Ukraine cities compete for IT companies by offering sanctuary from raids by security services

By bne IntelliNews September 29, 2015

Graham Stack in Kyiv -


First the good news: in September global photo sharing app Snapchat bought Odesa-based start-up Looksery for $150mn – the biggest ever buyout of a Ukrainian-based IT firm, less than a year after its launch. Looksery technology allows real-time modification of video images to brush up your looks when chatting, or can transform you into a cast member of “The Walking Dead”. Looksery's programming team was based in Odesa after being selected in national programming competitions, while the company was registered in San Francisco.

Now the bad news: Ukraine's IT sector, one of the strongest parts of the economy because of a plethora of talented coders, is reeling after a series of raids by the security services, which has caused some local developers to shut up shop and relocate to more benign environments such as Poland. "The large number of searches in IT companies is a cause for concern – in September alone there have been over five. This will hardly improve the investment climate,” the Lithuanian-born economy minister, Aivaras Abromavicius, tweeted on September 23. Estimates put the total number of 'raids' of IT firms by the security services so far in 2015 at over 50.

Outsourcing in 2013 brought in close to $2bn in revenue, for the first time exceeding revenues from arms sales, Ukraine's other technology export, with a growth rate predicted at 25% pa. But in 2014 the crisis with Russia caused the estimated figure to fall back sharply, as swathes of the country were hit by physical disruption.

Now increasing pressure from Ukraine's unreformed law enforcement is adding salt to the wounds.

İn early September, the Security Service of Ukraine, known by its acronym SBU, raided the Dnipropetrovsk office of New York-listed international outsourcing company Luxoft, reportedly after threats of a terrorist attack had been sent from its IP addresses in June. One week later, the SBU raided the Kharkiv offices of IT firm NIX Solutions, reportedly looking for documents relating to a bank.

Then a large Dnipropetrovsk web development company 908 announced it was entirely relocating its staff to Poland due to pressure from the security forces. “In Ukraine the police can enter any company, confiscate the means of production and keep hold of them,” the co-owner of 908, Andriy Khorsev, wrote on Facebook, after law enforcement confiscated servers in connection with child porn allegations. “This is done with one goal – to put pressure on the company and force it to undertake certain actions… Such moves will kill a sector that not long a go was a beacon of hope,” he lamented.

The raids and corrupt activities by law enforcement agencies add to an already unfriendly environment for those working in IT in Ukraine. Fighting in East Ukraine – both the actual conflict zone in the Donbas region, but also the accompanying threat of being called up to the army – weighs on the minds of the young men who make up the bulk of coders. Together with a general decline in living standards set against the rewards for coding talent in the West, Ukraine's IT brain drain is accelerating. The industry association IT Ukraine puts the total number of programmers who left Ukraine in 2014 at 2,500, but the loss of whole companies is a new phenomenon that threatens to reduce the growth rate of Ukraine's IT sector from 25-30% in 2013 to 2-3%.

Raids on IT companies may not always be a sign of corruption, the interior ministry points out in its defence, since the sector suffers unhealthy links to cybercrime, as bne IntelliNews has detailed. In August, the US Securities Exchange Commission accused Ukrainian hackers of teaming up with local investment banks to commit fraud in the US worth over $100mn. US regulators have also frequently accused Ukraine's IT sector of infringement of intellectual property rights.

Ukraine's government for its part suspects that the outsourcing industry exploits its offshore nature to evade taxes, and also that many local programmers formally registered as individual entrepreneurs are in fact full-time employees of IT developers.

Rolling out the welcome mat

With decentralisation a la mode in Ukraine, competition among cities and regions to provide the best conditions for IT could now offer the best solution for the sector's problems. “Regarding the numerous recent 'mask shows' [raids by masked police] against IT companies in Ukrainian cities, I invite all developers who find their local situation scary and uncomfortable: Come to Lviv,” wrote the mayor of Lviv, Andriy Sadoviy, who is also head of the Samopomich political party. Sadoviy is offering help in relocation, support from Lviv town council's IT Cluster and Business Services section, “and protection from unhealthy attention from 'people wearing epaulettes'.”

Ironically, September's landmark Looksery deal, while showcasing Ukraine's coding talent, also accelerated the IT brain drain, as the company closed its Odesa office to relocate staff to Silicon Valley.

But Odesa's reform-minded regional administration under former Georgian president Mikheil Saakashvili is now aiming to reverse the tide and like Lviv provide a friendly incubator environment for IT companies. Furthermore, an adviser to Saakashvili, former Microsoft lawyer Sasha Borovik, is now running for mayor of the city of Odesa and has made IT a major plank in his campaign. "I hope that in the future when coders will talk about work in Ukraine, they will first and foremost think of Odesa… We just have to free ourselves from bureaucracy and corruption and explain that coders are welcome here and we will assist them," he tells bne IntelliNews.

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