ICT services in Russia and the CIS: The challenges and opportunities

Foreign Direct Investment
| The European | 27th January 2016
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Over the last decade, outsourcing and offshoring have become more than just a trend; they have become a major opportunity for cost cutting. Neither large nor medium sized businesses can afford to ignore this opportunity to strengthen their business in an environment of increasingly intense competition. When considering offshoring ICT services, people tend to think about India, the Philippines, Malaysia and China. The challenges in those countries are well known, particularly the ones surrounding language, cultural differences, as well as distance and time differences. This leads to severe risks regarding service quality, to the extent that even some of the most basics SLA requirements might not be met. But what about destinations in Europe that are nearer, for example Russia, Ukraine, and Belarus? The idea is not entirely new; a while ago, companies started looking at closer destinations like Slovakia or the Baltic states. But why would you look at a region even further east, especially given the current political situation? First of all, Russia, Belarus, Ukraine and Kazakhstan are still quite big markets. They have an educated workforce, for example, in Russia, approximately 54% of the labour force has a tertiary education and in Belarus it’s around a quarter of the labour force. Yet salary levels in these countries are significantly lower than in Western Europe. This is particularly true for Belarus, where daily rates for programmers are not that far off the “classic” IT offshore locations, and even in Moscow IT specialists have become a more affordable resource. Since 2015 the Eurasian Economic Union with its member states of Russia, Belarus, Kazakhstan, Armenia and Kirgizstan offers new possibilities for investors by providing the free movement of goods and services within the union. Companies, which are located in one of the member states can deliver goods to the other countries of the Union without additional customs and taxes.

With its virtual high-tech parks, Belarus is of particular interest to ICT companies. These parks allow companies to benefit from low tax rates, and in reality companies can receive these benefits as long as they are working in a high-tech sector, regardless of whether they are located in one of the parks or not. Another advantage of Belarus is the geographical proximity to and cultural similarities with Europe. The time difference is only one hour, which facilitates communication between a company’s headquarter and the Belarusian team. In Ukraine, ICT services are also significantly cheaper than in Western Europe. Moreover, even though the economic performance of the country is currently decreasing, we continue to see potential investors who are considering a countercyclical approach to the Ukrainian market.

In terms of Russia, the devaluation of the ruble in the past year has made imports more expensive and therefore less attractive. On the other hand, local services have become more appealing for Western investors, since salaries and other costs have become comparatively lower. Russia is a country with extreme centralisation. Almost everything takes place in Moscow, and even energy corporations which have their oil and gas sources many thousands of kilometres away from the capital have their headquarters in Moscow. Additionally, transportation to the Russian regions usually goes through Moscow. Disposable income is the highest here, which is why companies almost always start their first activities in Russia in Moscow. For production of certain goods, factories are located in the regions where they might be closer to their customers. Since the users of ICT services are mostly in Moscow, the provider should also not be far away. Moscow still has the best infrastructure of the country and its population is almost the same as the whole of the Netherlands. The city also attracts the best specialists in the country which is particularly relevant in ICT outsourcing, where hiring cheap labour can prove to be more expensive in the long-term (due to training etc).

The political environment in Russia might seem unstable at the moment, but we do not believe that it is the goal of Russian politics to fully abandon business relations with the West. Also, the ICT sector is not affected by the sanctions. Investing now in Russia may well pay off two years down the line, when Russia will invest in the final preparations for the FIFA World Cup in 2018. When considering opening, for example, an ICT shared service centre in Belarus, Russia or Ukraine, you need to find a partner you can trust. This partner should understand your needs and be able to look at your problems and requirements from a neutral perspective. The potential partner should follow high quality standards, for example they should make detailed documentation on the work performed (particularly relevant for programming), and follow certain security rules (especially when considering cloud services). The partner should also understand the concept of backup and disaster recovery. A “proactive approach” sounds like a catchphrase, but nevertheless it is essential in order to keep your business running. Last but not least, your potential partner should speak a language you can understand. SCHNEIDER GROUP is happy to support your business in Russia, Belarus and Ukraine, providing you with an unrivalled service quality for your individual needs.

Further information
TitschT@schneider-group.com

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