Online Extra: From Russia with Technology?

Is the country poised to become a global software leader? With a little government help, it just might be ready to join the big leagues

It has a technological tradition that put man into space and launched the first satellite. Its computer programmers are the envy of the world, and it produces 200,000 scientific and technology graduates each year -- as many as India, which has five times the population. So why, Russians ask themselves, can't their country be a global powerhouse of software development?

Perhaps it is on its way to becoming one. Although small, Russia's software outsourcing industry is growing fast. After China and India, Russia is now the third-largest software outsourcing destination in the world. In 2005, software exports reached an estimated $1 billion, up from just $120 million in 2000 and a 33% increase from 2004. Most of these revenues are earned by home-grown software development companies, exporting services to Western clients.

"Just three countries, India, China, and Russia, are big enough to become IT superpowers," says Dmitry A. Loschinin, CEO of Russia's largest software development company, Luxoft. "And in terms of geography Russia has a pretty big advantage. In the long term it will be a very good [outsourcing] destination for Europe."


  Still, Russia's expanding software exports are a drop in the ocean compared with the tens of billions of dollars it earns each year from natural resources. Russians worry about their country's lack of value-added exports, and consequent dependence on unstable world commodity markets. They look with envy at India's success at building a thriving software export industry.

Literally so, in the case of Russia's President Vladimir Putin. On a state visit to India in December, 2004, Putin stopped off in Bangalore, the center of India's software development industry, to see for himself the secrets of India's success. He came away singing the praises of government-backed "technoparks" and other forms of state support for IT development.

A month after his trip to India, in a speech at a scientific township near Novosibirsk, Putin called for a program of technology parks to be developed in Russia, with backing from the state. "The country can achieve a serious breakthrough in the area of information technology. We simply mustn't waste this chance -- especially as other countries have achieved success without such a strong starting position," Putin said.


  That's music to the ears of Russia's software developers. They argue that in India, government assistance has been crucial in fostering the industry. In contrast, Russia's state has typically been more of a hindrance than a help. Software exporters complained that it was next to impossible to reclaim VAT on exports, thanks to outdated legislation and obstructive bureaucracy. And until the creation of a new Ministry for IT and Communications in 2004, government policy toward the sector lacked central coordination.

Now, with prodding from President Putin, policy-makers seem to be waking up to the industry's importance. Russia plans at least four state-funded technoparks to be completed by 2010, located in Dubna (a scientific center near Moscow), St. Petersburg, Nizhny Novgorod, and Novosibirsk. The idea is to create economies of scale and encourage collaboration between businesses and scientific researchers.

Each park is due to receive state funding of $80 million to $100 million to create the necessary infrastructure. Companies setting up in the parks will also be entitled to receive tax and customs benefits. The government has also promised to promote the IT industry through additional tax breaks. A draft law, due to be approved this year, will provide simplified taxation procedures and cut social security tax from 26% to 14% of salaries.


  Industry representatives are positive about the new measures, which follow recommendations submitted by the industry. "The key issue is that the [development] concept was prepared by business, not by the government," says Valentin Makarov, president of Russoft, the Russian software developers association. But as usual in Russia, there are still concerns about the implementation.

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