Ukraine’s new parliament and Cabinet of Ministers have a record number of people who previously worked in the information technology industry.
And one of the key tasks for these people is to increase the already rapid pace of local IT development. The industry’s revenues increase by 30% every year and could reach $5.4 billion by the end of 2019.
“We hope to double this number in the next five years,” Oleksandr Bornyakov, deputy minister of digital transformation, says.
But expectations from the tech community — which accounts for 5% of Ukraine’s gross domestic product — also seem to be high. Tech specialists expect the government to help with funding, implement fair taxation, develop technology education and improve laws affecting their sector.
Ukraine’s fifth largest tech employer, IT firm Ciklum, believes this is possible, given that the new government seems prepared for a stable dialogue.
“There’s a feeling that they are ready to listen and react,” says Oleksandr Snidalov, Ciklum’s vice president of delivery.
Big appetites for IT specialists
With the tech profession’s popularity booming domestically, Ukraine has ranked 11th among the top 50 countries with the best software developers in the world in 2019, according to a report by Ukrainian IT service company N-iX.
By the end of 2020, an additional 20,000 new tech specialists are expected to join the already existing 200,000-employee Ukrainian tech community across companies concentrated mainly in Kharkiv, Kyiv, Lviv, Dnipro and Odesa.
Ukraine’s biggest tech employer, EPAM, hired 1,500 IT specialists alone in 2019, bringing its staff to a total of 7,500.
“There is an ambition, combined with real opportunities, to overcome the mark of 10,000 IT developers within a year or two,” says EPAM Ukraine head Yurii Antoniuk.
However, such a rapid growth in the industry could be even higher. Experts say the market can employ many more IT specialists. Currently, however, there just aren’t enough of them in Ukraine.
Around 20,000 new specialists graduate from Ukrainian universities every year. Ideally, that number must be around 60,000 a year to satisfy the needs of the tech market.
“The industry could absorb twice as many as the country can currently offer,” says Andrey Kolodyuk, managing partner at venture firm AVentures Capital.
But even after graduating from university, students do not always have the right level of education to get a job in leading companies. Often, big tech companies in Ukraine have their own internal academies to teach the profession to newbies.
In Lviv, a city located 540 kilometers west of Kyiv that is Ukraine’s third largest tech hub, state universities and private firms cooperate to solve the problem of IT education.
The Lviv IT Cluster, an association that unites around 100 tech companies, cooperates with two universities, Lviv Polytechnic National University and Ivan Franko National University of Lviv. The association prepares special training courses and provides its own experts to teach students.
The total number of students already involved in the association’s programs is over 2,000. And apart from teaching them, it also helps them find work.
“It is know-how to help grads in the future to find a job,” says Stepan Veselovskyi, the CEO at Lviv IT Cluster.
Prices going up
With such a high demand for more tech specialists, the salaries offered to potential employees are going up too.
The average salary of an IT specialist in Ukraine is around $2,175 — almost six times higher than salaries in other industries, according to the latest research by the Kharkiv IT Cluster.
This creates another issue: Unlike India, Ukraine is no longer a country with a cheap labor force in IT.
“Ukraine is already not in the cheap segment (anymore),” AVentures Capital’s Kolodyuk says.
As a result of this change, some companies are looking to other places to minimize their costs. For example, Ciklum has already opened a branch in Pakistan.
Positive trends
Ukraine’s IT industry has also started gradually switching from a pure outsourcing destination to a place that provides tech services, something that adds value for clients, according to Ciklum’s Snidalov.
“In general, it’s a really positive tendency. It means the Ukrainian market can compete better with European, Indian and American companies,” he says.
Plus, Ukrainian IT product companies, including startups, have begun to develop more actively.
Kostyantyn Vasyuk, executive director at the IT Ukraine Association, cites Ajax Systems, a Ukrainian tech company that makes wireless security systems, as an example. It has just opened a new research and development center in Kharkiv.
On a larger, national scale, the Ukrainian IT startup community has already produced three so-called “unicorns,” tech startups valued at over $1 billion.
The last one recognized as a Ukrainian unicorn was Grammarly, a firm that makes an online, artificial intelligence-powered text proofreader with more than 20 million daily users.
“Unicorns create a very important benchmark for the industry and for investors,” says Kolodyuk, an investor himself.
In 2019, the creation of the Ministry of Digital Transformation of Ukraine was also a significant event for the IT industry. It creates new opportunities for the development of the internal market of high technologies, according to experts.
“One of the key projects of the ministry, The State in the Smartphone, is a potential driver for the development of internal demand for IT services,” says the IT Ukraine Association’s Vasyuk.
Legal issues
Even though successful tech startups can be born in Ukraine, they almost always leave the country, incorporating their businesses mostly in the United States. The reasons for that, they say, include the lack of investments and regulation problems at home.
For the past three years, this problem has been raised several times in the Ukrainian parliament, but the discussions had no effect, according to Kolodyuk.
“Currently, the legislation is outdated. It is not operating in the right way for real venture funds (to come to Ukraine),” Kolodyuk says.
The way to solve it, he believes, is to create a so-called “fund of funds” that would raise money from international donors and give it to some 20 local venture funds. This fund would require the Ukrainian government to take part in financing startups and provide around 10% of the needed money as well.
Such a model, the investor says, is similar to the one that has been operating for two decades in European countries.
Kolodyuk estimates that, should the government give this fund of funds $10 million, this body will then potentially be able to raise $500 million from other donors like the EBRD. These donors would see the Ukrainian government’s interest as a positive sign.
The previous government discussed the creation of such a fund, but the talks led to nothing. Now, Kolodyuk sees that the new government has renewed its interest in the idea.
The investor also urges the Ukrainian government to discuss taxing large international companies like Google, Netflix and Apple so that conditions for both international and domestic tech industry players are equal.
So far, however, the market has perceived attempts to introduce additional taxes on the tech community negatively. For example, when the government suggested increasing taxes for Ukraine’s individual entrepreneurs, it received huge pushback.
About 200,000 of Ukraine’s 1.3 million individual entrepreneurs are tech specialists.
“We need the government to act on creating investment protections and clear rules of the game on taxation,” says Oleg Krot, a managing partner at tech holding Techiia.
A predictable market and a systematic approach to the development of education in Ukraine are also on the tech industry’s “wish list.”
“Now the industry has two scenarios — to leave everything as it is now or to change something,” says EPAM’s Antoniuk.
“Depending on this decision, the industry will either become the driver of the economy, giving high-paying jobs, or will forever remain yet another industry with ‘high potential.’”
