.

A few days ago, Yandex announced financial results for the year 2018. Revenue reached almost two billion dollars, an increase of 41%, and net profit - 350 million dollars (growth of 62%). This does not include one of the company’s main assets, Yandex.Market, which since April is a separate entity partly owned by Sberbank.

Although advertising is still the main source of income (76%), this figure is falling rapidly. Just last year it was 90%. This is due to rapid growth in other segments. For example, in 2018 Yandex.Taxi, Uber Russia, Yandex.Food and Party Food brought in 19.2 billion rubles, showing an increase of 300%.

All it tells is that Yandex’s ambition extends far beyond the contextual advertising. It is clear that the company doesn't want to be the regional version of Google and Amazon. It sees itself as an international player ready to challenge the global behemoths.

A month ago, DXC Technology acquired Luxoft. Founded in Moscow in 2000, Luxoft quickly grew into a global business with offices around the world and a staff of nearly 13,000 people. The acquisition value is estimated at two billion dollars.

Yet we don’t find anything quite surprising here. Just look at the results of the International Collegiate Programming Contest (ACM-ICPC). Of the 18 competitions held in this century, students from Russia won 12 times. This year 111 countries, 3098 universities and 53446 people took part. And again the Russians won.

According to the International Data Corporation (IDC), by the end of 2017 the Russian IT market exceeded 5 billion dollars with a growth rate over 20%. Another study performed by Pierre Audoin Consultants, estimates the Russian market at 9 billion dollars and by 2022 it should reach 13.5 billion dollars. The market growth rate is well above the world average.

According to the Association Russoft, the export of Russian IT products and services is 10 billion dollars. Thus, in the near future, the share of IT in Russian exports will reach 20%.

It is well-known, yet still startling, that Russia is the only country that preserved sovereignty over virtual space in an open competitive environment: neither Google, nor Facebook, nor Uber managed to push local companies out of business. Another country with successful local internet companies is China. Yet, China closed its market for international competitors.

Whether it is a national trait or a smile of fortune but Russians demonstrated the ability “to win with skill, not with numbers”.

It is, therefore, worthwhile to note that the success belongs to private companies, who not only defended the local market but expanded outside globally with almost non existent state backing.

Recently, however, the Russian government has taken a number of steps to support local software developers. Now a significant part of the information systems procured by state organizations and companies must be produced by Russian developers.

Accordingly, we expect the continuation of this policy since the Russian internet market very promising.

In order to understand the potential of the Russian IT industry, one should note two main factors that are very favourable to Russia: on the one hand, this is a huge market, on the other, there are strong local players.

The Internet penetration rate in Russia is higher than the world’s average and only slightly smaller than that in Europe. According to VTsIOM, 81% of Russians use internet (among young people from 18 to 24 years old, this figure is 97%) and 65% of Russian people go online every day.

As a result of the national project "Digital Economy", in five years time 97% of households will have access to broadband Internet. The cost of the internet in Russia remains low.

At the same time, Russia, is the last large and, largely, unoccupied market for online commerce: there is no dominant online retailer and the market is at an early stage of growth.

According to the research agency Data Insight, the share of online commerce in the country's GDP is only 2.5%. It is growing due to an increase in the number of online shoppers, rather than to an average purchase.

All this indicates that the main events in this industry are still ahead.

Published: February 26, 2019