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. Last Updated: 07/27/2016

Inaction Derails Country's IT Boom

President Vladimir Putin's ambitious plans to turn the country's IT industry into an economic powerhouse are being derailed by labyrinthine bureaucracy and endless jousting by government officials, industry players say.

Enamored with India's information technology landscape after his visit to Bangalore in 2004, Putin pledged to help diversify the country's export base away from natural resources and toward innovative high-tech. A month later, Putin announced the first tax incentives for IT investors during a visit to the Akademgorodok scientific center in Novosibirsk.

Promised tax breaks have not materialized, however, and now there seem to be as many IT policies as there are ministries, leading IT companies say.

"The biggest hurdle is the unwillingness of the Economic Development and Trade Ministry, the Finance Ministry and the IT and Communications Ministry to work out a coordinated strategy for IT development," said Valentin Makarov, president of Russoft, an association of Russian software developers. "Bureaucracy remains the main stumbling block to kick-starting the innovation economy.

"Government officials, for example, have been unable to reach a consensus on how to reform taxation," he said.

After Putin called for tax breaks in early 2005, amendments to the law on unified social taxes were drafted that aimed to reduce the rate for IT companies. The amendments went through so many revisions in the State Duma, however, that they lost much of their meaning by the time they were finally passed last year.

"Like every other initiative, the proposed special tax regime for IT exporters was lost in the labyrinth between the Duma, the presidential administration and the Finance Ministry," said Sergei Matsotsky, general director of leading IT firm Information Business Systems.

Matsotsky said the original legislation would have spurred the IT industry and made it competitive with India and China. But seemingly never-ending promises and declarations from state officials took precedence over real action, he said.

As the law stands now, IT companies can qualify for tax relief if they export 70 percent of their goods and employ at least 50 people. But no company can claim the relief because the law, which came into force Jan. 1, also requires them to register with a special government agency, which has yet to be created.

Bureaucracy has also beset attempts to simplify export duties on software and reduce the value-added tax.

Software exporters have complained that it is next to impossible to reclaim VAT on exports due to outdated legislation and obstructive bureaucracy. They also wanted the VAT to be drastically reduced or abolished altogether.

Both Finance Minister Alexei Kudrin and Economic Development and Trade Minister German Gref had staunchly opposed reduction of the VAT from 18 percent to 13 percent as proposed by Prime Minister Mikhail Fradkov, arguing that the cut would boost inflation, strengthen the ruble and cause a budget deficit.

Kudrin has also said on several occasions that reducing the tax will prevent the government from meeting inflation targets and stifle positive financial measures.

Anton Danilov-Danilyan, a former economic aide to Putin, singled out Kudrin's ministry as the main government agency blocking tax reforms. "Whatever economic decision is made and whatever directive is given by the president, the position of the Finance Ministry eventually dominates all others," he said. "Kudrin is the man Putin trusts in fiscal decision-making. ... In the fiscal sphere, he is authority No. 1 for Putin."

A Finance Ministry spokesman declined to respond to Danilov-Danilyan's comments.

Repeated requests to the IT and Communications Ministry for comment were declined. A spokesman did say that individuals were entitled to free speech.

He referred questions to the Federal Tax Service, which also declined to comment.

Despite the bureaucracy, some strides are being made in IT.

Earlier this year, Putin put First Deputy Prime Minister Sergei Ivanov in charge of the government's diversification efforts and of developing what he termed "the innovation economy." The president also announced that $1 billion would be set aside to develop nanotechnology, and the Duma recently approved legislation to create a state company called the Russian Nanotechnology Corporation.

The government also plans to sink $740 million into the creation of technology parks over the next two years, IT and Communications Minister Leonid Reiman said in June at a investment conference. He said he expected IT exports to increase from last year's $1.5 billion to $12.5 billion by 2010.

IT players said they were ready to displace the resource-based economy but that bureaucracy needed to loosen its stranglehold for this to happen.

"There is Reiman's ministry, there is Gref's ministry, there is Kudrin's ministry and to some extent, there is Putin's ministry. Each has its own idea on how the IT industry should evolve," said Alexei Sukharev, president of Auriga, a U.S. IT outsourcing-services provider with development centers in Moscow, Kazan and St. Petersburg.

"There are always good intentions on the part of the government, and Putin certainly gave the right impulse, especially after his visit to Bangalore in December 2004," Sukharev said. "But what is happening on the ground is quite a different story."