Vladimir Putin’s visit to Iran in July 2022 marked new prospects for the ruble as a currency for direct international settlements with partner countries. What does the potential ruble zone mean for the Russian IT sector?
At the edge of our seat
The heads of Turkey and Iran announced the transition to the ruble as a currency for settlements last summer. Many experts say that the Middle Eastern countries are only beginning to accept the wide circulation of the ruble. In addition to settlements with Moscow, the two leading regional players will be able to use the ruble to trade with each other when the potential currency zone stabilizes.
There’s still a long way to go, but a reserve currency is necessary for the stable international trade, and for obvious reasons the dollar and euro will not be of much help here, while the ruble has all the chances given the policy of our Central Bank is smart.
If the transition happens, it will mean that the share of the Russian ruble in the BRICS reserve currency portfolio will be some 19%. Tehran and Ankara will be followed by Iraq, Lebanon and Syria, maybe Egypt. There will be enough countries to make the national currency a reserve one.
This event will directly affect the Russian economy by expanding the potential exports markets, including in the IT sector.
There are theories that say that the currency zone provides the population with advanced technologies at the condition that there are at least 500 million people in the economically active groups. According to some estimates, it’s 300 million.
That many people are needed to reach the level of labor division necessary both for quality work and for guaranteed consumption and a low prime cost of high-tech production.
The market must be at least 300 million people to have a cost-effective production in the high-tech segment.
In my opinion, Russia needs to build partnerships with the Middle Eastern countries. The thing is, India and China are completely independent in this regard, having their own currency, a developed IT sector and a population of over one billion each.
Russia’s population is 147 million. However, the number of potential participants in the ruble zone has already reached the necessary 500 million: Russia (147 million), Iran (87 million), Egypt (107 million), Türkiye (86 million), Iraq (40 million), Syria (22 million) and Lebanon (8 million). The CIS countries are also important as they are historically in Moscow’s sphere of influence.
In all of these countries, the high-tech sector is not really developed, and in some of them is simply absent. Except in Russia, which can sell its IT products using rubles.
When the market reaches 500 million people, the everlasting and very painful saying about the Russian insanely expensive processors will be forgotten. They will become less so at least in terms of the production cost and if having support from say, China, the prices might be even more acceptable.
It will be much easier to plan and develop production, which will allow for manufacturing products comparable to the Chinese and Indian products, and also for actively developing our own solutions.
The chip shortage can be overcome with the help of China and India (there will be no competition because of these countries’ huge markets). The launch of Russia’s own production of chips is also possible: under any scenario, high-tech products sensitive to the number of batches in terms of prime cost becomes more viable in terms of payoff.
The purchasing power of the population in the partner countries in the ruble zone should not be confusing. The fact that Tehran or Damascus are not the stereotypical consumer heaven means nothing.
High-tech products are used by various industrial sectors, such as the energy sector, whose infrastructure works on servers, networks, data storage systems and software. Same goes for the transport sector, mining and any other industry that requires a basic IT infrastructure.
The consumer sector in IT is not the main one. The question in now about how much the population would want to pay, but how the demand in infrastructure is being developed and whether the governments are ready to pay for it.
Therefore, the main issue at the first stage of the development of such cooperation will be about how many Russian-made IT products are left for exports after the domestic demand is met.
The consumer demand can be covered with the Chinese products, as per tradition, since China already supplies the half of the planet. If it loses the IS and EU markets, Beijing will easily pivot to the ruble zone in the Middle East.
Time to move forward
However, we shouldn’t get carried away or start counting our “fast rubles.” Starting a transformation of this kind in the real world is a slow process. Today we are in a phase where we launch IT production for domestic consumption. And we will see the results of this phase only in a few years.
A cluster of high-tech manufacturers should appear, which can later be scaled up to meet the demand of the new currency zone.
It is important to seize the day and get the hang of it, boost production and gain experience – we’ll need all of that to quickly deploy production to meet new external needs later.
Iran has been under sanctions for years, getting by with parallel imports. It can be assumed that the country will become the first customer for Russian IT products, the destination where the first batches of our equipment will go.
Actually, we have already seen a surge of interest in Russian IT solutions from that region; in this regard, the flagging stimulation of the Russian IT industry with benefits and state support is of concern.
Only the launch of internal investment and external marketing mechanisms will help Russia gain new markets in the future. There is no turning back for the Russian IT industry. Its export potential holds a clear growth prospect, and we need to grab onto it with both hands and move forward with it.
We want change
Our officials have already realized this is the vector of development. Not so long ago, the Ministry of Industry and Trade announced its plans to develop industrial production as part of the new paradigm of proactive import substitution. This paradigm does not require aggressive investment in science, education, production and development.
All these measures are for the sake of developing necessary technology proactively, before there is actual shortage, to avoid the model of catching-up development.
The challenge is big and requires revamping the management system and approaches to resource distribution. Ad hoc direct and, for some time, emergency governance must be established for each industrial sector. These bodies will be fully responsible for their respective industries and have sufficient powers.
Additionally, the Russian Government declared an objective to saturate the domestic market with radio electronic devices to 70% by 2030, up from the current 12%.
This ambition is realistic but requires guaranteed internal investment and a sales market. As we can see, the first condition is directly related to the package of measures supporting the IT industry that were introduced after February 24. The second condition fits into the paradigm of stimulating the market through external markets within the ruble zone.
The technological sovereignty that has been widely discussed lately can be achieved only by being able to scale up supply to the level of current demand.
By Vyacheslav Volodkovich, CEO, Aerodisk