A brave opinion on Russia by an Englishman

Ed Lucas can not travel to Russia. He simply can not obtain a visa. This is how the Kremlin mildly intimidates foreign journalists critical of its regime. Ed’s book “The New Cold War” has just come out this week. I am reprinting here his piece from The Times.

 From The Times

February 5, 2008

Why kowtow to brutal, cynical Russia?

We have a new Cold War and we’re losing it. The West must stand up to the Kremlin now

Edward Lucas

Sixty years ago the Berlin Airlift highlighted the menace of Stalin’s Kremlin. Forty years ago Soviet tanks crushed both the Prague Spring and any remaining illusions about the Kremlin’s grip on the captive nations. Twenty years ago we began dropping our guard, as totalitarianism withered under Mikhail Gorbachev. Now it is time to acknowledge the inconvenient truth. Russia is back: rich, powerful and hostile. Partnership is giving way to rivalry, with increasingly threatening overtones. The new Cold War has begun – but just as in the 1940s, we are alarmingly slow to notice it.

The loudest alarm signal is Russia’s predictable yet mystifying presidential election on March 2. Predictable because everyone knows who will win: Dmitri Medvedev, Vladimir Putin’s polite, lawyerly sidekick; mystifying because the meaning of that victory is so unclear. Will Mr Medvedev be a mere figurehead? Will he stand down and allow Mr Putin to return? What does his stint running Russia’s energy giant, Gazprom, one of the world’s most corrupt, incompetent and sinister companies, tell us about his plans for the future? What does his rise mean for the clans of crooks and spooks whose murky feuds have increased so sharply in past months? Once a dead art, Kremlinology is now a lively and useful discipline.

Politics in Russia is a matter of life and death. Mikhail Khodorkovsky, once Russia’s richest man, is on prison hunger strike in protest against the ill-treatment of his aide Vasily Aleksanyan. Mr Aleksanyan is confined in a filthy mould-infested cell because he refuses to sign a bogus confession incriminating Mr Khodorkovsky. His judicial torture, including denial of medical care, which has blinded him, has been condemned by the European Court of Human Rights. It reads like something from Dostoyevsky, not a factual account of prison conditions in supposedly one of the world’s top eight industrialised democracies.

That doesn’t bother most Russians. Mr Putin is wildly popular; so is Mr Medvedev. Mr Khodorkovsky and other former “oligarchs” are seen as despicable emblems of the 1990s, a decade in which Russians feel they were swindled at home and humiliated abroad. Mr Putin has brought both stability and pride. For now, democracy has failed: most Russians say they agree that the media should be controlled and that the opposition should not be allowed to contend for power.

Those feelings are complex. They are partly the result of the state-controlled media’s propaganda. They also truly represent tragic misunderstandings and missed opportunities in the Yeltsin years, when oil prices were low and Russian governments struggled with crippling foreign debts. Mr Putin has been lucky – with oil at nearly $100 a barrel, Russia is bound to prosper. Yet he too is a product of the 1990s, an unemployed ex-spy who became a top official in the Yeltsin Kremlin. His denunciations of that era neglect to mention its strengths: press freedom, and also economic reforms such as privatisation and price liberalisation from which Russia has hugely benefited.

Communism has gone, but in its place has come “sovereign democracy”, a potent cocktail of self-righteousness, nationalism and xenophobia that fuels the Kremlin’s power grab abroad. In the “swing states” of Eastern Europe – Bulgaria, Latvia and Moldova – we are already losing the new Cold War. We have avoided catastrophe in Serbia by a hair’s breadth. The great engines of EU and Nato expansion, which brought half a continent into our orbit after the collapse of communism, have stalled.

But it is not just “faraway countries of which we know nothing” that are at stake. Russia plays divide and rule with the West, ruthlessly using our democratic politics and open economies to undermine us. It has brazenly hired Gerhard Schröder, the former German chancellor, to promote its biggest energy project, Nord Stream. This is a hugely expensive and strategically vital gas pipeline on the Baltic seabed that will bypass Poland and deliver gas straight to Germany. Like a rich and powerful man who becomes pathetically dependent on heroin, Germany is mainlining on Russian energy. The new pipeline hooks up addict and pusher directly. Instead of urgently diversifying away from gas and to other suppliers, the Netherlands, Italy and Austria are following the same path.

Russia has cowed and muzzled the Organisation for Security and Co-operation in Europe, supposedly the Continent’s main democracy-promoting and election-monitoring body. It has nobbled the Council of Europe, a talking shop that is supposed to be the custodian of human rights. The British Conservatives, in bizarre alliance with Mr Putin’s United Russia party, came within a whisker of electing a former KGB man and Kremlin propagandist, Mikhail Margelov, to the presidency. At its summit in Bucharest in April, Nato’s European members are all set to kowtow to Kremlin pressure and give a cold shoulder to Georgia’s bid to move towards membership. The EU can not even summon the willpower to liberalise its internal energy markets, let alone counter the Kremlin’s ruthless use of cheap energy deals and lucrative pipelines.

Our biggest weakness is money. During the old Cold War, doing business with the Soviet Union was a rare and highly suspicious activity. Now bankers, lawyers, consultants and spin-doctors (and even, it is whispered, politicians) flock to take 30 silver roubles for services rendered, even when they are privately disgusted by the source. Until that changes, we have little chance of resisting the Kremlin – and even less of persuading ordinary Russians that their corrupt, cynical, brutal and incompetent rulers are harbingers of disaster, not triumph.

Edward Lucas is author of The New Cold War: how the Kremlin menaces both Russia and the West 

Consolidation in Eastern Europe: Who is Still in the Outsourcing Game?

Here is my article which came out in February issue of the Outsourcing Journal.

For a long time the management of EPAM Systems, Eastern Europe’s largest software development company, was looking to enter the Russian outsourcing market. At the same time the labor market in Belarus, with a population of nearly 10 million and EPAM’s first offshore location, began heating up. So the need for new resources became more urgent.

EPAM management selected Vested Development (VDI), a Russian software development company headquartered in Burlington, Massachusetts. “We looked at a number of companies, but with VDI we knew each other for many years and there was a strong level of comfort,” says Arkady Dobkin, CEO of EPAM. VDI, founded in 1993, began life as an offshore software development company. However, since the beginning of 2000, the company has placed a strong focus on the Russian market.

Such is the picture across Russia: many software development companies have seen more success on the local IT market than abroad. The Russian economy, rich in natural resources, finally showed a need for the talented engineers back home. Besides, unlike publicly-listed Western companies looking to squeeze every cent of efficiency out of their outsourcing business case, privately-owned Russian businesses pay well to keep the best suppliers delivering the best results.

The growth of the IT industry in Russia has been remarkable. According to the estimates of Russian information agency RosBalt, in 2007 the IT market in Russia grew by 25 percent compared to the previous year; the market has maintained that growth rate for a number of years in the past. The increasing local market need for IT professionals, exceeding existing supply, resulted in the first signs of the industry consolidation.

Thus in 2007 one of the largest Russian system integrators, IBS Group, completed an acquisition of Borlas, a consultancy and IT services company. At the end of the year the company employed 6,000 people. Also, last year Systematica acquired systems integrator TopS BI. In the meantime Verysell, which employed 750 employees in 2007 and was valued at $300 million by Troika Dialog, raised $50 million to acquire an IT services company in preparation for an IPO.

Across other eastern European countries the fight for IT resources gets tougher. In Poland, the third largest country in the region after Russia and Ukraine, there are only a few large specialized offshore outsourcing service providers. In 2007, the total IT outsourcing market volume was 750 mln PLN (3.5 PLN = 1 Euro). Most of the key players, though, offer software development services to their international customers, accounting for approximately 45 percent of their revenue, although there is no firm statistical data, according to Andrzej Horodeñski, the spokesman of the Polish Chamber of Information Technology and Telecommunications.

“The Polish IT labor pool is close to being exhausted,” he says. “The basic reason for that is not labor migration, but mainly the internal IT industry growth.” Here IT companies merge to survive fierce competitions from the international giants such as IBM and HP. In 2007 Computerland merged with Emax to form 3000-people-strong Sygnity Group, and at the end of the year Asseco merged with Prokom, creating Poland’s largest IT company.

In Romania, where the country entered the EU on the first of January 2007, its outsourcing industry was simply sold out. U.S.-based Techteam acquired Akela, one of the oldest Romanian outsourcing companies; UK-based Endava acquired AGS; and Adecco bought IP Devel to expand its embedded development team. U.S.-based Computer Generated Solutions bought EasyCall, the largest Romanian call center operator, with 600 employees and Euro 1.8M revenue.

Also, in 2006 Adobe bought the Dreamweaver development experts InterAKT. Now, according to Vasile Baltac, the president of ATIC – Romanian IT association, there are few small outsourcing companies with Romanian capital left. Branches of ICT multinationals or joint ventures where the main shareholder is a foreign company produce 80 to 90 percent of the industry turnover,” he says. “All the big names are present in Romania now: Oracle, HP, IBM, Alcatel, and Siemens. Large multinationals number about 3,000 people, and they are very aggressive on the local IT market too.”

In Bulgaria the demand for software developers exceeds supply, and the local providers are fighting with Coca Cola, HP, SAP, and Siemens for the talent. VMware solved the problem with resources fairly easily. In 2007 it simply acquired its outsourcing supplier Sciant, a Bulgarian software development company with a lower-cost subsidiary in Vietnam; so Sciant clients had to look elsewhere to set up their operations from scratch.

Acquisitions of outsourcing companies have been happening across Eastern Europe. Exigen, the U.S. outsourcer, has been buying companies in Eastern Europe for a while. In its portfolio, for example, is Dati Gruppa, a Latvian IT company, and Starsoft, a Ukrainian company.

In Ukraine, acquisitions also started to take place although the country has still over a hundred small and medium-size players, with only a handful of them employing over 200 people. For example, Global Logic whose resources are based in India and the U.S., merged with Bonus Technologies, whilst Kharkiv-based Telesens was sold for $2.7 million to NASDAQ-listed TTI Telecom in December 2007. The purpose of the latter deal was to open up markets for both companies, rather than simply secure a resource base.

Tom Scharning, the Vice President of Business Development at EDB, a Scandinavian IT company, has conducted extensive research looking for infrastructure outsourcing capabilities in Eastern Europe. “We looked at both outsourcing and acquisition options. However, we didn’t find sufficient level of expertise in infrastructure management, only some rudimentary skills,” he says. So the company decided to acquire a company in the region and train specialists in house.

“We looked at many Eastern European countries such as Russia, Bulgaria, Poland, Belarus, Ukraine, Romania, and Baltic States. We found that only Russia and Ukraine fit the bill. We feared that Belarus, Bulgaria, and Romania will follow the steps of the Baltic countries where the resources became drained quickly and the prices reached those of Finland.” Eventually, EDB bought a majority stake in two companies in Ukraine.

“We had a long list of about 40 Ukrainian companies, some of which had high expectations of their valuation,” says Sharning. “So finally we made a deal with Infopulse and Miratech, which are now part of the EDB global operation.”

In defining its Eastern European strategy, EDB looked not only just at low-cost resources, but it has also followed the steps of its clients. “Scandinavian banks are the key EDB customers. They are moving eastwards towards Russia and Ukraine,” adds Scharning, so the company looked for the resource base nearby to continue supporting its clients worldwide.

The consolidation of the offshore outsourcing industry in Eastern Europe has become a reality, which demonstrates both the high demand for the local professionals, located close to the Western European markets, and the bottleneck of the labor supply. As for EPAM Systems, the acquisition was a success; it completed the post-merger integration in 2007. “As a result of the merger we’ve got interesting CIS clients, and now 50 percent of our resources are in Russia and Ukraine,” concludes Arkadiy Dobkin.

Lessons from the Outsourcing Journal:

• As the consolidation of IT industry in Eastern Europe has started, the companies looking to secure IT resources in Eastern Europe need to look for the locations carefully, avoiding overheated labor markets.
• Companies looking to buy an outsourcing supplier in Eastern Europe should look at additional benefits of an acquisition such as access to the new markets.