Sanctions: Putin sacrifices his tech industry for the Ukraine war

This article first appeared on ntv.

Sanctions: Putin sacrifices his tech industry for the Ukraine war

This article first appeared on

Yandex, Ozon, VKontakte: Before the Russian war of aggression in Ukraine, Russia's digital industry was seen as a beacon of hope that could certainly compete with the big players from Silicon Valley. The IT sector in Russia has grown rapidly in recent years. In 2021, by a whopping 15 percent. But the considerable growth came to an end on February 24, 2022 at the latest. Putin has gambled away his former trump card - probably forever.

"Russia, along with China, was one of the only countries in the world that was able to counteract the market power of American IT companies with its own corporations," says Michael Rochlitz, an economist at the University of Bremen with a research focus on Russia, Long after the collapse of the Soviet Union, the Russian IT industry benefited from the fact that unrestricted research was not possible in many areas. Natural science disciplines such as astronomy, biology, chemistry and physics have therefore seen a strong increase. "Even regional Russian universities keep winning international mathematics competitions against leading universities in the USA," says Rochlitz. This is also reflected in the large number of well-trained programmers and software developers.

The international ban on the attack on Ukraine is the turning point in this boom. He recently broke massive losses in the IT sector. The Russian Google counterpart Yandex in particular shows that the war and Western sanctions are extremely damaging to the Russian technology sector. While the price of the first Cyrillic search engine was still listed at $60 on the Nasdaq in November 2021, the share collapsed to $19 after February 24, 2022. To date, the Internet company is excluded from trading on the US technology exchange.

"The Russian technology sector was the first victim of the sanctions and export controls," says Alena Epifanova, who researches Russia's Internet and technology policy at the German Council on Foreign Relations (DGAP), Fintechs and online trading companies in particular rely on technology from the West. Many companies could not cover their needs exclusively from Russia. Highly developed future technologies such as cloud computing, AI and fintech would therefore be hit particularly hard by the import bans. "The sanctions on imports of high-tech goods make it practically impossible for the Russian IT industry to continue to compete internationally," says Rochlitz.

Yandex is feeling this right now. The group had to put the development of so-called supercomputers on hold. A deal with the American company Nvidia had previously fallen through. The company, which actually supplies important graphics processors, left the Russian market in March 2022. However, the company relies on these processors to improve a number of functions such as search, the work of the language assistant "Alice", the cloud platform Yandex.Cloud and translations of foreign-language videos. Another example from the digital industry is Baikal Electronics, which relies on semiconductors from Taiwan.

From 2012 to 2020, the Russian tech sector grew by four percent annually. During the same period, the Russian economy stagnated at 1 percent a year. The hope of many economists: the technology sector could become the driver of Russian growth. It turned out differently. According to the digital association Bitkom, the sales of IT and telecommunications companies have recently fallen by a quarter. "With the war of aggression against Ukraine, Russia has sent its IT and telecommunications industry downhill," said Bitkom CEO Bernhard Rohleder. Russia has also made itself a pariah in the digital world and cut off from global innovations. "The trend towards digital dwarfing of Russia will continue. Only hackers are still booming in Russia."

Also due to the exodus of tens of thousands of IT experts, Russia is falling further and further behind digitally. This is particularly dangerous from one point of view: Even before the start of the war, according to the Russian Ministry of Economic Affairs, the industry was short of 500,000 specialists. Current estimates assume that around 100,000 IT specialists have left the country since the attack on Ukraine. Epifanova is even closer to 500,000. "This is a huge loss for the industry, because many of these well-trained specialists will not return," she is certain.

The forecasts for the current year are bleak. The digital association Bitkom expects a further decline in 2023. The country's tech sector is expected to shrink by 5.6 percent. Russia's tech sector, despite some successful companies, had failed to catch up with China or the US even before the war began. "There was a massive lack of investment in high-tech in the industry," says Epifanova. As a result, the country has to rely more and more on China. One thing will be particularly important for Russian technology groups in the future: To what extent can the companies manage to detach themselves from Russian politics?

The war in Ukraine is bad for the Russian digital industry. The country will not be able to catch up with the current setback any time soon. According to Epifanova, it will take at least 15 years to rebuild a competitive IT industry, assuming Russia ends the war and the political situation in the country improves.

And Rochlitz also predicts: "It is unlikely that the Russian IT industry will recover from this blow." The IT sector is developing too quickly for that. "The possibility of being able to play an international role in the future technologies of artificial intelligence or quantum computing is over."