The Growth of Russia's IT Outsourcing Industry: The Beginning of Russian Economic Diversification

At a recent Kennan Institute talk, Daniel Satinsky, Principal, B.E.A. Associates, Inc.; President, U.S.-Russia Chamber of Commerce of New England; and Editor, Buyer's Guide to the Russian IT Outsourcing Industry, described Russia's relatively small but dynamic information technology (IT) industry. The IT industry is important to Russia, he argued, because it is one of the few areas—outside of natural resource extraction—in which Russia is competitive in the world market. Thanks to its high levels of human capital, Russian IT companies have developed their own niche in the global outsourcing industry. Multinational companies such as Intel and IBM have also established research and development facilities in Russia and joint projects with Russian companies.

Russia's IT outsourcing industry is entirely a product of the post-Soviet period, according to Satinsky, and it has grown quite rapidly over the past 15 years. Unlike manufacturing and energy companies, most of which were established in the Soviet Union and remain in the hands of Soviet-era managers, IT companies were built from scratch by post-Soviet entrepreneurs. During the 1990s, Satinsky explained, most of these companies were very small and strove to keep off the radar of the state and the tax police. The founders and employees were mostly academics looking for new ways to make ends meet in the struggling post-Soviet economy. By 2000, however, some of these companies had become large enough, and successful enough, that they started to take an interest in marketing and sales, thus joining the formal economy. Satinsky noted that the majority of customers for Russian IT firms are U.S. companies, although some European companies also outsource in Russia.

Satinsky argued that, as an outsourcing destination, Russia will probably never surpass India or China, which have much larger populations and significantly lower average wages. Nevertheless, he said, Russian IT firms have developed a reputation for innovation and creative problem solving that guarantees them a significant niche in world markets. Russia has both high quality science programs in its colleges and universities and a large number of students who choose to study science; half of Russia's higher education students major in science, a higher percentage than in China, Japan, India, Europe, or the United States. As long as the United States continues to experience shortages of qualified software engineers, he argued, there will be a need for outsourcing to countries such as Russia.

In 2005, IT outsourcing in Russia was a $1 billion industry—a relatively small percentage of the global outsourcing industry. IT is dwarfed in Russia by large energy companies such as Gazprom and Lukoil. While a few Russian IT companies—such as Spirit, Abbyy, and Kaspersky Labs—have been successful at selling their products on the world market, many IT companies suffer from lack of experience in management, marketing, and finance, according to Satinsky. Nevertheless, Russian businessmen are rapidly gaining these skills as IT companies grow and integrate into the global market. Satinsky believes that this growth of human capital could fuel further economic growth and help transform Russia's role in the world economy.