Hi-Tech Ukraine: Why Ukraine Can Be An IT Powerhouse

November 18, 2020

Ukraine's information technology sector has been growing in leaps and bounds. UkraineWorld, along with the Ukrainian Institute, explain why IT is among Ukraine's fastest-growing industries.

Ukraine leads Europe in its volume of IT service exports. In the span of a decade, they have grown by 540% to $4,17 billion in 2019, according to the IT Ukraine. As one of the country's fastest-growing industries, the Ukrainian IT sector is growing by ~ 26% year-on-year. Even the pandemic couldn't curb its development. Although the Ukrainian IT industry lost about $199 million in Q2 and Q3 of 2020, a 19% y-o-y increase with exports amounting to $4.9 billion per year is expected in 2020.  What are the reasons for such strong continuous growth?

Favorable State Regulation & Tax Policy

In Ukraine, state regulation does not stand in the way of IT sector growth. Ukraine's tax policy makes the country especially appealing to international IT companies. According to Ukrainian tax legislation, companies can work with self-employed IT workers. Although the ruling Servant of the People party has sought to increase taxation for IT specialists, self-employed specialists still pay only a single tax --- 5 percent of their income --- and a monthly unified social tax, which is 22 percent of the minimum wage, or 1100 UAH (about $40) as of November 2020. This taxation system allows both companies and IT specialists to maximize their income and places Ukraine at 24th place among the 55 most attractive countries, according to the Tech Ecosystem Guide to Ukraine.

The Ukrainian taxation system allows both companies and IT specialists to maximize their income and places Ukraine at 24th place among the 55 most attractive countries.

No radical changes are expected any time soon in this tax policy. President Zelensky strongly backs the 5% tax rate for self-employed IT specialists. "This industry is developing in the country not due to state support, but due to the intelligence of Ukrainians. One of the steps that the state can take is not to increase the tax burden on this [IT] industry," he said during a meeting with IT industry representatives.

Oleksandr Bornyakov, Deputy Minister for Digital Transformation, explains that all governmental actions in the IT sphere are "aimed at market development and increasing its growth rate. Our objective is not to impose additional compound taxes on IT companies, but the opposite-- to establish favorable conditions for their operations. To fulfill this objective, we are constantly engaged in dialogue with the IT sector to develop the best model of regulation."

Given such a favorable environment, international tech companies have been intensively outsourcing to Ukrainian IT specialists. Every fifth company from the Fortune 500 uses the services of Ukrainian companies. Ukrainian specialists mainly work with companies from the USA (81% of all clients). These can range from startups to tech giants. Cisco, IBM, Atlassian, Travelport, OpenText, the Fluke Corporation and others turn to Ukrainian techies.

Every fifth company on the Fortune 500 uses the services of Ukrainian companies.

Often, teams of Ukrainians that work for Western clients grow into full-fledged R&D centers. According to the Tech Ecosystem Guide to Ukraine, there are over 110 research and development centers located in Ukraine. Ukraine's largest R&D partner is the United States (45% of companies), followed by the EU and Israel. Ukrainian R&D centers bring expertise in fields including gaming, e-commerce, big data and artificial intelligence, telecommunications, Internet, and software development. More than half of the R&D centers are located in Kyiv, but many have also opened offices in Ukraine's regional centers.

Overall, "Ukraine's $5 billion IT industry is [an] area where the Zelensky government is doing things right. Aside from the Digital Transformation Ministry trying to cut bureaucratic red tape and the President affirming the 5% income tax rate, the government's attitude is: hands-off", writes James Brooke, editor of Ukraine Business News.

A Promising IT Ecosystem

The scale of development of the Ukrainian IT ecosystem is still yet to match that of key Western players. However, Ukraine has been putting  great effort into developing its tech ecosystem, mostly through IT-clusters where IT companies, startups and research laboratories work side by side.

More than 20 Ukrainian cities have launched their own IT clusters. The key ones are located in Lviv, Kyiv, Kharkiv, Dnipro and Ivano-Frankivsk, according to the Tech Ecosystem Guide to Ukraine.

UNIT.City, an innovation park located in Kyiv, is another pivotal place where infrastructure and cooperation enable the development of hiigh-tech innovative businesses in Ukraine. It is one of the largest innovation districts in Central and Eastern Europe providing high-tech space for companies, startups, students, professionals, and research laboratories.

As UkraineWorld previously wrote, Ukraine also has several business associations, including I**Т** Ukraine. To date, it has assembled fifty-eight software development companies, which collectively account for 50 percent of the total revenue of the industry in Ukraine. Its goal is to represent the interests of member companies in international industry associations and organizations, as well as to facilitate the sustainable development of IT in Ukraine.

Although the Ukrainian IT ecosystem is still yet to match that ofkey Western players, Ukraine has been putting great effort into developing it mostly through IT-clusters.

Unfortunately, the Ukrainian IT ecosystem lacks accelerators, incubators, and research laboratories, as well as investment funds. Ukrainian startups often struggle to find financing, since foreign funds tend to back ready-made companies rather than small businesses still developing their ideas. In order to support innovation projects and help the most talented Ukrainian startups create successful companies at scale, the government has launched the Ukrainian Startup Fund.

The Fund allocates from $25-$75 thousand  to financing Ukrainian business projects at the initial stages of  development, namely with pre-seed and seed funding. The main areas of support include artificial intelligence, augmented reality, Big Data, blockchain, cybersecurity, defense, healthcare tech, travel, financial technology, educational technology, robotics, professional services, software as a service, manufacturing, e-commerce, and the internet of things.

Qualified Human Resources

Ukraine has approximately 200,000 IT engineers able to produce high-end solutions. According to the Tech Ecosystem Guide to Ukraine, the country is ranked 7th in the world in terms of quality and efficiency of its freelance workforce. It also takes 11th place in the world's top 50  developers.

Ukraine is ranked 7th in the world in terms of quality and efficiency of the freelance workforce

The industry attracts many of the coutry's best and brightest, since Ukrainian IT engineers earn far above the average income. Moreover, Ukraine has recently had its IT cadres reinforced by the migration of IT specialists from Belarus. Internet shut-offs and police raids on such IT businesses as PandaDoc, Yandex NV, Uber, and Wargaming.net have forced Belarussian tech companies and workers to flee. Meanwhile, the Ukrainian government has relaxed the requirements for such specialists to move to Ukraine. As a result, about a thousand IT specialists have already moved from Belarus to Ukraine, according to Oleksandr Bornyakov, Deputy Minister of Digital Transformation.

Ukraine's bright-minded techies have also founded many startups that have become household names in Europe and the US. You have most likely heard of at least one of these startups, even though people rarely know of their Ukrainian origins.

  • PetCube, a startup with Ukrainian roots, was the best hardware startup of 2014. It allows you to play with your pet when you are not home.
  • TripMyDream, a trip-planning website, became the world's best travel startup a year after it was launched by a Ukrainian.
  • Grammarly, a Kyiv-based startup which developed an AI communication assistant, became a 'unicorn' in 2019.
  • Reface, one more Kyiv startup, became the most popular app in the entertainment category in the US and 17 other countries in August 2020, ahead of TikTok and Netflix. Later it became the most popular app in America overall. The app allows users to use a selfie photo to place their faces in a video with stars.

Startups with Ukrainian founders are household names in Europe and the US, even though people rarely know of their Ukrainian origins.

These startups are just some the extraordinary collection of products and innovations created by Ukrainians. In 2019, investments in Ukrainian IT startups totaled $510 million, according to the annual report of the Ukrainian Venture Capital and Private Equity Association. The 111 investment deals concluded represented a 50% increase from 2018.

Notwithstanding its still-developing tech ecosystem, Ukraine'sfavorable regulatory regime and its productive workforce have allowed the IT industry to bring tangible economic benefits to Ukraine and make the country one of the world's most promising drivers of innovation.