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Ukraine's IT Boom Weathers The Pandemic But Questions Loom

A employee with the Grammarly technology company in Kyiv before the coronavirus pandemic.
A employee with the Grammarly technology company in Kyiv before the coronavirus pandemic.

KYIV – If you've ever used Grammarly to polish up a piece of writing, hired a Portuguese-language tutor on Preply, kept your dog or cat out of trouble with Petcube, or found a job through Jooble, you have used products designed by companies with Ukrainian roots.

They are some of the best-known names to emerge from an IT industry that has been booming in recent years -- and whose growth has been slowed a bit but not stopped by the coronavirus pandemic, which has hit Ukraine hard and continues to take a deadly toll more than a year after its onset.

The economy contracted by 4 percent in 2020 and Ukraine is undergoing a third wave, with more than 1.8 million cases recorded and more than 35,000 deaths attributed to COVID-19 as of April 6.

A hands-off approach from state regulators and tax collectors, at least when it comes to individual contractors has left Ukraine's IT industry mostly untouched and allowed it to thrive.

After recording growth of 30 percent in 2019, the sector defied the disruptive effects of the pandemic to grow by 20 percent in 2020, exceeding $5 billion in total exports for the first time. It also drew a record high of $563 million in investments, according to Yuliya Sychikova, director of AVentures Capital, a venture capital fund that also advises IT firms and other funds on strategy and execution.

Computer services accounted for more than 8 percent of the nation's exports after steel, food, and labor, central bank data shows. One out of five Fortune 500 firms use the IT services of Ukrainian companies, according to the Tech Ecosystem Guide to Ukraine, a report produced by UNIT.City, an innovation park on the outskirts of Kyiv.

Driving the growth is "minimum red tape that is careful not to incapacitate the goose that lays the golden eggs, a stable industry-wide tax policy, and the professionalism of Ukraine's IT specialists," said Andy Hunder, president of the American Chamber of Commerce in Ukraine. In turn, he said, the industry's performance is "strengthening Ukraine's image as a reliable and innovative IT partner."

Around the time Ukraine recorded its first COVID-19 case, in March 2020, about 35 percent of orders in the IT sector were canceled, according to Nataly Vyeryemyeyeva, director of Tech Ukraine, a nonprofit that serves as a development platform for the industry.

Silver Lining For Some

But as companies around the world adopted and began to implement work-from-home policies, business picked up, and the Ukrainian IT sector's growth accelerated in the last quarter of the year, Sychikova said.

"The pandemic accelerated the demand for higher digitalization needs as businesses moved online," she said, adding that "companies got leaner and increased [research and development] budgets -- a beneficial macro trend for the outsourcing industry."

One company that has weathered the pandemic so far is Grammarly, which helps users identify plagiarism in research papers and improve their writing by assessing the tone and correcting mistakes in grammar, syntax, and other areas.

With offices in Kyiv and three North American cities including San Francisco, where it is based, Grammarly sent people home to work and changed schedules to have time zones overlap for project collaboration.

Anatoliy Visikirskiy, a Grammarly "people partner" in Kyiv.
Anatoliy Visikirskiy, a Grammarly "people partner" in Kyiv.

This meant that 250 employees in Kyiv started and ended work later to cooperate with colleagues in San Francisco who got up earlier to accommodate for a 10-hour time difference, said Anatoliy Visikirskiy, the company's "people partner" -- a senior human resources position.

As a result, Grammarly surpassed 30 million active users in 2020 "and we continue to hire and grow," Visikirskiy told RFE/RL.

Ukraine's rich talent pool has made it "one of the top destinations for outsourcing in Eastern Europe with one of the largest workforces," Sychikova added.

Ukraine has about 200,000 IT engineers capable of producing "high-end solutions," according to the Tech Ecosystem Guide, which places it seventh in the world in terms of the quality and efficiency of its freelance workforce.

The work they do ranges from software development for mobile phone platforms to gaming, financial technology, health-care programs, artificial intelligence, and e-commerce.

Ukraine now hosts more than 110 research and development centers run by multinational companies, including Apple, Google, Samsung, Huawei, Boeing, Siemens, and French game developer Ubisoft.

Whether Kyiv or Silicon Valley, the IT sector has a lingo all its own: "people partners," for example, and also unicorns, ecosystems, clusters, startups, co-working spaces, and early-stage and late-stage investors.

Ukraine's first unicorn, a term used to describe a privately held company with a value of $1 billion, is GitLab. It stores and edits programming code and is currently valued at nearly $6 billion.

History Lesson

Grammarly followed suit in 2019, raising $90 million that year. Next could be Reface, a popular face-swap video application, Sychikova said. It's been downloaded more than 70 million times since hitting app stores in January 2020, making it one of the top five in about 100 countries.

Another growing IT company is Ajax Systems, a Kyiv-based outfit that was founded a decade ago and makes wireless security systems for homes and offices.

Ingredients in the sector's success include history and human capital, according to Vyeryemyeyeva, who said that "cybernetics is rooted in Ukraine."

Tech Ukraine director Nataly Vyeryemyeyeva delivers a presentation in Kyiv
Tech Ukraine director Nataly Vyeryemyeyeva delivers a presentation in Kyiv

"One of the first computers" – the MESM, or Small Electronic Calculating Machine – "was invented in Kyiv" about 70 years ago, she said.

Generations were trained at such institutions as polytechnical schools in Kharkiv, Lviv and Kyiv. Emerging from the earlier generation is Lubomyr Romankiw, an American who was born in western Ukraine in 1931. He and a colleague at IBM are credited with inventing the technique that produced the first practical and manufacturable thin film magnetic head that allowed for data to be stored on discs.

Fast forward a few decades and Jooble, a job-search site, was created in a dormitory room by two students at the Kyiv Polytechnic Institute.

Today, dozens of tech hubs are sprawled across the country and there are special tech startup schools and IT clusters in big and small cities alike. A 2.5-hectare innovation park is currently being built in the Black Sea port of Odesa.

The government, meanwhile, has established a Ukrainian Startup Fund that allocates seed money of $25,000 to $75,000 to finance startups engaged in artificial intelligence, augmented reality, Big Data, blockchain, cybersecurity, defense, travel, robotics and the "Internet of things," according to Ukrainian World, a website that promotes the country's image.

A Taxing Question

As it grows, the industry is also maturing, Vyeryemyeyeva suggested.

Ukrainian providers of tech services are increasingly being used to work on "mature projects -- providing more solutions, [taking] more risks, instead of being used as merely heads with brains," she said.

At the same time, the product and startup side of the industry -- the area that attracts investment and keeps capital and intellectual property inside the country -- is growing, Vyeryemyeyeva added.

As companies develop, they eventually open offices abroad and sometimes set up their headquarters outside the country while keeping a research and development team in Ukraine.

There's a catch, though, and the IT industry is divided into two categories: Freelancers, or individual contractors, often work as registered self-employed people and pay a simplified 5 percent tax, while the tax burden for legal entities, in one form or another, can be up to 40-60 percent of income.

This two-track situation poses a dilemma for the newly formed Ministry of Digital Transformation (MDT): How to put a some of the proceeds of the booming sector into state coffers without scaring away "top talent," Sychikova said.

At an IT industry roundtable in Kyiv on March 25, Digital Transformation Minister Mykhaylo Federov said he wants to reduce the tax burden for IT companies fivefold.

"We want Ukraine to be known as a country with the best tax system, as a country of startups and large food companies -- and as a country where it is easy to do business," he said.

Speaking at a news conference after the discussion, Ajax Systems founder and chief executive Oleksandr Konotopskiy said Ukraine desperately needs to introduce special tax conditions for IT companies.

"We need to create conditions for talented people to create value -- there are no other options," he said.

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    Mark Raczkiewycz

    Mark Raczkiewycz is a Ukraine-based journalist. A former RFE/RL news editor in Washington, he is the Kyiv correspondent for the New Jersey-based Ukrainian Weekly newspaper. He also contributes to the English-language Kyiv Post and has reported for Bloomberg, the Financial Times, the Associated Press, the Irish Times, The New York Times, and other publications. 

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