This paper analyzes the Russian software industry in the context of trade in information technology services. We assess Russia's underlying sources of competitive edge in software, such as its scientific establishments, education system, diaspora and low costs, and identify the institutional impediments to growth. A survey reveals that foreign outsourcing contracts, a high value‐added niche and high education levels characterize Russia's small, privately held software firms. A comparison with the Indian software industry underscores the structural differences in outsourcing relationships developed by the two countries and emphasizes that national advantages are complex amalgamations of many factors and need to be overtly marketed. Beyond the resources that give comparative and competitive advantage to a transitioning economy, a critical role is played by powerful industry organizations and by non‐market state institutions that can level the economic field and inject credibility into market structures.