U'S' Russia Information Technology Roundtable

1
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\1
U.S. - Russia Information Technology
Roundtable U.S. - Russia Presidential
Summit Moscow, Russia
May 24, 2002
Russian IT Sector Opportunities and Challenges
2
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\2
Table of Contents
Section 1
Current Investment Climate
Section 2
Keys Elements of a Successful IT Sector
Section 3
Current State of Russian IT Market
Section 4
Presence of U.S. Companies in Russian IT Sector
Section 5
Ways to Improve Prospects for Russian IT Sector
3
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\3
Section 1
Current Investment Climate
4
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\4
Current Investment Climate
Russia Today

• Russia in 1998
• Unstable federal government
• Unpredictable business environment
• 
  
  
• Significant capital flight

• Russia Now
• Strong federal government
• More conducive business environment
• Capital flight slowing investment capital
  returning to Russia

1
5
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\5
Current Investment Climate
Russia Today (contd)

• Russia in 1998
• Patchy record of reform xxxx
  
  
  
• Punitive tax system
• Poor corporate governance and disclosure

• Russia Now
• Steady if evolutionary reform process
• Tax system overhauled
• Improvements in corporate governance and
  transparency

2
6
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\6
Current Investment Climate
Russia Today (contd)

• Russia in 1998
• Oligarchs asset stripping
• Strategic investors very cautious

• Russia Now
• Oligarchs investing
• Strategic investors becoming more confident

3
7
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\7
Current Investment Climate
Russia Today The Result
Result Devaluation and Default

• Result
• Russian debt and equity markets among the best
  performing in the world
• Russias RTS up 181 since January 2001
• 30-year Russian Eurobond yield has dropped from
  75 percentage points over U.S. Treasuries in
  October 1998 to 5 percentage points

4
8
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\8
Current Investment Climate
Foreign Direct Investment in Russia

• Absolute and relative levels of FDI in Russia
  remain low
• 2.0 billion in 2001
• Cumulative FDI 1991 - 2001 in Russia only 18.0
  billion vs. 350 billion in China
• The U.S. has the largest accumulated FDI in
  Russia AmCham to confirm
• Increases in FDI are expected
• Russias importance as an energy source
• Large consumer market
• Steady process of reforms
• WTO accession

5
9
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\9
Section 2
Keys Elements of a Successful IT Sector
10
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\10
Keys Elements of a Successful IT Sector
Key Elements of a Successful IT Sector
6
11
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\11
Keys Elements of a Successful IT Sector
Educational System
Source AmCham
Source AmCham
7
12
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\12
Keys Elements of a Successful IT Sector
Human Capital

• Strong RD traditions and significant resource
  pool of experienced specialists across Russia
• Key centers in Moscow, St. Petersburg and
  Novosibirsk
• Brain drain has been substantially reduced
• Salaries not yet at European levels

8
13
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\13
Keys Elements of a Successful IT Sector
Infrastructure

• Russias defense sector was very well developed
  and driven by technology during Soviet times
• Russias edge in defense technology has been
  negatively impacted by lower government spending
• Conversion of defense industries and institutes
  to commercial purposes has been negatively
  impacted by lack of financing and management
  skills
• Russian industrial infrastructure is generally
  characterized by state of the art technology

9
14
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\14
Keys Elements of a Successful IT Sector
Business Environment

• Russia has only recently begun to create a
  business environment conducive to small
  businesses and entrepreneurs
• Under President Putin, Russia has made progress
  in the simplification of the legal, regulatory
  and tax procedures for new businesses
• Government sponsorship of entrepreneurial
  activity recognized as key to economic growth

10
15
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\15
Keys Elements of a Successful IT Sector
Access to Financing

• Limited government funding
• Very limited funding from Russian commercial
  banks
• No local venture capital funding
• Very limited foreign venture capital funding
• Access to financing will greatly increase the
  pace of development of the Russian IT sector

11
16
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\16
Section 3
Current State of Russian IT Market
17
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\17
Current State of Russian IT Market
Market Size

• Information technology is currently Russias
  fastest growing industry AmCham input needed

Source IBS
12
18
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\18
Current State of Russian IT Market
Market Components

• Hardware currently represents largest portion of
  Russian IT sector
• PC penetration low (6) but growing rapidly
• Russian vendors account for over 85 of PC market
• Software and services have grown rapidly over the
  past three years
• Now represent over 1.0 billion market in Russia

Year?
Source IBS
13
19
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\19
Current State of Russian IT Market
Market Prospects

• Russian IT sector represents only 1.2 of GDP
  compared to 4.6 in the U.S.
• Growth in the IT sector will be driven by growing
  Russian business and consumer spending
• Currently Russian businesses spend only 2-3 of
  revenues on IT vs. 10-15 on average in developed
  markets
• PC market most dynamic in Europe with 20 annual
  growth
• Higher value-added areas such as software and
  services expected to continue to grow rapidly

14
20
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\20
Current State of Russian IT Market
Market Challenges

• Russian IT companies lack access to financing
• Russian IT professionals often lack management
  experience
• Growth of Russian IT sector is dependent on
  continued growth in the Russian economy
• Russian IT companies lack access to global
  distribution channels

15
21
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\21
Section 4
Presence of U.S. Companies in Russian IT Sector
22
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\22
Presence of U.S. Companies in Russian IT Sector
Research Development (RD)

• RD is a growing business in Russia for U.S.
  companies
• Motorola has enjoyed success with its St.
  Petersburg Software Development Group, founded
  in 1993, currently employing over 200 Russian
  specialists developing software and models for
  Motorola global systems
• Other examples include Intels Performance
  Library Suite and Sun Microsystems Sparc
  Technology center ask AmCham for more details

16
23
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\23
Presence of U.S. Companies in Russian IT Sector
Offshore Software Development (OSD)

• OSD is a growing market in Russia, with many
  foreign companies recognizing Russias
  programming expertise and relatively low cost of
  labor
• Annual revenues for OSD between 60 - 100
  million per year, growing 40-60 annually
• A number of Russian cities have emerged as OSD
  centers, including Moscow, St. Petersburg, and
  Novosibirsk
• US clients include Intel, IBM, Motorola and
  Boeing ask Amcham to contribute to this list

17
24
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\24
Presence of U.S. Companies in Russian IT Sector
Systems Integration

• Systems integration is a growing segment of the
  IT market in Russia, with estimated revenues of
  400 million in 2001
• Russias largest companies, with operations
  spanning across Russias regions, seek to
  efficiently share data between regional
  subsidiaries and Moscow headquarters
• Several U.S. consultancies have successfully
  entered this market in Russia, including ask
  AmCham for examples, can we get a case study on
  Accenture?

18
25
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\25
Section 5
Ways to Improve Prospects for Russian IT Sector
26
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\26
Ways to Improve Prospects for Russian IT Sector
Ways to Improve Prospects for Russian IT Sector

• Promotion of Russian IT
• Intensified Russian Government sponsorship
• Promotion of entrepreneurial activity
• Free flow of products and persons
• Continued foreign Investment

19
27
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\27
Ways to Improve Prospects for Russian IT Sector
Promotion

• Russias IT sector lags behind its international
  competitors in the aggressive marketing of its
  products and services
• Key steps could include
• Creation of an alliance of Russian IT companies
  to jointly market their services to international
  clients (e.g. Indias National Association of
  Software and Service Companies)
• Coordinated, unified promotion of FDI in Russian
  IT sector by the Russian Government (e.g.
  Irelands Agency for Industrial Development)

20
28
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\28
Ways to Improve Prospects for Russian IT Sector
Government Sponsorship

• The Russian Government has expressed its support
  of growing Russias IT sector
• Electronic Russia program - improving access to
  government through IT
• Goal of 100 computerization of educational
  institutes
• Government direct investment into IT sector would
  accelerate development
• Need to increase general level of IT awareness
  among Russian population

21
29
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\29
Ways to Improve Prospects for Russian IT Sector
Support for Entrepreneurial Activity

• Government efforts to create an environment
  conducive to entrepreneurial activity should be
  stepped up
• e.g. introduction of special tax benefits for
  investment in IT
• As the business environment improves, many
  Russian IT specialists currently working abroad
  may choose to return to Russia bringing
  management skills they have gained

22
30
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\30
Ways to Improve Prospects for Russian IT Sector
Free Flow of Products and Persons

• Free flow of products
• Simplified customs regime
• Conducive tariff regimes
• Free flow of persons
• End of propiska system limiting ability of
  professionals to move freely within Russia
• Simplification of visa procedures by foreign
  countries for Russian IT professionals seeking to
  travel abroad to promote their businesses

23
31
C\Tanja\IT in Russia\U.S. - Russia IT
Rountable_v4.ppt\A2\19 MAY 2002\614 PM\31
Ways to Improve Prospects for Russian IT Sector
Continued Foreign Investment

• RD centers
• Licensing of Russian technology
• OSD contracting
• Investment in Russian IT companies by foreign IT
  companies
• Investment by venture capital funds

24