On global-technology radar screens, the Russian Internet business is just one of thousands of dots. Even though supporters say Russian Internet accounts for 1.5 percent of the global market, the facts don't back that up. Since the demise of U.S. dot-com mania - and the plunge in technology stocks worldwide - the Russian Net has become a barely perceptible speck on the screen.

Just as many Russian companies followed Western Internet business models - albeit too late, in an under-funded way and rather poorly cloned - they are now beginning to struggle with the realities of the new, New Economy. But unlike in the United States, where more than 4,000 dot-coms have closed down and thousands of jobs have been lost, Russian projects - many of which should have been buried long ago - are being nursed by promoters and investors in hopes that the boom will somehow return.

In its first phase, the Russian Internet's most striking features were lack of innovation and a belief that special rules apply to the sector. When most net-preneurs speak of a "Russian Internet" they are referring to a place where international business norms do not apply. Of course, this runs against the entire logic of the Internet, which is a global phenomenon. And ultimately, this fundamental logic cannot be ignored.

But I am an optimist when it comes to the Russian Internet and believe that it is wrong to write off the entire sector - just as we cannot give up on the entire global-technology market because of the recent failure of some companies and business models.

Despite setbacks, there is still vast potential in Russia, and we have only seen the tip of a massive iceberg - one that has the potential of bridging major economic divides and raising Russia's competitiveness and productivity. Moreover, the country's highly competent population is just now overcoming some of the biggest barriers to the industry, marked by a lack of connectivity and computerization, heavy burdens on small businesses and large gaps in learning and language.

SHADOW OF THE WEST

Even as the NASDAQ plunges to new lows, Western markets are gearing up for a second wave of successful Business-to-Business (B2B) and Business-to-Consumer (B2C) business models. New ideas are emerging on inter- or intra-corporate procurement and trade exchanges. Profits are finally coming through on some of the more tenacious B2C dot-coms as the industry shakeout continues, cooling the irrational expectations of investors and venture capitalists alike - and allowing serious entrepreneurs some breathing room.

In this global scenario, Russia's Internet-driven industries have only taken their first steps, and after a late birth at that.

It is still a new era of opportunities here, and one that people are struggling to sort out. Most of Russia's Internet companies formed in the last two years were born premature, lacking strong (or any) business models, management skills and even a basic understanding of standards established by Western dot-coms.

Russian programmers cloned U.S. and European ideas at breakneck speed and at a fraction of the cost. But the market did not have a demand for even a small percentage of them. Moreover, a clone often cannot succeed when its original is competing for worldwide dominance. The biggest mistake most entrepreneurs here made was not accepting that the Internet's global reach means that sound models and products will break through national, cultural and language barriers. In such an environment, only innovation stands a chance - of which the Russian Internet had none.

A disregard for these principles and a lack of financing and skill to support the foundation of these projects brought on many failures and left the Russian Web littered with the carcasses of thousands of dysfunctional sites.

And like everywhere else, a big part of the Russian Internet boom was swindlers aiming at profiting on the global love for the New Economy by suckering venture capitalists and investors into parting with their money on unrealistic projects. Many did, and the proof is in failed ventures such as NetBridge, which merged with another spectacular failure of Russian Internet, port.ru.

But from this carnage - which has been considerably less painful than the European or U.S. meltdowns because of the relatively low quantity of venture capital here - some clear strategies and winners have emerged.

INFRASTRUCTURE A SAFE BET

It's true that ISPs here can rely on continuous demand and the increasing capacity of people to pay through government, NGO- and multilateral-donor-funded schemes. However, whether U.S.-style marriages between ISPs, multimedia content providers and portals (AOL-Time Warner-CNN) will work is highly suspect. Acquiring unproven portals at huge costs will only lower profits in the short to medium run for ISPs, and there is no reason why they should rush into unnecessary marriages with content providers.

But ISPs that focus on core competency and offer basic quality services should not have much to fear, even in an extremely competitive environment. Eventually, a huge section of the population - one way or another - will be able to pay for basic dial-up access, and even increased bandwidth services.

SELLING TO VIRTUAL CUSTOMERS

Even though per capita online spending in Russia is likely to remain a fraction of those by U.S. or European consumers, some B2C models still deserve mention. The best-known B2C site in Russia would have to be Ozon.ru, modeled on Amazon.com. The book-and-entertainment retailer is the key holding in Russia's best-known Internet venture, ru-Net Holdings, which also has the most successful Russian portal, Yandex, in its bag. And Yandex has consistently outperformed its rivals, Aport (taken over by Golden Telecom) and Rambler (child of the self-styled mother of the Russian Internet, Esther Dyson), on almost all counts.

However, despite Ozon's recent success, optimistic projections and quality management, the investment-holding company is likely to face some rough weather ahead - which is unfortunate because this is a success the Russian Internet sector desperately needs.

Foremost, advertising is a warped industry in Russia, and that will through barriers before any serous Internet boom. Moreover, the new kid on the block, eStart (another failed venture by publishing giant Independent Media), will continue to corner huge chunks of advertisement because of the special relationship the company enjoys with advertisers and its ability to twist an arm here and there.

For this reason, all of Russia's portals will have to go to war for ad dollars. And it will be bloody. None of them have the muscle eStart does, and eStart promoters have ruled out any mergers. They are determined to recover, on their own, the $5 million they have reportedly sunk into the venture.

Given this environment, the only way Russian Internet companies can survive the short term is through partnerships with brick-and-mortar businesses or some other profit-making enterprises that can keep pouring money in Net ventures to keep them floating.

Currently, Russian publishing is such that neither Rambler nor Yandex can fairly compete when Independent Media operations continue not only to attract, but also monopolize, advertisements.

THE STATE OF THE RUSSIAN NET

A statistic by Expert RA would have us believe that nearly 90 percent of leading Russian companies are connected to the Internet. But another study by Internet Business.ru cited by PriceWaterhouseCoopers in its analysis of Russian market, sees only 500-600 e-shops, 20-25 e-markets and fewer than 1,000 corporate information portals.

In short, Russian companies have a long way to go with the Internet, or even getting technologically up-to-date. Many companies, even powerful monopolies, have yet to implement automated payroll, accounts, production, inventory and sales systems. Their Internet presence is usually a farce, and even though the platforms being used might be good enough to host any business, they are usually standalone ones with little or no connection to what the company actually does. The virtual business of Russian companies is truly virtual.

As most Russian companies run parallel and offshore accounting - and are always in mortal fear of the tax inspectors - it would be naive to expect them to go online soon. Bringing business to the Internet would mean levels of transparency that are unthinkable. That is why I would recommend lowering the expectations significantly on B2B market projections, which are cited as high as $4.2 billion within the next three years.

Moreover, just like in the thousands of Russian commodity and goods exchanges that mushroomed in the early 1990s, there is good reason to believe that transactions will continue take place outside the exchanges not on e-platforms. Business models based on projections that transactions will shift online are bound to fail.

BUSINESS EXCHANGES

The development of B2B business must follow the general transition of Russian companies toward transparency, better management and corporate governance, and implementation of enterprise-resource-planning, or ERP, systems.

However, eventually, the biggest winners in the Russian Internet will emerge through the B2B route. At the same time, standalone exchanges - even with the support of industries in a sector - are not likely to be hugely successful. Anyone contemplating a significant investment in a B2B exchange should look at the history of U.S. pioneer Freemarkets (www.freemarkets.com). Dozens of standalone exchanges have failed as the industry looks to in-house procurement exchanges and jointly-owned sectoral exchanges.

SPENDING MORE

An increased spending by the industry on IT is necessary to bring money for local software and consulting companies to develop their skill and experience levels. And for Russia's Internet companies, this will be the key to success.

Our own studies indicate that all Russian companies could spend some $200 million in 2001-2002 on implementing ERP systems - roughly what a large British corporation could spend in a few years.

Increased domestic spending on information and communication technology will create opportunities for online commerce, and generate better cash flows for fledgling technology, design, consulting and outsourcing groups.

Best of all, high commodity prices mean that these companies have the money to pay for it, however whether they are able to change their management and governance practices is a different matter. Nevertheless, that kind of spending on the emerging outsourcing leaders, such as Luxoft, RosBusinessConsulting, Actis and the newly formed New Software Company will eventually become the foundation of the Russian Internet.

MAKING THE RIGHT INVESTMENT

For those looking for investment advice, I would have to say that the smartest venture investment made in the Russian Internet is in Actis Systems by Red-Stars and the New Software Co. by Boris Jordan's Sputnik group.

The Russian Internet is not an enigma, and strategy for success is simple - invest early and target good cash flows but, most importantly - build superior technology and management teams and carve a niche in conventional software business. Virtual business and virtual profits, leading to virtual IPOs, leading to virtual millionairdom, are a thing of the past.

Outsourcing groups such as Luxoft, a daughter company of IBS, and RosBusinessConsulting, are already awash in money. However, it remains to be seen how prudently they spend it on their own Internet ventures.

Opportunities in the Internet business will always be around. However, even though prospects will come around again and again, entry will be more and more difficult each time. Only the better-equipped, mobile and dynamic companies with core skills, a focus and management capabilities will be able to ride out to success next time around.