Anti-Americanism provides big boost to Russia's small IT businesses

Russia's economic conditions seem like they couldn't be less hospitable to starting a new company. But small software firms are starting to thrive, in part because of Western sanctions.

At a glance, starting a company amid Russia's perfect economic storm of Western sanctions, bottoming oil prices, and a devalued ruble seems like a bad idea.

But that's what Sergei Sherstobitov did, launching Angara, a small Internet security company, in February. And he thinks the prospects for Russian IT firms such as his are quite good.

His optimism is not due to much-hyped but largely mythical government assistance to small business. Rather, he insists, things are looking up mainly because of a bad news cocktail that includes Western sanctions, a 30 percent devaluation of the ruble, the growth of anti-American sentiment, and burgeoning suspicion toward all foreign digital goods and services in the wake of the Edward Snowden revelations. That has made Russia's IT sector surprisingly fertile ground. 

"Every coin has two sides, and it's true that this crisis has tightened the market, there's less money in people's pockets, and the competition has become really fierce," says Mr. Sherstobitov, sitting in his central Moscow office. About a dozen young employees are spread around the casual workplace, hunched over computers or seemingly staring out the windows.

"On the other hand, the market for IT services is really opening up, and people only want Russian goods and expertise – even if the quality isn't quite as good as the Western ones everybody had gotten used to. There are a lot of new niches appearing, and I aim to move in to some of them."

It's not an unusual story. The share of small business and self-employment in the Russian economy is astoundingly low – about 20 percent, compared to up to 70 percent in developed Western economies – but experts say there is a new wave of 30-something entrepreneurs coming up.

"They are people who are not encumbered by the Soviet experience, and they have no illusions," says Nikolai Solabuto, an analyst with FINAM, a Moscow-based investment firm. "They're not looking for fast profits. They know they have to work hard, count their kopeks, and brave a lot of risks. We see a lot of them going into business now, and they are surviving."

Sherstobitov fits that bill. He says he pondered long and hard before giving up his secure job of many years and taking the plunge. "The biggest obstacles for me were internal ones; I had to overcome my self-doubts and prepare myself to accept all the uncertainties," he says. "But it's a chance to own and manage something that's mine. That's already an achievement my parents couldn't dream of. So, whatever else you want to say, that's really a qualitative change in this country."

The limits of Kremlin aid

Barely a day goes by without some top Russian leader declaring that the government must promote small entrepreneurship, slash red tape, provide tax holidays, and encourage "import substitution" to defeat Western sanctions. But most small business people seem hard pressed to name any state program that has actually assisted them.

"There are some programs run by the Moscow government, and even the Central Bank, to help small and medium businesses connect with financing," says Maria Barbakadze, director of Leaders' Lab, an employment agency for professionals. "But it seems that very few businesses know about these programs, or make any use of them."

The complicated process of registering a new business has become easier in recent years, experts say. By July 1, it will be possible to do the whole thing online, says Alexei Darkov, deputy director of Rulex, a consulting firm that provides legal and logistical advice to small businesses.

"Bureaucracy is a machine that changes slowly, but there is a gradual tendency to streamline these procedures," he says. "Now much of the information can be found online, and increasingly you can get things done online. The number of small business startups is definitely on the rise, particularly in the IT sphere."

One thing everyone mentions are the big state-sponsored high technology "incubators," which include the Kremlin-funded international technopark Skolkovo and the Moscow government's huge Technopolis complex, where tax privileges and streamlined bureaucratic procedures are among the benefits extended to nurture high-tech startups. Those advantages may be particularly attractive for foreign firms that find it hard to navigate Russia's business jungle, where the hazards can still include exorbitant rents and capricious landlords, corrupt officials, byzantine paper work, endless state inspections, and the occasional visit from gangsters.

Sherstobitov, whose business would qualify, says he has been mulling the option of moving to one of those protected zones. "I know they do provide some services, and make things easier in general. But so far we're doing fine where we are," with premises in a spacious, modern office complex near Moscow's Victory Park, he says. "I just don't feel any specific urge to move at the moment."

'Fresh energy'

Though the economic crisis and the new emphasis on made-in-Russia solutions may be goosing the domestic IT sector just now, some experts say the basic engine of growth is the global information revolution of recent decades, which is belatedly beginning to penetrate deeply into Russia's economy.

"Over the past couple of years, traditional economic sectors, like construction, banking, and energy have really begun to engage with the Internet," says Sergei Ponomarenko, CEO of Ingenious Systems, a small business consulting firm that bills itself as a "startup factory."

"Our business doubled last year alone, and a lot of it is about businesses adopting Internet-based strategies," he adds.

By next year, Sherstobitov says he wants to start producing his own line of security software that would be designed to protect his clients from targeted attacks. Though he isn't thinking of going up against state-sponsored hackers, such as those who – according to Mr. Snowden – have attacked Russia's leading security firm Kaspersky, there are plenty of other cyber-dangers facing Russian businessmen, and nowadays they want Russian specialists to provide the solutions, he says.

"There are a lot of gaps to be filled, we're still behind the rest of the world," he says. "But a lot of fresh energy is out there; people are developing new technologies and totally new products. It'll take some time to work its way into reality, but come back in two or three years and Russia's IT landscape is going to look completely different."