Russia has a profound culture of the digital, significant internal market, but lacks globally strong native players
Vladimir KorovkinVladimir Korovkin is Head of the Digital Technologies of the SKOLKOVO Institute for Emerging Market Studies, Moscow School of Management SKOLKOVO.- In June 2017 Russian president Vladimir Putin made a speech at Saint-Petersburg International Economic Forum and announced a national project of the digital economy. He stated that we "… are capable of taking the lead in a number of areas of the so-called new economy, primarily the digital economy. Our specialists are not just coming up with the best, unique software solutions but are also creating a new area of knowledge". This is an official view of current IT development in Russia, and I will elaborate on some aspects of this.
You can find a video version at the bottom of the page.
The Soviet Union was quite close to the classic "garage" culture of Silicon Valley. Basically, first computers were invented in second-rank, relatively unimportant scientific institutes, almost as side projects, people were just experimenting!
Let's have a brief historical background of digital development. The Soviet Union was one of the global pioneers of computing. The USSR didn't invent the computer at first, but in 1952 it had the first computer in continental Europe and it was a third operating machine in the world after the US and UK. In Soviet times everything was planned and highly regulated, and for that reason, computer technologies were not the first on the priority list for party officials. We were more focused on atomic development and space technologies. The Soviet Union was quite close to the classic "garage" culture of Silicon Valley. Basically, first computers were invented in second-rank, relatively unimportant scientific institutes, almost as side projects, people were just experimenting! Those were brilliant people who for different reasons were not allowed to top-secret engineering and were working on second-rank departments. Then, through this culture, we had developed very interesting breakthrough designs, including small machines and even trinary computers. Generally, we were on par with the US and UK in productivity and system programming. Yet the number of installed machines was clearly lagging behind the US and the UK.
There was a question of standardization. In 1969 the very big decision was made: it was decided that the design of IBM 370 was taken as the standard for mass production of computers in COMECON. The idea was that we could purchase software from the West and run it quickly. We were not officially licensed to produce IBM 370, it was a "pirate" development; we got few machines from the German Democratic Republic and tried to duplicate it. Things didn't work smoothly, but it was more or less the end of this early period. So, most civil machines created in USSR were either the clones of IBM or some other digital equipment of Western designs.
Original designs were focused on supercomputers and special purpose machines which led to ELBRUS series. In 1980s ELBRUS supercomputers were in the global top by speed. Definitely, we were falling behind in the PC revolution, Soviet PCs were available only after 1986 for ideological reasons. The party wasn't ready to give out the means of reproducing information. So, in Russia PCs appeared like 10 ten years later than in the West.
There was a question of standardization. In 1969 the very big decision was made: it was decided that the design of IBM 370 was taken as the standard for mass production of computers in COMECON. The idea was that we could purchase software from the West and run it quickly. We were not officially licensed to produce IBM 370, it was a "pirate" development; we got few machines from the German Democratic Republic and tried to duplicate it. Things didn't work smoothly, but it was more or less the end of this early period. So, most civil machines created in USSR were either the clones of IBM or some other digital equipment of Western designs.
Original designs were focused on supercomputers and special purpose machines which led to ELBRUS series. In 1980s ELBRUS supercomputers were in the global top by speed. Definitely, we were falling behind in the PC revolution, Soviet PCs were available only after 1986 for ideological reasons. The party wasn't ready to give out the means of reproducing information. So, in Russia PCs appeared like 10 ten years later than in the West.
New System will Enable Elbrus Computers to Recognize Passports of 35 Countries. Source: Rostec
In the 1990s with the transition to the market economy, we had a mass penetration of imported PCs. Widespread software piracy made it difficult to develop the local industry. There was also a massive "brain leak" to the West, many people who had a good background in mathematics were emigrating because the economic situation was really gloomy at that time. Anyway, some pioneering software companies succeed on the market: 1C (accounting), ABBYY (image recognition), Kaspersky (security). The Internet started to penetrate in the mid-1990s, but it was limited by the low quality of telephony.
Around 2000s first important players appeared in the Internet economy. It was ".ru boom", more or less simultaneously with ".com boom", when Yandex, Rambler, mail.ru, Ozon etc. were created. That time venture funding was coming from the West and local entrepreneurs (Ru-Funds, RUNA, DST Global, etc.). Mobile phones took off in 1999, by 2006 penetration is calculated at 100%. E-commerce in goods was handicapped by deficiencies in logistics. Russian post was famous for a very slow delivery, damaging and losing parcels, so you needed to find alternative channels.
Finally, we have a transition to the digital economy with a wide penetration of digital systems in corporations, mostly from international vendors. We have "import substitution" drive-in hardware and software since 2014 and geopolitical crisis since that time. It was not so successful as it was supposed to be but there were some achievements here. Finally, some Russian digital companies became the important global niche players, and Russian venture capital goes into global markets. Particularly, Digital Sky Technologies (DST Global) are a big player in Silicon Valley; we recently established a fund called Fort Ross Ventures. It was funded by Sberbank and became a really significant project in Silicon Valley. In 2015 all big Russian cities passed the threshold of 70% Internet penetration. Thus the "primary digitalization" is generally completed. Now it comes to how the available digital base is actually used by consumers, business and government.
Around 2000s first important players appeared in the Internet economy. It was ".ru boom", more or less simultaneously with ".com boom", when Yandex, Rambler, mail.ru, Ozon etc. were created. That time venture funding was coming from the West and local entrepreneurs (Ru-Funds, RUNA, DST Global, etc.). Mobile phones took off in 1999, by 2006 penetration is calculated at 100%. E-commerce in goods was handicapped by deficiencies in logistics. Russian post was famous for a very slow delivery, damaging and losing parcels, so you needed to find alternative channels.
Finally, we have a transition to the digital economy with a wide penetration of digital systems in corporations, mostly from international vendors. We have "import substitution" drive-in hardware and software since 2014 and geopolitical crisis since that time. It was not so successful as it was supposed to be but there were some achievements here. Finally, some Russian digital companies became the important global niche players, and Russian venture capital goes into global markets. Particularly, Digital Sky Technologies (DST Global) are a big player in Silicon Valley; we recently established a fund called Fort Ross Ventures. It was funded by Sberbank and became a really significant project in Silicon Valley. In 2015 all big Russian cities passed the threshold of 70% Internet penetration. Thus the "primary digitalization" is generally completed. Now it comes to how the available digital base is actually used by consumers, business and government.
Now we are on the stage from primary digitalization to secondary digitalization. In 2015 all big Russian cities passed the threshold of 70% Internet penetration, but the question is what people would do with this connectivity, how would they use this. The «secondary digitalization » is about the usage of technology potential across all spheres of life. The secondary digitalization is very uneven across the Russian regions with some clear leaders and laggards. There are important gaps between digital supply and digital demand, which represent market opportunities. Digital demand has almost doubled on average in a year, while digital supply was close to stagnant. Especially important opportunities in digital health, digital education and digital retail.
We do have strategic government efforts in the sphere. Firstly, we should mention a national program "Digital Economy" (2017) which aims to create national digital ecosystem, to create necessary institutions and remove barriers, and to increase the global competitiveness of Russian digital companies and economy in general. It has few technologies in focus, including big data, neurotechnologies and AI, blockchain, quantum technologies, new industrial technologies, industrial Internet, robotics, wireless technologies, AR and VR. These ideas were translated to national project "Digital Economy" (one of 13 national projects for 2019-2024). It covers several goals, such as:
– To increase internal investment into a digital economy by at least 3 times vs. 2017
– To create an effective infrastructure for high-speed data transfer, big data storage and processing
– Mostly to use nationally developed software used by government bodies and corporations
To sum up: Russia has a profound culture of the digital, significant internal market, but lacks globally strong native players. Russia has several strong points:
1. Developed digital culture:
Russia was a pioneer of the computer age in hardware and software, especially strong in complex software development, special strengths in AI and cybersecurity. The tradition of Russian programming is to create a very laborious, very complex things with a high quality of coding. Being a programmer myself, I was trained to working on the quality of code because machines were not so powerful and we had to compensate that by coding. Another fact is that some interesting hardware designs in niches created by military/special purpose. For example, they are trying to adopt ELBRUS series to general purpose and civilian use. It's original and compatible in terms of software to classic IBM architecture.
2. Internal market
Pure e-commerce market was U$ 20 bln in 2019, growing at over 20% a year despite the slow economy. 44% of Russians shop online, mostly for apparel, consumer electronics and travel tickets. Finally, we have a huge potential for further growth in Russian regions, because logistics problems are now largely solved.
3. Local players
Russia was the world's sixth-largest economy by GDP (based on PPP) in 2019, but as Russia comprises some 2,5% of global GDP it is hard to reach globally competitive scale solely on the internal market. The market cap of the biggest Russian digital companies is relatively small vs. global peers. To overcome the handicap Russian e-businesses and venture capitalists actively seek global partnerships and joint ventures.
We do have strategic government efforts in the sphere. Firstly, we should mention a national program "Digital Economy" (2017) which aims to create national digital ecosystem, to create necessary institutions and remove barriers, and to increase the global competitiveness of Russian digital companies and economy in general. It has few technologies in focus, including big data, neurotechnologies and AI, blockchain, quantum technologies, new industrial technologies, industrial Internet, robotics, wireless technologies, AR and VR. These ideas were translated to national project "Digital Economy" (one of 13 national projects for 2019-2024). It covers several goals, such as:
– To increase internal investment into a digital economy by at least 3 times vs. 2017
– To create an effective infrastructure for high-speed data transfer, big data storage and processing
– Mostly to use nationally developed software used by government bodies and corporations
To sum up: Russia has a profound culture of the digital, significant internal market, but lacks globally strong native players. Russia has several strong points:
1. Developed digital culture:
Russia was a pioneer of the computer age in hardware and software, especially strong in complex software development, special strengths in AI and cybersecurity. The tradition of Russian programming is to create a very laborious, very complex things with a high quality of coding. Being a programmer myself, I was trained to working on the quality of code because machines were not so powerful and we had to compensate that by coding. Another fact is that some interesting hardware designs in niches created by military/special purpose. For example, they are trying to adopt ELBRUS series to general purpose and civilian use. It's original and compatible in terms of software to classic IBM architecture.
2. Internal market
Pure e-commerce market was U$ 20 bln in 2019, growing at over 20% a year despite the slow economy. 44% of Russians shop online, mostly for apparel, consumer electronics and travel tickets. Finally, we have a huge potential for further growth in Russian regions, because logistics problems are now largely solved.
3. Local players
Russia was the world's sixth-largest economy by GDP (based on PPP) in 2019, but as Russia comprises some 2,5% of global GDP it is hard to reach globally competitive scale solely on the internal market. The market cap of the biggest Russian digital companies is relatively small vs. global peers. To overcome the handicap Russian e-businesses and venture capitalists actively seek global partnerships and joint ventures.
Contact us
If you have any recommendations, questions or any projects of your own as well as suggestions concerning international youth cooperation, russian "soft power" and public diplomacy development, feel free to contact us. We also accept expert analytics of good quality for publications.
Creative diplomacy is always open for creative people and ideas!