Russian IT sector still under serious pressure

Russian IT sector faces challenges on multiple fronts as Western sanctions widen

Computer Weekly correspondent

Published: 29 Jan 2024 16:45

The IT sector of Russia continues to be under serious pressure from Western countries, with a significant expansion of sanctions in recent months.

At the end of 2023, several large Russian IT companies were included in the 12th package of sanctions from the European Union against Russia. According to local analysts, in contrast to previous times when sanctions on Russian IT suppliers were imposed for their direct affiliation with sanctioned persons or operations in occupied territories, the reason for inclusion in sanctions lists this time was because their licences were issued by Russian IT regulator Roscomnadzor.

This signals that almost 100% of IT companies with Russian registration could be subject to further sanctions. That has already sparked serious concerns from many Russian IT businesses, which have already called on the state to hide from public view the existing register of IT firms in the country.

In the meantime, the Russian authorities continue to take measures for the withdrawal of global IT giants from the domestic market. As of January 2024, many of them have already left the country or significantly reduced their local presence.

One example is Google. At the end of October 2023, the Moscow Arbitration Court declared Google’s Russian subsidiary bankrupt and imposed proceedings on it for a period of six months. The debts of Russian Google to creditors exceeded 20 billion rubles ($225m).

Last June, the company announced that bailiffs had withdrawn all money from its accounts. In the same period, the company said seizure of its Russian bank account made it impossible to operate the office in Russia, including retaining employees and fulfilling financial obligations. Accounts and assets were seized by the court in several lawsuits from local TV channels that demanded restoration of access to their YouTube accounts and recovery of legal penalties.

According to Dmitry Aristov, head of the Federal Bailiff Service, Google is the largest debtor among internet and IT resources fined in Russia for violating laws.

Gradual reduction of Russian business

At the same time, another US major, Microsoft, continues a gradual reduction of its Russian business – once one of the most profitable and important for the company among emerging nations.

The exodus of Microsoft is bad news for Russian business, as even now, the market share of the firm’s products in Russia is approximately 75%.

According to Timur Badretdinov, head of the department of infrastructure solutions at Sissoft, a Russian software developer, Microsoft’s share in the corporate sector exceeds 70%.

Still, according to local experts, Russian users continue to update Windows, despite the fact that some are blocked by IT security departments (mostly of large Russian businesses and even state bodies) due to security issues.

The end of official sales of products of Microsoft and other major Western IT suppliers has already led to a sharp growth of supplies of pirated software to Russia. In general, for many years, the IT infrastructure of Russian organisations and enterprises was built on Western products and technologies – primarily Windows – and replacing this system still seems unrealistic.

Many users are currently implementing plans for an evolutionary transition to Russian operating systems, continuing to use Western IT infrastructure during these transition periods, even if illegally.

As Microsoft and other Western IT suppliers do not have the ability to block old Windows versions (7, 8, 10) remotely, they are still widely used in Russia, including in critical information infrastructure.

Due to this and the acceleration of activities of domestic companies, the Russian IT sector has been generally able to withstand Western sanctions’ pressure.

According to data from the Russian CNews IT paper, in 2022 the Russian software market even grew by 8.8% to $16.56bn. The entire IT market, however, declined by 2.5-3% to approximately $40bn. While the figures for 2023 are not yet available, most analysts expect almost the same dynamics as in 2022.

Analysts expect that over the next two to three years, the share of foreign companies in the Russian IT market will decline, 90% being occupied by domestic players, and much will still depend on the level of import replacement in the Russian IT and computing markets – primarily in the segment of operating systems.

Funding is another issue, and representatives of leading Russian software companies have already said they will not be able to implement these plans without serious support from the state. According to them, that should be primarily in the form of soft loans and the introduction of various incentives for business to purchase domestic IT and computing offerings. This, however, may pose a threat of consolidation of the industry and lead to domination of the market by several large players close to the state.

Other support measures include fighting piracy and implementing stricter controls on pricing in the Russian IT market.

Another challenge facing the sector is the loss of its skills base. Skilled IT and computing specialists became probably the biggest group to have left after 24 February 2022. There will be a serious challenge for Russia to train new IT specialists in the shortest time, as skill levels in the industry have significantly declined.