It’s no secret that digital transformation is one of the main factors driving international economic growth. Russia is positioning itself as a leader in the area, particularly following President Putin’s 2017 announcement of a ‘new Russian digital economy’, intended to impact all spheres of Russian life before 2024.
There is great potential, and the country already has many successful digital companies. However, there is also a nagging perception that Russia is something of a digital laggard.
This perception doesn’t twin with my own experience. It’s clear from the conversations I have with Russian businesses that the benefits of digitalisation are keenly felt, and there’s a powerful drive to transform further.
With this in mind, I spoke to Dr. Daniel Thorniley, President of DT-Global Business Consulting GmbH, a consultancy firm that provides advice and information on global business and emerging markets with a focus on the CEE-Europe and Russia-CIS region. Danny is a three-time author, one of the world’s leading authorities on Russian economic history and a former East-West affairs specialist for the UN. I wanted to find out how he perceives Russia’s digital trajectory, and how it compares to the rest of the world.
In the highlights below, Danny and I tackle the current state of Russian digitalisation, and the motivations of Russian businesses seeking to transform.
How Does Russian Digitalisation Compare to the Rest of the World?
Gennady: Russia has significant expertise in mathematics, software production and the development of Artificial Intelligence (AI). But while great strides are being made, it is still behind other countries when it comes to investing in digital technologies. Russia spends 2% of GDP on this area, versus 6% in the United States and 4% in Western Europe.
So, Danny – when you look at the development of Russian digitalisation, what are your thoughts on how it compares to the rest of the world?
Danny: I could talk forever about this. I think the Russian Federal Government would be marked 'not bad' on digitalisation. For example, the Russian Federal Tax Service is well known for being highly digitalised, using real-time tax data to boost transparency with taxpayers. A number of large-scale Russian enterprises are now also digitalising. Solid investment is being made by the West and the market is growing increasingly advanced. If there is an idea that Russia is primitive or backward on this, that's not entirely true.
However, if I’m being critical, Russia’s weak spot is a failure to support and incentivise SMEs. This is a systemic issue in Russia, and it’s becoming particularly pressing during the COVID-19 crisis. Across the world, SMEs are often responsible for developing many of the innovations that drive economic growth. But they’re not prevalent enough in the Russian economy, accounting for just 23-27% of GDP and the same proportion of employment. In Western Europe and the United States they make up 55-58% of the same measures. There’s a lot of room for improvement here.
Gennady: What do you think is attracting Russian businesses to digital transformation?
Danny: Our recent survey of Russian business leaders identified that 75% of businesses want to use digital transformation to improve customer relations, 73% want to improve internal productivity and costs and 52% to develop new business models and open revenue streams.
There is a difference in motivations between B2B and B2C businesses. If a business is consumer-focused, they’re more interested in using digital technologies to improve customer relations. If you look at a B2B business, such as a manufacturer with a smaller number of customers, they are targeting internal productivity, cost reduction and streamlining operations. There is a clear mix of driving factors. But I do see an increasing focus on analytics and big data to uncover competitive advantage, as well as technologies like remote working which are becoming especially important as COVID-19 progresses.
What Technologies Are Important in Russia?
Gennady: Let’s talk more about the specific digital technologies Russian businesses are using. I have seen companies starting to explore what advantages can be accessed by analysing data, and using personalisation to improve customer experiences. They’re also looking at what value can be derived from AI and machine learning, and how a multi-cloud strategy can enhance their operations. How important do you think these areas are, and what other technologies are Russian businesses adopting in 2020?
Danny: While there are important discussions going on in these areas, the focus of many businesses is usually different. Our recent survey asked business leaders about which technologies they were making use of. It found that social media is the most heavily utilised, with 38% of businesses using it extensively. Mobile technology and apps are used by 34%, and 30% rely on document digitisation.
The adoption of more advanced technologies, such as IoT, AI, advanced robotics and 3D printing, is low, used extensively in 10% or less of Russian businesses. Now, that is roughly what you would expect considering the current state of the Russian market and many similar countries. But what surprised me is that just 37% are fully integrating cloud into core business operations, which is much lower than businesses in other regions.
Gennady: That’s an interesting point. When we speak to customers about this, we know they are concerned about privacy. While the desire to leverage the cloud is there, they don’t want internal production data to be analysed by international providers as they are apprehensive about the security and business continuity implications of storing that data outside of their organisational infrastructures. That’s why we often provide businesses with guidance on how a multi-cloud approach can help for specific business needs, while still protecting internal processes.
A Different Path
As we are seeing with cloud, Russia’s unique operating environment poses challenges to the adoption of certain technologies. The balance of GDP and incentives in favour of large corporates over agile SMEs will make digitalisation – particularly if it involves advanced technologies such as IoT and AI – a lengthy process.
However, uptake of other technologies is already healthy, and the appetite for transformation is strong, both in government and in business. It may be taking a less trodden route to digitalisation, but it’s clear that Russia is no digital laggard.
Join me and Danny again in July for another blog on this topic. Meanwhile, visit the Management Perspectives hub to learn more about digital transformation and find valuable resources for executive industrial decision-makers.