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Why doing IT business in Russia is a good idea

  • When: 05 February 2020

As the last edition of ‘Doing Business 2020’ showed, the Russian market keeps growing. Many companies want to work in the Russian market because of its high digital focus with increasing interest in cloud solutions, data transfer, and protection services. And although the legislation seems complicated it is not much different from the Western ones. As such, the Russian Federation offers Western players attractive and significant opportunities to grow their business through digitalization.

Heiko H. Koop

CEO, Linxdatacenter

Business practice in modern Russia is the subject of almost as many legends in the West as once upon a time in the USSR. The situations are indeed similar: very few of those spreading rumors about the Soviet reality had actually visited that mostly closed-off country. Today authors of business “scary tales” rarely have any experience in Russia.

Because of these myths, people have exaggerated fears of excessive state regulation and control of industry, plus distorted ideas of labor, culture and climate. Sometimes they don’t understand the country’s economic potential. All this affects the image of business in Russia.

In contrast, I run a company operating in the Russian market for 19 years. My experience and vision of market conditions make me a reliable source of practical advice on doing business here. My insight is particularly relevant for IT companies, carriers, indeed all companies focused on their digital development. 


Russia in the TOP30 of Doing Business 2020

Let’s begin with objective data: Russia now occupies 28th place in the Doing Business 2020 ranking of the World Bank, having risen in the past year from 31st place. The full ranking includes 190 countries. Immediately above and below Russia in the report appear Austria and Japan.

The authors and experts explain the growth of Russia as a result of its dynamic development in three major areas: electrification, taxation, and protection of the interests of minority investors.

You could point out that Russia has not achieved the government’s target for growth, but progress is evident. You could joke about Russia lagging behind Kazakhstan and Lithuania. But the joke would have to include Japan, which lies below Russia in the ranking.

Look at the sub-sections of the 2020 ranking to find more useful information. For example, take the simplicity of launching a new business. Russia sits in 40th place for this measure, while Austria, one position ahead of Russia in the overall ranking, occupies 127th place. As to the availability of electricity for business, Russia is in 7th place and Canada 124th, etc.

Overall, whether or not you agree with the benchmarks in the ranking, they do reflect at least some facts of doing business in the listed countries. TOP30 status and growth over the past few years are unquestionably achievements for any country, including Russia.


Digitalization: a global, collective and complex task

Another considerable advantage of Russia is its readiness to join the effort to build the global digital future.

Sports, retail, manufacturing, mining, transport, utilities, healthcare: digitalization has become the key development factor for many industries and social spheres. At the same time, some technological issues are so complex that they cannot be resolved within the closed environment of any single country. Digital progress results from exchanges of resources, ideas and communications beyond national and other boundaries.

In many fields, the level of technological development varies from country to country. The global labor division system and local or regional traditions in education, differences in culture and the long-established structures of national economies explain the existence of these varying levels.

Throughout its recent history, Russia has been in a strong position. In fact, it has always stood out, thanks to its IT experts, the quality of its IT education and the creative freedom in the engineering field.

Many companies want to work with Russian developers. The current dynamics of software export from Russia and the speed of digitalization of the national economy demonstrate this trend.

In some areas, Russia outstrips both the West and the rapidly developing Asian countries. Aside from its traditionally strong position in the segment of custom-designed corporate software, the rather long list includes IT products and services for individual users, electronic payments, robotics, Big Data, AI, supercomputers, etc.

 

Technological risks

The Russian business community is debating the impact of state initiatives to strengthen control over the digital space. Indeed, you can see many reasons for a negative outlook: Telegram blocking, Federal Law 152 on personal data, Yarovaya’s Law on counter-terror and personal safety, the law limiting independent use of the internet, and so on.

However, if we look at European countries, we see similar efforts: states trying to control the flow of personal and commercial data.

A quick review of news over the last couple of years confirms this observation:

·         Mark Zuckerberg’s appearances before the US Congress, European Parliament and EU anti-monopoly authorities as they investigated Facebook’s operations;

·         Austrian users getting internet access only after submitting their passport data;

·         EU introduction of the Global Data Protection Regulation (GDPR) – new rules for the treatment of personal data in business - with violations leading to significant penalties,

·         etc.

With business becoming global and processing customer data all over the world, cross-border protection of that data grows more and more important. For this reason, Russia and the EU introduced Federal Law 152 and GDPR at almost the same time.

In parallel, data centers like ours create a secure ecosystem that allow businesses to work with users legally wherever they are in the world and simplify logistics for goods and services going in all directions.

By the way, from my experience in data protection in both Russia and in Europe, I must point out that GDPR has disadvantages compared to Federal Law 152 as to transparency, feasibility and simplicity of compliance. It is easier to fulfill the requirements of Federal Law 152 and stay completely on legal ground: its provisions are clear. Violations of the much-less transparent GDPR lead to enormous fines, putting businesses in a riskier position.

The legal status of many international IT startup projects with British registration is completely unclear in view of the UK’s exit from the EU. Also bear in mind article 13 of the EU copyright law: if it had been applied literally, it might have led to interruption of operation of the internet the way we know it today.

In other words, the West is no more a legal safe haven for IT than Russia.


In my experience

As I mentioned earlier, the company I lead started operations in Russia 19 years ago. It obtained a carrier license, launched a data center in Tallinn, and then moved the center of operations to Moscow and Saint Petersburg. We have grown from a small carrier to the commercial data center operator with the third largest turnover in Russia, more than 200 customers, and more than 500 implemented projects.

Our development and growth did not take place in a vacuum, happen accidentally or in spite of the circumstances. Certain factors did play a role:

·         Russia’s market demonstrates high digital focus.

·         Demand for data center services increases all the time.

·         We see huge interest in cloud solutions, data transfer, storage, and protection services.

·         Sometimes growth seems exponential.

Here the only differences between Russia and the West lie in the specifics of IT regulation by the state and the demand structure of industries in the economy. Nothing else.

From the point of view of compliance with the requirements of the market regulator, working in Russia is not any harder than in Europe. As many years of practice show, it is enough to have responsible specialists in the team (there is no deficit of such people on the local labor market today or in the foreseeable future), read laws attentively, follow them, and invest in technological development.

Then the potential of a company’s executives and their desire to build it will be the only limits to its horizons for business growth.


More positives than negatives

The number of EU countries that understand the mutual benefits of cooperation with Russia in the IT field keeps growing. Some of the highest-level politicians talk about it today. Just recently, EU Ambassador to the Russian Federation Dr. Markus Ederer commented in a diplomatic note that it would be practical to establish closer relationships between Brussels and Moscow in the digitalization sphere. In particular, he mentioned data protection, information security, and 5G development.

Of course, the relationship between the West and Moscow is quite difficult today. The country’s image in political circles, media and public opinion is far from ideal. But big business does not want to see its interests held hostage to press headlines or political and public-relations campaigns. European businessmen see the difference between the country’s image in the media and the real state of things.

The most important consideration is that businesses want to make money, and it is profitable to work with Russia today.

Mining, retail, medicine, metallurgy, logistics, manufacturing – all these industries expect large-scale digital transformation.

The development of these industries and of the global economy requires automation and digitalization of business processes. Economy 4.0 and Industry 4.0 work only with effective Digitalization 4.0.

Russia masters it. Russia can offer Western players attractive and significant opportunities to grow their business through digitalization.

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