10.11.2004
Russia On-Line
№4 2004 October/December
Pavel Zhitnyuk

Pavel Zhitnyuk is the partner and cofounder of «iTREND» Ltd. He is also web-editor of «Russia in Global Affairs» journal and expert-analytic for KORUS Consulting

This year
the Russian Internet has celebrated a remarkable anniversary. One
decade ago, in March 1994, the Russian web domain zone .ru was
officially registered. Through all these years Runet (or the
Russian section of the Net) has been dynamically developing,
experiencing both ups and downs. Today, the Internet in Russia is
no longer a mysterious phenomenon that exists beyond the processes
that take place in society, but a full-fledged media and
communicative environment.



 

BETWEEN
BRAZIL AND SPAIN

 

According
to the Public Opinion Foundation, the number of Russian users of
the Internet is continuously on the rise and over the past two
years it has doubled. The lengthy experience of computer retrieval
technology and Internet statistics systems shows that the number of
Russian users has been growing by 40 to 50 percent
annually.

 

According
to a survey carried out by ROMIR, a Russian independent public
opinion research agency, the Internet is presently used by 13.2
million Russians (or 11.7 percent of Russia’s adult population).
According to Rambler’s Top 100, four million people visit Runet on
a daily basis, of which 52 percent live in Russia. Forty-five
percent of Russian users live in Moscow (45 percent of Muscovites
above the age of 16 visit the Internet more than once every three
months); another 10 percent live in St. Petersburg, while the
remaining 45 percent reside in other Russian regions. Moscow, St.
Petersburg, Novosibirsk and several other large cities account for
the greatest number of Internet users due to the large
technological and economic gap between the large cities and the
rest of the country. While in the developing countries, such as
China, Brazil and India, which have made a major contribution to
the growth in the number of Internet users in the world, high
technologies have been proliferating extensively, the
’Internetization’ of Russia has been developing intensively.
According to a Russian market expert, Russia is experiencing what
is known in the West as digital divide: “In the capital and at the
various research centers our self-made programmers are developing
technologies capable of competing in the world market, whereas in
the Russian provinces an automatic milker is still viewed as the
pinnacle of technology.”

 

In Russia,
the Internet user/non-user ratio is comparable to nations that are
at a level of economic development on a par with Spain or Brazil.
To be more favorably compared with the highly developed Western
nations, Russia needs a more stable economy, as well as a greater
proportion of its population that is financially stable.

 

Foreign
Policy, an influential U.S. magazine, which annually calculates
(jointly with the A.T. Kearney company) the Globalization Index for
62 countries, has placed Russia only 44th – in the neighborhood of
such countries as Colombia, Saudi Arabia, Tunisia and the
Philippines. This is rather indicative of Russia’s present
situation as the level of Internet development (the number of
users, secure sites, etc.) is one of the criteria used to calculate
the index. Basically, this survey shows that IT development in
Russia corresponds to the country’s involvement in the processes of
globalization.

 

Graph
1. Number of Internet users by regions

 

 

INTERNET
JOINS TRADITIONAL MEDIA

 

Russia is
now experiencing a real breakthrough in the development of IT
technologies. This is due more to changes in public perceptions
than to technological progress. Internet technologies are no longer
viewed as something unusual, mysterious or trendy. The Internet has
become commonplace in Russia, and many Net events are a remarkable
side of society’s life. For example, the presentation of the
National Internet Award in 2003 was broadcast live by the national
TV Channel One. There is a special website
(http://www.linia2003.ru/) where anybody may send questions to
President Vladimir Putin. Over the Internet, people discuss current
events and criticize celebrities and fashion stars. In March 2004,
the Rambler Internet Holding Company was named Russia’s
co-organizer of the Miss Universe beauty contest, and it was
possible for anybody to vote over the Internet for Miss Russia.
Today, the Internet in Russia can serve the needs of broad sections
of the population rather than just the needs of the elite, as was
the situation throughout the 1990s.

Internet
media outlets now rank on a par with the traditional mass media –
newspapers, television and radio. According to the Rambler company,
over 10 percent of Internet users prefer to learn the news from the
Internet. This figure represents one and a half million people,
most of whom are socially active, well-educated and salaried. That
is, these are people who are capable of shaping the events that are
taking place in Russia.

 

At a
Russian Internet Forum in April, a noted web analyst and one of the
authors of an alternative law on the Internet, Mikhail Yakushev,
said that in 1999 federal regulations made no mention of the
Internet. In 2004, federal legislation mentioned the Internet about
10 times, while in the laws of Russia’s administrative entities the
Internet was mentioned at least 50 times. The federal law On
Communications recognizes access to the Internet as a universal
communications service. This means that not a single citizen of the
Russian Federation can be barred from using the
Internet.

 

Graph
2. Distribution of Internet users’ interests in February
2004

 

 

RUNET, A
UNIQUE PHENOMENON

 

In
February, at a conference named “Investment in the Russian
Internet,” Andrei Sebrant, editor-in-chief of the Internet
Marketing magazine, described the Russian segment of the World Wide
Web as unique. Unlike other national domain zones, such as those in
Germany, Spain or the UK, the Russian Web was created by people who
were motivated not so much by money as by pure enthusiasm. They
have created resources and services that are in no way inferior –
and in many cases even superior – to those in the West. Users of
the .ru domain have free access to services that their Western
counterparts charge for.

 

There is
one remarkable incident regarding Runet. Three years ago, Lycos
Europe launched a Russian-language portal to provide Russian users
with their first Internet project of European quality. A year
later, however, Lycos had to close down its operations in Russia:
it failed to win over Russian users who preferred using the local
services of Rambler and Yandex. It appears that Russia,
traditionally viewed as a backward country by the West, has created
Internet products that are capable of successfully competing with
internationally popular resources, such as Yahoo!, Altavista, MSN,
etc.

 

All major
international Internet projects are in fact products of the
globalization processes and exist within the framework of
multinational corporations. For example, the MSN or Yahoo! sites
are maintained by American and other companies working on the
entire world market, whereas in Russia the development, support and
expansion of Internet services and products is done solely by
domestic companies, even if these companies emerged on Western
money.

 

The
editor-in-chief of the Internet daily Lenta.ru and one of the
founders of Russia’s web-based mass media, Anton Nosik, says that
“the information content and consumption in Russia by far exceeds
that in many industrialized and well-off nations, because Russians
are very fond of reading and the process of creating Runet’s
information treasury did not involve state officials. Everything
was done on pure enthusiasm, of which the Russian-speaking
intelligentsia all over the globe has more than enough. The Moshkov
Library, Artemy Lebedev’s non-profit Web-design projects, Jokes
from Russia – all these and other projects have been created by
people who make good money in other fields, while the Internet
offers them a way for realizing their creative potential, which is
a function of talent. And Russia has always been rich in
talents.”

 

Nosik said
Russian Internet projects “are capable of competing on the Western
market, but it would take some will and determination in order for
their creators to tailor them to that market. Two or three
successful examples would be enough to form a tendency. However,
since the market of Internet projects in Russia is not very
transparent, people are not very willing to speak about their
successes.”

 

Maria
Govorun, editor-in-chief of the authoritative Web-Inform daily,
explains failures of foreign investors in Russia’s Internet by “the
high customer loyalty characteristic of Russian users, which is
largely due to their limited knowledge of Internet infrastructure
and their unwillingness to give up their accustomed Internet
resources.”

 

In
addition to the high quality of Russian Internet services and the
conservatism of local users, Western Web-designers wishing to enter
the Russian market confront a veritable ’Chinese Wall’ – the
morphology of the Russian language and the bad knowledge of the
English language by Russian users (a non-factor in many developing
countries). The specifics of the Russian language makes it
inconvenient for use with unmodified Western search engines or
antispam programs. Incidentally, Russian hackers, carders and
spammers have played into Russia’s hands. “It appears that they can
be counteracted by Russian specialists only. Therefore, Russian
companies producing antivirus and antispam software (Kaspersky Labs
provides the most illustrative example) are very popular outside
the country,” Govorun says.

 

LEAVING
THE WAYSIDE

 

Vladimir
Parfyonov, the dean of the IT and Software Department of the St.
Petersburg Institute of Precision Mechanics and Optics, and a
member of the international organizing committee of the world
software contest, confirmed that St. Petersburg alone hosts about
300 software companies that employ a total of 4,000 people. As of
April 2003, 90 percent of all orders to the tune of U.S. $240
million a year came from the West.

 

Compare
this with India, which entered the software development business
ten years earlier than Russia, and is the leader in this field – it
attracts orders worth U.S. $6 billion a year from the West. Many
orders are also placed with Irish and Israeli programmers, many of
whom received their education in the Soviet Union.

 

According
to expert estimates, in 2001 Russia provided U.S. $200 million
worth of offshore programming, whereas in 2003 the figure went up
to reach U.S. $460 million.

 

Since
demand for IT services in the world continues to grow, offers of
new software vendors are also expanding. Therefore, the outsourcing
market has been growing larger and more diversified. Of the
countries that are relatively new to the outsourcing software
market, special mention should be made of China, Poland and the
Philippines. Although these nations’ share of the world software
market is rather small (the Chinese specialists, whose high
software development skills should not be underestimated, serve
mostly the domestic market), they have a whole range of advantages.
These include the availability of top-notch IT specialists,
competitive prices for their services and, more importantly, strong
governmental support for IT service exports and the industry as a
whole. Evaluating how promising a country is for offshore
programming, Western specialists also use other qualitative
indicators, such as the political situation or cultural
compatibility. However, India’s successful record of approximately
10 years, as well as the successes scored by Ireland, Israel,
Pakistan, China and the Philippines, have shown that the key role
in creating a favorable climate for the development of information
technologies belongs to the government and IT public
associations.

 

Graph 3.
Qualitative indicators of countries
involved 
in customized
software development

Source:
Gartner Research

 

 

In Russia,
the development of IT has never enjoyed an all-embracing and
coordinated support from the government or industry. Nevertheless,
the Russian software market, its small size notwithstanding, has
shown that it is very dynamic. Thus, there is a trend toward
continuously more growth rates thanks to talented specialists, the
high quality of products and services, relatively low labor costs,
and other factors attracting foreign customers. According to the
RosBusinessConsulting news agency, in 2003, the market of IT
technologies in Russia reached U.S. $5.8 billion, an almost 25
percent growth over 2002.

Government
spending in the IT and communications sector is also growing. The
2003 figures showed that government organizations invested some 13
billion rubles in IT and communications, and this spending is most
likely to be growing further. Regrettably, it is absolutely
impossible to say how much of this money reached the IT domain and
how much of it dispersed as a kickback for agencies and civil
servants. In the IT domain, the practice of receiving kickbacks is
as widespread as in any other industry.

 

Predictions for the electronic business market are also very
optimistic. In the West, B2B (business-to-business) e-commerce
systems have again become widely used. This section of the market,
oriented toward interaction between companies that are involved in
buying and selling of goods and services, covers trade relations
over the Web. This includes the organization of shipments and
sales, as well as the coordination of contracts and plans. Various
analytical companies tend to believe that in 2004, the total volume
of B2B sales in the world is likely to reach $2,000-7,000 billion.
The National e-Trade Association believes that Russian online
trading, which by the end of 2003 reached a total of $900 million,
will grow by almost 50 percent in 2004. However, currently the
biggest share of the electronic market belongs to the B2C
(business-to-consumer) domain (some $480 million in 2003 and $615
million expected in 2004) rather than B2B. As for B2B, and one
other sector of the market, B2G (business-to-government), their
figures in 2003 were $316 and $141 million, respectively; in 2004
the figures are expected to reach $464 million and $275
million.

 

It must be
noted that whatever the figures and financial indicators may be for
Russian outsourcing, they are always underestimated. This is
because many of the companies that maintain direct contacts with
their foreign customers defy any tax or statistic registration.
According to various estimates, to the 100 percent of Russia’s
officially registered outsourcing companies one must add 50 to 80
percent of those IT entities which have never been registered; this
latter fact rather significantly changes the overall picture. (Many
unregistered offshore companies continue to be unregistered in
Russia because of their being involved in software support for
Internet porno sites)

 

Meanwhile,
although Russia has a huge number of high-class specialists, it has
not become a mecca for IT technologies. This is mainly because of
Russia’s prolonged separation from the world economy, the language
barrier, the unreasonable customs and currency exchange policies,
and the lack of governmental support for the software industry. A
serious problem for Runet’s further development is the brain drain
that is flowing from the provinces to the nation’s capital. The
phenomenon of qualified engineers migrating is prompted by
objective factors: compared with Moscow, the country’s periphery is
lacking any promising financial, career and social
opportunities.

 

Although
Russia has scored several successes, it continues to be on the
outskirts of the software business. This can be witnessed by
statistics that show Russia’s volume of sales of customized
software is less than 10 percent of that in India. The market of
ready-to-use software packages is even less developed; only a few
Russian companies can boast they have won a significant position on
the world IT market. For example, products from the PROMT company
of St. Petersburg, which has operated for over 13 years on the
Russian market of computer-aided translation systems, have been
known outside Russia since 1996. PROMT has been selling its
products in many countries; foreign sales account for about 40
percent of its total turnover.

 

RUNET:
WHAT NEXT?

 

According
to many authoritative players on the Russian Internet market, a
time of revolutions and global upheavals within Runet is over.
Rather, the future will be a rather predictable and routine
evolution. The socialization mechanism in society is likely to
gradually change; life will increasingly depend on the World Wide
Web. The Internet may well turn into a space “where people
can  arrange their habitat in an
entirely new way,” Ivan Zasursky, head of Rambler’s PR-service,
said, addressing Russia’s Internet Forum. Remarkably, all these
processes will be possible if Russia remains economically stable
and politically wise. The 1998 crisis, for instance, most
negatively affected the development of the domestic Internet
market, as many companies and projects closed, networks and
Internet access services started developing at a much slower
pace.

 

The last
few years have been marked by rather suspicious attempts by the
government to control the Internet. True, there is a pressing need
to adopt legislation regulating the Internet, but the drafts being
offered by the government to date are more harmful for the
full-fledged existence of the Runet than under its currently
unrestricted condition. Usually, such offers emanate from people or
groups who have only minimal understanding of the Web’s
functioning. A graphic example is an article in the Izvestia daily
(May 16, 2004) written by Moscow Mayor Yuri Luzhkov,  entitled On the Darker Side of the Internet,
which in fact is a set of myths and a fuzzy perception of
cyberspace that are so characteristic of man in the street. To
fight against such threats as piracy, violation of copyrights,
porno (which are not the ills of the Internet alone), Mr. Luzhkov
suggested that Web journalists be more responsible, providers be
licensed and, what is more important, each website be registered in
compliance with the Mass Media Law – “so that one would not guess
whether a website, according to the present text of the law,
belongs to ’other mass media’.” But the Web journalists have long
obeyed the general mass media legislation, while the providers must
have at least two licenses (from the Ministry of Communications).
The implementation of the third measure suggested by the Moscow
mayor may result in that all websites that have not been registered
as mass media will be immediately outlawed; regardless, the
dissemination of information contravening Russian law will not be
stopped.

 

A number
of public figures have also come out with initiatives to legally
regulate the Internet. Thus, Lyudmila Narusova, Federal Council
deputy from the Republic of Tuva, compared the Web to a “smelly
dust hole” and demanded that all websites be licensed.

 

However,
it’s too early to talk about Runet switching over to the Chinese
model (there, access to the Internet is fully controlled by the
state which is striving to monopolize the market and become the
provider). Apart from objective technical, legislative and
financial difficulties there are negative sentiments in society. It
is due to this combination of factors that the scandalous idea of
implementing a system for operative and retrieval measures (SORM)
have failed. (According to the order of the Ministry of
Communications, all IT operators, including mobile telephone and
the Internet companies, were supposed to install this system at
their own expense and make any information available on a 24/7
basis to the Federal Security Service.) Had this act been
implemented, the secret services would have received practically
unrestricted abilities to eavesdrop on voice communications and
read e-mail messages. Luckily, the Supreme Court of the Russian
Federation ruled that the order ran counter to the
Constitution.

 

Presently,
the Russian Internet community has consolidated, expanded and
acquired the necessary links and levers to bring pressure on the
authorities. This makes everybody hopeful that any potential
attempts by the government at “making the Internet clearer” would
be opposed by a force powerful enough to shape public
opinion.