Wins-Losses for Ukraine’s IT Industry in 2016

The Kyiv-based website published a piece on respectively five wins and losses for Ukraine’s IT industry in 2016. Below is a translation of the article which appeared on January 3, 2017 written by Vsevolod Nekrasov who specializes on the IT industry in Ukraine.

What was lost and what was gained in 2016 in the IT-industry in Ukraine? A selection of five win and five loss cases in the field of information technology follows.

Ukraine’s IT-industry generated  2.7B USD, or 3.3% of Ukraine’s GDP and has ninety-one  thousand programmers.

PricewaterhouseCoopers experts predict that by 2020 the industry will bring 27.2 billion UAH, approximately 1.277B Canadian dollars, to the country’s budget through revenues from the export-oriented IT industry.

What were some of the failures and achievements of the country’s IT industry in 2016 as it strives towards the ambitious prediction by PwC?

LOSS: Searches

Often at the order of the competition, unwarranted searches are used as a form of extortion.Though this was not done as it was in the 1990s as a way of imposing a “roof” over others to control them, which was the main motive to have competitors searched in Ukraine. Though there are no records kept of this say entrepreneurs and lawyers in the industry.

“Incursions” by the SBU, Ukraine’s State Security Service, the Prosecutor’s Office, the Ministry of Internal Affairs, the taxes imposed on medium and large enterprises under the pretext of fighting terrorism and separatism. Over the past six years, IT-companies have experienced more than fifty searches, but not a single criminal case was brought to court and no security forces were prosecuted for abuse of power.

During searches law enforcement officials are bold, the do not follow the norms laid out by the Criminal Procedural Code and forbid anyone from capturing any of their actions on video, they destroy video security systems, they steal money, valuables and servers.

The direct annual loss in the sector is $10-20M USD. Indirect losses for the country could reach $100M in forgone investment. Searches stimulate the movement of the sector into a shadow economy, the outflow of specialists abroad, and change of tax residency Ukrainian IT-entrepreneurs.

WIN:  AgTech

The agricultural sector is intensely interested in the field of Ukrainian innovative businesses and in the entire venture ecosystem. This is the only sector in the domestic market, where there is money and a demand for innovation. In 2015, Ukraine exported agricultural products and foodstuffs worth $14.5B USD. This is much more that what the export of metallurgical products provided.

An example of the rapid rise of an innovative project  in symbiosis with the agrarian sector was Founded in 2013, today is a company with a worldwide reputation. Its value – to collect data on crops using UAVs and their interpretation.

For the time being AgTech is not comparable to mainstream niches with its number of “star” projects. However, the potential of that direction is huge, because the share of agribusiness in Ukraine’s economy is significant.

LOSS: Startup results

The majority of successful Ukrainian startups leave the country. They are beckoned by global markets, “smart” money and a large possibility for networking in the world centres of innovative business growth. In the best case scenario, teams of developers stay in Ukraine, though all investments and receipts of the company pass through non-resident legal entities.

“There is no one to ask for money in Ukraine? We will ask the Czech Republic and Poland. In Poland, there is an incredible amount of “seed” capital. There startups who asked for money three or four times and have failed, there are a whole lot of them, and no one is telling on them. There all of  this is very good because our startups go there happily and feel comfortable, while raising Poland’s economy,” said Denis Gursky founder of startup-incubator “1991”

Estonia, Latvia, Lithuania, Poland and Canada spend hundreds of millions of Euros of government funds to attract the best specialists and innovative entrepreneurs from Ukraine. For the time being Ukraine is losing the  war for brain power.

WIN: Cancellation of Registration of Foreign Investments

Practically a win. Parliament in October of 2016 passed a bill on the Abolition of Mandatory Registration of Foreign Investments in its first reading. The law also simplifies the regime for foreign-investors to visit the country.

The registration of investments – is an opaque bureaucratic obstacle to the rights of investors. Also, a foreign investor who is not an employee of the company, does not have the right to freely visit Ukraine to monitor the activities of their business.

LOSS:  Raw IT-Outsourcing

Ukraine’s domestic IT-sector, like 70% of its economy, sells raw materials – the knowledge and time of Ukrainian IT specialists. However, a finished IT-product is of greater value.

In Ukraine there are no strong players who are motivated to create their own products, rather than the development of outsourcing. This plays into the hands of the strongest economies in the world. They are interested in using cheap raw materials for the production of products with high added value, as a result they are buying a raw product from suppliers.

“There are US, the EU and Russia. Which of them  are interested in that we stopped using other people’s products, as we’ve done for all 25 years (Ed – of Ukraine’s independence – WP)? In my opinion, this is a rhetorical question,”said Yevhen Utkin President of KM Core a technology holding company..

WIN: A Fund of Funds

The state represented by deputy head of the presidential administration Dmнtrо Shymkiv expressed the willingness to bail out of the Fund of Funds (Asset Fund). In order to do this he needs Ukrainian startups to receive funding domestically and not from abroad.

The Fund of Funds (FF) – is an instrument to attract large investments, a link between large international investors, local venture funds and startups. The head of the supervisory board of Ukrainian Venture Capital Association (UVCA) Andriy Kolodyuk believes that the FF will attract $500M USD.

For Ukraine this instrument to attract funding not unique. Similar projects have been implemented in many countries: the US, the EU, Canada and China.

LOSS: The Flight of IT-experts

Over the past two years nine-thousand IT-specialists have left Ukraine. They emigrated to the US and EU. Experts leave in search of professional development and more comfortable living conditions. Amongst this massive exodus from the country are professionals seven years of experience and more – those that generate the most revenue for outsourcing companies.

It is noteworthy that in terms of instability, devaluation and low level of development in the country the outflow IT-specialists is not catastrophic. The main reason is that the standard of living of IT professionals in Ukraine is much higher than in developed countries.

WIN: Simplification of Exporting IT-Services

In November 2016 parliament passed a law abolishing the mandatory conclusion of a foreign economic agreement in writing. Now you can enter into a contract electronically, in fact by email.

The law simplifies the terms of cooperation with foreign customers in the export of services. It also significantly reduces the number of ways by which State Fiscal Services calculates additional taxes.

LOSS: PayPal Will Not Arrive

The global internet payment system is not planning on providing providing its services in Ukraine in the near future. “PayPal is not interested in Ukraine,” stated Serhiy Shatsky, director of of the department of payment systems and innovative development of the National Bank of Ukraine. The NBU is ready to wait a tough wait regarding PayPal’s arrival.

Despite the fact that the Ukrainian IT-business is successfully using many alternative payment systems, PayPal remains almost the uncontested payment instrument for cross-border e-commerce. Meanwhile, the management of payment system artificially set barriers for Ukraine to export services and products.

It is difficult to say whether these limits have only a economic or political subtext. Understanding one thing: they are unfriendly and they are putting the brakes on the development of Ukrainian trans-border ecommerce and small e-business. It is the state which the first loser here.

WIN: Telecom-Cluster

Mobile operators, who are working in Ukraine, are initiating the creation of of an ecosystem of telecom-clusters. In April of 2016 VDNG-Tech in cooperation with Kyivstar started an accelerator for IT-projects in the area of telecommunications and and communications. In October the operator, Kyivstar, selected three projects to support for commercialization: Gravitec, inCust, Virbox.

Besides this, in August Kyivstar, Vodafone and the outsourcing company EPAM with support from the Ministry of Economic Development and Trade opened Hi-Tech Office. Its purpose is to support Ukrainian startups and innovative projects, which have a potential for commercialization. The Office will provide financing, incubators and accelerator programs.

Vsevolod Nekrasov