The software-services outsourcing industry in Russia today is at about the same level as it was in India a decade ago. Now, if Russia can emulate what the Indians have done over the past 10 years, the sector will be a powerful engine of economic growth in this country.

Sales in the sector, also referred to as "offshore outsourcing," have hit about $350 million annually in Russia, according to estimates by Market Visio, and McKinsey research puts the growth rate at 40-50 percent a year. That’s a good start, but it still trails behind India, where the software-services market was worth $8 billion in 2002.

Experts say that Russian companies are able to offer competitive prices, even when compared with low-wage countries like India. One man-hour in a Russian company with a certified quality-control system and qualified specialists costs $30-$50, about on a level with rates in larger Indian companies. Small Russian companies or unofficial groups of programmers will work for $10-$20 an hour, also similar to rates at comparable Indian operations.

The question now is whether Russian companies can keep up this growth rate and take a bigger share of the world market. Big Western companies are actively setting up software-development centers in China, where qualified programmers earn $150-$200 a month. With living costs and wages on the rise and a much smaller and declining population, Russia will find it increasingly difficult to compete with China and its potentially millions of low-priced programmers.

So, instead of competing head-on with China, Russian companies are trying to follow the example of Ireland and Israel, two of the world’s other leaders in the field of software-services exporting. These countries have software-export markets worth $6 billion and $1.5 billion (1998 data), respectively, but have 20 times fewer people employed in the sector: Some 18,000-20,000 compared with 450,000 in India. The secret of this productivity success is that Ireland and Israel export program products rather than program-development services.

No matter what services Russia can develop and at whatever prices they may be sold for, the software outsourcing market is subject to many outside factors. Mikhail Novikov, chief executive and founder of ADMIN, for example, said that – along with intense competition from India, Israel and China – orders from the United States have decreased sharply as a result of the overall economic slump.

But the market here is attempting to adjust, Novikov added. "As the Russian economy grows, we are seeing more and more software-outsourcing orders from domestic clients," he said, adding that most of the business is coming from fuel and energy companies and financial companies, such as banks, exchanges and investment and insurance firms.

Novikov said that offshore programmers tend to work with customers from a specific region. "Some work only with American partners," he explained. "Some offer their services only to European clients (mostly from Finland, Sweden and Germany). Most small companies are willing to work with customers from any country, though 70 percent of all their orders in money terms come from the United States."

European clients account for about one-third of large software-development companies’ business, with many of the orders coming from cell-phone makers, including contracts for software development for their billing systems and related operations as well as the production of games sold with mobile phones.

"It’s interesting that almost all the Russian software-exporting companies are predicting a considerable increase in their business in 2003," said Ivan Martynov, leading analyst at Luxoft, a software services provider. "In fact, the most optimistic Moscow companies are expecting growth of 150 percent."

But, overall, there’s still a long way for Russian companies in the sector to go. "We are still not a very visible player on the market," said Alexander Yegorov, general director of the Reksoft company. "Leading world analysts such as Gartner still place Russia last among existing and new IT-services suppliers. India is still the leader, and China and the Philippines are also beginning to work actively."

In an effort to make themselves a larger force in the market, many Russian companies are considering mergers and acquisitions to consolidate their assets. Andrei Konev, business-development director at the Digital Design company, said that during 2003-2004 a group of around 20 leaders would emerge on the Russian offshore-programming market, companies that would have the size and financial resources to invest in creating quality-control systems and getting them certified, marketing abroad and product development.

"There’s a trend for increased concentration around the sector leaders," Konev said. "That is to say that small companies able to compete only in price terms are beginning to die out."

Martynov said that, despite being geographically closer to Europe, Russian companies often work for American firms. "But we shouldn’t forget that Gartner called Northern Europe the most promising region for Russia, with the market there predicted to triple or quadruple," he said.

The big Russian companies are now preparing for a move into that market. As well as having good technical potential and skilled management, Russia is increasingly offering itself to the world as a stable market, especially when contrasted with the possibility of conflicts in and around Israel or India.

The Scandinavian market is promising for Russia in several ways, experts say. Countries in the region have the financial means, but they have the problem of a shortage of qualified specialists. The closest country they can turn to is Russia, and the geographical proximity makes it easier for a company to have its software subcontractor just an hour’s flight away rather than in distant Asia.

Reksoft’s Yegorov said the Scandinavians are showing new interest in Russia as a partner as they begin to realize the potential of its market.

"Scandinavia is the leader in cell-phone and telecommunications industry applications, but now the United States is crowding into this market. That competition is forcing Scandinavian countries to look for ways to bring their costs down, which automatically leads to outsourcing," he said.

More than 100 large software development companies are at work in Moscow and St. Petersburg, with another 2,000 smaller companies battling to join the big boys. About 20 of the big companies have staffs of at least 80 people. In order to take advantage of the nearby opportunities, these Russian companies are switching into high gear.