Market Overview
The positive trends driving the IT market are likely to remain constant and give Russia the potential ofbeing one of the fastest growing IT markets in the world. Against a backdrop of ambitious governmentICT development plans, and an oil- fuelled spending boom, BMI projects a Russian IT market CAGR to21% for the period until 2012. The total size of the IT market is now predicted to increase fromUS$13.1bn in 2007 to around US$31.3bn in 2012.
Accelerating growth in computer sales in 2007 and immense potential for IT investments by Russia’straditional industries, all make Russia a key market. It is estimated that the government has as much asUS$350bn in reserves for investment to apply IT to improving areas such as education, healthcare,defence and the power sector. Increased funding has also been announced for the ambitious series of ITparks, and laws are being passed to provide tax and other incentives for companies specialising in IT.
The government is keen to encourage local production, and has recently been mounting a strongercampaign against illegal imports of IT components and taking a stronger stance on intellectual propertyissues. Much will depend on the government’s ability to maintain an environment conducive to furtherdevelopment, including an effective customs regime, low import duties and generally transparent businessenvironment.
Industry Developments
Two government measures with important implications for the software market were introduced inJanuary 2008. A new legal code came into operation, which strengthens protection of IT intellectualproperty following signs of progress in the fight against software piracy. Meanwhile, VAT on softwarelicensing agreements was abolished in the same month. A stronger government drive against illegalsoftware may counteract any downward trend in market prices as a result of the VAT cut.
The Russian government’s spending on IT projects is expected by BMI to accelerate over the next two tothree years. The government has recently announced plans to introduce an e-invoice system to cover allinteractions between the state and business. The system is expected to be introduced by the end of 2008.This initiative was announced following a recent IT ministry meeting to review progress in 2007 andidentify challenges in 2008.
Competitive Landscape
Keen to encourage local production, the IT ministry has announced a target of developing a US$400computer for the domestic market by the end of 2008. This has led to a tougher campaign against illegalimports of IT components. As a complement to its anti-smuggling campaign, the government isincreasing, or at least not reducing, tariffs on ready made computer goods, while duties on componentsare being reduced.
Most foreign vendors enjoyed rapid revenues growth in 2007, driven particularly by laptops. Toshibareported 50.8% growth in laptop sales in 2007, but believes that it could have performed even better.Acer achieved 2007 revenues of more than US$1bn in the Commonwealth of Independent States (CIS)markets.
Meanwhile, local companies are showing an increasing aggression to build market share. Leading localPC vendor National Computer Corporation (NCC) reported nearly 35% year-on-year growth to nearlyUS$1.69bn of sales in 2007. NCC subsidiary Aquarius performed even better with a 49% rise in profitslast year, and sales up 85% since 2006.
Hardware
Around 20% of PCs sold in Russia are self-assembled, but BMI estimates that the Russian IT hardwaremarket grew to a value of around US$6.9bn in 2007. The main driver of growth was falling prices, buthigher internet penetration is also becoming a factor in some areas. The government is keen to increasecomputer penetration to speed internet adoption, and to this end is encouraging local production. In 2008the government has announced a target of developing a US$400 domestic computer for market this year.This follows from the new ‘computer for every home’ subsidised computer programme launched by theMinistry for IT and Communications (MITC) last year. Hardware spending CAGR in the next five yearswill be in the region of 13%.
Software
The Russian domestic software market was worth US$1.4bn by the end of 2007, and should be furtherboosted by recent measures to strengthen intellectual property protection. Although Russia has the fifthhighestsoftware piracy rate in the world (87%), BMI expects that government efforts to strengthen IPprotection as part of WTO entry will see this decrease closer to average Eastern European levels. Thiscould boost the market to US$2.6bn by 2010. The rapid growth of internet penetration is stimulatingdemand for security solutions, while there is growing demand from the corporate sector for ERP andCRM applications. The corporate market is moving beyond demand for single function applications suchas accounting, to broader solution packages. Meanwhile, the small business market is emerging as theprimary battle ground for enterprise application vendors in the Russian market, with domestic companiesemerging to challenge the multinational vendors.
Services
Russia’s IT services sector is growing from a low base, with BMI calculating a value of about US$2.8bnin 2007, up from US$2.2bn in 2006. The IT services sector is expected to grow at a CAGR of 22% in theperiod up to 2012. Russian vendors continue to dominate the market, with companies such as Croc (themarket leader), R-Style, Open Technologies, Borlas, Optima and Lanit all in the top ten, along withHP. Other foreign vendors such as IBM, SBS and Logica-CMG are also winning significant contracts,however, and the market remains diffuse, with the top 40 companies accounting for less than 50% ofspending.
Special Focus: IT Parks
The ‘technopark’ programme is the government’s flagship policy for development of the IT sector (seeIndustry Developments). The main construction phase began in 2007, with a federal budget of aroundUS$74.68mn initially assigned for the project, which is being co-ordinated by the Federal Agency for IT(see below). A new phase of funding for 2008-2010 worth some US$850mn has recently been announced.The ‘technoparks’ were initially intended to be exclusively ‘IT Parks’, but are now actually open toenterprises in other sectors such as nano- and bio-technology, as well as Information Technology. A planwas approved in March 2006 to construct the parks in seven regions, and it is expected that the parks willemploy 19,000 people by 2008 and 75,000 by 2011. Investment will be US$985mn, and the Russian ITMinister predicts that the output of the technoparks will be US$749mn by 2008, reaching US$4.4bn by2011. So far the St Petersburg project is the most advanced.
Intra-departmental wrangling over budgets has caused some delays to many projects. State financing isexpected to make up only around 20% of the funds required by the programme, which overall are likelyto exceed RUB100bn. One proposal floated - for tax breaks - was not included in the current programme.
E-Readiness
Internet penetration was estimated by BMI to have reached around 21.4% by end 2007, representingaround 30mn internet users, up from 26mn users in 2006. By the end of 2007, BMI estimates that therewere around 4.5mn broadband users, mostly DSL, and this is expected to increase to 24mn by 2012.The government’s ambitious policy is that every locality in Russia should be provided with fixed linetelephony infrastructure, cell phone coverage and internet by 2015. According to the ministry’s target,every populated area in the country should be provided ‘irrespective of its economic ‘weight’ andpopulation’. Russian IT and Communications minister, Leonid Reiman, has described the ‘digital divide’as a very challenging issue for all Commonwealth of Independent States (CIS) countries, and one that theRussian government was seeking to overcome.
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