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IDG News Service, San Francisco Bureau, March 16, 2001

From Russia with code

By Ashlee Vance

After enduring overwhelming regulatory and economic changes over the last decade, Russia now appears ready to make strides toward establishing a place in the growth of global technology markets. While the country will undoubtedly battle business policy challenges for some time, it has nurtured technology talent to the point where many experts suggest the country could begin to resemble such hotbeds of IT development as India and Israel.

Executives from the likes of Sun Microsystems Inc. and Intel Corp., along with Russia's leading IT insiders, gathered here last week at a forum devoted to examining Russian IT capabilities and declared that recent changes in the country's business climate are reinvigorating domestic technology companies and attracting foreign investment.

"It is a tough part of the world we are working in," said Trevor Gunn, deputy director of BISNIS (Business Information Service for the Newly Independent States) a group at the U.S. Department of Commerce that examines the economy of former the Soviet states. "Some people call it the toughest part of the world to work in, but Russia is back and back with a vengeance," said Gunn, one of the organizers of the conference, called "Russian IT: Stretching the Limits of Possibility."

In the post-1989 era, since the early stages of the fall of the USSR's Communist regime, Russia has met with a bad rap in terms of the international view of its business practices. Rampant software piracy, ineffective intellectual property (IP) protection, and the tendency of companies to hide revenue to avoid what was seen as an overburdensome tax regime have led to a climate in which it has been difficult for foreigners to conduct legitimate, fruitful business operations, according to conference speakers.

While skeptics still abound, many experts claim that the government, in union with business leaders, has made headway toward modernizing the IP laws, and streamlining both the tax code and business regulations concerning foreign investments.

"There is an excellent supply of math and computer science talent in Russia," said Jason Horowitz, program manager for the Russian Engineering Software Systems Group at Sun. "But even with all of the talent, it remains a difficult place to work. We have learned that choosing partners carefully is almost a commandment for working in Russia, if you want to use the talent best."

Sun turned to Russia for work on several software development projects almost 10 years ago. The company hoped to take advantage of a population filled with technically strong and creative individuals. Sun's efforts, however, took almost four years to bring to fruition due to numerous complications in the country's business environment.

In the past, the cash-strapped government tended to go after any company making a profit and take what many business people thought to be too great a share of the gains, according to conference speakers. Taxes on business are still considered overburdensome by some, but particularly with technology-driven commerce, the government seems more willing to streamline regulations and create incentives to foster growth.

New laws are currently up for consideration in the State Duma parliamentary body to address IP protection, and President Putin has asked the U.N. to keep a close eye on the abuse of IP across all of the former Soviet Union, according to BISNIS reports. In addition, the Russian government seems prepared to launch incentive programs and give tax relief to companies making headway in technology sectors.

Sun provides a good example of how a foreign company can both face business challenges and encourage the government's recent efforts. Sun "kicked out the lawyers and the MBAs" and started conversations on an engineer-to-engineer level, according to Horowitz. Horowitz felt this helped forge a relationship of trust and understanding about what Sun and its partners wanted to accomplish. With this personal foundation in place, Sun could then move forward with its development goals.

"In a lot of ways the personal relationship is one of the rewards of the overall partnership," Horowitz said. "As the work becomes more complex problems will inevitably come up, but these relationships help alleviate misunderstandings. It is important for the U.S. side not to micromanage the Russian teams' work. They have very different approaches to problem solving, and a lot of them work."

"This is not anything like a peripheral implementation; the engineers contribute to products that Sun actually sells as part of its product line," added Horowitz.

Under the Communist regime, Russian engineers were often allowed to pursue projects regardless of their future economic value, according to BISNIS' Gunn. Since they didn't have to worry about short-term revenue deadlines on many projects, they had more time to develop and apply a variety of scientific and problem solving techniques to different technical challenges. This, along with Russian schools' traditionally strong science, math and computing curricula, leads Gunn, Horowitz and others to believe that Russians tend to take unique, creative approaches to development efforts.

"They definitely have unique ways to solving software problems," said Thomas Diffely, vice president of securities research and economics at Merrill Lynch & Co. Inc. "As software and technology becomes increasingly complex this is a strong advantage."

This is at least in part what motivates pundits to take the view that Russia has the potential to stake out a position similar to that of countries such as India and Israel. These countries have developed programming expertise that has attracted U.S. and European companies looking for contract workers, and also launched products and services used internationally. Some industry analysts speaking at the conference said they believe Russia has such a strong foundation of IT talent that it is only a matter of time before foreign companies knock on developers' doors as they have done in India and Israel.

However, Merrill Lynch's Diffely points out that Russia still must meet numerous challenges before truly competing with the likes of India. India maintains several advantages, including the lower cost of labor, more widespread use of English, aid from the government and the existing placement of myriad executives in U.S. companies.

Many Indians came to the U.S. and established themselves in high-profile positions at leading tech companies. These workers can now promote partnerships between U.S. and Indian firms and generate investment from abroad in Indian companies.

"There are not many Russian executives in U.S. companies at this time," Diffely said. "India has a heavy presence of business leaders here."

Nevertheless, some companies have been able to take advantage of the country's efforts to streamline regulations and protect IP. A number of Russian companies has helped spark the ongoing process of change by showing that businesses can operate in a transparent manner -- avoiding old practices of hiding revenue and assets -- and succeed. Heavy investment from Russia's wealthy oil sector fostered an initial cash influx in these companies and now foreign investors are also getting involved.

Moscow-based ru-Net Holdings Ltd. attracted capital from a number of foreign and Russian investors and has ended up as one of the country's biggest success stories. The holding company currently owns Ozon, the leading Russian e-tailer; Yandex, a search engine and portal; and, a company dedicated to attacking the global information services market.

"In Russia, you don't have the same level of competition as you do in America and don't have enormous marketing costs," said Victor Paul, advisor to the board of directors at ru-Net.

Paul believes ru-Net can reach break-even on profitability within the next 12 months due to the success of its Internet holdings. Ozon currently generates revenue selling Russian language books overseas at a high premium to expatriates, and Yandex's search technology stands as some of the industry's best. Prominent U.S. search engines such as Google Inc. have incorporated some of Yandex's work into their own search systems.

Information Business Systems Group (IBS) is also a shining star of Russia's burgeoning technology brigade. The company provides full- scale IT services, ranging from network design and installation to various consultancy services.

"The desire to get big investments and be on good terms with the government has been driving IT lately," said Eugene Peskin, vice president at IBS.

IBS could be the first Russian technology company to offer an IPO (initial public offering), sometime next year, either in Europe or the US, according to Peskin.

In addition to software and services, many of Russia's technology executives look for the server-driven data center market to explode in the country in coming years, and for a widespread adoption of the Linux operating system by the government.

Up to now, unconnected PCs populated companies and organizations in the consumer, business and government sectors, according to Eugene Shablygin, an executive at Moscow-based Jet Info Systems which focuses on implementing Unix-based data centers. Dell Computer Corp. stands as the leading PC supplier in a country that has rejected the need for large data centers or server-based computing models, he said.

In the early 1990s, Hewlett-Packard Co. set up a complex network to handle the Moscow Interbank currency exchange, and IBM Corp. designed a railway ticket reservation systems, he noted. But these two examples, stand as rarities in a country flooded with PCs and absent of servers.

Several competing companies want large Russian organizations to adopt a more networked approach to computing and believe this push could generate large amounts of revenue for systems integrators. If the emerging Russian data center companies can make headway in the back-end computing arena, they could be the biggest Russian success stories in the years ahead, Shablygin said.

Russia has a world-renowned tradition of fostering creative problem solvers with strong scientific backgrounds, conference panelists agreed. Though challenges remain, the country is starting to get right mix of foreign investment, infrastructure improvements and regulatory change, and is poised to play a role in international IT development.

BISNIS can be reached at and will have a collection of speeches and documents from the conference in the coming week.

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