The current government policy

In the Porter’s diamond model, government plays an important role as it can exert its influence on all four elements of the diamond, shaping the competitive advantage of a country in a certain industry.

It’s hard to disagree with the opinion of Pankaj Ghemawat (an economist and global strategist) that currently the function of the government is not only the taxation and regulation, it can also become both a buyer and an investor¹¹³. If government recognizes the strategic importance of an industry (software in this case), it can use a lot of

different options to boost its growth and help the industry and its participants to become competitive on the global market.

113  Pankaj Ghemawat, "Finding Your Strategy In The New Landscape", Harvard Business Review 88, no. 3  (2010): 54‐60. 

3.3.1.1. The evolution of state policy towards IT in Russia

Before 1991, Russia (then a part of the Soviet Union) had a centralized planned economy, so that the role of the government was even bigger than described above. The notes on the development of computing industry in Soviet Union have been given in the previous chapter. The government then has made a sizeable contribution to the

development of information technology, however, the process was hampered by the centralized planning system when a lot depends on the qualification of the decision makers as “in conditions of centralized planning and the directive style of government control, an improper decision could cause serious consequences”¹¹⁴. Also, due to the political factors, the task of making the country competitive on the global market was not considered by the government at the time.

As Dm. Zhamenskiy suggests, “a clear conception of state policy in the sphere of science and technology [in Russia] did not exist before 2002”¹¹⁵. In 2002, the “Key aspects of Russian Federation’ policy in the field of science and technology

development for the period up to 2010 and further”¹¹⁶ have been published. Even though this document was not dealing with the development of IT industry in particular, it can be considered an early example of a policy document¹¹⁷ that has had an impact on the information technology development in Russia. In the same year, a federal program of e-government development has been launched. The process of its

implementation was not so smooth and it has been corrected several times during that eight-year period. In 2008 it was claimed that only 38% of the financing dedicated to that program has been used by the date¹¹⁸, also, it was realized by the government that        

114  Trogemann et. al. (2001), pg. 163 

115  Dmitriy Znamenskiy, "The State Scientific And Technical Policy Of Russia", Vlast', no. 10 (2009): 38‐40. 

116  Key Aspects Of Russian Federation’ Policy In The Field Of Science And Technology Development For  The Period Up To 2010 And Further (Пр‐576, 30.03.2002), 2002. 

117  The “Key aspects”, as noted by Znamenskiy, didn’t have a force of law 

118  Oleg Krasilnikov, "Problems Of E‐Government Introduction In Russia", Saratov University Bulletin: 

Sociology and Politic Science 12, no. 2 (2012), pg. 36 

the previous implementation was focused mostly on some highly-specialized tasks and there was a lack of an infrastructural base for the electronic workflow between different government agencies. In 2009 both targets, measures and financing of the program have been corrected significantly, and currently the Ministry of Telecom and Mass

Communications reports that by 2010 41 out of 42 targets have been accomplished¹¹⁹. The program has had an impact both on IT industry by creating a sizeable demand for both hardware and software tools and on the business climate by increasing the government efficiency in some routine procedures as the paper-based workflow has been phased out by electronic communication.

Currently, the state policy towards information technology industry is stated in “The strategy for the development of IT industry in Russian Federation in 2014-2020 and up to 2025” approved by the government in 2013. It puts an emphasis on software and services grouped in the following four categories: a. production of ready-made software;

b. IT services including customized software development, design and deployment of information systems, testing and consulting, especially with high degree of complexity;

c. development of complex hardware-software solutions with a high value added by the software; d. remote information processing through websites (excluding e-commerce and entertainment) It is quite a controversial document. On the one hand, the important advantage is that it does acknowledge the existing problems such as the undersupply of graduates, a sizeable gap between Russia and the top economies of the world in some areas such as hardware etc. and offers the development of those particular segments where Russia can still have a strong competitive advantage. The officials have invited numerous research firms and industry associations to compensate for a lack of official statistical data available for IT industry. In some way, a broader scope and a clearer focus of the new strategy can be credited to their influence. On the other hand, when the final document was published, a lot of inaccuracies related to statistical data has been discovered by experts and media. Some data had been misrepresented and based on        

119  "The "Electronic Russia" (2002‐2010) Federal Target Program", Ministry Of Telecom And Mass  Communications, Russian Federation, accessed April 25, 2017, 

http://minsvyaz.ru/ru/activity/programs/6/. 

incorrect assumptions¹²⁰, other have been not listed at all in spite of their importance, also, the forecasts for the growth of Russian IT industry and the particular segments within it also raise a lot of questions as the growth there turns out to be extremely uneven with no clear reasoning behind it¹²¹. Some media suspect that these errors, often leading to the underestimation of starting conditions, may be beneficial to the

government officials in charge of new strategy, as it will be easier for them to achieve the lowered targets¹²². \

Below, we will try to analyze how the Russian government currently influences each of the four nodes of the “diamond” in order to make Russia’s software industry more competitive.

3.3.1.2. Supply (factor) conditions

i. Education and language proficiency:

Some of the figures and conclusions presented in the “Strategy” and describing the situation with the education system have been criticized by industry experts. One of the examples was the incorrect estimation of the number of IT graduates that has been mentioned earlier in Section 1. The industry experts as well as private companies consider the education quality to be even bigger issue that the number of graduates. The figure of 15% graduates “that can get employed immediately” does not necessary imply the low quality of education (however, there should be a room for improvement); the real problem may be the lack of practical skills among the graduates except those who        

120  For example, when the document authors were estimating the size of Russia’s IT market compared  with the global one, for unknown reasons the size of the market in national currency turned to be  significantly smaller than the estimate made by the Russian Information & Computer Technologies  Industry Association (the organization was one of the consultants for the “Strategy”), moreover, while  trying to convert this figures into US dollars, the authors used the exchange rate significantly lower than  the average for 2012 (26.5 versus 31 rubles per U.S. dollar) when the document was prepared 

121  "Playing With Numbers", Lenta.Ru, last modified 2013, accessed March 16, 2017,  https://lenta.ru/articles/2013/11/15/strategy/. 

122  Ibid 

has participated in an IT-related part-time job or internship. Dmitriy Voloshin from Mail.Ru Group notes that the government needs to partner with private businesses and establish common targets for both sides to pursue in order to improve the quality of IT education¹²³. Currently, both the business and the government are trying to partner with educational institutions; however, there is a lack of coordination. The “Strategy”

emphasizes that the education programs in IT should become more tailored to the employers’ needs through cooperation with industry leaders in both human resources and scientific research areas¹²⁴, but implementation is what matters the most. Financing may become an obstacle, as government expenditures in education have been

decreasing since 2013 (RUB 482.1 billion in 2016 versus 661.2 billion in 2013 for tertiary education in constant prices¹²⁵) and it’s quite unlikely that the IT education escapes the overall cost cutting.

An advantage of the “Strategy” is the realization of the fact that not only the technical knowledge, but also the English proficiency, as well as entrepreneurial and marketing skills are necessary for the development of Russian IT industry¹²⁶. However, there’s currently no information about specific measures implemented.

ii. Internet penetration

In 2012 the Ministry of Telecom and Mass Communications has developed a program for telecom, mail, media, IT and e-government services development for the period of 2012-2018, stating that by 2018 80% of households should have access to wired or wireless broadband access, also, all the communities with the population of more than 8 thousand residents should be connected to the high-speed broadband        

123  "The Government Wishes To Increase The Number Of IT Specialists And Deliberately Sacrifices The  Quality Aspect", Vedomosti, last modified 2014, accessed March 8, 2017, 

https://www.vedomosti.ru/management/articles/2014/11/24/professionaly‐idut‐lesom. 

124  Strategy (2013), pg. 24 

125  "The National Defense Expenses Of National Budget Have Exceeded The Ones On Education", RBC,  last modified 2016, accessed February 21, 2017, 

http://www.rbc.ru/politics/12/12/2016/584996939a79476ef58c6cb3. 

126  Strategy (2013), pg. 22‐23 

Internet lines¹²⁷.

The report in Rossiyskaya Gazeta (the official daily newspaper of the country’s government) dated June 22, 2015 cites the official statistics for 2014: by then, high-speed Internet access was available to 64 percent of the country’s population, growing 7.5 percent compared with the previous year. The head of the Ministry of Telecom and Mass Communications Nikolay Nikiforov has noticed that, while for some major cities the penetration of high-speed Internet access had reached 90%, lots of smaller

communities are lagging behind. He also predicted a slower growth in the following years as making broadband available in remote areas is a much more complex assignment, so “each new milestone will be harder and harder to reach”¹²⁸. The other concern voiced were the “unstable foreign exchange rates” and the “increased costs of borrowing” (attributable to an economic recession that started in the end of 2014) that could lead to an extension of the project’ time frames.

The recent years have seen a stable increase in Internet penetration among the residents of Russia. Both official statistics and research by private firms confirm this (see Chapter 3 for more details). However, there’s still a number of policy concerns that may hamper the progress of the Ministry of Telecom’ project mentioned above.

To start with, the program has been designed in 2012. Thanks to stable and high oil prices, the recession of 2008-2009 (caused by the world financial crisis) seemed to have passed away, so the government was eager to develop bold and long-term

modernization plans aimed at narrowing the gap in technological development between Russia and developed world. Besides the Ministry of Telecom’ six-years strategy, another notable example was a project to introduce an electronic “universal ID card”

replacing a large number of documents including national ID, health insurance, social

127  Ministry of Telecom and Mass Communications, Work Plan For 2013‐2018, 2015. 

128  "Fast Internet Will Be Available To Most Of Russia' Population By 2018", Rossiiskaya Gazeta, last  modified 2015, accessed May 18, 2017, http://rg.ru/2015/06/23/internet.html. 

insurance etc. and having debit card capabilities at the same time¹²⁹. Now, in contrast, because of low oil prices and the financial sanctions imposed by major Western powers (and the existing flaws in the country’s economics and political system) the country is experiencing a new recession. The government is taking measures to cut the expenses of the country’s budget and it’s quite likely that the implementation of the “Internet

access” program will be hampered too.

Another concern voiced by Internet and mobile service providers is a series of laws implemented in the last few years aimed at increasing the control over the Internet and telecommunications industry for the sake of national security. Among them, the most controversial was the new “anti-terrorist” law passed on summer 2016 and scheduled to come into force in June 2018 that requires telecom providers to store all the voice, text and other (including images, videos etc.) content sent by its users for up to 6 months (previously only the metadata¹³⁰ but not the content had to be stored) and the metadata of this content for up to three years. The reason of concerns was the enormous capital expenses required to create an infrastructure able to store huge amounts of data (the expert group expects it to be 59 million Tb¹³¹). While the state corporation and hi-tech wealth fund “Rostec” predicts that the costs will not exceed RUB 10.3 billion¹³²

(currently US$ 165.62 million), Internet and mobile data providers estimate the overall costs for the whole industry to be at RUB 5 trillion (currently US$ 80.4 billion) against the aggregate income for the industry of RUB 1.7 trillion. As the law is scheduled to become effective in June, 2018, the experts do not rule out the possibility of it being amended in order to decrease the implementation costs and to fix the flaws of the original bill (the current version raise a lot of question both from the technical and the        

129  The project was first time introduced in 2010, but the pilot program including a number of regions  started in 2012. However, due to a lack of infrastructure development and underfinancing the project  was not successful and the issue of such cards has been finally stopped in 2016 

130  Including such information as sender ID, receiver ID, time of calling/sending etc. but not including the  content of the call/message. 

131  "The New Anti‐Terrorist Law May Bring Profits To "Rostec"", Vedomosti, last modified 2016, accessed  May 7, 2017, http://www.vedomosti.ru/technology/articles/2016/08/22/653913‐million‐nadezhnie‐ruki. 

132  "Megafon Estimated The Costs Of Anti‐Terrorist Law Implementation To Be 0.5 Trillion Rubles",  Kommersant, last modified 2016, accessed April 1, 2017, https://kommersant.ru/doc/3143331. 

legal points of view)¹³³. Otherwise, the huge capital expenditures will lead to an

increase of the Internet or mobile service prices; also the companies will have to sharply decrease or even stop their investments in communication infrastructure (increasing penetration and quality of service) and redirect them towards implementing the new law. It will likely cause zero or even negative growth in Internet penetration for the country for quite a long period, which will undermine the competitive advantages of Russia in this area.

iii. Other areas under “Factors”

In Chapter 3, business climate was described as one of the factors; however, improvement of business climate is not the task that can be executed according to a carefully written plan but rather a combination of efforts of various structures at various levels. Some of the factors that influence the business climate (such as macroeconomic cycles) are outside of the government’s control. In some other areas years and even decades are required for results to become visible. The broad meaning of term “business climate” means that making a comprehensive list of all the steps that have been done and must be done in this area will be a hard and time-consuming task. We will return to this question later in Chapter 4 and outline some possible implications for the

government in this area.

In the sphere of intellectual property protection (that may be regarded as a part of the business climate) RUSSOFT quotes Federal Institute for Industrial Property, stating that the laws that protect intellectual property in “ordinary” and high-tech industry in Russia do meet the global standards in the area, however, there are problems with the law enforcement¹³⁴. Speaking about the pirated software, we can note that, even though the new series of anti-piracy laws that allow government agencies to block websites

133  "They Haven't Planned It Well", Kommersant, last modified 2016, accessed May 18, 2017,  http://kommersant.ru/doc/3150175. 

134  Russoft (2016), pg. 136 

with unlicensed content¹³⁵, permanently under certain circumstances, have come into force in 2015¹³⁶, the level of software piracy in Russia as measured by BSA is still higher than in the developed world. It’s hard to make conclusion if the government should pursue pirates more aggressively by putting more efforts into finding unlicensed content and increasing the possible punishment for the copyright violations, or if such actions are unlikely to change the situation. We should also remember the limitations and deficiencies in the BSA methodology that have been mentioned in Section 1 of this chapter.

3.3.1.3. Demand conditions

In modern world, the government is not only the regulator, but also a powerful buyer. The “Strategy” states that in 2011 in Russia the government has accounted for 13% of total IT expenditures, against almost 20% for the global market (no source quoted in the final document, but in the draft version the data are credited to

McKinsey)¹³⁷. The government was planning to stimulate the government demand for information technology mainly by encouraging its own departments and agencies as well as major companies (probably meaning state-owned enterprises) to outsource IT solutions to the market (instead of using affiliated structures to develop them).

The economic sanctions imposed by the major Western countries in 2014 created a threat for the state agencies and SOEs that the support of the foreign software they were using may get discontinued if they were added into the sanctions list. The reaction was the proclaimed “import substitution” policy in the field of software. In 2015, the Registry of National Software has been created, and since Jan. 1, 2016, state and        

135  The “unlicensed content” here is not limited to pirated software and includes unlicensed music,  movies, e‐books etc.   

136  "Russia Beefs Up Anti‐Piracy Laws", BBC News, last modified 2015, accessed February 18, 2017,  http://www.bbc.com/news/technology‐32531275. 

137  "Strategy For The Development Of IT Industry In Russian Federation In 2014‐2020 And Up To 2025  (draft version)", CNews File Archive, accessed May 20, 2017, 

http://filearchive.cnews.ru/doc/2013/09/strategy.pdf. 

municipal agencies are required to purchase the software from national developers included in the Registry unless there’s objectively no solutions that can meet their needs¹³⁸. In Dec., 2016 the Ministry of Telecom and Mass Communications said it will develop the table that will allow the purchasers to find the alternatives for specific examples of foreign-made software more easily¹³⁹.

Currently, as the federal law suggests, software may be defined as “national” a. if the sole rights for it belong to the state or to a company with a share of Russian

investors more than 50% or to a Russian citizen, b. if it is legally sold on the whole territory of the country, c. if the licensing, royalty and other similar payments to foreign entities constitute less than 30% of the producer’s revenue and d. if the software itself or its elements do not belong to the sphere of state secrets¹⁴⁰.

At the same time, the process of import substitution raises a lot of questions. There are both flaws in the legal framework as well as questionable practicability of the policy itself. These questions will be addressed later in Chapter 4.

3.3.1.4. Related and supporting industries

i. Military research and development

Even though the authors of “Computing in Russia” note that the military field was not the only one that required computers (there was a separation between “civilian” and

“special” devices), it was still an important driver for development of the information technology industry¹⁴¹ in Soviet Union. Now the government of Russia still attaches a        

138  "The Registry Of National Software", Ministry Of Telecom And Mass Communications, accessed May  14, 2017, http://minsvyaz.ru/ru/activity/directions/772/. 

139  Sergey Karasiov, "Government Purchases Of National Software To Be Simplified", 3Dnews, last  modified 2016, accessed May 3, 2017, https://3dnews.ru/943670. 

139  Sergey Karasiov, "Government Purchases Of National Software To Be Simplified", 3Dnews, last  modified 2016, accessed May 3, 2017, https://3dnews.ru/943670.