1 Alexander Belyaev, BRICS meeting, April 2007 Alexander Belyaev, BRICS meeting, April 2007

State University – Higher School of EconomicsInstitute for Statistical Studies and Economics of KnowledgeState University – Higher School of EconomicsInstitute for Statistical Studies and Economics of Knowledge

ICT Sector in Russia

2

Contents

ICT sector in Russia IT Market Software development for Export

Market (case) Barriers to Growth & State IT

Promotion policy

ICT sector in Russia IT Market Software development for Export

Market (case) Barriers to Growth & State IT

Promotion policy

3

Structure of main performance indicatorsStructure of main performance indicators(per cent of total)

ICT sector – general statistics: 2005

115115 thousand enterprisesthousand enterprises

over 1,3 million employeesover 1,3 million employees

17,4

19,1

16,70,4

46,4

Production ICT equipmentWholesale of ICT related goodsTelecommunicationsRentin of office machinery and equipmentComputer related activities

35,3

4,338,4

0,1

21,919,9

12,3

53,3

0,1

14,5

EnterprisesEnterprisesPersonnelPersonnel

Sales = Sales = $50 bill.

(130% growth of 2004)

4

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

5,1 5,45,8

6,36,8

7,8 7,8 8,1 8,1 8,4 8,6 8,7 8,7 9 9,3 9,6 9,6 9,8

11,2 11,412,2

13,1

16,4

Rus

sia

Mex

ico

Slo

vaki

a

Gre

ece

Ger

man

y

Can

ada

Japa

n

Aus

tral

ia

Por

tuga

l

Fra

nce

Ave

rage

EU

Aus

tria

Den

mar

k

Cze

ck R

epub

lic

Sw

eden

Net

herla

nds

Ave

rage

OE

CD

Hun

gary

UK

US

A

Kor

ea

Irel

and

Fin

land

Russia

5

Export and import ICT goods: 2005

ExportExport ImportImport

ComputersComputers 58.758.7 1356.41356.4

Telecommunication equipmentTelecommunication equipment 41.041.0 1163.81163.8

Video equipment Video equipment 1.91.9 277.5277.5

Television receiversTelevision receivers 10.610.6 491.3491.3

mlnmln. . $$

Import ≈ 29-fold export

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

Total, thsd Freshmen as a % to graduates

freshmen total graduates

Russia, total

1640 7065 1152 142

Of them on ICT related specialties

Total 130 522 83 157

As a % of total for all specialties 7,9 7,4 7,2 х

8

Employment of graduates

9,3

38,335,4

8,3 6,9

1,7

8,9

44,1

30,2

9,15,7

2,0

9,6

33,4

39,7

7,7 8,0

1,5

0

5

10

15

20

25

30

35

40

45

50

Graduates whoseeducation was

paid by employers

Graduates whofound job in

advance on theirown

Graduates whofound job in

advance withassistance of the

educationalinstitution

Graduates whofound job on

leaving on theirown

Graduates whofound job on

leaving due to theeducationalinstitution

Jobless graduates

Total for all institutions

For institutions with 50-100% share of ICT students

For institutions with less than 50% share of ICT students

9

Use of computers by enterprises (% of total)

2001 2005

Use of computers 78,7% 91,1%

Use of LAN 39,0% 52,4%

Use of Internet 32,4% 53,3%

Having a web-site 10,2% 14,8%

Use of the Internet for e-commerce by enterprises 2002 – 26,2% 2004 – 33,5%

10

Availability of ICT in households

33

14

21

17

9

5

0

5

0,5

6

0,6

0

1

0,5

0

0

0

89

57

54

34

21

17

12

7

6

6

3

2

2

2

1

0

3

2003

2006

Mobile phone

Phone

Camera (except digital)

Desktop computer

Internet connection

Cable TV

Videocamera (except digital)

Digital camera

Games console

Fax

Digital TV

Satellite dish

Digital videocamera

Portable computer (laptop)

Handheld computer (palmtop)

None of the above

11

Access to the Internet in Russia

  Used the Internet at least once

Active users

1998 7 1

2003 13 9

2006 21 13

A per cent of surveyed

12

Use of PC and Internet

The frequency of use of personal computer

13

15

44

6

8

12

2

4

3

5

2

2

Russia-2003

Russia-2006

EU-2006

Every day or almost every day

At least once a week (but not every day)

At least once a month (but not every week)

Less than once a month

61%

29%

26%

The frequency of use of the Internet

3

5

33

4

5

14

2

3

6

3

2

2

Russia-2003

Russia-2006

EU-2006

Every day or almost every day

At least once a week (but not every day)

At least once a month (but not every week)

Less than once a month

55%

15%

12%

13

E-Commerce

29

3

6

21

18

0,8

1

1

79

EU-2006

Russia-2006

Never bought or ordered

More than 1 year ago

3 months to a year ago

Within the last 3 months

Never used to buy over Internet

14

E-Skills

55

53

39

30

9

54

45

19

9

11

9

29

25

22

16

15

13

9

4

66

16

10

6

4

3

1

1

0,9

82

EU-2006

Russia-2006

PC-skills

Copying or moving a file or folder

Using copy and paste tools

Using basic arithmetic formulas in a spreadsheet

Compressing files

Installing new standard programs

Connecting and installing new devices

b problems

Writing a computer program

None of the above

e-skills

Using a search engine to find information

Sending e-mail with attached files

Searching, downloading and installing of programs

Messages to chat rooms and other communications online

Diagnostics and removal of viruses from a computer

Using the Internet to make telephone calls

Using peer-to-peer file sharing for exchanging music etc.

Creating a web page

None of the above

15

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

63

15

12

10

8

5

3

1

0

5

Have no need in Internet

Too high connection costs

Lack of skills or knowledge

Lack of time

There is no access to the Internet at our region, house

Foreign language skills

Slow speed of Internet connection

Security or privacy concerns

Content (not interesting)

None of the above

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 IT Sector 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 MarketIndia: IT Export – 80% of IT Market

19

Features of IT Market in Russia

1) Strong shift towards foreign imported Hardware and technologies

2) (Russian) IT Services –30% of IT Market

3) 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

56%30%

14%ImportedHardware andtechnologiesIT Services

Software Dev

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

1. Russia entered firstly the Offshore100 rating (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 yearsProgresstech 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:

1. 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 CompaniesGiven 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 demand from State2) Not sufficient demand from population (low income, 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 obligatory2) 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 policyIn 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”:

1. Orientation on Oil, Gas, Metal Industries (most biggest and state-dependent Taxpayers)

2. 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.ruabelyaev@hse.ru