One Year Ago: Is Russian E-Commerce Ready to Explode?

Recently, it has been reported that Russia is on the verge of cashing in on a growing boom in Internet use and e-commerce, if only -- we are told -- authorities would seize the opportunity and do away with bureaucratic hurdles.

The fact of the matter is that Russian e-commerce generated about US$160 million in sales in 1998, according to the Russian Internet Technologies Center. This is due in part to the country's burgeoning online population.

For example, by the end of 1999, the center reported that 7.8 million adult Russians were using the Internet, though it added that actual usage may be higher because many people have Internet access at work or school.

"I can think of few countries in the world better positioned to take advantage of e-commerce and the Internet," Scott Blacklin, president of the American Chamber of Commerce in Moscow recently told reporters. "There is greater Internet density here in Russia than anywhere else in Central and Eastern Europe.''

Lots of Engineers

Already, network equipment giant Cisco Systems and chipmaker Intel Corp. (Nasdaq: INTC) , have offered suggestions to the Russian government designed to increase Internet usage and e-commerce.

Both companies feel that Russia is in a strong position because of its well-educated workforce and large number of engineers and technical experts -- unusual for an emerging market.

Compaq Computer, Lucent Technologies and IBM (NYSE: IBM) have also made recommendations to the Russian government on how it can help accelerate the growth of e-commerce.

Taxing Problem

Still, experts say one of the biggest challenges facing the growth of e-commerce in Russia is the widespread tax evasion that exists in the country.

They point out that this is why some Russian officials favor e-commerce, hoping it will make it easier for the government to monitor commercial activity -- therefore making it harder to avoid paying taxes.

But other officials fear an expanding online marketplace will have the unintended consequence of stunting the growth of small brick-and-mortar businesses springing up throughout the former Communist empire.

The companies advising Russia on growing its e-commerce industry also say regulation must be eased, but, at the same time, they add that a law is needed to recognize electronic signatures. The issue of taxing e-commerce also must be resolved.

More Trouble

I agree with them. I also believe the potential growth of Russian Internet businesses is enormous, but I think there are additional problems making such a jump start far more difficult than one might imagine.

For instance, some experts predict that Russia's inventory of engineers and high-tech workers will be quickly depleted as they are lured to the West by the booming new economy. This brain drain could seriously stop any imminent e-commerce boom in its tracks.

Additionally, Russia's poor track record of paying back its foreign loans on time makes it a risky investment for the mammoth influx of Western capital that is needed to build the kind of infrastructure capable of sustaining real e-commerce growth.

Therefore, it seems to me that the prospects of an impending e-commerce gold rush in Russia are quite premature, despite all the hype to the contrary.