Russia's Preference For Open-Source To Hurt U.S. Tech Stocks

Amid rising political tensions with the U.S., Russia is planning to further lower its usage of licensed software from IT giants like International Business Machines Corp (NYSE:IBM) , Microsoft Corporation (NASDAQ:MSFT) , SAP AG (NYSE:SAP) and Oracle Corporation (NYSE:ORCL) .

Per Bloomberg, “The State Duma, Russia’s lower house of parliament, is drafting a bill to restrict government agencies from buying licensed software, giving preference to open-source software.”

The proposed law is an addition to an already existing federal law that came into effect on Jan 1, 2016, which restricts the use of foreign software in the public sector, if there is a domestic version available.

Growing Security Concerns

Over the years, licensed software from the U.S firms or software built on frameworks like IBM’s Web sphere or Microsoft’s ASP.Net were hugely popular with Russian state agencies and firms. Per Bloomberg, almost 75% of an estimated 157 billion rubles ($2.9 billion) in Russian software spending went to imports in 2014.

According to the ministry of communications, the share of imported software in the government sector was between 50% and 97%, depending on the type.

However, license software usage has declined over the last couple of years due to the fears of international sanction post Russia’s annexation of Crimea in 2014. Additionally, Russian government’s import substitution strategy - preferring domestic products - has also fuelled local growth.

Moreover, dependence on foreign software - in this case U.S based - is creating security risks according to Andrey Chernogorov, executive secretary of the Duma’s commission on strategic information systems.

To explain the risk, the draft law has cited vulnerability issues faced by the Russian government website zakupki.gov.ru last year. The website which was based on IBM’s framework faced security concerns after the company’s contract with Russian vendor Lanit expired.

The reduced dependence on U.S. based software is positive, in this regard. President Vladimir Putin’s government has laid out a plan to cut foreign program reliance to less than 50% by 2025.

Expanding Exports a Positive for Russia

According to industry association Russoft, the export of software and IT services in 2015 increased by 16% from 2014 to $7 billion. The growing footprint of Russian companies like Kaspersky Lab, InfoWatch and Positive Technologies in international markets boost exports.

Additionally, Russia’s close association with BRICS members (Brazil, Russia, India, China and South Africa) is helping it to lower dependence on the U.S. companies in enterprise software segments. This include rapidly growing fields like client and mobile operating systems (OS), server operating systems, database management systems, cloud software and virtualisation, as well as user-defined office software.

Moreover, Russia is partnering Finnish developer Jolla to create a new mobile operating system based on its open-source Sailfish OS. In November last year, software company Parallels announced a locally-built cloud computing platform called ‘Rosplatforma,’ to store data online. The new service aims to challenge existing US platforms such as Microsoft Azure and Amazon (NASDAQ:AMZN) Cloud.

Further, Russian IT companies are increasing their presence in the U.S., Germany, Austria and Switzerland, as well as in Brazil, India, the Middle East and China. This will further bolster exports in the long haul.

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