Ukraine’s Post-Maidan Tech Economy: A Confusing Web of Hope and Hardship

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They call them the Aitishniki: the IT workers. They drive around in fancy cars, drink flat whites from cafés with English on the chalkboard and eat at flashy new restaurants. They can earn up to ten times the national average salary. Thanks partly to their fortunes Kiev has become one of Europe’s hippest capital cities–albeit in small, privileged pockets.

But in post-EuroMaidan Ukraine, cleaved by its Russian neighbor and caught in perpetual conflict with Kremlin-backed rebels in its eastern reaches, for every push forward there is a pull towards economic ignominy. Few industries feel this tug-of-war as much as tech, which has flourished in the years after widespread protests helped oust former president Viktor Yanukovych in February 2014.

There is plenty of reason for Ukrainian tech professionals to be hopeful. The country sits on a goldmine of human capital: there are now over 90,000 IT workers and 1,000-plus companies. Almost a fifth of Ukraine’s tech talent has seven or more years’ experience.

That has cemented the nation’s place as a regional leader in outsourcing, which employs around 40,000 of those IT professionals. According to PwC, Ukraine is the fifth-ranked IT services exporter on earth–and a swathe of multinational tech corporations have R&D centers there.

Education, too, provides plenty of optimism: Ukraine’s higher education institutes churn out 15,000 tech graduates each year. In 2011 the country’s IT sector represented 0.06% of its GDP. Now it is worth 3.3%; Ukraine’s third biggest industry by export volume at a value of $2.5 billion.

But in Ukraine the roadblocks to success, on a par with that of western European nations, are huge. In some cases they are literal roadblocks: the ongoing war in Donbass and Luhansk, seemingly impossible to win, has cost tens of billions of dollars since it erupted in 2014.

The value of the Hryvnia has all-but halved and corruption is still chronic. According to Forbes, Ukrainian President Petro Poroshenko, a candy magnate, is Europe’s richest leader. He has failed to address graft, preferring to turn his people’s attentions to the eastern war. That has spooked foreign donors who pour billions into Ukraine’s fragile economy.

It’s one quicksand on which the country’s tech industry stands. Almost half of all IT investments in 2015 came from outside the country. They are not all aid-related, of course. But less foreign investment is bad for the tech industry, and would do little to help an economy growing at less than 2% annually.

Another is a brain drain that the war has vastly accelerated. One tech exile is Kyrill Zlobenko, regional manager of equity crowdfund Seedrs, who is now based in Berlin. He claims that most people want to return home. But there are significant draws away.

“Most of the people who are in their late twenties and early thirties leave to get better access to different development opportunities for the career, or venture,” Zlobenko adds. “As to the ‘special’ skill: this is just subjectively from my personal experience, but we Ukrainians are great at not realizing our own potential very often, unfortunately.”

According to Dmitriy Shvets, managing partner of Imperious Group, the biggest problem facing local companies–of which there have been many successes–is the challenge of scaling into foreign markets. They must move “quickly,” he says, adding, “Bridge financing and meeting expectations of foreign funds are vitally important for the startup survival. That is why Ukrainian startups try to expand as quick as possible, just trying to test the product, feedback and understand the main pain points in Ukraine.

“We don’t have enough internal market capacity, due to macro factors and the war in the East Ukraine, and consumption to meet the US and EU funds requirements for traction or financials,” adds Shvets.

Despite considerable wins, such as Snapchat’s purchase of Looksery for $150m, and the growth of brands including PetCube, CleanMyMac and Jooble, the Ukrainian tech market is small and immature compared to neighbors in Europe such as France, Germany or even western neighbor Poland.

Lviv, a city culturally and geographically close to Poland, has capitalized on that to become one of Ukraine’s hottest tech hubs. The historic city of 700,000 has 15,000, or 2% of its population, employed in tech. The local sector is worth $300m, three times that in 2010, and a glut of coworking spaces and incubators have emerged, which take advantage on low costs of living and close proximity to Krakow, Slovakia and Hungary.

Yet Kiev, once the Soviet Union’s third-largest city and now home to a little under three million people, is undoubtedly Ukraine’s tech capital. Home to the majority of its leading startups, as well as its investors and spaces like Underhub, Smartville and Time Wagon, Kiev has become a hub of continental significance. Ukraine’s prime minister, Volodymyr Groysman, recently opened UNIT.city, a large innovations district in the capital.

Ukraine’s energy sector, too, has provided considerable cause for enthusiasm. A sector torn to shreds by the conflict, it has seen a huge amount of foreign investment. The country is keen to cut its reliance on Russia for energy–and that has helped it secure money for a number of renewable projects.

Roman Zinchenko, chief at Greencubator, an “enthusiasm provider” for Ukrainian tech, has been enamored by the way young Ukrainians have taken to entrepreneurship, especially in such a high-tech field. It has been eight years since Greencubator was founded, and Zinchenko has seen a landscape transformed.

“It’s just been eight years since greencubator was launched and for the first four years the key perception was, ‘Green startups might be a cool idea, but it will never work here,’” he says. “Well, the shift is visible. The venture market has seen an impressive growth since I’ve been working in the first venture company AVentures in 2003 to 2004. Now it’s backing a wide range of innovative companies with domestic and international focus…It’s great to see the turnaround from a green-energy-sceptic to green-energy-positive country.”

Zinchenko adds that the biggest problems are to be found on a policy level. The government has simplified the tax regime to encourage entrepreneurship (Zlobenko wants a single tax system: 4.7% sales tax and 9-12% payroll tax). It has even committed to powering auctions through Blockchain, ensuring transparency. But its financial and corruption woes do little to help local companies secure private investment, either from locally-based VCs or those abroad.

According to The Good Country, a think tank, Ukraine ranks 14th globally in science and technology ability. Yet in the same report it ranks 137th (of 163 nations) in ‘International Peace and Security’, 96th in ‘Heath and Wellbeing’ and 126th in ‘Prosperity and Equality’.

Those facts are unlikely to shift so long as Ukraine remains at war. There is huge opportunity for cross-pollination between local and Russian digital firms, but as Zinchenko says, “Information warfare is taking its toll. It’s often hard to have a dialog with Russian counterparts when you know the sound of your artillery shelling is called ‘Junta’, just for protecting your country.”

CIS (Commonwealth of Independent States; an entity created after the fall of the USSR) nations, however, remain well within the reach of Ukrainian entrepreneurs–if not only for a common language, then for a solidarity among former Kremlin vassals to grow and build their economies.

That, allied with a hugely growing sector and the experience of those working for EU and US firms in the outsourcing industry, should ensure Ukraine’s tech industry continues to grow at breakneck speed. Ukraine may not be ‘The Next Silicon Valley’, as some bloggers have predicted. But it is on the right track. Trouble is, its nation is underperforming on a similar scale. Ukrainians are used to instability: it runs throughout their 20th century history. Perhaps the Aitishniki can bring some to the 21st.