The IT outsourcing industry used to be one of the few non-natural resource sectors of the Russian economy that had an active presence in world markets. Russian IT companies developed a reputation for innovation and creative problem solving that helped them build a successful track record on the international tech scene. But Putin’s desire to wage war in Ukraine has caused Russia’s tech ambitions to grind to a screeching halt.
War vs. IT Outsourcing Industry: 5 Reasons Why Russia is Losing
Thanks to a high level of human capital and developed startup culture, the Russian IT market saw a compound annual growth rate (CAGR) of 8.8% between 2016 and 2020. In 2020 the total revenue of the Russian IT services industry amounted to $19.5 billion. By 2025 it was expected to reach somewhere between $28.1 billion and $31.5 billion, but in light of recent events it seems highly unlikely.
With the restrictions imposed by Western sanctions, Russia’s IT outsourcing industry will soon be unable to maintain operations. The mass exodus of international companies, technological and digital isolation, economic oblivion, and the accelerating tech sector brain drain will consign IT in Russia to existence to the role of a secluded, government-controlled cluster that can’t offer actual career growth.
The state of Russain IT market in 2021
Russia now faces intense pressure on its economy and is bearing massive losses due to its isolation from global trade and cutting-edge technology. Western sanctions have already created severe bottlenecks in the supply of semiconductors, electrical equipment, and the hardware needed to maintain the operation of the nation’s IT ecosystem.
Most of the world’s largest chip manufacturers, including Intel, Samsung, and AMD have cut ties with Russia, closing off access to the components the country needs for high-end industry and advanced weapons. The unprecedented coordination of efforts among the US, the European Union, and Japan, along with their allies and partners, also drastically curbed Russia’s ability to import foreign tech and equipment containing these chips, such as smartphones, networking equipment, and data servers.
As a result of the sanctions, Russian manufacturers who had previously depended on technologies imported from abroad now only have enough stock to last them around eight months. It’s hard to predict what will happen after that since even the capacities of a black, or even gray, market are not sufficient enough to sustain pre-invasion supply volumes.
The Russian government has already started looking for ways to stabilize the IT industry through a series of support measures. These include legalizing parallel imports, allowing the use of pirated software, and seizing equipment left by foreign tech companies that have departed or suspended operations in Russia.
The nation’s authorities also plan to shell out a whopping $45 billion to support the development of the domestic IT sector. That money will be allocated to Russia’s National Project for Electronics aimed at providing large subsidies for manufacturers and ensuring the construction of new design centers. Lawmakers hope that these investments will spur domestic production, ensuring 30% of Russian households transfer to locally made electronics by 2030.
Critics say this plan is unrealistic, especially since the majority of the country's manufacturing facilities are powered by foreign-made software. Amazon, Microsoft and Google stopped all new sales of their products and services in Russia, further constraining the nation’s technological capability to replicate what would have otherwise been imported from abroad.
The departure of tech giants from Russia is a hard blow to the country’s IT sector. Companies that already set a course for transition to cloud-based operations fear the looming threat of being cut off from AWS, Microsoft Azure and Google Cloud. This has forced them to review their business continuity plans as without the familiar technologies they simply can no longer function as usual.
While there is no substitute for the former supply of imported technology, software and equipment failure is not happening just yet. The most worrying development the Russian IT industry is experiencing now is Western Internet providers pulling out of the country.
Lumen and Cogent Communications, two of the largest telecommunication companies operating in Russia, severed their business relations in the region following the start of the invasion. Both providers cited the “uncertain security situation” and a focus on “ensuring the ongoing integrity of the global Internet” as the rationale behind their decision to disconnect their high-capacity networks from Russia.
The move doesn't mean people in Russia have no Internet connection, but now the major traffic conduit is gone. Under these circumstances, it will be harder for Russians to gain access to international services, such as news sites or social media platforms based in the West. This might eventually create a digital fortress around Russia, isolating people working in the IT sphere and creating a new iron curtain.
Amid this backdrop, Virtual Private Network (VPN) services have gained a lot of traction, especially with mobile visitors. Just in the first two weeks following the invasion the download numbers of top VPN apps on the App Store and Google Play skyrocketed, totaling 4.6 million new users. These applications allow people to bypass restrictions on certain websites, use the internet anonymously, and roam the web freely.
However the Russian government has a variety of ways to stop VPNs from operating in the country, up to the point of blocking the App Store and Google Play entirely.
With the United States and European Union imposing economic measures against the Kremlin, major platforms, services and payment processors decided to block transactions in the country. The first to do so were Visa and Mastercard. These financial services corporations stopped processing foreign purchases for millions of customers living in Russia. Moreover, they no longer support cards issued by Russian banks. It means that people who either fled the country or happened to be abroad when the invasion started must now find new means of accessing their funds.
With PayPal having suspended its operations in the country and Payoneer closing Russian accounts, there is effectively no way for many tech professionals to earn money from abroad. Moreover, after the country was disconnected from SWIFT in early March, Russian IT companies can neither receive payments from overseas clients nor pay their employees working in Europe.
The scarcity of advanced goods, economic crisis, and digital isolation seriously undermine Russia’s status as an outsourcing destination. But nothing did more harm than the loss of the most valuable asset of all: young, educated, and financially self-sustaining tech professionals.
With nearly 1.8 million IT specialists, Russia was no stranger to the global tech community. According to HackerRank, the country was ranked second on the global leaderboard for best developers, outranked only by China. At the same time, Topcoder puts Russia #5 among 200+ other countries by first-place finishes in coding challenges. Additionally, the country currently holds 21st position in the Kearney Global Services Location Index, which assesses the capacity to deliver high-quality services, people skills and availability, and overall business environment.
Despite the initially strong position on the global outsourcing scene, Russia is now losing its former prominence. The Russian tech industry faces a severe brain drain due to a mass exodus of seasoned IT workers that includes programmers and cybersecurity specialists. As many as 200K engineers, or 11% of the nation’s tech talent pool, have already left their homeland since the outbreak of the war.
The decision to leave Russia has overwhelmingly stemmed from a disagreement with government policy and escalating censorship. However, since military service is compulsory for men aged between 18 and 27, a lot of people simply seek to avoid wasting their abilities on war. Some IT professionals undoubtedly also fled to escape the fate of becoming malicious cyber actors in the service of the Kremlin. Others view immigration as the only possible way to express their protest, taking their skills and money with them.
Yet not everyone is driven by some form of protest. Many software developers have received ultimatums from their overseas customers, who demanded them to leave or risk losing their contracts. In this situation, tech specialists are usually offered relocation to the nearby Armenia, Kazakhstan and Georgia, as these countries have relatively lenient visa regimes and have regular flights to and from Russia. Other popular destinations include Israel, Turkey, and Dubai.
Mass Business Exodus
The Russian tech ecosystem is currently getting battered from two directions: the brain drain and mass exodus of foreign businesses. According to the report by Yale School of Management, nearly 1,000 Western companies have already curtailed their operations in the country.
In the first weeks following the invasion, global sanctions were the primary reason compelling enterprises to re-examine their ties with Russia. However, these days it's often the incurring reputational harm and investor wrath that forces Western companies to get out of the country. Stakeholders, consumers, and even whole markets are praising businesses for leaving Russia while punishing those that remain.
Western companies are cutting ties with Russia
Over the past two decades, Russia has established itself as a competitive technology services hub. However, with the current geopolitical situation, all the efforts of the nation’s IT cluster to create a reputation as an efficient and reliable outsourcing partner have been scrapped. If the war continues to escalate, the Russian tech industry will experience a rollback to 10 to 15 years ago without any guarantee of sustaining, let alone expanding, their IT services.
The outflow of Western companies, the scale and dynamics of the brain drain, coupled with lack of access to key hi-tech goods has put Russia’s outsourcing industry in a bad spot. Technology buyers have started to express concerns about using software that originates from this part of the world. As “made in Russia” becomes an increasingly toxic label for IT products, the best way to prevent a damaged reputation is to relocate talent and redirect cash flows out of Russia as soon as possible.
Grid Dynamics ceased all its remaining operations in the Russian Federation in mid April. Our exit plan was designed in a way to ensure the ongoing management of projects to eliminate delivery impact to clients. To do so we organized the safe and expedient relocation of willing employees to our engineering centers in Serbia, Romania, Moldova, and Poland.
A lot of high-end developers from Russia chose to move to neighboring Armenia, an emerging global tech hub. Over a hundred engineers have already been onboarded in our new office in Yerevan.
You can leverage Grid Dynamics’ experience to create a compelling exit plan and safely relocate your software engineering operations to reliable outsourcing destinations. By partnering with Grid Dynamics you get access to top-notch talent, 15+ years of expertise in digital transformation, and the opportunity to choose the engagement model which best suits their requirements, including pod teams, team extension, dedicated teams, and remote development centers.