This is the third article in a series, in which we are looking at the impact of the Russian invasion of Ukraine and ensuing international sanctions on major Russian IT companies.
IBS Group is best known as the leading provider of IT solutions for Russian businesses and regional governments. Since the war in Ukraine started its importance as a source of software has spiked. Cut off from foreign software after many foreign IT vendors exited Russia IBS has become one of the only sources of homegrown software solutions.
The company is flourishing, picking up more business supporting previously installed foreign solutions, as well as helping local companies to switch to Russian software and building its own solutions to replace imported products.
Founded in 1992, IBS Group is one of Russia's oldest players in the IT sector. IBS Group's head office is located in Moscow, while development and customer service offices are located in Nizhny Novgorod, Penza, Perm, St. Petersburg, Ulyanovsk, Ufa, Belgorod, Barnaul, Vologda and Taganrog.
The company offers services in IT outsourcing, deploying IT solutions, optimizing business processes, building systems for data management, analysis and modelling. It also develops, tests and supports software and manufactures servers, laptops and other hardware. IBS Group is at the heart of Russia’s digital transformation, CEO Svetlana Balanova told bne IntelliNews in an exclusive interview in 2018.
Scrapped expansion plans
Before the war in Ukraine, IBS had ambitious plans of becoming a major global IT company and hoped to IPO before eventually cancelling that plan in 2020. Now the company has to adjust to the new realities. Plans to established presence in some European countries, as well as in Japan and Australia, have been scrapped.
Still, according to general director Grigory Kocharov, IBS never considered entering the markets of the United States, Canada, Germany and Great Britain as they are highly competitive.
"In addition, attitudes towards Russian companies [in those countries] was utterly negative even before February 24," he said in an interview with the Russian business news web site RBC. "In Russia, we welcomed foreign companies, but abroad, no one was expecting us." He added that possible future expansion could now focus on Middle East and Africa as Russia continues to switch from the West to focus business on the BRICS bloc
Employees stay home
In the wake of Russia's invasion of Ukraine, many foreign IT firms have left the country, while a number of local players in the IT sector quickly relocated their employees to other countries. However, IBS Group bucked the trend.
In May 2022, the company said that it had over 5,000 employees, all of which were located in Russia, because all of IBS' customers and assets were also in Russia. Therefore, no relocation plans were on the table, although the company helped its personnel based in regions bordering on Ukraine to move to other locations in Russia.
Some IBS Group employees independently relocated last year, fearing they could be drafted to fight in Ukraine. The company didn't stop them from relocating and working remotely but, in late 2022, it announced a list of "banned" countries, remote work from which was prohibited.
Back then, IBS Group said that less than 1% of the company's employees had left Russia. IBS Group's policy was to divide countries into "friendly," "neutral" and "unfriendly" towards Russia. The firm's employees working remotely from the latter group, which included countries that slapped sanctions on Russia over the war in Ukraine, were told to either return to Russia or move to "friendly" or "neutral" countries.
Incidentally, in April 2022, IBS Group acquired the Russian assets of its former subsidiary, Luxoft, which completed an exit from the country. Prior to the war in Ukraine, Luxoft, an 83% share in which was sold to the US IT giant DXC Technology back in 2019, had offices in Moscow, St Petersburg, Omsk, Dubna and Nizhni Novgorod. The firm later relocated its personnel to Serbia, Poland and Singapore, breaking ties with Russia.
Narrowly avoiding sanctions
Russia’s flagship tech company Yandex has been placed on the sanctions list, but IBS Group has narrowly avoided the same fate.
In the spring of 2022, the company's founder Anatoly Karachinsky was sanctioned in the US, but he was targeted as a board member of the sanctioned Russian lender Otkritie rather than anything linked to IBS Group. Nevertheless, IBS Group remains a candidate for future sanctions.
Therefore, to avoid any possible problems for his company, Karachinsky subsequently left IBS Group's board of directors and sold his 75% share in the company's main legal entity, IBS Holding, to the management, and cut all ties with the firm.
"The addition of Anatoly Karachinsky to the sanctions list could have had an impact on IBS Group's business in Russia and abroad," Kocharov later explained. "For a number of companies still operating in Russia, it is important to avoid doing business with companies linked to [Specially Designated Nationals]. We would have had to explain to them that the reason why Karachinsky was added to the list was not his work at IBS Group." According to Kocharov, possible US sanctions against IBS Group would have been "unpleasant," but not "critical." He added that the company would have lost 12-14% of its business.
Incidentally, in May 2023, the sanctions against Karachinsky were lifted.
Helping local companies to adapt
Immediately after the Russian invasion, foreign software manufacturers, such as SAP, Adobe or Microsoft, one by one, started to exit the market. In addition to discontinuing sales of their products, most of the foreign vendors stopped supporting their solutions already deployed in Russia, which hit dozens of their Russian customers.
As a result, demand for supporting IT solutions from vendors that left Russia, replacing foreign IT solutions with local equivalents and developing new solutions skyrocketed.
"Product portfolios are changing, as companies are forced to replace foreign products with local equivalents," Kocharov told RBC. "Therefore, you need to immediately build and improve Russian software solutions. This is a fairly complicated and long process, but no one can prohibit Russian companies from copying what is built in the international market."
The exit of SAP, a German supplier of industrial software, was especially painful for Russian companies, as its solutions were widely deployed across various industries.
Grabbing the opportunity, IBS Group offered Russian firms comprehensive support of SAP-supplied systems without the vendor in the spring of 2022. The company said that it was ready to assist customers continuing to use SAP software, as well as those choosing to switch to "technological sovereignty" – meaning, those who decide to replace SAP solutions with those supplied by Russian developers.
IBS Group claimed that commissioning it to support SAP solutions enabled customers to spend the software support budget "more efficiently."
IPO plans remain off the table for now
While IBS Group is apparently busy supporting and replacing solutions from foreign vendors, the company admits this is not the right moment to think about attracting capital. In late 2022, the firm said it was considering an IPO on the Moscow Stock Exchange again after the original plan, floated in 2018, was abandoned in 2020.
However, those plans have been postponed from 2023 to 2025 or 2026 in a third attempt to list. Between 2007 and 2014, IBS' depository receipts were traded on the Frankfurt Stock Exchange. Then, the company was delisted and minority shares were converted into stock of its subsidiary, Luxoft.
Kocharov says that IBS Group would also consider selling to a strategic investor, but it is unlikely to come in the near future.
"We also consider the arrival of a strategic investor or an investment fund," he said. "Throughout the company's history, we have repeatedly had negotiations about it. But at this point, there are no negotiations. We need to wait for two or three years. We have enough capital for development."