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. Last Updated: 07/27/2016

Oil Dollars Fuel Boom in IT Sector

VedomostiMikhail Lyashch
Russia's oil boom is driving the domestic IT sector to grow nearly three times faster than the rest of the economy, the country's leading IT companies said Wednesday.

As the petrodollars pour in, Russian businesses are beginning to adopt more sophisticated IT systems while the government makes large-scale IT investments, said Mikhail Lyashch, president of Compulink.

Government programs such as Electronic Russia, which aims to propagate the use of high-tech equipment across the country, translate into multimillion-dollar contracts for the sector, Lyashch said, speaking at an investment conference organized by Interfax and Britain's Chatham House think tank. The IT market is expanding at a rate of about 27 percent annually, triple the rate of gross domestic product growth, said Oleg Kuzhikov, vice president of mergers and acquisitions of IBS holding. Last year, the economy grew by 7.2 percent.

The country's IT market -- including software development, IT services and hardware sales -- is set to top $23 billion by the end of 2005, according to J'Son & Partners.

"Oil and gas resources are limited, while IT is based on a limitless, renewable resource -- the human intellect," said Mikhail Krasnov, president of Verysell Group.

Hardware sales currently make up about 67 percent of the total market, Kuzhikov said. But as Russia's economy develops, the IT services segment, now 13 percent of the total market, is set for explosive growth, he said.

By 2010, IT services will be greater than hardware sales by market share, said Sergei Gorbuntsov, an analyst with J'Son & Partners.

Overall, the country's competitive advantage lies in providing "non-standard solutions" for complex problems, Krasnov said, in part thanks to Russia's tradition of science education.

Just over a year after opening an R&D center in St. Petersburg, Sun Microsystems now has some 300 programmers there, making Russia its second-largest overseas development location after India, said Sun's marketing director, Sergei Moiseyev.

As the IT market continues its double-digit growth, more domestic companies will start searching for capital to expand. IBS, which includes software developer Luxoft and other high-profile IT businesses, held a private offering last week, raising funds from undisclosed Western and Russian investors, Kuzhikov said. On Monday, Vedomosti reported that the company had raised $113 million by selling roughly 33 percent of its shares.

Compulink and Verysell are considering IPOs in the near future.

"Investment in people is always very risky" compared to investment in tangible capital, Compulink's Lyashch said. Nevertheless, he said, market consolidation is under way.

Major players will continue to gobble up small IT companies, said J'Son & Partners' Gorbuntsov, and eventually no more than five large domestic IT companies will remain.