On June 16, 2015, the Russian Duma—the lower house of the Russian parliament—approved Legislative Bill No. 764677 in a third (and likely final) reading, taking another step forward on an import substitution strategy for software used in Russia. Earlier this year on April 1, 2015, the Ministry of Communications and Mass Media ("Minkomsviaz" or the Ministry) issued Order No. 96 "On the adoption of plan for import substitution of software" ("Order No. 96"). The Russian government also drafted and published a regulation on the public procurement of software for federal and municipal needs in February 2015 (the "draft Software Procurement Regulation").
These steps are aimed at implementing the Russian government's strategy of preference for domestic IT products in federal government and municipal procurement programs. The stated goal is to support Russia's domestic IT companies and, ultimately, to reduce the dominant position of foreign (primarily U.S.) software in Russia's domestic software market. Presently, according to some experts, imported software accounts for 95 percent of the market in virtually every category of corporate and office software.
Should U.S. software giants be concerned? Probably not now, but they may want to pay attention to Legislative Bill No. 764677 and other steps the Russian government is taking to effect import substitution, including Order 96 and the Software Procurement Regulation.
Minkomsviaz's Order No. 96 contains an addendum that divides all software products into three categories:
- Category 1 includes B2B apps (ERP, CRM and BI), antivirus software, data security software and web-based services utilized in corporate Russia (email, Internet browser, instant messaging and maps).
- Category 2 includes desktop and mobile operating systems (OS), server OS, database management systems, cloud infrastructure and virtualization management systems, and office user software.
- Category 3 includes software for specific industries, namely: manufacturing (PLM, CAD, CAM and CAE), oil and gas, construction (BIM, CAD and CAM), healthcare, finance, and transportation.
The plan introduced by Order No. 96 calls for reducing imported software for government use, by 2025, having a 50-percent share of software in Categories 2 and 3 developed domestically and having a dominant share of domestic software in Category 1 (for example, web-based corporate services to be about 90 percent).
Some experts seem skeptical about this initiative. However, the Ministry appears optimistic and cites Russia's history of producing competitive Russian IT solutions in the corporate software market segments. Although the Ministry does not provide specific names, it probably has in mind Kaspersky® antivirus programs that are successful worldwide, including in the United States, and the Yandex® search engine, which still dominates Russia’s market.
Legislative Bill No. 764677, approved in June, is titled as law "On Amending Federal Law on Information, Information Technologies and Protection of Information and Other Legislative Acts of the Russian Federation." Once approved by the Federation Council (the upper house of the Russian parliament) and signed by President Vladimir Putin, the bill will become law. The bill proposes that the law will come into effect on January 1, 2016.
If Bill No. 764677 becomes law, a registry of domestic software programs will be created. Inclusion of a software program in that registry will enable its owner to participate in Russian federal government and municipal procurement programs and receive preferential treatment in certain cases.
Under the bill, the criteria for inclusion of software in the registry are as follows:
- ownership of the software belongs to a single or several Russian entities;
- software is available for purchase on an open market;
- the total amount of license fees or other royalties paid to foreign entities and domestic entities controlled from abroad is less than 30 percent of gross receipts received by the software owner from the annual sales of the software;
- the software owner must be an accredited IT entity; and
- the software does not contain data that are considered a state (government) secret.
Under the government's draft Software Procurement Regulation, an organization that is soliciting contractors and products for government needs would have to limit bidders only to owners of software that is included in the registry. If it does not do so, it has to explain the reasons. It appears the absence of a capable domestic software product in a particular software segment in which the bidding is organized would be a satisfactory explanation. For many public procurement programs, developers and owners of software programs that are not in the registry but that include open source software may also receive preferential treatment.
Because the Russian government and municipal governments, as well as the financial and oil and gas sectors, are the main purchasers of software (others often obtain software illegally or on the gray market), the import substitution for software measures may have an impact on U.S. and other software companies that sell their software in Russia. Interestingly, Russia's import substitution measures do not appear to provide any preference to software owners from China, India and other non-western countries—countries that were not subject to Russia’s food import ban—but ultimately give preference to software owners in the countries of the Eurasian Economic Union.