Private Investments in IT Need to be Expanded if the Russian Digital Sector is to Grow

7 november 2018

"We're going to have to significantly expand the share of private investments in the digital economy, there is no alternative," said Anastasia Alekhnovich, the Head of the Expert Center of the Authorized Representative of the President for the Protection of the Rights of Entrepreneurs, as she opened a meeting of the subgroup for cluster policy and territorial and industry-specific projects devoted to 'Companies, Operating in the Digital Sector of the Economy', which was held at the Analytical Center.

"Our successes in digitization are for the time being resulting from the demands of government rather than business, I'm talking about the Platon toll collection system, the Yarovaya Law, Unified State Automated Information System of accounting for production and sales of alcohol products (USAIS), GLONASS, online payoffices and others," Ms. Alekhnovich explained. "Some might claim these are not really successes, but we view these systems as a foundation for development. Huge amounts of data are coming up from local administrative systems. The level of automation and digitization that has been achieved through these systems can be used as a platform for further growth and development of private businesses offering storage and processing services for all these data."

According to her, the main problems preventing more participation by private business in the IT sector stem from an uncertain economic situation in the country, constantly changing business conduct conditions, risks of arbitrary restrictions on property rights and prosecution and lack of access to borrowed funds for private business. The experts also believe businesses have no incentives to export services: because of the current tax regime practically all the companies that make software and hardware in Russia sell their products to foreign companies through special intermediaries in jurisdictions outside of Russia while primarily keeping in Russia units involved in research and development. 2019 will see the end of the special regime for the payment of social insurance for manufacturers of computers, electronic and optical products, software developers and companies offering consultancy services, tech support and other types of work. If the sector is to grow, the regime of reduced social insurance premiums should be extended by at least 7 years, with special benefits being offered to Russian companies in which controlled foreign companies hold a stake of 25% or less.

In addition, the experts suggest defining ‘digital development regions’ where simplified procedures could be introduced for authorizing the use of new information technologies as well as reduced social insurance premiums for private companies plus three-year tax exemptions for venture capital firms and high tech startups, including zero social insurance premiums and complete freedom from any state oversight and supervision (except for licensed activities).

For solving the problems of the digital sector the experts also offer to:

1. Simplify the procedure and reduce the time for registering copyrights and patents in the Federal Service for Intellectual Property (Rospatent).

2. Implement additional measures to protect copyrights and ensure that investments in venture capital projects, production development projects can be recouped as well as additional protections for trademarks, industrial designs and know-hows.

3. Take additional measures for promoting e-(digital) trade, specifically exports of information and telecommunications products and services (VAT – 0%).

4. Establish well-defined criteria and procedures for classifying equipment and media used for the free reproduction of phonographic records and audio-visual works of art as systems subject to special duties, the lists of such equipment must be revised and the duties payable on such equipment must be included in the registry of additional fees and duties payable in addition to taxes.

5. Introduce special measures to significantly expand the provision of state services and functions that businesses can make use of in digital form, among other things: regulating the status of electronic documents, developing free software products for filling out documents needed to get state services in digital form, digitizing oversight and supervision.

6. Provide for measures aimed at promoting the development and use of modern cryptography in the civilian sectors.

The participants in the roundtable agreed that the required level of digitization cannot be achieved unless enough people get the requisite training. Today 47 thousand people graduate from universities with IT degrees but the shortage of labor in the IT sector exceeds 2 million. Meanwhile, it's not just programmers that the digital state needs. Artificial intelligence projects need mathematicians, analysts, designers and engineers. This means that the educations system must undergo a major transformation to pivot towards the digital sector.