According to a study conducted by SPARK-Interfax, analysing the end-of-year results of companies in the fields of software development, information technology, consulting, and related services, the Russian IT industry has fared far better than the economy as a whole throughout 2022. Revenues in this sector increased by 22% year on year (to 3.8 trillion rubles); similar to the dynamics observed the previous year. However, Russia has experienced rising inflation for the past two years, reaching 8.4% in 2021 and 11.9% in 2022. As a result, using the consumer price index as a deflator (because there is no more accurate price data for the industry), actual growth could be around 10%. This is still significantly better than the economy as a whole, where nominal revenue growth was only 8%. An even more pronounced difference can be observed in the net financial results (profit minus loss). In the IT industry, this indicator increased by 16% from 2021 to 365 billion rubles. In the economy as a whole, it fell by 13%.
As a result, the alarmist forecasts made six months ago, which predicted a 20% slump in the market, have not come true. Several market participants told the study's authors that the actual figures could be even higher. ‘In the context of external restrictions, many [sanctioned] companies have had to move away from open procurement procedures, which also influences the statistical picture,’ explained a representative from Krok.
Software development has yielded the best results. According to a study from the Higher School of Economics based on official statistics, revenue in this sector increased by 27.4% last year. The main factor behind this growth was, predictably, import substitution in the public sector: ‘Even systems which work and do not cause any complaints, and which were not scheduled to be updated for several years, have been included in the volume of changes to IT infrastructure.’ The industry will continue to adapt to the increased government contracts this year. Only 3% of systemically important enterprises have currently gone through the process of system software import substitution, according to SearchInform, whose data is cited within the study. On the whole, the departure of foreign manufacturers has freed up 40-50% of the market for Russian players, with some segments reaching as high as 80%.
At the same time, corporate customers in 2022 mostly waited: ‘Some companies lost their Western partners and are still trying to find their bearings, others began to substitute them with Chinese solutions, and the most enterprising began to look for Russian partners.’ Market participants say 60% of private companies have halted new IT projects. The main reason for this pause is a lack of Russian analogues of foreign software or the low quality of these alternatives.
Despite a growth in income (albeit not by much when adjusted for inflation), IT investment fell by 4% to 304.6 billion rubles. In the economy as a whole, investment grew by nearly 5%. In 2022, the venture capital market in Russia virtually ceased to exist: a handful of foreign investors left the Russian market, while Russian investors suspended their operations. According to the study's authors, state assistance helped to compensate for this lack of investment. This is linked to an increase in the number of new small and medium-sized businesses which registered to apply for subsidies and grants.
Despite the high proportion of IT specialists among those who have left Russia (Re: Russia covered this in detail here), there was no decrease in the number of employees in the sector over the past year. In fact, by the end of the year, the sector had grown by 4.2% (it employs a total of over 1.3 million people). However, the largest employers admit that emigration has deprived Russian companies of their best employees. ‘We will be restoring our qualification requirement for a while because the outflow of people from the country consisted predominantly of middle and senior-level professionals, that is, the people with higher qualifications,’ lamented Herman Gref, head of Sberbank, which he described as ‘the largest IT structure in the country.’ Gref notes that some of the specialists who left the country have since ‘moved back,’ but these are primarily junior employees; more experienced professionals have an easier time finding work abroad. To stem the exodus of workers, Sber has increased IT salaries. According to The Bell, they increased wages by an average of 8.5%, with some divisions increasing them by as much as 20%. According to a study by the Higher School of Economics, the average salary in the IT sector increased by 19.3% year on year to 131,100 rubles per month (approximately $2000 at the time of publication). Gref implied that even this was insufficient.
Market participants say that they are in an ‘anxiously positive mood’ for 2023. There has been no collapse. According to a survey of 1C partners who use 1C: Enterprise (data from the SPARK-Interfax study), more than 60% of those surveyed do not expect significant changes to occur. However, these changes may still take place: last year, there was plenty of money in Russia and within the Russian budget due to an increase in export prices and a reduction in imports. Budget revenues fell by 21% in the first quarter of 2023 compared to the first quarter of 2022 as a result of lower oil prices. This may have an effect on the scope of government procurement.Further, the ostensibly positive effects of foreign firms leaving Russia may be less than positive than they seem: less competition in the sector may lead to stagnation and more inert corporate behaviour, according to research. So the most likely future option for Russian IT is the use of government funds for 'technologically regressive import substitution' (a term coined by the famous economist Branko Mladovic). One striking example is Rostelecom's plan to transition Russians to a homegrown smartphone operating system. This is estimated to cost half a trillion rubles (more than $6 billion at the time of publication). This operating system has been in development for over a decade. Five years ago, the plan was to transition civil servants to smartphones running this system at a cost of 160 billion rubles. There are now plans to manufacture 70 million Russian smartphones by 2030. However, the project proposal suggests that ‘Russian smartphones’ will be manufactured in China or, at best, assembled in Russia using Chinese components. In other words, the import substitution process which has been lauded, thus far mostly amounts to the replacement of imported parts with other imported components, which are essentially replicas of the original ones.