Russian Tech Spending Declines as Sanctions Take Toll

The sanctions will depress IT spending in Russia this year by an estimated 39%, or $12.1 billion, to $19.1 billion from the $31.2 billion forecast for 2021, according to researcher International Data Corp. IT leaders in Russia say they expect the sanctions will lead to widespread shortages of hardware and will introduce difficulties while they replace Western software with open source or locally developed alternatives.

In 2017, Russia mandated that majority state-owned enterprises needed to start weaning themselves off software from Western nations, but as of February 2022, many of these organizations were still heavily reliant on Western sources, according to IDC.

“Pretty much no one is expecting the sanctions to be lifted anytime [soon],” said Oleg Aksenov, a Moscow-based IT executive with 15 years of experience, including most recently as a division CTO at Russia’s largest bank, Sberbank, and one of the leading members of a nonprofit group of Russian digital leaders. “Most everyone is just taking this as, this is a new reality. We are going to adapt to it. It’s going to be like the days of the Soviet Union,” he said.

Hardware spending will decline the most primarily due to lack of supply, said Robert Farish, IDC vice president and regional managing director for the market comprising the former Soviet Union. Going forward, the weakened ruble also will make imported hardware more expensive, which will in turn affect demand, he said.

Karen Kazaryan, Moscow-based chief analyst of the Russian Association for Electronic Communications, said that there are Russian manufacturers of hardware, but their production is constrained by global supply-chain problems.

The war in Ukraine has disrupted the Russian hardware business, and foreign companies such as Intel Corp. and Advanced Micro Devices Inc. are no longer supplying parts to Russian hardware companies, according to IDC’s Mr. Farish. “They’ve largely not been producing very much since the beginning of March,” he said.

Ivan Kozlov, vice president of the St. Petersburg CIO Club, said large Russian companies have enough hardware stock for about eight months. Afterwards, he said, “We will see how it goes.”

Russian companies are turning to open source or locally developed alternatives to Western software subscriptions that won’t be renewed, according to Mr. Aksenov.

Russian alternatives include MyOffice, which has similarities to Microsoft 365, and 1C Co., which can duplicate some of the functions of SAP software, according to Mr. Farish, of IDC. Nonetheless, “the Russian software industry cannot cover all of the thousands of niches that exist in the global software industry,” he said.

Konstantin Grachev, the deputy CIO of a 611-store grocery chain in Russia, said his company had to scrap plans to switch to Microsoft 365. He said the company is currently using Microsoft Windows 10 and Microsoft Office 16 on licenses it bought several years ago.

“We need to reinvent ways to work,” said Mr. Grachev, whose company roughly translates in English to “Good Choice.”

IDC estimates that Microsoft’s Azure Cloud is the largest cloud provider in Russia with a 17% market share, followed by Amazon Web Services with 14%.

Mr. Grachev said his company is transferring its data from Google Cloud to Russian cloud providers such as Yandex NV and VK Cloud Solutions.

Sberbank, Mr. Aksenov said, uses its own SberCloud, one of the larger local providers.

While the Western software services are still active, Mr. Farish said, Russian users now understand the enormous risk in using them since they could be blocked by the companies or the Russian government at any point.

In the long term, Russia will have to develop more of its own technology products, he said.

“Definitely this is crisis time,” Mr. Kozlov said, “[but] when someone leaves the market, there is always someone else who will take that place.”

Write to Isabelle Bousquette at Isabelle.Bousquette@wsj.com