Russia's Iron Curtain Descends on U.S. Tech Firms

Russian lawmakers want to kick Western tech companies out of Russia. Those companies should reconsider what they were doing there in the first place.
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The Russian parliament is likely to limit purchases of Western computer hardware and software by public companies and government agencies -- a response to Western sanctions that would cost billions to the likes of Microsoft, Hewlett-Packard and IBM. Russia surely can do without the big brand products. The question is why so much Western technology was bought in the first place.

The parliamentary commission for strategic information systems, formed last year before President Vladimir Putin's Crimea adventure, and apparently dormant for months afterwards, has now reared its head. In a document obtained by my colleague Ilya Khrennikov at Bloomberg News, it has called for reform of government purchasing laws to reduce Russia's dependence on Western tech solutions and equipment.

According to the data compiled by the commission, most Russian industries are hooked on Western information technology: Retailers, for example, are estimated to be 90 percent dependent on Western technology, compared with 60 percent for government agencies. It is, however, state-controlled entities and government agencies, not supermarket chains, that account for most of the U.S. tech corporations' Russian revenues. (I converted the rubles in the table below into dollars at the current exchange rate):

Of the companies the commission identified, Hewlett Packard appears to be doing the most business in Russia, with $2.2 billion of its $3.4 billion in 2013 Russian revenue coming from public and state-controlled entities. In April, the Russian branch of the corporation agreed to plead guilty to U.S. charges of bribing Russian officials to secure a $100 million contract with the prosecutor general's office.

HP sold computers and other products to a Russian intermediary, then repurchased them at a markup, paying the intermediary additional fees for "services." The company then resold the hardware to the prosecutor general's office. They worked hard for their money. "Hewlett-Packard subsidiaries, co-conspirators or intermediaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous e-mail accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash,” said U.S. deputy assistant attorney general Bruce Swartza in a statement. That web of deals took place back in 1999. It took U.S. prosecutors a long time to investigate because Russia is a distant, deeply corrupt country and because HP had done its best to cover its tracks.

Members of the Russian commission know perfectly well how hard it is to get a Russian government contract without paying a kickback. According to the commission document, the Russian public sector's dependence on big-brand Western tech companies leads to "growth in illegal schemes based on the practice of kickbacks, initiated by the Western IT-companies" -- never by greedy Russian bureaucrats! The commission estimates the kickbacks to be worth 30 percent to 40 percent of every deal.

The commission proposes a "patriotic" cure -- reliance on local IT. Russian tech companies have long written sensitive software for banks, telecoms and the retail industry. Between them, they will be able to replace most of the Western brand software, although they would need time to duplicate functionality based on open-source platforms such as Linux. The corruption, of course, will not go away, and there will be even less chance of it coming to light because U.S. investigators will no longer be interested.

For Russian operators willing to work in this system, a golden age is coming. Today, Putin signed a law that bans the storage of Russians' personal data -- from credit card numbers to e-mails -- on servers outside Russia beginning September 1, 2016. For many Western companies, this will entail tectonic changes in the way they do business; some may prefer to leave Russia. Russian engineers and tech entrepreneurs will fill the void. Such are the benefits of isolation.

As for Western companies that have profited from dealings with the Russian government, the new Cold War will probably result in a small loss of income -- HP, for example, had $112.3 billion in total revenue last year. But it presents an opportunity to reconsider their corporate ethics, and how they operated for years in a system where corruption can only be hidden by an iron curtain.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Leonid Bershidsky at

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