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. Last Updated: 07/27/2016

Market's Hopes on IT as Oil Loses Its Luster

Oil revenues, the bedrock of the country's economy for more than a decade, went soft this month beneath the nation's feet.

Warm weather cut into U.S. demand for heating oil, while the Organization of Petroleum Exporting Countries fell short on its promised supply cuts. Global stockpiles soared, and the oil price bottomed out at about $55 per barrel over the holiday break. Then, in the year's first week of trading, commodity stocks fell hard across the board.

The bulls of the fourth quarter of 2006, in which the blue chip-heavy RTS index gained 24 percent, suddenly looked weak in the knees.

The trend may continue if the oil price stays at about $50 per barrel and commodity stocks sour in 2007 -- a scenario that analysts would not dismiss.

The main hope for picking up the slack in such a scenario would be the IT sector, said Peter Westin, chief economist at MDM Bank, adding that the sector had enjoyed annual growth of at least 30 percent for the past five years.

Arguably the biggest single Russian IT breakthrough was the invention of the Tetris video game two decades ago. Since its inventor, Alexei Pazhitnov, went to work for Microsoft, things have been pretty quiet.

The IT sector only showed new signs of life after President Vladimir Putin made his 2004 visit to Bangalore, the hub of India's IT sector. Putin earmarked $2 billion for IT development and pledged vast tax breaks to help businessmen create "Russian Bangalores."

Seven technology parks -- town-sized clusters of high-tech firms with room for thousands of live-in employees -- have since gone into development around the country. But Russian IT exports only topped the $1 billion mark in 2005, while India exports around $22 billion worth of software per year, said Alexei Sukharev, president of Moscow-based IT consultancy Auriga.

Opportunities for private investment in the country's IT sector are also straggling. IBS is the only listed IT firm in Russia, and Sitronics the only one slated to go public this year.

There is much more promise in the country's IT outsourcing industry, said Barry Schumaker, IT analyst at Alfa Bank. Russia is the world's No. 3 outsourcing market after China and India.

But it is a distant third. Russia's largest IT outsourcing brokerage, Luxoft, announced $65 million in revenues for 2006, while Wipro, its Indian counterpart, brought in about $3 billion.

"In absolute terms, [IT outsourcing in Russia] is tiny next to India and China. And as a part of the larger economy it is microscopic," said Kim Iskyan, head of research at MDM Bank.

But, according to a study released last week by Silicon Valley, California-based consultancy NeoIT, Russian outsourcing will grow by 40 percent to 45 percent in 2007, possibly making it a "major competitor" with India as early as next year.

Russia's advantage is not in its labor cost but in the expertise of its IT workers, analysts said.

"If you have saturation in India and China, then Russia is a candidate," MDM's Westin said.

But a study released in December by Sukharev's Auriga said Russian and Indian universities were training IT workers at almost the same pace -- around 250,000 graduates per year -- making saturation seem somewhat unlikely.

So if commodities continue to sink, Russia's plan B may depend on the IT workforce of the two most populous nations becoming "saturated."

Failing that, Russia can export more building materials, Westin said.