Since the invasion of Ukraine in February 2022 and the ensuing Western sanctions, the Russian authorities have been trying to replace foreign software with local solutions. This could act as a significant boost to the Russian software industry, but significant hurdles lie ahead for local software firms if they want to move into the gap.

At first sight, the import substitution drive should open up new opportunities for Russian IT firms. Among the clear winners from major global software firms such as SAP exiting the Russian market are companies operating in the same areas. One good example of such a company is 1C, which builds ERP systems comparable to those previously supplied by SAP.

However, not all Russian software firms chose to stay in the country after the invasion of Ukraine. For instance, one of Russia's best known IT companies, Luxoft, which used to have offices in Moscow, St. Petersburg, Omsk, Dubna and Nizhni Novgorod, relocated most of its staff to Serbia, Poland and Singapore. In April 2023, Luxoft sold what remained of its Russian business to IBS, completing its exit from the country.

Those companies that stayed in Russia are seeing much more substantial demand for their products but they are also facing obstacles. Primarily, they need investment, as they have to scale their production to meet growing demand. But they are also facing technology issues and personnel shortages following a mass exodus of IT professionals from Russia last year.

It is still too early to say if Russian IT companies have been able to adequately replace imported software solutions with local equivalents as new fully-fledged software takes many months or even years. Pavel Kalyakin, general director of the company MoyOfis was quoted by the business news outlet PBWM as saying that full migration of a company's IT infrastructure to new software takes between one year and two years, while another six months is required for testing.

Long and expensive

Since last year, the share of Russian software in the economy has definitely grown, but the time it takes to substitute imported solutions is also on the rise, as Russian IT firms try to cope with the increasing demand.

As a share of the total investment in software development by Russian companies and state institutions, locally developed solutions currently account for 53%, up from 45% a year ago, the competence centre for import substitution in the area of information and communication technology recently announced.

However, the average delivery time for a locally developed software solution has increased even more dramatically. According to Alexei Martyntsev, director of the information and IT infrastructure protection at miner Norilsk Nickel, Russian software solutions satisfy all security requirements, but delivery times for such solutions can be up to 12 months.

"We are ready to buy [local software solutions], but they wouldn't be able to sell it to us," he was quoted as saying by the Russian business daily Kommersant.

Andrei Barinov, director of the network security portfolio at Solar Dozor, added that things are especially complicated when it comes to solutions involving both software and hardware.

"If you place a large order, and the vendor doesn't have the equipment in the warehouse, you'll wait between one month and six months for the delivery, and only then they would begin deployment and integration," he said.

Moreover, contrary to the popular belief that Russian software solutions should be cheaper than imported equivalents due to lower salaries, the price tag for locally-developed IT system is not very different from what Russian companies used to pay for software purchased from foreign vendors.

According to Kommersant, many companies currently use a "hybrid" approach, combining locally developed software with imported programmes.  However, this results in extra maintenance costs. In addition, incompatibilities between imported and local solution may create extra hurdles.

Carrot and stick

The Russian government has been pushing for replacing imported software solutions with local equivalents, mostly on security grounds. To pursue that drive, it is using a carrot and stick approach.

Back in March 2022, Russia adopted a law banning the use of foreign-made software by companies belonging to the "critical information infrastructure" as of 2025. However, it is already clear that the deadline is unrealistic.

In the spring of 2023, companies in the energy sector requested an extension of the deadline to 2026 or even 2028, warning about the risk of energy shortages. However, the government is apparently dragging its feet, with no decision made so far.

To speed up the process of replacing imported software with local solutions, the Russian government promised support to the developers. However, so far, Russian software developers haven't seen much government cash.

In late 2022, the Russian government announced that it would spend roughly RUB20bn (€203.1mn) on grants to domestic software manufacturers, while another RUB11bn (€111.7mn) was mentioned in the early summer of this year.

A list of companies eligible for state support was meant to have been finalised in May 2023, but that hasn't happened so far.

Still, Russian software developers could capitalise on tax breaks and government contracts.

"Developers can earn from the growing local market, as well as from tax breaks and procurement preferences," Alexei Smirnov, chairman of the board of Bazalt SPO, was quoted as saying by Kommersant. "This is more efficient than direct funding from the state budget."

He added that companies should invest in their development from their own revenues rather than wait for state cash.

The Russian government has promised software development contracts for major local companies. The cash is supposed to come from major Russian state-run corporations, rather than from the state budget, which has no available funds for that.

Last month, Prime Minister Mikhail Mishustin told an industry conference that the government will facilitate access to sizeable contracts from state-run companies, as long as the software companies invest in the development of their business. Companies that reinvest funds received as payment for contracts will be considered "systemically important" and will be given preference when it comes to getting more contracts from the public sector.

Brain drain

One key issue for Russian IT companies trying to capitalise on the situation is brain drain. In the wake of the invasion, thousands of IT professionals left Russia in protest against the invasion or out of fear of being conscripted.

While some of them are still working for Russian employers, many are not considering returning to Russia and have either switched to foreign companies or are considering such a move.

Still, measures that Russian authorities have taken to stop more IT professionals from leaving the country seem to be working. Scared by the prospects of a possible collapse of the local IT sector, the Russian government adopted a set of measures a few months ago focused on incentivising IT professionals to stay in their home country.

The two main components of this policy are exemption from the military draft and low-interest mortgage loans for those employed in the IT sector.

According to a recent opinion poll conducted by Data Economy, an organisation in charge of digital transformation of the Russian economy, among final year IT university students, 82% of the respondents say they plan to stay in Russia and work for local companies.

Vladimir Kozlov has covered Central and Eastern Europe for more than 20 years. He is currently based in Istanbul, Turkey.