Russia looks to make IT its ‘next natural resource’

In an effort to jump-start its economy and diminish its dependence on natural resources like oil, Russia has made local IT development one of its top priorities, with plans for infrastructure growth, regional “technoparks” and industry-friendly legislation.

“IT is Russia’s next natural resource,” Leonid Reiman, Russia’s Minister of Information Technology and Communications (ICT), said at the Russian Economic Forum in London on Tuesday.

The pillars of this burgeoning IT economy are Russia’s strong education base and thriving software development community. But the country still faces significant challenges, among them, spotty infrastructure development, limited funds and crime.

The country is hoping to jump these hurdles and has set aside US$650 million to invest in hi-tech initiatives such as its e-Russia program, which covers e-government and services such as putting medical records online. As part of e-Russia, the government also intends to extend the country’s telecommunication infrastructure and provide Internet access to remote communities.

Telecom is the country’s fastest growing sector, and by the end of this month the government expects 100 per cent of the Russian Federation to be covered by a Global System for Mobile Communications (GSM) network. However, there are still 46,000 communities that lack a single fixed line. “We need to address this unbalance,” Reiman said.

To do this, the government is putting a universal service guarantee into law and establishing a service fund, as well as enticing local operators to take on the initial financial burden of spreading phone access, with the promise that they will be rewarded by market growth later on.

Much of the country’s plans are couched in the spread of democracy, and the importance in providing citizens with increased information, through telephone and Internet access. “There is an obvious high correlation between the improvement of democratic institutions and the progress of telecommunications in Russia,” Reiman said.

The government is pointing to the growth in mobile phone use to underscore the nation’s IT appetite and encourage investors. Mobile phone use has grown from just 3.4 million users in 2000 to around 82 million users last month, giving Russia a national penetration rate of 57 per cent, according to Reiman. In Moscow and St. Petersburg the penetration is over 100 per cent.

But ICT infrastructure and access is just one part of the country’s plans. Russia is looking to turn technology into the “flagship industry of its modernized economy,” according to Reiman. The industry is already growing at 20 per cent to 25 per cent a year, outpacing every other sector, he said.

To spur further growth, the country hopes to develop regional, government-sponsored IT research and development centres, or “technoparks,” similar to areas in Bangalore in India.

The technoparks will be geared at developing areas of technical expertise and software is a major part of this plan, given the country’s strong base of local programmers. Software exports are already growing at 40 per cent to 50 per cent annually, and by 2010, the government hopes that Russian programmers’ contributions will make up seven per cent of global software exports, and a US$40 billion market.

Local programmers have substantial experience in the development of complex solutions since much of Russia’s application software has historically been developed in-house by IT departments of large organizations, according to IDC Russia senior analyst Timur Faroukshin.

Along with local talent, the government also needs private sector businesses to invest in the parks, and so far there has been some interest expressed by foreign IT companies that want to strengthen their presence in Russia with local R&D.

Germany’s Siemens AG, which already has 3,000 employees and seven regional offices in Russia, is one of these. “Just recently we opened two R&D centres in Russia and we are very encouraged by the technoparks and want to participate,” Rudi Lamprecht, a member of Siemens’ Corporate Executive Committee, said at the economic forum.

Lamprecht added that it was vital to support local industry there and that Siemens sees great opportunities and double-digit IT-sector growth in Russia over the next few years.

Still, he acknowledged that there are “enormous challenges” in the country. Corruption, and concerns over the government taking a heavy-handed approach to big business were just two issues brought up by forum attendees.

The country’s growing computer crime problem is another serious challenge when it comes to building a sound IT industry. Russia may have some of the best software programmers in the world, but it also has some of the best hackers, according to Boris Miroshnikov, head of the Russian police’s cyber crime unit.

“Everybody knows Russians have always been good at mathematics and our software writers are higher trained.That’s why our hackers are the best in the world,” Miroshnikov said at the E-Crime Congress in London last week.

“It used to be naughty boys who were hackers. Now they’ve grown up and realized that they are clever enough to make a living,” Miroshnikov said.

And the statistics are worrying, he added. From 2001 to 2003, computer crimes in Russia doubled year-on-year. However, the cyber crime unit was able to hold back the growth in 2004 by working with telecom providers, Internet service providers (ISPs) and the private sector, he said.

Miroshnikov is pushing for new international laws that define cyber crime and set out similar penalties and sanctions across borders, so that countries can work together to locate and punish hackers. He also wants to set up a certification program for IT security companies to eradicate the “charlatans” posing as security consultants.

Meanwhile, the Russia government is hoping to reassure investors by cutting red tape and amending the tax code to create simplified regimes favourable to the IT industry. It’s also developing a set of laws governing intellectual property, e-commerce and information exchange.

While these efforts are moving Russia in the right direction, according to analysts, Russia faces a growing list of emerging market competitors seeking to get their own slice of the IT industry. Eastern European countries like Poland, Hungary and Estonia are joining other powerful regional players like India and China in cultivating a local IT economy.

Russia’s low labour costs and new industry-friendly legislation may help it stay competitive, according to Faroukshin, but there are still other concerns that need to be addressed. “Most foreign investors would like to see government decision-making process more clearly. We want predictability,” Siemens’ Lamprecht said.

Predictability, and more fundamentally a clear ICT plan, was what Reiman was hoping to offer during his speech at the economic forum Tuesday.

“Russia’s ICT industry seeks not just to meet the challenges of the day but to be ahead of the curve,” Reiman said. And while Russia may have come late to the IT game, it plans to win, he added.

The Russian Economic Forum in London ends Tuesday.

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