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International Herald Tribune, Monday, May 28, 2001

Russia Takes Advantage of Brain Power at Home

By John Varoli

ST. PETERSBURG This city has earned a number of nicknames in its 300-year history - Venice of the North, the Northern Palmir and Russia's Cultural Capital. Now St. Petersburg has joined the growing list of places trying to add a "Silicon Valley" nickname.

The city is home to a large community of computer programmers who are fueling a growing outsourcing industry to international companies.

Calling St. Petersburg "Russia's Silicon Valley," as some of the locals do, is hyperbole since the amount of revenue generated by information technology here is still a fraction of that in California, but the city is indeed a strong newcomer to the software outsourcing boom that exploded in countries such as India and Ireland in the 1990s.

Many business people and analysts say a number of Russian cities, especially St. Petersburg, are already becoming important centers of information technology development for the next decade.

Trying to strengthen this tendency, Russia will host its first Software Outsourcing Summit beginning this week in St. Petersburg. The event will bring together leading information technology business leaders, scientists, programmers and government officials to discuss ways to promote outsourcing in the country.

Russia's outsourcing centers are primarily in three cities - Moscow, St. Petersburg and Novosibirsk in Siberia. But for a number of reasons, St. Petersburg is proving to be the leader of the group.

"St. Petersburg is the intellectual capital of Russia, software engineers are superb," said Regina Velton, president and chief executive of eVelopers Corp., a privately held company based in San Jose, California. "St. Pete has 10 world-class universities, and it has all the necessary infrastructure, including convenient geographical location for telecommunication connections."

St. Petersburg universities, for example, finished first and third in the IBM-sponsored world computer programming championship in Vancouver, British Columbia, in March. The first-place team, staffed by three third-year students in the mathematics and mechanics department at St. Petersburg State University, successfully defended the crown it first claimed the year before in Orlando, Florida.

This wealth of talent convinced eVelopers, which sells e-business applications to American companies, to open its only development center in St. Petersburg. Now, the company employs 25 programmers there, while management is based in California.

Ectaco Inc., a privately owned New York company founded by Russian emigrants in 1990 to produce handheld electronic dictionaries, opened its development center in St. Petersburg in 1998 to make the software, while the actual dictionary was produced in Hong Kong.

The company also began outsourcing for U.S. companies that were creating embedded systems and software. Now, Ectaco wants to jump from onetime outsourcing deals to long-term cooperation, giving each client a customized development center.

"This is a way to get around the current IT personnel shortage in the West," said Igor Kotelnikov, director of Ectaco's outsourcing group. "In Russia, programmers are a fraction of the cost, but quality is high - plus the advantage with our company is it has American management."

That formula is proving successful. The company began in April 1998 with one employee, and now has 100 programmers; that figure is expected to double this year as Ectaco's workload rises rapidly.

Since Peter the Great founded St. Petersburg nearly 300 years ago, most of the city's industry had been defense-oriented. After the Soviet Union collapsed in 1991, many of the factories that supplied the defense industry collapsed too, and a lot of its scientific minds emigrated, retired or took unskilled jobs.

Talk of Russia's "brain drain" became a national obsession as the country's best minds left for better salaries in developed countries. That is changing.

"Russia's brains are now finding jobs in the new economy," Mr. Kotelnikov said. "The brain drain is not beneficial to anyone because there are cultural and emotional obstacles to overcome when people relocate to a foreign country, and they are more expensive in the West."

Outsourcing is seen as a win-win situation. While the job gets done for a lot less money, the average programmer's monthly salary of about $600 allows him or her to live a good life in Russia, where salaries average about $100 a month.

According to a recent report by the American Chamber of Commerce in Russia, the country has as many as 8,000 programmers working in outsourcing, each year producing services worth $60 million to $100 million - and that figure is expected to grow as much as 60 percent annually.

By comparison, India's outsourcing industry has soared from $110 million in 1990 to a $6.3 billion forecast for 2001, according to India's National Association of Software and Service Companies.

Some analysts say Russia stands a good chance of catching India over the long run. They point out that Russian technical personnel trained in the Soviet era have experience working on complex tasks for the military, nuclear and space programs.

Indeed, many such people have found jobs in the new economy, said Anton Epifanov, senior vice president of Ectaco, who himself worked in the military-industrial complex, developing radio systems for the USSR's Buran space shuttle.

"None of the other major centers of offshore software development in the world have as many qualified engineers and software development with experience on such complex projects," said the American Chamber of Commerce report.

"Indian programmers, for example, do not have such wide experience with different technologies: Their experience is typically limited to working in large software development factories," the report said, adding that Russian programmers have "more breadth of experience and the ability to think laterally during problem solving."

Russia might have a lot of potential for programming, but growth remains hampered by political instability and poor legislation regulating the industry, said Andrei Fedorov, chief executive and co-owner of Digital Design, a St. Petersburg-based systems integration and programming concern.

He said 80 percent of his company's programming was for Russian companies. And though outsourcing sales were expected to double this year to $1 million, he said, the company spends much of its time wrangling with Russian bureaucratic chaos.

The information technology industry in Russia lacks an effective legal base, especially regarding taxation and the export of technology, Mr. Fedorov said. Russia's version of the IRS, the Tax Inspectorate, hardly recognizes the word Internet and seems incapable of understanding that goods - in this case, software - can be transmitted to the United States via the telephone line, he added.

Still, despite these problems and the crisis that has hit the global IT industry, directors see growth in Russia.

"We expect the IT crisis in the West to be positive for our company," Mr. Kotelnikov with Ectaco said. "Companies will have to cut costs and so we think they will prefer our services, which give top quality at a much cheaper price."

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