Russia's IT sector failed to grab the opportunity opened by the exodus of foreign vendors, and prospects for 2025 lack optimism.

Slowing growth

When major Western IT vendors left Russia following the invasion of Ukraine in February 2022, many saw it as a window of opportunity for local IT companies that would step in to satisfy the economy's need for tech solutions. The government also encouraged the substitution of Western solutions with Russia-made equivalents.

And although Russia's tech sector showed substantial growth in ruble terms, it was not as impressive as in the years preceding the war in Ukraine.

According to Russia's statistics agency RosStat, the IT sector's growth has been slowing down. While in 2019-2021 growth amounted to 13.5% per year, and in the 2012-2021 ten-year period it stood at 11.9% per year, in 2022-2023 the average growth rate was just 7.5%.

Moreover, in a situation of restricted competition and companies' being forced to purchase domestic software products, any rise in revenue is to a great extent driven by increased prices against the backdrop of higher costs for tech firms.

Over the last three years, the number of employees in the tech sector has grown by 40%, while the average salary has been up by 70%. Incidentally, this situation has been also typical of the Russian economy's other sectors lately.

 

Missed opportunity

Despite seemingly favourable conditions, Russia's IT sector has failed to make a breakthrough in the last three years. Despite deadlines set by the government, Russian companies are apparently in no hurry to switch to domestic software due to high prices, inferior quality and poor system compatibility. According to surveys, no more than 20% of companies that were required to switch to Russia-made software solutions have done so.

Experts say that it is impossible to create a full-fledged environment for domestic software and IT solutions in such a relatively small market as Russia. As a result, the Russian IT industry is likely to develop under a model in which only a small number of companies – and, primarily, those controlled by the government – will be forced to switch to local IT solutions, while the rest will be largely focused on imports from China.

 

Failed import substitution

Despite the Russian government's demands that local companies switch to IT solutions supplied by domestic firms, a relatively small number have actually done that.

Experts recently surveyed by the Russian business daily Kommersant estimated that only between 15% and 20% of local companies made the January 1 deadline for switching to locally made IT solutions.

Under a study by K2 Cybersecurity, the public sector is predictably more successful in import substitution of software and equipment, with about 43% of the companies having completed the switch, while about 30% of companies in the energy and financial sectors have done so. Meanwhile, for the rest of the companies, the proportion is no higher than 20%.

Interestingly, the study revealed that a large proportion of businesses understand "import substitution" as replacement of Western IT systems with Chinese solutions. Roughly 30% of Russian companies are reportedly interested purchasing Chinese software.

About 30% of surveyed companies complained about the lack of domestic equivalents of software solutions they need, and another 30% pointed out to their inferior quality. Overall, roughly 75% of respondents faced problems when switching to Russian software.

One of the main complaints, along with insufficient functionalities, turn out to be the incompatibility between new solutions supplied by Russian companies and those already in use. Only just above 10% of respondents said that their IT systems have been fully integrated. 21% called their IT systems "inconsistent" and "convoluted."

Russian IT products are widely believed to be inferior to Western equivalents in terms of functionality and stability, because the latter were built and tested for years or even decades, as opposed to hastily made software solutions offered by Russian firms lately.

In addition, Russian software developers, forced to operate almost exclusively in the domestic market and with little or no competition, are unable to come up with truly competitive and innovative products.

The government-run Centre for Macroeconomic Analysis and Short-Term Forecasting (CMACF) has recently presented three possible scenarios for the Russian IT industry, which include "active expansion," "strong collaboration with China" and "focus on the local market."

Under the present conditions, only the second and third scenarios are realistic, while CMACF experts also pointed out to the threat of "forced import substitution," meaning the use of inferior-quality locally developed IT solutions to satisfy "import substitution" conditions set by the government and avoid possible penalties.

 

State support to no avail

In the last three years, the Russian government has taken some steps aimed at supporting the local IT sector in a move to achieve "import substitution." IT companies have received support in the form of tax benefits, subsidies and forced demand for domestic software, which was created by import substitution requirements.

In terms of benefits, the key measure was the abolition of the profit tax. However, even before that, the rate was relatively low, standing at only 3%. This figure was set during the COVID-19 pandemic to prevent companies from relocating to Cyprus, where the IT sector's profits were taxed at a rate of 2.5%.

In addition, to compensate for the virtual absence of the venture capital market, small and medium-sized companies (SMEs) were permitted to borrow at 3% per year. Still, as early as in late 2023, according to Kommersant, banks began to raise rates to market levels on loans that had already been granted, saying that the government had not allocated funds to compensate them.

 

Little optimism, moving forward

At this point, prospects of the Russian IT sectors don't look rosy. The government is already rolling back the privileges that the industry has enjoyed in recent years. In 2025, IT companies will again start paying income tax at a rate of 5% – although still very low, compared with 25% for the other sectors. Still, even that increase will lead to a higher tax burden, while, as of 2027, IT companies will have to pay the standard 25% income tax.

One sign that the Russian IT sector is already feeling the squeeze are layoffs at major IT companies that began in late 2024 and are viewed by many as a harbinger of tough times ahead. The Russian business magazine The Bell reported that some large companies, including Sber, VK and MTS, had laid off entire development teams. The market has begun to shrink, and new areas that have not yet proved their economic efficiency are going to shrink.

According to Kommersant, three of the largest employers in the IT sector – Lanit, MTS and Vimpelcom – reduced the number of posted vacancies for IT specialists by 15-18% in 2024. The total number of vacancies in the market, according to the recruitment service Habr.Career, has decreased by 5% so far and is likely to shrink further.

What is already clear at this point is that the Russian IT sector failed to use the window of opportunity opened due to Western vendors' departure, and is unlikely to achieve any major breakthroughs in the coming years.