According to 2014 statistics, the Russian software market has a value of around USD3.2 billion. By 2019, the Russian software market is forecast to have a value of USD3.8 billion, which would reflect an 18.7-percent increase relative to the market size in 2014. General business productivity and home applications is the largest segment of the software market in Russia, accounting for 23.6 percent of the market’s total value. Russia accounts for around 3.1 percent of Europe’s software market by value. Competition within the software market is boosted by constant advances in technology, the presence of large international incumbents, as well as a regular supply of new entrants with alternative business models, forcing the industry’s players to operate increasingly competitive pricing strategies.

As in many other industries, import substitution was the most popular subject in the Russian IT sector in 2015. There is not enough clarity and understanding as to the goals and tasks that this process entails. Almost a year was needed for the first step, which was the provision of preferences to Russian software developers in state procurement. At this rate, in another year, Russian IT companies are likely to receive preferences in procurement by state companies.

Some domestic IT companies are confident that they are already prepared for import substitution now and would like to accelerate it. It is not hard to understanding the position of Russian IT firms: they are greatly tempted to eliminate competitors.

However, in import substitution as applied to software, there is a conventional understanding that it is impossible without the creation of competitive products. Even if the entire domestic market was given over to Russian companies, this would give them neither enough resources for development, nor competence. The Russian market makes up only one to two percent of the global market, and this is not enough for the creation of complete substitute solutions for the products of international corporations. To their credit, Russian companies have done work for a large number of clients around the world, which shows that they are succeeding in creating higher quality marketable products.

The position of the Russian authorities seems contradictory: on the one hand, they speak about strengthening the positions of domestic developers on the international market; on the other hand, they want to create hothouse conditions limiting competition inside the country.

Be that as it may, new projects and products on the Russian market have already begun to come to fruition, starting with cloud services and ending with diverse types of hardware. However, development so far is proceeding in the segments that the Russian companies earlier found comfortable.

Import substitution in BRICS

The Communications Ministry in 2015 attempted to get Russian software developers to focus on cooperation with companies from the BRICS countries. According to the Ministry, if developers from Russia, China, India, Brazil, and South Africa unite their efforts, they might be able to create products that would end the domination of Western companies, such as Google or Apple. “It is necessary for BRICS countries to work out a joint technology policy in the IT sphere, with the help of grants from our governments aimed at the creation of an international software system,” Communications Minister Nikolai Nikiforov said in the summer of 2015. “The BRICS countries have a large enough market for leading companies in their respective database management, operating systems, applications, messengers, and other niches to ensure growth,” he said.

“Today, there cannot be a Russian mobile operating system: theoretically, in laboratory conditions, this is possible to do, only this will not work – it is impossible to create such a system and guarantee its penetration into the global market due to a closed market and state procurement,” the Communications Minister said. “It is necessary to create a product, – there is talk about the Sailfish mobile operating system – which will receive access to hundreds of millions and billions of mobile devices around the world that will be able to work with existing ecosystem applications. For this, we need to join our colleagues from the BRICS countries.”

The Communications Ministry has suggested financing the development of import substitution software with grants from the state budget (the Ministry has estimated spending at three billion roubles over the course of five years), which should be allocated through a specially created autonomous non-commercial organization, the question of forming which still has not yet been resolved. According to the Ministry’s plan, the autonomous non-commercial organization will coordinate joint projects of Russian companies with partners from the BRICS countries, which would have also received support from their governments. IT companies will designate a certain number of programmers that will engage in collective software development using state money.

However, the Ministry still has not yet managed to receive funds from the budget for this project. “We are adhering to the goals of finding funding sources for the support of such collective software development,” Nikiforov said in the fall. “The question of financing sources remains open. But I think that sooner or later we will resolve this issue.”

So far, the result of all of this rhetoric, including the Moscow meeting of the BRICS IT ministers in October, was the decision on the creation of an expert group to develop measures for the cooperation between sector players from the countries involved and to work out the mechanisms of state support. The representatives of Russian IT companies reacted to this meeting and its results without any notable enthusiasm. “We are not expecting anything from the meeting because there is no mechanism of cooperation at the level of BRICS,” Acronis head Sergei Belousov told Interfax. “If ten such meetings are held a year over the course of 10 years, then an understanding may emerge that it is necessary to cooperate and how to go about doing so.”

Buy domestic products!

In parallel with the resolution of these global tasks, work on more mundane matters continued, in particular, on preferences for Russian software developers in state procurement. The Communications Ministry prepared a draft government order, which envisages the creation of a register of domestic software and obligates state clients to choose products from that register. The procurement of software from foreign vendors is possible only if there is a lack of a Russian equivalent on the register, or if the client has good reasons to do so.

It took government agencies, including the Economic Development Ministry and the Finance Ministry, until the fall to approve the draft decree. Ultimately, the Communications Ministry had its way and the resolution came into effect on January 1. “We are expecting that the first justifications of state agencies will soon come out for why they could not use domestic software,” Nikiforov said in December. “For sector players there will be creative competition – to challenge it: there is no better reviewer than an angry competitor.” The Federal Antimonopoly Service will act as the arbitrator in disputes, and the Communications Ministry will present its expert conclusions to the FAS. “We will prepare them in a timely manner, in the course of two or three days,” Nikiforov said.

As part of the Internet Economy 2015 forum, the Minister said that the Communications Ministry is not planning on resting on its laurels and that it intends to tighten the application of these norms over the course of two or three years. “Gradually, in a year or two, by filling the domestic software register with specific products, we will tighten the screws in the plan for the procurement of foreign software by state agencies,” he said. “We will introduce its use for state companies.”

In their turn, lobbyists of Russian software companies expressed their wishes for the future development of preferences during the Internet Security forum. These include the dissemination of the legal requirements for cloud services. “Foreign developers already offer various options to state clients for circumventing these requirements, including the transfer to the ‘cloud,’” executive director of the Association of Russian Producers of Software Products Yevgenii Vasilenko said. “In addition, for state companies that are subject to sanctions, it would be good to make a single plan for software procurement with import substitution.”

At the very end of the year, the Communications Ministry prepared a draft government order on the provision of preferences to Russia’s producers of IT products in procurement by state companies. In the course of procurement, state companies should apply a 15-percent reduction coefficient to the price on the offer of Russian IT producers or suppliers of their products. The list of products that will be affected by this requirement includes informational storage, monitors and displays, computer components, communications equipment, consumer electronics, various software, and IT services – a total of 22 positions for the Russian classification of products by the type of economic activity.

In the draft document there is a timeline for its coming into force by May 2016. However, in view of the fact that it took many months for the various regulators to agree on the initial set of preferences for Russian IT companies, this timeframe is likely to be shifted.

The “Russification” of software

Amidst the regulatory changes and the accompanying discussions, some IT companies began preparing for new rules. In particular, the talks concern the question of whether it is necessary to transfer the main business unit to the Russian jurisdiction or to transfer the intellectual property rights to Russian divisions.

In 2014 and 2015, many Russian system integrators were fully or partially (more than 50 percent) transferred to the Russian jurisdiction. This includes IBS, Sistematika, Krok, Lanit, and the National Computer Corporation.

The situation with software developers has turned out to be more complicated. Those who initially were focused on the Russian market, such as 1C, took almost no steps. Now they are more interested in entering the markets of non-C.I.S. countries.

No significant changes have occurred for software companies focused on the global market, as the share of the Russian market in the structure of their revenue is relatively small. Only those like Luxoft are trying to more gradually integrate into the global market – they are distributing centers of developers among various countries. Others, such as Parallels, are extending exclusive rights to their products (only for Russia) to their Russian divisions, which have more than 50 percent Russian beneficiaries.

Furthermore, projects and companies focused specifically on the resolution of import substitution tasks have emerged. Here, New Cloud Technologies (a Russian developer of office software, “Moi Ofis”) serves as an example. New Cloud Technologies created a line of office software products (for work with text, tables, and presentations) and also a mail client, a calendar, and a planner.

New Cloud Technologies is planning to hold up to 25 percent of the Russian office applications market in the next five years, the volume of which in 2014 was estimated at 15 to 20 billion roubles.

“With the launch of the project, initially we expected it to enter the markets of Europe, Latin America, and Russia,” New Cloud Technologies Director Dmitry Komissarov said. “That is, besides the domestic market, we were focused on large regional markets.” Komissarov added that the company will probably raise investors for the entry onto foreign markets.

The National Computer Corporation has invested several millions of dollars in the creation of KNS Group (Yadro brand name), a contract producer of RISC-servers (reduced instruction set computing) and systems for data storage on the basis of the consortium developer OpenPower (in which the U.S.-based IBM participates). Already in 2016, according to the estimate of the National Computer Corporation head Alexander Kalinin, Yadro may post revenues in the amount of USD100 million. The servers and data storage systems themselves, as well as the software solutions implemented on their basis, will be a division of the Akvarius group of companies, which belongs to the National Computer Corporation.

Kalinin said that RISC-servers are widely used in Russia in various settlement systems, such as at Sberbank, the Finance Ministry, the Federal Treasury, and the Pension Fund.

“They will transfer to new, more powerful solutions,” Kalinin said. “We have the chance to take part in the work for the modernization of this infrastructure upon ourselves; some of it we will do, some IBM will do.”

Another interesting example is from the information security sector, which traditionally fares well in Russia despite the crisis. Infosystems Jet, a system integrator in information security, has put a product division into an independent company named Solar Security, which planned to post revenues of more than one billion roubles for 2015.

“The situation has become so complicated that with the portfolio of such products of the company, it is necessary to act quickly because the information security market is rapidly changing,” Infosystems Jet head Vladimir Yeliseyev said. “Some foreign suppliers have left due to sanctions, and corporate and state clients have begun to think about import substitution.”

“A month does not go by when a large client does not have a serious incident,” Solar Security CEO Igor Lyapunov said. “This encourages businesses to understand that information security should be real, and not just on paper. It is necessary to pay a lot of attention to this issue.”

National data

Another notable topic for the Russian IT market of the past year was the localization of personal data. Since September of 2015, any company focused on work with users from Russia must store the Russian citizens’ personal data inside the country. However, for now, not all data has been localized. The massive inflow of data into Russian data centers is yet to happen. The situation may change in 2016, when Roskomnadzor undertakes the inspection of large internet services.

At the same time, market players are tying the prospects for the future growth of the data center market not so much with the localization of personal data, as with the devaluation of the rouble, thanks to which the cost of hosting the information in Russian centers has turned out cheaper than in Europe.

Personal data also became one of the central topics for discussion at December’s Internet Economy 2015 forum. InfoWatch CEO Natalya Kasperskaya made a radical proposal to the Russian President: to legally regulate the use not only of personal data, but any personal data of Russian citizens “by any organizations.” The President approved the idea. “Okay. This is absolutely right in the context of the fight against terror. Only we need to be careful, so as not to interfere in the private life of citizens,” President Vladimir Putin said.

“Companies are collecting a vast amount of personal data, everything, which goes through mobile devices, searches, and so forth. All of this data gives a definite portrait of the user, his or her preferences, as well as movements. The companies trade them, and use them as they wish. I would not want this information to go anywhere without my control,” Kasperskaya told Interfax on the sidelines of the Internet Security forum. “The idea is that the bank of this personal information be called the property of the state. This will give the state the grounds to legally regulate it.”

“We are proposing the creation of a law, according to which personal data will belong to the state,” she said. According to Kasperskaya, “the President said that this is an important issue that is very much material” and he gave his approval for the preparation of proposals for a change in the law.