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Russia
Starting with this issue we will be looking at emerging n
ew markets as well as looking at the more established markets in subsequent issues of this newsletter.We will attempt to combine the research that SSP undertakes for its clients combined with practical experiences gained directly in the countries /markets under discussion.
As the new year unfolds there appears to be a growing mood of careful optimism. Expansion into new markets appears to be high on the agenda once more. This issue will look briefly at the potential for entering the Russian market.
Some Basic Facts On Russia
Russia is the largest country in the world in terms of geographical size. It is twice the size of the USA (including Alaska) and has a population of 145 million. Russia has nine time zones. Four years ago the size of the IT market was estimated at $580 million. Today it is nearer $4.7 billion. So what has changed to fuel such growth?
Investment
While Western Europe and the USA have seen their IT industries languish with little growth over the last three years,Russia in stark comparison has rapidly expanded.
The International Finance Corporation has led the way with a $12million investment in “Information Business Systems”,Russia’s largest IT company, and other investments in Financial services companies.
The reasons for this investment are varied but can be summarised as follows:
- Russia is rich in intellectual and scientific resource:The Russian education system is still biased towards science and mathematics.IT Companies are therefore able to draw upon some of the best minds in the world.
- Political stability:. Russia has taken to capitalism, particularly in Moscow and the liberal policies of President Putin have facilitated this “free market” culture in the commercial sector.
- Expanding economy: The average GDP rate of growth in Russia has grown at 5%. Russia is the second largest oil exporter in the world and this has isolated Russia from some of the adverse effects of a global slowdown.
The Markets
This growth has been fueled by two converging business drivers.State driven IT projects and larger corporates wanting to invest in IT infrastructure for competitive advantage.
Government Projects
The Government has been one of the key drivers for the introduction of IT projects that have led to creation of many highly qualified “Systems Houses”. However, there is little accountability within Central Government to coordinate and more importantly to ensure that objectives are delivered and to agreed specifications.
For instance the government still has no complete registry of its property, which means there is no dependable information for calculating property tax and the budget never seems a significant part of potential income.However, creating a unified property registry for Russia is first and foremost a political issue, and for this reason,the government has been putting off this potentially profitable project.
Dealing with government projects can also reveal significant differing business practices from the Commercial sector.
For example, it is still common to find that each stage of some projects requires “incentives” to be offered to smooth the path for their acceptance and completion, in contrast to the commercial sector it is not uncommon for projects to have cost double or treble the actual cost to meet the requirements of the “black economy”.A similar scenario is all too familiar with the purchase of software as well.
The Commercial Sector- Consumer
In the consumer end of the market piracy is still a major issue.Estimates have suggested that “pirate” copies represent 80% of all software sold in this category.It is also estimated that the number of internet users has dramatically increased with an estimated 8 million on line by the end of 2003. This has fueled growth in the telecommunications sector but in reality this growth is localised to Moscow and St. Petersburg.
Undoubtedly Russia is at the beginning of adopting such technologies and appears committed to embrace technology with a vengeance. 20 million Russians have mobile phones of which more than half were purchased during the last year.
Leonid Reiman,Minister of Communications and Information intends to roll out technology to other urban areas as well as the remote rural parts of the country. If that is successful then within 5 years internet access could well be within reach of in excess of 40 million subscribers.
The Commercial Sector- The Enterprise Market
Russia has a growing enterprise culture and an emerging array of small businesses that are beginning to flourish. At the top end of the market the integration market has a vast array of highly skilled and extremely technically competent workforce. Salary levels are rising but are still a third to one fifth of those in Europe and the USA.
These systems have also led to an emerging software products market,particularly in the Financial Services area. Culturally ,The Russians are extremely pragmatic and excellent problem solvers. They like to get things done and to budget. This may appear alien to Western cultures that are used to changing specifications and project extensions.
There is an emerging market for Distribution and Reselling, but be prepared to have your technology localised to accommodate both the Cyrillic alphabet as well as the adaptation to Russian culture and business practices.
Do not expect top dollar for your products in the commercial markets but prices and values are staring to rise as the economy expands.
The Russian technology industry is still technology led and is not sophisticated in marketing yet. Most of the medium to larger size technology companies have staff who are fluent in English and there appear to be a vast array of potential partners wishing to offer integration and reselling capability. However, all of these companies need to be validated by exercising due diligence at both the technology and business level.
Entry strategies
One of the biggest barriers to entry is the Immigration Service !! Getting a Russia visa is both expensive and a complex process. Your company has to receive an official invitation from the Ministry of the Interior on behalf of a sponsoring company that you wish to visit. The original and official invitation must then be forwarded to the Embassy issuing the visa.
SSP would strongly recommend partnering as your initial entry point. Be prepared for localisation but expect to be pleasantly surprised with the professionalism and technical expertise that most Russian companies possess.
Relationships are important and access to Senior Government officials is far more common than in other markets. There is a “can do” attitude and a “no problem is insurmountable” spirit. If you learn to like Vodka you will be an instant hit.
SSP is continuing to help companies grapple with the challenges that confront software companies in today’s markets and further details on our search services, consulting and other services can be found at www.sspltd.com
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