IT as an Opportunity to support falling Rubble! (A E-Growth Strategy)

This article tries to understand hidden opportunity on untapped Russian IT/E-Commerce sector, and also proposes if this can be strategized to act as a catalyst during current economic downturn for the country’s revival. This will be first of the series of article on Russia economy focusing on E-Growth strategy to overcome its existing financial turmoil.

 

Russia’s extremely strong economic growth during 2010-2014 years has been one of the country’s recent major accomplishments. Undoubtedly, the natural resources sector has played a significant role in this achievement. However, economic growth based solely on the natural resources sector is neither sufficient nor sustainable. We are entering the era of the global information society, where knowledge is the core resource and mechanism of accelerated development.
The advanced development of high-tech industries, including the Information and Communication Technology Sector (ICT), is also a key condition for a strong and growing economy. In most developed countries, ICT represents 8-12% of a country’s GDP and is one of the leading sectors in terms of capitalization of the global economy. Since 2000, this sector has developed four times faster than the average performance of the Russian economy, but still is not a major growth GDP/Foreign Exchange growth driver. The implementation of a number of key national projects and other large-scale government programs will also encourage the development of innovative industries. 

 

Russia took 16th place among 224 countries for average data downloading speed in 2011(Pando Networks), while the Internet access rate in the Russian regions grew 440 percent over the past year (based on the number of new contracts).

 

What stops Russia from focusing on it and growing this market has been a big irony? A focus approach and a policy framed to grow this sector is must. Currently it does an annual business of USD 18 to 20 billion, which doesn’t even constitute a significant portion of GDP

 

Recently, as the Ruble has deprecated by more than 50%, this is an ideal opportunity for Russian economy to look at alternate Industry, which can increase the inflow of USD, and increase job creation too.  

 

India has been a global leader in IT sector, if Russia and India can create a joint working framework where Russia could utilize India’s expertise, then this initiative could hugely benefit the Russian Economy.

 

Saturated Segment of Existing IT business:

 

With a significant reduction in PC sales (by 32%), the sales of tablet computers increased by 67% in 2013. It is worth mentioning that in pieces the reduction in PC sales is not so great (27%) while the growth of tablet PC sales looks more significant (108%).

The slumping sales of servers and a decrease in the growth rate of software market takes place against the background of the cloud service market growth. IT & ITES business is over all saturated.

 

Opportunities:

 

Only 10% of business in Russia happens online. This gives tremendous potential for new Russian-entrepreneurs to tap this segment. India has had a great experience of revolutionizing IT and being a part of Global E-Commerce revolution.

 

The report “E-Commerce in Russia,” from East-West Digital News, lists the following statistics.

• Almost 30 million Russians shopped online in 2013, representing 23 percent of the population 18 and over.
•  The ecommerce market is composed primarily of small merchants and is fragmented. There are 39,000 Internet shops but fewer than 20 earn at least $100,000 a year.
•  The market is growing at 20% per annum.

Forward Economic Outlook:

 

Ecommerce revenue in 2013 was $16.5 billion, up 28 percent from 2012 and representing two percent of total retail expenditures; Consumers in Moscow and St. Petersburg account for 30 percent of total Internet users in Russia but do 60 percent of ecommerce purchasing. Russia needs inflow of capital and foreign currency to stabilize its current economy. One of the preferred options is to create an alternate Industry, which is less capital intensive and also turn around time for set-up is quick. Once a platform for “E-Growth” is created, that could become a major driver for next three to five years.Russia, if they focus on aggressively growing from the existing 10% online sales levels to 25-35%, the IT business can expect to generate USD 50 billion annually in next three years, with E-Growth being a major contributor. This will also attract Private Equity players and other investors to invest on this sector, which could create a boom.

 

Russia and India had signed an agreement in 2010 to cooperate on various initiatives of IT/ITES. Also a 3rd Joint working group on ICT should focus on “Digital Transformation” and “E-Growth”. This has to look on setting up a major action plan to get this moving. The current situation in Russia is similar to Indian situation of 1992 when India had a depreciating Rupee and Dollar reserves depleting. At that juncture India choose to develop and prioritize new Industries such as Telecom and IT, which then became a major backbone of Indian economy for next 25 years. This similarly is doable and can be replicated in Russia.

 

Note: The next article shall focus on Russia E-Growth Policy and Role of India in a collaborative effort to grow this Industry