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Press about Auriga

Oct 21, 2002

Expert: Act Fast or Miss Out on Outsourcing Boom

The St.Petersburg Times,
Yuriy Humber

Time is running out for Russia to capture a significant slice of the IT outsourcing market and recent government steps are on the wrong tack, a senior figure in the industry said Friday.

"Russia has a window of two years" to kick-start the development of its Information Technology sector, Alexis Sukharev, president of Auriga software developing firm, said at the sidelines of a Russian Outsourcing and Software Summit (ROSS) 2005 held in St. Petersburg last week.

Sukharev, named by The New York Times as the godfather of Russian outsourcing, warned that either the ITstrong India or new competitors like China and the Philippines will come to dominate the outsourcing market, since the initiative to stimulate the domestic industry has been left in the hands of the "wrong" ministry.

"We thought that we have a ministry which has proper resources and really knows what's going on - the IT and Communications Ministry headed by Leonid Reiman - but the responsibility for legislature reform went to another ministry," Sukharev said.

After his visit to Bangalore in India last December, President Vladimir Putin ordered the drafting of a law that could stimulate Russia's IT sector growth using India as a model.

The task was delegated to the Economic Development and Trade Ministry, which adapted a law on special economic zones to accommodate the creation of hi-tech parks in Russia. The draft bill is in its second reading at the State Duma and expected by the head of the economic ministry, German Gref, to come into force by the end of the spring session.

At ROSS 2005 heads of Russian IT firms judged the law to be largely impractical, spun together without any discussion or dialogue with the companies to which it will apply.

A source at the IT ministry agreed, saying suggestions to create a special economic zone exclusively for IT companies, put forward from their side to the economics ministry where swept aside. As it stands, the draft law "will not aid the IT sector development whatsoever," the source said.

Meanwhile, IT firms wonder who they need to address for attention.

"First, the law doesn't have anything to do with the industry: and now it looks like the two ministries are fighting each other," Sukharev said. "It's like a circus."

Despite invitations to ROSS 2005 among other steps IT firms have made towards cooperation with the government, only a representative of the IT ministry attended the event. Galina Bronnikova, spokeswoman for the economic ministry, said Friday that the absence of a representative from their side was "probably due to a good reason," although she was not sure which.

Igor Tikhy, director for business development at Artezio, a software developing firm, keeps less despondent about the situation, if only because there is nothing to lose he says. "It's the first time that the state has tried to give us any benefits," Tikhy said. "There's simply no experience of [the IT sector] working with the government and cooperation needs to be learned. At least the law has highlighted points that need government's support," he said.

Concrete steps

The Economic Development and Trade Ministry proposed setting up two types of special zones - for manufacturing and hi-tech. Within the zones, the state will offer a reduction in social tax from 26 percent to 14 percent, a chance to import equipment without paying customs duties, and the construction of modern infrastructure to be financed by the state, Bronnikova said.

The favorable tax rates that will expire after a 20-year period. "The law will not, however, aim to be the only instrument of support for the development of IT [in Russia]," Bronnikova said via e-mail. She did not specify what other instruments of support will be made available.

Analysts see the proposals as positive, but a tricky "carrot" to hang in front of IT firms at a time when many there are still many memories of closed tax-free zones having been subsequently investigated by the tax authorities.

"A leap of faith and perhaps some official guarantees will be required that back-tax bills will not be drawn up in the future for having taken advantage of incentives that seemed legal at the time," Alfa Bank said in a research note.

What's more, IT firms say the special economic zones will not prove practical or even feasible for the vast majority of companies and the zones' benefits would be better applied in cities.

"It makes more sense to keep an office in Moscow or a small branch in a Nizhny Novgorod or Kazan," Tikhy said. "The hi-tech parks will bring more people to work in the industry, but they won't attract those that are already working in Moscow. Would you move to live in an empty field?"

Learn by example

Instead of pushing through reform with the special economic zones, the government should focus on "investing its money wisely," Sukharev said.

"If we want to achieve what the Indians achieved we have to pay attention to modern IT education," he said.

Harking to the Indian model, Sukharev proposes establishing special IT units on the base of five or six elite universities. The units would pay higher professor salaries, student grants, and run an industry-directed curriculum.

"Intel will invest a few pieces of equipment here and there, but no one will put in a major investment apart from the government : Generally, we could do very useful things with $1 billion to $2 billion," Sukharev said.

The fate of the IT industry without such investments is difficult to predict, and not all are willing to write off Russia's opportunities on the world market as having a time limit. However, there is a real chance that the domestic software firms will be bought out by global rivals.

Artezio's Tikhy notes that attempts by Indian IT firms to buy Russian companies have been made. Sukharev rates China as "hav[ing] a very good chance" in the global outsourcing market.

Meanwhile, with the size of India's population, 1.5 billion people to Russia's 140 million people, India will always have a bigger pool of staff, Tikhy said.

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