Drawn by low wages and the legacy of strong Soviet science training, software companies grew IT outsourcing in Ukraine into a $1.5 billion industry.
Now the government, licking its wounds in Crimea and the east, is selling the sector as a cloud-based bulwark against Moscow.
“Russia’s aggression against Ukraine seeks to destabilize the Ukrainian economy and threatens to start a new Cold War and lead to global economic recession,” reads a site set up to attract investment in the country. “Ukraine needs your help to withstand this assault.”
“Increase your profits. Support Democracy. Cloudsource to Ukraine.”
Ukraine does have the fourth most “IT professionals” in the world — 230,000 by government count — and the country’s technical schools turn out another 14,000 ever year.
It’s likely that most smartphone users have used an app developed at least in part in Ukraine. By 2020, officials want to grow its export revenues from IT outsourcing to $10 billion.
But today the country still captures only a miniscule share of the $288 billion global export market, and the current turmoil puts recent gains at risk.
By comparison, India’s IT export market is expected to grow to $86 billion in 2014.
“The fundamentals in the Ukraine are fairly robust,” Salil Dani, practice director in the global sourcing team at Everest Group told VICE News. “But it’s likely to experience a period of very slow growth. Any existing plays in Ukraine or other companies thinking about expanding in Ukraine are going to think twice. Looking at the existing players in Ukraine, they haven’t expanded their plays in the last 5-6 months.”
Dani says the volume of deliverables from Ukraine has declined and some employers are looking elsewhere in Eastern Europe, to countries like Hungary.
To counter those fears, Ukraine’s diplomatic corps is going on a charm offensive.
Photo by Sam Oakford
At an event held last week in New York at the palatial Ukrainian Institute of America on 5th Avenue, officials painted a rosy picture of an industry barely perturbed by the recent turmoil.
“In terms of new projects, of course there was a cutback,” Volodymr Shalkivsky, first secretary at the Ukrainian Embassy told VICE News. “But we didn’t experience any delays in terms of already launched products. We do hope that things will get back on track.”
Anthony Conti, CFO of EPAM Systems, Ukraine’s second largest employer of outsourced IT labor and contractor for the likes of UBS and Barclays, told VICE News their workers actually stepped up productivity this year, despite distractions. (Or maybe because of those distractions, like a spouse who works longer hours when there’s trouble at home.)
“When the events were happening in Kiev, where we have our biggest office, it was really confined to the center,” said Conte. “That’s allowed us to really not experience as much of a disruption.”
The majority of outsourcing work takes place in the country’s west, far from the fighting in places like Luhansk and Donetsk, a trend that is likely to grow, no matter the outcome of separatist rebellions in those regions.
To help sell their labor, Ukrainian officials have enlisted the help of a company called Transparent Business.
The firm’s founder is Alex Konanykhin, a Russian born serial-entrepreneur who at one point was worth $300 million and who, after the fall of the Soviet Union, escaped a KGB kidnapping, was imprisoned by American immigration officials and later began a company that Wikipedia banned for offering custom page edits for corporations.
Transparent Business’ software allays the concerns of outsourcers by allowing them to track their workers via a networked panopticon, snapping screenshots of their desktops every three minutes.
The Chocolate King
Ukraine’s IT push comes as the government of newly elected “Chocolate King” Petro Poroshenko is faced with implementing the terms of an emergency $17 billion loan approved by the IMF at the end of April.
The money will keep Ukraine from going bankrupt, but its provisions, including curtailing fuel subsidies, are expected to cause the economy to contract 5 percent in 2014.
The IMF agreement could further the split between East and West, where certain sectors of the economy with closer ties to the West, like IT outsourcing, may survive austerity better than most.
But if the pinch gets bad and protests spread against the IMF and Poroshenko, a brain drain of the Ukraine’s top talent could decimate the nascent industry.
The flip side of the flexibility that Conte referred to is the capacity for employers to pick up and leave for sunnier shores at a moment’s notice.
Dani estimates the number of locals actually employed in the IT export market — not doing tech assistance or fixing computers — at only 25,000.
“When you compare Ukraine to Mexico, Brazil, the Philippines, or Poland, the pool is much smaller,” said Dani. “It is not the largest sector of the economy by any extent. Most of it is still petrochemicals, natural gas and heavy industries — if the overall economic revival is the main agenda, then they need to be targeted towards those sectors.”
That, said one hedge fund manager at the New York event, was the only reason to be interested in Ukraine. “I’m a rocks guy, I’m into coal and electricity,” he told VICE News. “I don’t even have an iPhone.”
The caterer pouring the hedge fund manager’s wine however, did pay close attention to the night’s presentation.
The man, who gave his name only as Ivan, said he worked four days a week from home, finding web design work in the US to send back to a group of colleagues in Western Ukraine — an outsourcer.
Follow Samuel Oakford on Twitter: @samueloakford