How Recent Legislative Changes Will Affect Russian IT
By Josh Wilson
Assistant Director
The School of Russian and Asian Studies
www.sras.org

Two major pieces of legislation that some might assume would improve the business environment for Russian information technology (IT) companies are not likely to make a major impact - at least not for IT companies who already have a major presence there.

Special Economic Zones: Benefits and Structure

Russia's law on special economic zones (SEZ) has been much touted as a way to push Russia away from being a resource-based economy to an innovation economy. The law gives tax breaks to companies who build facilities on new "technical-innovation" SEZ. These include the right to deduct all R&D expenses from their tax base during the period in which they are incurred. Also, five-year exemptions from land and property taxes are granted, as well as reduced rates on Unified Social Tax for employees. The SEZ is also considered a customs-free zone. SEZ regions have a legal life span of 20 years.

Although the situation varies from zone to zone, each is due to receive government funding to help build the infrastructure needed for the incoming businesses. For example, the Zelenograd SEZ is set to receive USD 90 million and the St. Petersburg SEZ is slatec for USD 25 million. However, businesses entering the zone are also obliged to contribute to its infrastructure development, usually on a 50/50 basis with the government.

There are now several companies officially registered as residents of the SEZ developments, including Cisco systems, which has joined the Zelenograd SEZ. The Tomsk SEZ has received high marks from industry leaders as being particularly efficient, perhaps because of its long history as a scientific zone relatively removed from Moscow's politics and focused largely on research.

Special Economic Zones: Problems

Nearly all the technology SEZ are greenfield developments, meaning that firms that have already invested in infrastructure in Russia have little reason to consider moving to the new location, as the tax benefits would not offset the amount needed to reinvest in the infrastructure. For this reason, most of Russia's most successful offshore software development firms have no plans to take advantage of the SEZ.

Assisting these companies does not seem to be a priority for the SEZ. Some areas that have already informally evolved into "technoparks," such the former industrial zone in the "Yuzhnaya" region of southern Moscow - which is already home to 40 technology companies - also lobbied for SEZ designation but were turned down.

Many companies are also wary of any promised tax breaks as the Tax Authority in Russia tends to actively audit companies and to question and press companies about any tax deduction claimed, assuming that taxpayers are guilty until proven innocent. For this reason, many tax breaks actually require additional administrative resources to claim and defend, and often companies simply agree to pay the extra tax to avoid having to defend the deduction. Thus, companies can be understandably hesitant to make a substantial investment on the basis of promised tax breaks.

The new zones have also been held up in their development by a legislative clause that barred the use of developers - meaning that companies investing in the area would need to largely take on construction and design of their new facilities themselves. Only recently was the legislation changed.

Financing for these zones is sometimes difficult to receive due to the fact that all development must be conducted on government-owned land and not all sources of financing may deem this an entirely stable arrangement. Only after construction is complete do the companies building the infrastructure have the option to buy the land they have developed.

The substantial economic benefit the government expects to garner from these SEZ zones, estimated in the billions of dollars over the next 20 years, has yet to begin to materialize, and the explosive growth Russian IT has experienced in recent years has had little to do with any government help received. This may alsoi explain why development of the Russian IT sector is still well behind that of India and China, which receive considerably more effective assistance from their governments.

Intellectual Property Rights: Reforms

Russia also recently passed reforms to its legislation on intellectual property rights (IPR), however, like the SEZ program, these reforms will have virtually no effect on the IT sector.

Reforms to Russia's intellectual property law had three major effects: 1) it made registering trademarks easier (denied applications can now be amended to address the reasons for denial and resubmitted rather than having to begin the process entirely anew); 2) fines for using a trademark illegally can now be levied for up to double the value of the goods involved or double the fee for the trademark's use; and 3) brand names and commercial designations are now protected in Russia with legislation resembles that of other modern countries - same or similar brand names can be made to stop thier commercial activity via legal action brought about by the original holder of the brand name. Much of Russia's previous legislation on brand names dated to 1927 and has for years been recognized as outdated.

The state is currently also developing new legislation that should clarify how transfers of and use of intellection property owned by the state should be carried out and how profit from that should be distributed.

Intellectual Property Rights: Problems

Obviously, this all does very little to help the IT companies that are currently battling wide-spread pirating of software. Pirates may be prosecuted under harsher conditions if they sell disks with pirated materials marked with a protected trademark, but likely after a couple of cases of this, pirates would be smart enough to remove the offending trademark before putting the product on sale.

Russia does have laws on the books that allow them to prosecute software pirates. However, the major problems in Russia as concerns IPR lie not in the lack of legislation, but rather in an uneven enforcement of the law and the ability to evade existing penalties by taking advantage of corruption within the system. Perhaps an even larger problem than this is that much of the Russian public is willing to disregard the concept of intellectual property (and is generally willing to disregard legislation that may pertains to "victimless" crimes) if it means a short term savings or profit for the individual involved.

The only way to solve these problems would be with a general reform of the Russian criminal justice system and with effective public education. Dmitri Medvedev has promised a crackdown on corruption after he takes office - but has not promised the sweeping and drastic reforms that would be needed to quickly effect improvements in the situation. As for public education, while television news occasionally carries stories about venders of illegal disks, the stories nearly always focus on DVD sales - and, in recent weeks, have focused on venders who sell pornography to minors (not on if royalties have been paid for the film sold).

The government has made public efforts to remove pirated software from computers operating in Russian schools. This has included prosecuting a local school master and current efforts to replace pirated programs in schools with freeware. The prosecution of the school master only raised public opinion for the school master - and did much more to raise awareness of the lack of funding to regional schools (another serious problem in Russia), as most saw the school master as someone targeted by the authorities who was only trying to do his job the best he could with the limited resources supplied to him by the authorities. Replacing pirated programs with freeware may reduce somewhat the use of illegal software in Russia, but the move is being conducted rather quietly - not as a move that would publicly repudiate the use and manufacture of pirated software. No widespread public education is planned in Russia by either the government or the software industry itself, which could also likely be doing more to help the situation.

While a few reforms have been implemented that may seem to offer promise for the IT industry in Russia - none are likely to have major consequences for that industry. Russian IT continues to grow, but to lag in third place behind countries that actively and effectively support human-resource-based industries. Russia will also likely continue to stay in third place so long as government - and public - apathy continue.