Ben Aris in St Petersburg -
Anatoly Karachinsky has seen it all. A maths and computer whiz who was a product of the Soviet Cold War emphasis on pure science, he went into business as a young man in 1987 when Mikhail Gorbachev allowed the first private businesses to be set up during perestroika. He attended the famous "oligarch meeting," called by President Vladimir Putin shortly after the start of his first term in office where he laid down the law to the likes of Mikhail Khodorkovsky. And this is his seventh crisis.
From its humble beginnings, Karachinsky worked in a joint venture Intermicro as a technical director (joint ventures were at first the only form of private enterprise allowed). Later in 1992 he formed his own company IBS, which today is one of Europe's leading software development and IT services providers, with over 10,000 employees in ten countries and annual revenues of $650m. "I went into business at the end of the 1980s, but all I ever wanted to do was write programmes," says Karachinsky, who took time out during the annual Kremlin-sponsored St Petersburg Economic Forum to talk to bne.
It was actually Gorby's glamorous wife Raisa who gave Karachinsky his first big break. A moderniser who wowed the West and ostentatiously went on shopping outings during her trips abroad, Raisa wanted to bring Russian women up to date and so encouraged the German publisher of Burda Moden, a home design magazine that also carries sewing patterns for trendy women's wear, to publish in Russia. The magazine was an overnight sensation. "Burda Moden decided to do a Russian edition because of the first lady," says the bearded and ebullient Karachinsky. "She wanted Russian women to know something about home and family. They had their German publishing system, but didn't know what to do next so we built the Russian publishing system."
The fall of the Berlin Wall changed everything. As Russia raced to catch up with the West, computerisation was one of the main places where the gap was greatest. Importing computers made the first fortunes for several of today's oligarchs, but Karachinsky went a step further and wrote the code that Russian companies needed to make them work. "The first really big job we had was Sberbank where we built the system that allows cards to be used in ATMs and for the bank to keep electronic records of people's accounts, as before that everything was done on paper. That job covered half the territory of Russia. It took seven years to complete," says Karachinsky, adding that Sberbank remains one of the company's biggest customers today.
But it has not been an easy ride. If anyone knows about the volatility of the Russian market, it is Karachinsky, who has worked through every big crisis that Russia has experienced including, almost uniquely in the Russian corporate universe, the very first one in 1991 when the Soviet Union collapsed. "There are always crises in Russia," says Karachinsky, who rattles off such years as if they were wine vintages. "1998 was a very tough year, but then so were 1996 and also 1993. But 2004 was okay and 2006-2007 was a good time like 1997, which was also a great year - before 2008 of course or the struggle in 2009. When there is a boom, everyone forgets the last crisis. When the price of crude is high and the state is not spending, the economy develops well. 2007 was a real boom year, but if there is a boom, then the next year will be a crisis - it is always the way."
Reversing the brain drain
Despite the rocky ride, IBS has grown steadily over the last two decades, managing growth of 45% a year even in the current difficult environment. Karachinsky attributes this success to the world being in the midst of the biggest IT revolution in history and the fact that Russia, the first country to put a man into space, has some of the best programmers in the world. "People talk about the brain drain, but in 2002 Russians started to come back home," says Karachinsky. "During 2008 and 2009, we were hiring 500 people a month, while in America unemployment was running at 11%. The market is open and our people didn't leave for good. They are only looking for places to work and will go where the best jobs are. We offer good conditions and so they come back. Russia still has excellent engineers, but where we fall down is on poor management."
The rising standard of living in Russia is making it an increasingly attractive place to live and work. While on a dollar-for-dollar comparison salaries for programmers in Russia are about half those in the US, they are more than competitive when the cost of living is taken into account. Karachinsky says his firm did a comparative study and found that after you take out taxes, food, entertainment, debt and rent, workers end up with more cash in their pocket in Russia than in the US. And on top of that is Russian patriotism: Russians love their country and will return if they can make it work professionally. Karachinsky says these days the problem is getting his Russian managers to go and live overseas, as many of his top people are reluctant to leave their homeland.
IBS has quickly expanded beyond Russia's borders. It has opened offices throughout the emerging markets and is now increasingly moving into developed markets. Karachinsky says he has offices in Ukraine, Poland, Romania and Vietnam, but also offices in the US and the UK, while German is an especially vibrant market for IBS.
Turn on your mobile phone, start your car, take a plane or withdraw some money using an ATM, the chances are the software that makes all these things possible was at least partly developed by IBS.
The outlook for the software business is very good, says Karachinsky. Microsoft dominates the operating system on PCs, but more recently CPUs (central processing units, the brains of a computer) are increasingly finding their way into most gadgets we use everyday, from our phones to our fridges. "The king is dead," says Karachinsky. "For 20 years, Microsoft's architecture has had a virtual monopoly, but now that computing is moving out of computers all the software needs to be rewritten. Think: only 10 years ago most companies had a computer centre and now almost none of them do; everything is quickly migrating into the cloud. The whole set-up is being remade."
Karachinsky rattles off a list of blue-chip clients that make use of IBS' services - both Russian and multinational - which includes Deutsche Bank, UBS, and several other large European and US banks. Providing software for the financial services industry is one of the company's core competences. IBS also writes software for the aviation industry and started working with Boeing 12 years ago. Cars are a more recent addition; as cars become increasingly computerized, IBS already works with most of the biggest European and American automakers. "We offer a global service and we are the biggest implementer of SAP solutions for Russian clients. If you were to name the 100 biggest Russian companies, then 80 of them are our clients," says Karachinsky.
But surely the US is the home of innovative software: how can a Russian company compete so well against the likes of Silicon Valley? Karachinsky explains it's down to his 4x4 formula. "What we do, the US companies can't do any more," says Karachinsky. "There is a big difference between innovation that you find in Silicon valley and the industrial projects that we cater to. We use their innovations - and pay for them - but the companies that sell cars, planes and financial services want better products at a minimum price and that is what we do. We are like a 4x4: we are four-times faster and four-times cheaper than our competitors. It's the cornerstone of the business."
The Kremlin has committed itself to modernising the economy and in Putin's speech at the St Petersburg forum, the president committed himself to increasing the share of high-tech business in the economy from 20% to 27% by 2020. That would surely make IBS one of the Kremlin's "dream" companies. "We don't feel like the dream company," says Karachinsky. "There are raw materials at high prices here. Who wants to do anything if you are well off already?" asks Karachinsky. "So the dream of the president will be very hard to implement. So far I don't believe in the modernisation of the country, as I don't see any signs of it other than the speeches given at conferences."
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