Business Intelligence ENG Russia & FSU

Business & Geopolitics: A Welcome Stimulus for Russia’s Sovereign Tech Sector

The Russian Tech sector has witnessed a remarkable development over the last twenty years, moving out of a soviet state-led institutional and technological matrix into a beacon for flagship tech companies such as Kaspersky Lab, Telegram, Yandex and Ozon. The COVID-19 pandemic and recession presents both challenges and opportunities for Russia’s tech players.

Twenty years ago the Russian tech sector was almost inexistent. By tech industry, I mean an ecosystem of private tech companies and start ups, alongside a system for financing these companies at different stages of their lifecycle. I had the chance to witness that first hand. I started my professional career at the French Embassy in Moscow, where I was responsible for sourcing and facilitating partnerships between French and Russian tech entreprises. I still remember back in those years, in 2002-2003, the heated debates running through the different agencies of the Russian government in relation to the sector. In a country slowly emerging from the chaos of its post-soviet transition, concepts such as technology transfers, tech incubators and venture capital were in their infancy. You could easily count on your fingers the members of the Russian Venture Capital Association, which at that time counted more foreign-backed funds, like the pioneering Vostok Capital, than home-grown investors.

This was a few years before today’s dominant players in the Russian Internet sector all emerged: the like of VK – or V Kontakte, the “Russian Facebook” whose founder Pavel Durov, went on to create the killer instant messaging app Telegram), Yandex (the Russian equivalent of Google), – a diversified Internet conglomerate which has over the years become pivotal – and Ozon – the Russian leading eCommerce platform. Since then, I have returned frequently to Russia to witness how the Russian high tech industry grew in scale and scope to become one of the leading tech industries in the world.

Obviously, the Russian High tech sector is a far cry from its US and Chinese counterparts. But it can compete with the Japanese tech sector and it is well ahead of other European nations such as the UK, France and Germany in this area. Actually, Russia is one of the few countries in the world that managed to established a completely integrated indigenous Tech sector, from the technical infrastructure up to B2C applications. This has been made possible thanks to the country’s Soviet tech legacy and its outstanding educational system. Don’t forget that Russia launched the first satellite into space – Sputnik – in 1957. Russian scientists and mathematicians were also among the leading contributors to what was then called “cybernetics” – in the 1950s-1960s – and that has now become fashionable as Artificial Intelligence.  
The Russian Oligarchs made a fortune in the 1990s amassing deeply discounted State assets in commodity extraction and transformation industries or made their way in the fiercely contested – at the time of the 1990s Wild Wild East – retail, construction and real estate sectors. Over the years, the Oligarchs came to appreciate the commercial and financial potential of High Tech, thanks to the bridge that has been established with the SIlicon Valley and the possibility to cash-in by listing Russian companies on the NASDAQ. The Kremlin has also understood the potential of leveraging on the sector to transform the Russian economy. But the Kremlin wanted a more Sovereign Tech sector, one which it could easily control to prevent unwanted “political disruptions”. Perhaps one of the best illustrations of its involvement in the sector is the sale by Pavel Durov of his controlling interest in VK to a group controlled by Alisher Usmanov, one of Russia’s richest oligarchs and a close associate of President Vladimir Putin.  

The coronavirus pandemic poses a significant challenge to the development of the Russian tech sector. In June, Prominent industry veterans Natalia Kasperskaya, chair of the Otechestvennie Soft programmers association, and Valentin Makarov, president of Russoft, sent a letter to Prime Minister Mikhail Mishustin. By the end of 2021, they claimed that 10-15,000 IT professionals could leave Russia as the overall economic downturned caused by the pandemic is likely to hit the sector,. In the short term, the Russian State is trying to fill the gap left by the contraction of private funding – including foreign funding – especially for seed and early stage financing rounds. The government has set up a range of high tech seed funds and has mandated Behemoths like Sberbank and Rostek to step-in in order to support the most valuable assets. Longer term, the sector needs more foreign investment to thrive, as does the Russian economy as a whole. 

The Russian government has also announced that it will slash taxes on software/IT companies from 20% to 3% – effectively one of the lowest corporate tax rates in the world. To be eligible, the software creator must be a majority-Russian entity, paying no more than 30% of its revenues to a non-Russian entity and not subject to mandatory software updates or management from abroad. Detractors of the move say that this will not encourage foreign capital to flow into the sector. In addition, financially speaking this is not as good as it looks. Indeed, the government is considering suppressing the VAT exemptions that supported the development of the Russian IT sector for many years. Nevertheless, with all its shortages and contradictions, the Russian tech sector has managed to get the attention of the country’s top leadership. This would have been unimaginable twenty years ago.