Layoffs, relocation, terminated projects and the brain drain in Russia’s IT sector

Layoffs, relocation, terminated projects and the brain drain in Russia’s IT sector
Russia’s IT sector undergoes major changes as foreign companies pull out of the country and domestic firms are forced to rethink business strategies / wiki
By bne IntelliNews April 24, 2022

In mid-March, Hiroshi Makino, a venture capitalist, made the difficult choice to relocate his family and business from St Petersburg, Russia back to his home country of Japan.

After moving to Russia’s northern capital in 2016, Makino and a university friend from Moscow launched SAMI, an IT consulting firm that helps startups from Russia and other CIS countries to enter the Japanese market. Later, as the whole world went online during the pandemic, SAMI expanded to develop its own web services and software.

Makino considers himself an optimist. He long believed that despite political tensions between Russia and the West, doing business in Russia was not only possible, but full of great and untapped opportunities. After Russia invaded neighbouring Ukraine, this vision collided with a harsh new reality.

“Of course, leaving was really tough. Even around March 7, I still didn’t think we would ever leave,” Makino recalls. “But when the government started announcing restrictions on transferring money abroad, we were all a bit shocked. We sat down as a company and decided to get our money out of the country and relocate.”

Financial restrictions weren’t the only concern. As the Russian government imposed tighter controls on speech and cracked down on anti-war protesters, Makino worried for the safety of his employees. At the same time, snowballing sanctions and rumours that Russia might cut itself off from the global web generated fears that doing business with the outside world would become close to impossible.

Makino’s story is just one of many. Over the past two months, a growing number of IT companies have suspended operations in Russia, with some relocating offices to nearby countries such as Turkey and Georgia.

Between 50,000 and 70,000 IT specialists left Russia between the end of February and March, according to the Russian Association for Electronic Communications. It’s estimated that another 100,000 will have emigrated by the end of April.

Along with Moscow, the city of St Petersburg has been a major hub for both Russian and multinational IT companies. Thanks in part to the large number of specialists working in this industry, incomes in St Petersburg on average are some of the highest in the country, with IT specialists in the city typically earning around RUB178,000 ($2,334) per month.

Until recently, the largest foreign IT company operating in St Petersburg was EPAM systems, an American/Belarusian software engineering firm. Almost immediately following Russia’s invasion of Ukraine, EPAM moved to relocate its Russian employees abroad, which according to the company’s website totalled around 9,000. In early March, EPAM officially announced that it would discontinue services to customers in Russia.

Several other major multinational IT firms with offices in St Petersburg, like JetBrains, Veeam Software, Oracle and Deutsche Telekom, made similar decisions to suspend operations in Russia and relocate some of their staff. So while foreign companies feel compelled to abandon the Russian market, many are nevertheless interested in maintaining the IT talent that the country is known to produce.

In their own turn, many IT workers want to relocate. According to an online poll conducted in March by the IT-recruitment service Khabr Karyera, 33% of respondents are actively seeking employment in a foreign company. Likewise the Russia-based internet recruiting company HeadHunter has observed a significant daily increase in the number of uploaded resumes that have included “relocation desired” since the end of February.

The mass exodus of highly qualified workers spells a serious brain drain for the Russian economy, which has already alarmed government officials. During a speech in early April to the State Duma, Prime Minister Mikhail Mishustin made a desperate plea to IT specialists to remain in the country. “Don’t be afraid… Everything will be fine here [in Russia]. You will be able to work for your country, for your company, earn a decent income and live comfortably.”

The Russian government introduced a series of measures in response to the outflow of IT workers. For companies, this includes a tax exemption on income for up to three years. Meanwhile, individuals aged 22-40 employed in the IT sector can receive preferential mortgages. However, in order to qualify, a worker must earn more than RUB200,000 ($2,622) per month in large metropolises like St Petersburg and Moscow, or RUB150,000 rubles in provincial cities. Therefore it’s unclear whether this kind of incentive will mean much for younger IT specialists, whose incomes are less likely to meet the required minimum.

“I think these are strange measures,” says Alexei Pavlov, a software engineer from St Petersburg who in March moved to Georgia. Asked what it would take for him to return to Russia, Pavlov answers: “All high-ranking government officials would need to resign. Political prisoners would need to be released and the court system would need to be made fair and just. But I think the chances of that happening is a question of years, if not decades.”

For others, the chief concern isn’t purely political or even a lack of perks, but the fact that much of IT is built around integrated global markets. Companies doing business with foreign clients face serious challenges simply receiving payments from abroad due to sanctions and a whole host of other financial restrictions. And for those who derive most of their profits from foreign clients, the choice may come down to either relocating or risking losing their business entirely. 

Yet even IT firms oriented on Russia’s domestic market are encountering problems of slashed budgets and frozen projects, leading to layoffs in the sector.

Masha Minakova, who works as a quality assurance engineer at the web development company Proscom in St. Petersburg, says that projects she was working on a month ago were terminated after clients notified the company that they were scaling back development and reducing budgets. Minakova still has her job and is being transferred to work on other projects. However, some of her co-workers were laid off in recent weeks.

“For now, large companies aren’t ready to invest money in development or the creation of digital products,” recently wrote Alexander Bogdanov, founder of the Moscow-based web development firm AGIMA. “The main reason is because of uncertainty. No one can guess what the business environment will look like tomorrow. Some are counting on government contracts and import substitution, but right now there’s nothing to suggest that will work out.”

Despite catering to dozens of big clients such as X5 Retail Group, Megafon and Tinkoff Bank, Bogdanov reports that over the past month, the flow of orders to AGIMA has markedly decreased. The company scrapped its original development plans for 2022 and is now looking to hire around 200 new in-house employees.

As Bogdanov explains, during normal times AGIMA, like many IT companies in Russia, struggles to hire enough workers for its projects. With the sudden surge in laid-off specialists, the company sees a window of opportunity to build its in-house expertise, which later could give AGIMA an edge over competitors as smaller firms are squeezed out of the market.

Hiroshi Makino is thinking along similar lines. Although his company can no longer act as boots on the ground in Russia, it can now draw from the large talent pool of programmers and IT specialists flowing out of the country. “What we’re seeing is a resource drain, and we want some of it,” says Makino with a smile. “We’ll attract these specialists and bring them to work for us in Japan.”