Tuesday, December 6, 2022

Anatoly Motkin: Ukraine will become a role model for Eurasian IT markets

by Anatoly MotkinDecember 26, 2021 12:29 pm
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Minister of Digital Transformation Mykhailo Fedorov meets with representatives of the IT industry in Ukraine. Ukraine has recently introduced a special legal framework for the local IT market. (city.diia.gov.ua)

The contemporary history of the post-Soviet countries in Eurasia is the history of resource-oriented economies. These countries used to export what they managed to mine or grow. But now, the situation is starting to change. Not because they are running out of resources – the Stone Age came to an end not because people ran out of stones.

Now, people have an understanding that it is vitally important to diversify the economy and switch from the industrial model to the knowledge economy, primarily the IT industry. And this transformation process should be carried out by relying on those who actually determine and form the demand — on global IT industry leaders. The thing is not only about increasing export earnings or attracting investments but also about intellectually and technologically developing the country, acquiring new knowledge and skills.

Currently, Ukraine is rapidly developing the intellectual component of its economy, integrating it into global production chains, and this allows it to become a role model for the rest of Eurasia.

Eurasian IT market

Today, a structured export-oriented IT sector exists in six post-Soviet countries of the Eurasian region, excluding Russia: Ukraine, Belarus, Georgia, Moldova, Kyrgyzstan, and Armenia. Recently, Georgia has made a major breakthrough. Mostly, due to introducing a law base similar to the one that Ukraine recently introduced as part of the Diia.City program.

The situation with Georgia is quite enlightening. In just one year after reducing income tax for employees of export-oriented IT companies from 20% to 5%, 30 international IT companies opened their offices and started their operation in Georgia. And here, it is important to emphasize that just a year ago, there were no such companies in Georgia. During this time, 2,000 new jobs were created, the country received tens of millions of additional foreign currency earnings, and it launched the organic growth process of the science-intensive economy sector. This example convincingly demonstrates how implementing clear, transparent tax legislation leads to immediate results.

For such countries as Kazakhstan and Azerbaijan, developing the IT industry means not only an opportunity to diversify the economy. It is quite obvious that it is impossible to build a successful state without ensuring equal opportunities for all its citizens. It is important that a person who was born outside the capital, who speaks English and has technical skills, has the same opportunities as a person who lives in a big city, grew up in a wealthy family, and has good networking opportunities. IT provides such an opportunity.

Gender inequality, regional uneven development, lack of inclusion — these and other issues were previously difficult to solve by traditional methods, but now they can be solved through developing the knowledge economy.

It is important to note that in the tech field, the countries of the Eurasian region prefer the Western model of cooperation. In contrast to the Chinese model that imposes purchasing products for credit money, the Western model entails opening R&D (research and development)  centers, training local developers, and providing a partial technology transfer. And this is vital for the development of a country.

For a long time, the leading country on the Eurasian IT market was Belarus, although Ukraine was ahead of it in terms of the number of IT specialists. In 2005, Belarus created Hi-Tech Park with low tax rates and clearly defined “the rules of the game.” Even though Belarus is inherently an authoritarian country, many Western companies have entered it.

And even though some of the developers took part in protest activity, the Belarusian authorities do not dare to strike a blow at the industry that generates $3 billion a year. It is quite obvious that if IT specialists feel uncomfortable in Belarus, they always have an opportunity to move to another country without losing their jobs. And this, I want to repeat, will cost the country's economy a loss of $3 billion.

Starting next year, countries of Central Asia will start to intensely develop the export component of their high-tech economy sector. The Kazakh authorities are planning to allocate large funds for education and create new jobs in the IT industry. A similar program is now pending approval by the government of Kyrgyzstan. Most recently, Bishkek hosted the StrategEast State and IT Eurasian Forum, where, among other things, a new tax model was discussed. The Ukrainian case was also presented and attracted a lot of interest.

Ukrainian IT market

Now, the Ukrainian IT sector is a chaotically developing market for entrepreneurs. Many companies are simply reselling the working hours of Ukrainian IT specialists. In my opinion, the trivial reselling of working hours of a Ukrainian IT specialist is not much different from any other type of reselling Ukrainian natural resources, which does not provide for investments in increasing added value on the territory of the country. But here the resource is human brains.

In such companies, people do not grow professionally, they simply age. At some moment, it becomes difficult for them to meet the requirements of an employer and they lose their jobs. At the same time, large engineering and product companies invest in developing their employees, ensuring their professional and career growth, and integrating them into the global production chain.

Now, thanks to Diia.City, a special legal framework for the IT industry, Ukraine has an opportunity to build a transparent and structured market with clear and stable conditions.

As a result of implementing this special legislation, we are going to see several positive developments. First, it will lead to the de-shading of income. The existence of such income on a large scale is evidenced by simple calculations. For example, with pretty much the same average salary of an IT specialist in Ukraine and Belarus, when it comes to the official statistics, we see a significant disparity in the revenue of the IT industry. While a few years ago, the Belarusian IT sector of 50,000 specialists generated $2 billion a year, 200,000 Ukrainian IT specialists, according to official reports of the same year, brought the country only $5 billion. A simple arithmetic calculation shows that an additional $3 billion were earned off the books.

The uniqueness of the IT sector lies in the fact that it must not have any shadow components. This market must be simple, understandable, and transparent, and its development is yet another way to transform the state. In this sector, a significant number of young people are employed, and it is natural for these guys to avoid hiding anything from the outset, and rather pay all taxes and keep money in banks. In a few years, these people will become a new elite capable of transforming the country as a whole. Non-transparent relationships in IT negate the strengths and benefits that were originally embedded in the DNA of this sector.

An additional important function of Diia.City is to ensure the social protection of IT specialists. The point is not only that they will receive a “white” salary, but they will have the right to have a vacation, sick leave, and other social benefits.

Companies will also benefit. Working in a transparent environment, they will be largely protected from the corrupt actions of any authority. Using FOPs, “individual entrepreneurs,” which is a simple and flexible business structure in Ukraine widely used because of considerable tax savings, poses risks too. It allows officials from the tax or any other supervisory authority to demand bribes for removing certain claims against business owners. Having legalized the tax relationship between the IT business and the state, Diia.City deprives officials of this opportunity. This will inevitably add more confidence to companies. They will work in the legal field, and this is strategically important for the development of any company.

And most importantly, the current model of the IT market in Ukraine restrains potential investors, it is unnatural for them. When the whole market is structured in a civilized manner, where employees are employees, and investors understand that they can safely invest money and legally withdraw dividends, the country will receive a tremendous increase in investment in IT.

Ukraine’s role in Eurasian IT market 

Ukraine has a unique opportunity to become a role model for other countries in Eurasia. Diia.City can become a case of the most successful approach to developing IT with the support of the state leadership. It can also help Ukraine brand itself as the leader of the Eurasian market. Without Diia.City, this would be impossible. Creating a well-functioning mechanism, which defines the rights and obligations of each one with equal conditions for everyone: due to its transparency, intelligibility, and predictability, it already now attracts the attention of Western investors.

It is quite obvious that with all the benefits of Diia.City, it is not enough to introduce an effective tax regime for a certain sector of the economy to push the economy to grow intensely. Without successfully implementing judicial reform and returning public trust to the national banking sector, the positive effect of even such important reform as Diia.City will be less noticeable. At the same time, I am absolutely convinced that Ukraine will cope with these challenges as well.

Anatoly Motkin
Anatoly Motkin

<div class="author__description">Anatoly Motkin is a technology investor and the founder and president at StrategEast, a center for a new economy on a mission to reinforce the values of the rule of law and private property protection in Eurasian and Baltic countries through the transition from natural‑resource‑based to knowledge-driven economies.</div>

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