IT is a leading sector for U.S. exports & investments in Russia.

With Russia’s population at 142 million, the country’s IT market is one of the world’s largest, and it continues growing. By 2025, there are expected to be 124 million internet users in Russia. According to Rosstat, the information and telecommunications industry grew by 3.7 percent in 2017 and was among the most successful sectors of the Russian economy. Market participants’ aggregate revenue as detailed in the annual CNews100 rating (based on 2017 data) decreased by 1.9 percent in rubles to 1,157 billion rubles, but grew in dollar terms by almost 12.6 percent. TAdviser provided similar estimates of 12-14 percent growth from 2016 to 2017.

Current growth projections stand in contrast to market declines from 2015 to 2016. Per research firm IDC, Russia’s IT services market was USD4.27 billion in 2016, which was 5.3 percent lower compared to 2015 (the market grew by 3.6 percent in ruble terms).

IT demand suffered in 2015 due to ruble depreciation and negative real GDP, which depressed private consumption and reduced the affordability of imported devices and solutions. The hardware segment witnessed postponed spending and a further shift towards cheaper brands and models; however, retailer reports and import data showed a modest rebound in 2016. Domestic software and services vendors benefited as imports became less competitive with ruble depreciation in 2015 and 2016, increasing their market share for certain products.

In 2017, the country’s economy began to rebound and about a third of the surveyed executives expected to see a positive trend in demand for IT services in 2018. Research agency IDC published the following results for the IT sector in 2017: data on smartphone shipments +19 percent, desktop PCs +6 percent (after three years of continuous decline), cloud services +50 percent in the IaaS (infrastructure-as-a-service) segment, and print devices +16 percent.

The “thawing” of IT budgets in Russia is proceeding slowly and systematically. 2018 witnessed more optimism among IT market participants. The largest IT spends have been by the banks (26 percent of the total IT market, including the Central Bank), oil and gas (25 percent), and the public sector (17 percent, taking into account federal and regional executives authorities only). IT expenditures are concentrated among the 100 largest Russian companies that account for 85 percent of total IT spending. Concurrently, this level of concentration exhibits some variation by industry according to TAdviser, and the following list represents the percentage of IT spending budgets in each industry, controlled by the five largest firms in that sector:

1. Transportation: over 90 percent including Russian Railways and Aeroflot;

2. Telecom: 80 percent;

3. Oil and gas: 80 percent (including Gazprom, Lukoil, and Rosneft); and

4. Energy and finance: over 50 percent.

Russian IT industry experts single out five key technological trends for the Russian market in 2018:

1.  Robotic assistance. Virtual assistants are becoming an essential component, as companies seek to deliver cost-effective and personalized services.

2.  Internet of Things (IoT). Russian utilities, energy, and transportation systems will become increasingly interconnected and enabled by advanced technology, leading to Smart Cities initiatives throughout the country. This type of technology-focused infrastructure development is a central component of Russia’s Digital Economy program.

3.  The all-over-platform environment has become an essential component of modern IT vernacular that encompasses IoT platforms, cloud platforms, virtual reality (VR) platforms, block platforms, and platforms for managing drones. Such projects involve many players. They can be built on the basis of a revenue-sharing model. While minimizing costs, these projects will generate new sources of revenue.

4. Import substitution. The Russian Unified Software Register displays new solutions developed in Russia that are beginning to displace global vendors. In RusHydro, EMC Documentum was replaced by a domestic electronic document management system from Lanit. Transneft has migrated from SAP to Galaxy. RZD (Russian Railways), the largest user of products of the German vendor in the world, was partnering with Galaxy and with 1C in 2017. These examples reflect a trend of Russian companies looking for domestic solutions. The Russian Software Association (Russoft) reports three-to-five percent growth in 2017.

5.  Improving speed to market. The main focus is not only the holders of the largest IT budgets, but also all those who are striving to catch up with the digital economy.

Russian internet and telecom regulators have taken a number of actions in 2017-2018 that have elicited mixed reactions from industry participants and warrant consideration by U.S. exporters:

Telemedicine law: In accordance with a January 2018 law, doctors are now officially allowed to consult patients through the internet by means of video conference calls or by phone.

Anonymizers and VPNs: As of November 1, 2017, VPN-services and anonymizers operating in Russia must restrict access to banned information. The list of such banned information is maintained by Roskomnadzor. Roskomnadzor has the power to block such VPN-services and anonymizers if they are found to be non-compliant.

Fines for illegal processing of personal data have been increased by a factor of three-to-four. Additionally, the list of actionable offenses has been expanded. As of July 2017, there are seven punishable offenses and the maximum fine is RUB75,000 (approx. EUR1,100).

In the aggregate, changes to Russia’s internet regulatory framework exhibit competing priorities. The government is striving to enhance the use of modern technologies in daily life, while attempting to maintain significant control over the information available on the web.

The United States is one of the leading suppliers of IT products and technologies in Russia’s highly-competitive market. The quality level of most of the domestic products is lower than that of the foreign manufacturers, but Russian firms are frequently trying to sell products and services at a lower price point. Google, Apple, IBM, Cisco, Oracle, Intel, Dell, and HP are among U.S. market participants that face competition from Russian firms, including Kaspersky Lab, Yandex, 1C, Cognitive Technologies, EPAM Systems, CFT, Luxoft, Abbyy, Acronis, Parus, CBOSS, and Mail.Ru.