The Russian Ministry of Economic Development presented a draft concept of a new extraterritorial Special Economic Zone for IT companies (or Cyber Economic Zone). According to the Ministry, the zone should help to stimulate the export of IT goods and services and aims to implement the May 2018 Presidential Decrees which require the overall increase of non-commodity exports.
Currently, according to Gartner, a research and consulting company specializing in the information technology markets, the Russian IT services market accounts for only 0.5% of the world market. A large proportion of the market are held by the software development and testing services (45%) as well as data processing and storage services (25%).
What constraints are there for the growth of the IT market in Russia?
One of the main factors is the problem of the migration of specialists and the resulting lack of qualified programmers. Currently just over 1 million software developers and analysts, database and network specialists are based in Russia which is 27 times lower than the total number of programmers in the world in the year 2018. This ultimately means that when authorities successfully expand the Russian IT market and make it more attractive for foreign companies and should the number of specialists remain unchanged, the market players would have to use the labor resources outside of Russia and would thus cause the loss of the main advantage of the labor low-cost of the Russian IT market .
Russia also has a trend of registering their companies and IP rights under foreign jurisdictions. The reasoning behind such a trend includes favorable taxation and more developed IPR protection systems in foreign countries. These unique circumstances have caused the situation where only labor costs and some proportion of the revenue gained from the distribution of software remains within the Russian market.
According to the independent study Startup Barometer 2018, 63% of the founders of existing companies have a negative experience of a project failure, and only 30% of respondents have entrepreneurial experience and have previously had their own business.
Moreover, only 29% of Russian IT startups have external investors, while almost all startups in America’s Silicon Valley receive venture capital investments. Currently banks remain the main external source of funds for the IT market in Russia. At the same time, due to the possibility of totally remote operation of IT companies most of the them do not have immovable property that could be used as the guarantee for the loan.
Cyber Economic Zone
Preferences and benefits of the Special Economic Zone (SEZ) would be aimed to improve the situation over the first two problematic areas as identified above, while others related to the business educational area shall be covered by the Russian Ministry of Economic Development in the Project of Development of the IT Sector in Russia for the period of 2019-2025.
Going deeper into the regime of the SEZ, in order to create a better environment for IT specialists, the project offers personal income tax exemptions, as well as visa-free entry for foreign IT specialists.
At the same time, the SEZ regime offers IT companies the deduction of customs duties for the import of equipment that does not have any counterparts in the Russian market . The project also prescribes for granting companies exemptions in relation to revenue, property, dividends, land tax and value added tax. These actions are aimed to attract foreign companies to Russian IT market and make Russian companies willing to stay within the Russian jurisdiction.
Residents of the SEZ would include Russian companies (including those fully owned by foreigners) with 50% or more of export revenues. The Ministry has also identified industries in which companies could apply for residence in the SEZ, such as software promotion, including computer games, E-sports, audiovisual and music production.
Currently, the project is still under the stage of discussion, in the case of successful adoption it would be a significant step forward in the development of the Russian IT sector. While the IT market in Russia was constrained for various reasons in the past, the establishment of the SEZ may create chances to stimulate the export of IT goods. At the same time, the success of the Cyber Economic Zone may also highly contribute to the development of the IT job market, therefore it may be a good chance to invest in an IT company in Russia in the near future.