Burgeoning Russia IT blasts government policies

With Russia facing stiff competition from other emerging economies for a piece of the global high-tech market – especially offshore outsourcing contracts – corporate leaders in Moscow are complaining that the Russian government is not doing enough to support the industry.

In comparison with moves taken by the Indian and Chinese governments, Russian efforts leave much to be desired, they say.

“Government support is an important part of the industry and the Russian government is not doing very much, to say the least,” said Alexis Sukharev, president of Auriga Inc., an IT consultancy and offshore outsourcing firm with offices in Moscow and New Hampshire. “Compared to India, Russia is doing nothing at all. It’s laughable.”

Russia’s high-tech industry has been growing at an impressive pace – about 10 per cent a year over the last four years, according to Russoft, the national software developers association.

But despite aggressive marketing campaigns, such as a road show of Russian software developers touring Germany from Oct. 21 to Oct. 29, Russian firms have had little success beating out Indian companies for lucrative outsourcing contracts. And with China increasingly touted as the next major outsourcing hub, many here fear Russia will be left behind. Much of the blame, they say, rests with the Russian government.

“Look at the Indians and the Chinese, why can’t we do what they’re doing? Why doesn’t the Russian government seem to care?” asked Dmitry Loschinin, CEO of Luxoft, one of Russia’s leading offshore outsourcing firms.

Experts say much of the success of India’s IT industry can be traced to government initiatives, such as establishing software technology parks, creating zones where companies are given generous tax advantages for developing exports, significantly reducing technology import duties to promote research and development funding, using offset programs to support local industry and reducing a variety of other taxes.

Beginning in 1995, China started pursuing the same kind of policies, creating high-tech zones where companies enjoy significant tax breaks and providing seed money to IT-related projects. Last year, the Beijing city government passed up software giant Microsoft Corp. in favour of six indigenous companies supplying the Linux operating system.

But Russia, critics say, has done nothing comparable. The government has yet to devise a concrete, long-term development plan for the high-tech sector, let alone take initiatives such as setting up tax-free zones or offset programs.

“The Russian government is doing more than it used to, but it still is not doing enough,” Loschinin said.

The only major government high-tech initiative has been the Electronic Russia program, under which government and private partners are spending US$2.4 billion to develop Internet use across the country by 2005.

But other projects, such as a plan to create four high-tech zones offering significant tax breaks to investors, have stalled.

In October 2001, Economic Development and Trade Minister German Gref promised that legislation on tax-free zones and tax holidays for high-tech companies would be submitted to Russia’s State Duma, the lower house of parliament, by the end of that year. Four months later his deputy announced that a decision on tax breaks would be made only after a year-long study into whether they would be beneficial. Since then, no plans have been presented.

“All the government is doing is creating confusion,” Sukharev said. “So not only is the government doing nothing, it’s being counter-productive.”

In September, Alexander Shubin, the deputy head of the Duma’s information policies committee, told a high-tech conference in Geneva that the government wants to introduce tax privileges for high-tech companies.

“We should not throw China’s experience aside,” Shubin was quoted as saying by Russia’s RosBusinessConsulting news agency. “Russia is capable of making the same breakthrough (as China), or even a more impressive one. There is everything necessary for this. All we need is favourable conditions for the development of the high-tech sector like in China.”

Shubin said he supported a number of tax break schemes, including a 10 per cent reduction in the value-added tax rate for high-tech companies.

But he made no promises about when the government might finally introduce the measures.

“It’s always the same: there is a lot of sweet talk, but nothing ever happens,” Sukharev said.

For Loschinin, the government’s most galling mistake has been its failure to use offset programs to promote the Russian high-tech sector during the country’s recent economic upsurge.

The Russian economy is enjoying its biggest boom in years, with gross domestic product expected to grow by 7.5 per cent this year, and foreign investments are starting to pour into Russia. Now is the time that offset programs should be in place to encourage or force foreign investors to use Russian firms for their IT needs, Loschinin said.

“Look at that huge deal with BP,” he said, referring to the British oil giant’s purchase of a 50 per cent stake in Russia’s third-largest oil company, TNK, for $6 billion earlier this year. “It would have been so easy to propose such a simple thing as an offset program in that deal to support high-tech here.”

The main reason the government has failed to take action, Sukharev said, is that it’s not clear exactly who is responsible for supporting the high-tech industry. Three different ministries – the Economic Development and Trade Ministry, the Industry, Science and Technology Ministry and the Telecommunications and Information Ministry – are all supposed to work to develop the high-tech sector. But there’s little co-operation between the three, making it next to impossible for the government to come up with concrete plans, Sukharev said.

Sukharev says the first thing the Russian government needs to do is designate a single department – or even a single person – in charge of the government’s program for developing high-tech. Only then will it be able to devise plans for high-tech zones, tax breaks and other support programs, he said.

“The real problem is that nobody is in charge. Government officials are competing with each other so nothing is happening for the industry.”