The Boom Has Gone to Prices: the Russian IT sector has not made a breakthrough despite favourable conditions and forced import substitution

The dream of software sovereignty

Since the beginning of the war, the Russian IT sector has been undergoing a profound transformation, driven by the departure of Western companies – previously dominant in many niches – and the government’s push to ensure ‘software sovereignty’, or independence from foreign suppliers in the public sector and strategically important enterprises.

The strategy for IT import substitution was first introduced a decade ago, following the annexation of Crimea and the imposition of initial sanctions. In early 2015, the Ministry of Digital Development approved a plan requiring government agencies to procure only software listed in the Unified Register of Russian Software. This policy was later extended to hardware in 2020, with the creation of the Unified Register of Radio-Electronic Products. However, in practice, even government agencies and state-owned companies continued to renew licenses for products from Western vendors like Microsoft, Oracle, and SAP, let alone private businesses. By the end of 2021, Russian software was supposed to account for 50-70% of state company use, but it only reached 30-35% – and even that figure appears inflated.

Even the Ministry of Digital Development, the process overseer, transitioned from Microsoft Teams to a corporate messenger developed by Mail.ru Group only in 2021. As reported by Tadvisor, this switch, costing 487.7 million rubles, became the most expensive IT import substitution project of 2021. That year also saw increased pressure on companies to transition to domestic software, sparking some resistance from business.

Following the start of the war, software and IT infrastructure sovereignty was redefined as a wartime state priority. In March 2022, Vladimir Putin, issued a decree, requiring government bodies to abandon foreign software on critical information infrastructure facilities by the end of 2024. In 2023, similar requirements were imposed on state companies, mandating the replacement of basic software, such as operating systems, office suites, antivirus programs, and virtualisation systems, by 1 January, 2025. The transition to Russian database management systems was set for 1 January, 2026.

Growth dynamics

According to Rosstat, the sector has shown nominal growth (in current prices) since 2019, averaging 25% annually (OKVED 2 categories 62-63), reaching 3.1 trillion rubles in 2023. This accounted for 2% of the country’s gross value added (GVA). To put this in perspective, agriculture, fishing, and aquaculture collectively contributed 3.7%, while construction accounted for 5%.

MTS Web Services (the IT division of MTS spun off into a separate entity) estimated the market size at 2.7 trillion rubles in 2023, forecasting growth to nearly 3.3 trillion in 2024 based on a mathematical model. Their analysis relied on public revenue data from the 1,000 largest IT companies. These estimates encompassed not only companies formally classified under IT by OKVED but also those effectively operating in the sector without the official classification.

Dynamics of the Russian IT sector, year-on-year growth, %

The growth trajectory of the IT sector vividly demonstrates the effects of government attention to the industry. For instance, during the early attempts at software sovereignty in 2015, revenue grew by 36% in nominal terms (from 499 billion to 678 billion rubles). However, price growth within the sector (as measured by the deflator index) surged to 22%, according to Rosstat estimates. jAs government enthusiasm for import substitution subsided, price increases nearly halted. As a result, in constant prices, the sector grew by 14.6% in 2018 – more than the 10.5% recorded in 2015. In 2022, the situation repeated itself: nominal sector revenue grew by 25% (from 2.01 trillion to 2.49 trillion rubles), but the price index jumped from 8.4% to 17.5%. This resulted in the lowest real growth rate in 12 years – just 4.8%.

Rosstat estimates that price growth slowed slightly in 2023 (deflator index at 13.4%). With nominal growth at 25%, real growth reached 10% – a rate in line with the sector's average annual growth from 2014 to 2022. This means that while the sector nearly doubled in nominal terms between 2020 and 2023 (3.1 trillion rubles vs. 1.6 trillion, +94%), real output growth was only 34% over three years.

However, the price factor may have an even greater impact than Rosstat’s averages suggest. Market participants interviewed by Kommersant in March 2023 noted that the departure of Western companies and the forced transition to domestic operating systems led to a 30-40% increase in the cost of Russian software. Customers even filed complaints against developers with the Ministry of Digital Development. In 2024, the Federal Service for Technical and Export Control (FSTEC) expressed concern over excessively high prices for domestic software. Ilya Massukh, director of the Competence Centre for Import Substitution, countered that prices were rising 'only' 15-20% annually on average. Nevertheless, this remains significantly above the 2023 sector-wide deflator index (13.4%).

Developers justify price increases by citing staff shortages and rapidly rising wages. According to the monitoring data from the Higher School of Economics, employment in the sector grew by 11% annually, rising from 692,000 employees in Q2 2021 to 977,000 in Q2 2024 (a 41% increase). Over the same period, average salaries grew by 18% annually, jumping from 106,000 rubles to 182,000 rubles (a 72% increase).

This situation is typical of Russia’s wartime economic boom. The reduction in competition following the departure of Western companies and the stimulation of demand through government import substitution programs have led to a sharp rise in prices within specific product niches, where most of the sector’s nominal growth is concentrated. As a result, when using price indices averaged across the entire sector, real growth rates are overstated. At the same time, high demand has caused significant increases in labour costs amidst fierce competition in the labour market.

In 2024, according to estimates from MTS Web Service, growth in the IT market began to slow, with nominal growth at 22%, down from 29% in 2023. Monitoring by the Higher School of Economics (HSE), which includes a broader range of organisations in its IT market model, conversely showed a 60% increase in revenue in the first half of 2024, despite rising costs (employment grew by 13% by Q2 2023, and average salaries rose by 25%). Preliminary data from Rosstat also indicated an acceleration in growth: the communications and IT sector (two-thirds of which is IT) saw real growth of 17% in the first half of the year. However, by Q3, growth rates had nearly halved.

Overall, real growth rates in the sector appear modest. While they averaged 13.5% annually from 2019 to 2021, and 11.9% over the decade from 2012 to 2021, the average growth rate dropped to 7.5% during 2022–2023. Even with the acceleration in 2024, the three-year average is unlikely to exceed 10%.

Hybrid model instead of sovereignty

Forced sovereignty has led to a rapid increase in prices alongside modest product quality improvements. As a result, companies are hesitant to transition to domestic software.

According to a July 2024 survey conducted by K2 Cyber Security among over 80 top managers from organisations with critical information infrastructure, only 20% had fully replaced foreign solutions with domestic ones, another 20% were in the process of replacement, and 60% acknowledged they would not meet the 1 January, 2025, deadline. Experts interviewed by by Kommersant similarly estimated that only 15–20% of companies would achieve import substitution by the deadline .According to another study by K2 Cyber Security, the most success in software and hardware replacement (43%), followed by industry, energy, and finance (around 30%). In retail, agriculture, telecommunications, transport, and logistics, the figure was only 15-20%. For many businesses, 'import substitution' also included replacing Western systems with Chinese ones, with 30% of respondents expressing interest in Chinese software.

At the same time, about 30% of respondents complained about the lack of domestic software alternatives, while another 30% cited low quality (Government representatives also acknowledged 800 ‘white spots’ – unmet needs across various industries – that Russian developers failed to address after the departure of foreign competitors.) Around 75% of respondents faced issues transitioning to Russian software, with common complaints including system flaws, lack of functionality, and incompatibility between offered systems. Only 11% of respondents reported fully integrated IT systems, while 21% described theirs as 'patchwork' and ‘fragmented’. Dissatisfaction was highest in sectors with greater levels of import substitution.

Russian IT products lag behind Western ones in functionality and stability, as the latter were developed over decades, informed by detailed user needs. Artem Preskaryan, CTO of SKB Kontur, noted in an interview with CNews that the disparity reflects the limited size of Russia’s domestic market, which made the idea of a full transition to domestic software economically unfeasible from the outset.

The impracticality of digital sovereignty is evident to economists. Analysts at the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), which is close to the government, in their review of scenarios for the development of the Russian information and communication industry, outlined three main scenarios for the development of Russia's IT sector: ‘maximum active expansion’, ‘technological and production cooperation with the 'main partner' (China)’, and ‘maximum domestic orientation’. The first scenario, deemed optimal, requires a combination of low interest rates, expansive fiscal policy, and robust growth incentives, which appear unlikely under current policies prioritising stabilisation (high interest rates, restrained fiscal policy).

As the modest results of the IT sector development in 2022–2024 show, when the situation looked favourable for a breakthrough in the context of broad budgetary incentives, the real choice for the Russian IT sector exists only between the second and third scenarios. The worst scenario, according to the experts at CMASF, is ‘forced import substitution’. In this hybrid scenario, IT companies will primarily focus on satisfying demand from the state, while weak private demand will be partially covered by imports from China. Apparently, this is the scenario that will be de facto implemented.

The end of the banquet

Over the past three years, IT companies have received support from the state in the form of tax breaks, subsidies, and artificial demand for domestic software, which was created by government requirements for import substitution.

In terms of benefits, the key measure was the zeroing of the profit tax. However, even before this, the rate was relatively low – only 3% (it was set during the pandemic to prevent the relocation of companies to Cyprus, where developers' profits were taxed at a rate of 2.5%). In addition, to compensate for the actual absence of a venture market, small and medium-sized companies were offered to take loans at 3% per annum. However, at the end of 2023, according to Kommersant, banks began to raise rates on loans already issued to market rates, citing the fact that the state did not allocate funds for compensation.

The reversal of the economic course towards a stabilisation policy, which manifests itself both in high interest rates and in the consolidation of budget revenues, indicates that the situation for the IT sector will seriously worsen this year. The government is already scaling back the preferences that the industry has enjoyed in recent years. In 2025, IT companies will again begin to pay income tax at a rate of 5% (instead of the standard 25%). Thus, compared to 2020-2021, the tax burden will even increase. However, this benefit will only be valid until 2027. It is also unlikely that it makes sense to count on preferential loans in the near future. Against this background, the deadlines for requirements to switch to domestic software will most likely be pushed back, as has happened more than once in the past. The government has begun to monitor expenses more closely, and the financial situation of companies has begun to deteriorate, including as a result of the increase in the tax burden. All this will force companies to sabotage the transition even more stubbornly.

The layoffs at major IT companies that began at the end of 2024 are a harbinger of a new cycle in the life of the industry. At the end of last year, The Bell and the ‘Non-digital Economy’ Telegram channel reported that some major companies, including Sber, VK and MTS, were parting ways with entire teams of developers. The market has begun to shrink, and new areas that have not yet proven their economic efficiency are being cut. According to hh.ru, cited by Kommersant, the three largest employers that it classifies as IT — Lanit, MTS and VimpelCom – reduced the number of posted vacancies for IT specialists by 15-18% in 2024. The total number of vacancies on the market, according to the ‘Habr.Career’ service, has decreased by 5% so far.

The fact that the IT sector practically failed to make a breakthrough under rather favourable circumstances, or, more precisely, made it only in nominal terms (in current prices), is largely determined by the market unrealism of the import substitution scenario that was outlined by the decisions of the authorities and the very limited effectiveness of incentive measures in a relatively closed market.