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While the Russian economy has developed rapidly over the last five years, spending on information technology, process automation and productivity systems still lags considerably behind developed economies. This presents considerable opportunities for Australian IT and consulting companies to help Russian clients address technical and process changes needed to remain internationally competitive.
Russia is one of the fastest growing emerging markets in the world. Its economy has performed consistently well in recent years, achieving its sixth successive year of GDP growth in 2004. Russia's average GDP growth rate of 7 per cent over five years is a rate that few other Central European countries have been able to match. In 2005, the official GDP growth forecast is 5.8 per cent.
Economic growth has been largely dependent on a number of external factors, including high world commodity prices for major Russian exports (oil, oil products, natural gas and metals). These export industries have carried the whole economy forward, encouraging new development in agriculture, industrial manufacturing and processing and consumer retail.
The birth of new enterprises and modernisation of existing facilities is encouraging rapid development of business infrastructure. Information technology, software, telecommunications, consulting and related services are in demand to fulfil Russia's development ambitions. This provides outstanding opportunities for Australian companies, particularly in areas where the overlapping economic profiles of the two countries mean Australian companies have world-leading expertise (such as mining, oil and gas, agriculture and telecommunications).
According to market experts, the Russian IT market in 2003 was worth US$6–7 billion, representing a 23 per cent increase on the previous year. Thus IT accounts for almost 1.2 per cent of total GDP. Continued growth in the IT sector is expected to be driven by growing Russian business and consumer spending.
Currently Russian businesses spend on average just 2–3 per cent of annual revenue on IT products, compared to 10–15 per cent in developed markets. For this reason, experts predict the value of the Russian IT market to almost double to US$11.5 billion by 2007.
Key areas of opportunity
The key areas of opportunity for Australian IT and consulting companies in the Russian and CIS markets include:
- Banking and financial software;
- Business applications and related services;
- Insurance systems;
- E-government;
- E-learning.
High growth in software and services
High value-added areas such as software and services are growing rapidly. In 2003, the IT services industry (including systems and network integration, software upgrades, outsourcing and consulting) was valued at US$1.5 billion dollars, representing 28 per cent growth on 2002. Of this, 31 per cent of spending went to systems integration and 23 per cent to implementation and customisation of software. Experts predict that by 2008 the IT services market will be worth about US$4.76 million.
In 2004, IT services were greatly sought by financial services organisations, which accounted for 19 per cent of all services business. Demand for IT services was lower among manufacturing and telecommunication firms.
The Russian state sector is currently developing many new IT projects under a Russian Federal Government program called "Electronic Russia". The bulk of the IT services market is focused on large-scale projects, although analysts expect the share of small to medium projects to increase in the near future.
Increasing PC and internet penetration
Rising incomes and the need to upgrade business equipment have contributed to fast growth in IT hardware sales. Some 55–65 per cent of IT spending is comprised of hardware, including desktop and portable computers, servers, network infrastructure, communications equipment and spare parts.
By 2007, it is estimated that 246 in every 1000 people will have a home computer. This will mean the number of home computers will have increased 2.7 times since 2002. The number of internet users is constantly growing and by 2007 will reach 32 million people. This exceeds the 2002 level three-fold. Broadband usage is still below western levels owing to high prices.
Booming telecommunications usage
Telecommunications is one of the most dynamic sectors in Russia, with estimated growth of 35 per cent in 2003. The telecommunications sector accounts for 2 per cent of GDP, compared to an average of 5 per cent in western countries. The combined value of telecommunications and related companies was estimated at US$28 billion in 2003. The small size of the domestic telecommunications manufacturing industry reflects customer demand for cheaper imported equipment or hardware supplied by manufacturers on credit.
Partnership opportunities abound
It is estimated that US$60 billion worth of investment is required to bring the Russian telecommunications industry up to international standards. While technical skills are in abundant supply, Russian IT companies often lack access to financing and management experience.
For this reason, the majority of Russian businesses requiring IT services prefer to use western-trained specialists and international companies for projects. Australian companies should aim to establish contact with leading IT and telecommunications industry players by supplying advanced technical equipment.
Many Australian IT and consulting companies have successfully tendered for projects. Opportunities are opening up for Australian companies to work in collaboration with the Russian IT industry on training and projects to develop the IT industry. Growth of the Russian IT sector will be dependent on continued growth in the Russian economy and access to global distribution channels.
Success story: Mincom
As Australian software and services provider Mincom Limited looked around the world for expansion opportunities in 2000, it set its sights on Russia, one of the last great untapped markets for information technology companies.
With its enormous mineral wealth and
"Mincom saw a great opportunity to help transform the Russian mining industry though the use of our innovative solutions", said Mincom Chief Executive Richard Mathews.
Against this backdrop Mincom aimed high in its quest to establish a foothold in the Russian market by targeting Norilsk Nickel, the world's largest nickel producer (with a 10 per cent global market share) and a pillar of the Russian economy.
Norilsk Nickel contributes 1.9 per cent of Russia's gross domestic product, 2.8 per cent of its industrial output and 4.3 per cent of the nation's exports.
Mincom's timing was good as Norilsk Nickel had made a commitment to modernise its business through the introduction of modern technology and it was enjoying the benefits of soaring demand for nickel, particularly from China.
After several years of talks Norilsk Nickel signed contracts in 2003 to buy the Mincom Ellipse enterprise resource planning (ERP) software and the Mincom MineScape mine modelling software.
"Although Mincom is providing Norilsk Nickel with software as well as consulting, support and maintenance services, our most important role is to help the company with business improvement", Mr. Mathews said, "Our software is simply the agent of change in this modernisation program."
It was quite an achievement for Mincom, which has customers in the mining, utilities, transport and defence sectors in more than 40 countries and more than 1,000 staff in 17 offices on all continents.
Mincom worked closely with Austrade to identify opportunities to sell the company's software and services to Russian mining companies.
"As a result of excellent introductions from the Australian Department of Foreign Affairs and Trade and Austrade, Mincom gained entry into key boardrooms in Moscow", Mr. Mathews said, "The Austrade team provided market research, briefing, translation and introductory services to Mincom in Russia."
Mr. Mathews said that Mincom planned to grow its business in Russia by generating more sales from mining and actively targeting utility organisations.
"We hope to participate in the unbundling of the Russian electricity sector by providing services to newly privatised utilities", he said.