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What Ukraine's tech industry needs to survive Russia's war

by Daryna Antoniuk August 16, 2022 8:26 PM 7 min read
Volunteers working on a laptop in the Science Center on March 10, 2022 in Ternopil, Ukraine. (Photo by Alexey Furman/Getty Images)
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There is a dilemma dividing Ukrainian society: whether to allow the country’s male tech specialists to temporarily leave the country during the war.

Martial law, introduced on Feb. 24 and extended until Nov. 21, prohibits Ukrainian men between the ages of 18 and 60 from leaving the country, except under special circumstances.

The Ukrainian information technology industry has been particularly affected by martial law, as its business models rely heavily on outsourcing. Ukrainian tech companies work with big international clients such as Deloitte, Siemens, Google, and Microsoft, and their work requires a lot of in-person face time.

In order to continue doing business as usual, many Ukrainian companies have found ways to open offices abroad. Poland, Romania, and Portugal, countries with booming tech industries and affordable taxation, are popular destinations for Ukrainian IT companies.

Others, however, are left waiting for the government to approve a bill allowing tech specialists to at least briefly leave the country on business.

Despite the havoc Russia’s war has wreaked on the Ukrainian economy, the IT industry is one of the few that still brings in money. Its exports grew by 23% in the first half of 2022, to $3.7 billion.

“Information technology is our oil, our gold,” according to Konstantin Vasyuk, executive director at the IТ Ukraine Association. But to maintain its golden status, the Ukrainian tech industry needs more help from the state, he said.

According to Vasyuk, there are three problems facing the industry. The first is keeping IT specialists from having to serve in the military for at least six months. The second is permission for techies to leave the country for up to a month. The third is making sure the techies already working abroad can continue to only pay taxes in Ukraine.

Ukrainian IT companies have been lobbying for these changes for months, but the government hasn’t moved on them. Among the reasons are a lack of attention to the IT industry and of coordination between ministries, several companies told the Kyiv Independent.

“In order to come to an agreement, the government must understand that the economic factor during the war is no less important than the military one,” according to Vasyuk.

Going global

Before the war, there were about 285,000 tech specialists in Ukraine, of which up to 57,000, mostly women, have already moved abroad. Another 52,000 techies now live in Ukraine’s safer western regions –  Lviv, Ivano-Frankivsk, Ternopil, and Chernivtsi, according to a study by Lviv IT Cluster.

The outflow of specialists abroad could be a problem in the long run. Although they continue to work for Ukraine and still pay taxes to the state budget, it is not yet clear how many of them will choose to stay abroad permanently.

Large Ukrainian IT companies, including Intellias, SoftServe, Globallogic, Genesis, Ciklum, and N-iX, are opening offices abroad to retain customers and continue hiring. The most popular destinations are Eastern Europe, the Balkans, and Latin America.

Opening offices abroad does not mean these companies are fleeing the country. “This means that the business is flexible, works efficiently, and saves jobs,” according to Vasyuk. In fact, many companies intended to expand globally even before Russia’s full-scale invasion.

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One of Ukraine’s largest tech companies, SoftServe, which employs almost 11,000 people worldwide, opened offices in Mexico, Colombia, and Chile a month before the invasion, and entered the Romanian market during the war.

Another IT company, Intellias, which employs about 2,600 people, opened new offices in Poland, Bulgaria, and Croatia during the war and is preparing to enter Portugal, Spain, India, and Colombia.

The war forced the company to go global in a matter of months rather than two years, as previously planned, Intellias told the Kyiv Independent.

One of the main reasons for entering global markets is "business diversification," according to Kateryna Gubareva, vice president of human resources at SoftServe.

“When most Ukrainian IT specialists moved to safer places in the first weeks of the war, their Polish and Bulgarian colleagues were working at full capacity,” Gubareva told the Kyiv Independent. This allowed the company to continue to work and fulfill orders, she added.

A man works on his laptop in a bedroom at an artist co-living studio space that has turned into a bomb shelter for approximately twenty-five Ukrainians on March 20, 2022 in Kyiv. (Photo by Chris McGrath/Getty Images)

Another reason for entering global markets is the risk of losing customers. Large international clients were worried that Ukrainians would be unable to provide their services due to hostilities or internet outages and wanted to play it safe, several Ukrainian IT companies anonymously confirmed to the Kyiv Independent.

Some clients prefer distributed teams to mitigate the risks, while others might have some regulatory restrictions, such as being able to only work with partners in the EU,” according to Alyona Yakymchuk, communications manager at N-iX.

Retaining staff

Even before the war, Ukraine had fewer IT specialists than it needed, and companies were competing for headcount.

The number of vacancies in Ukrainian IT has halved since the beginning of the war — from 28,000 at the beginning of February to 14,000 now, according to the job search website Djinni. One of the reasons for the decrease is local IT companies hiring more actively abroad rather than in Ukraine.

Both Ukrainians and locals work in the foreign offices of Ukrainian IT companies. SoftServe employs no more than 10% of Ukrainians abroad; in the Polish offices of N-ix and Intellias, the share of Ukrainians is 80%, and in Croatia and Bulgaria, Intellias plans to employ 40% of Ukrainians.

Many fear that if Ukrainian IT specialists are allowed to travel abroad, even fewer people will work in the local tech industry.

Tech companies don't agree. Firstly, they say, tech specialists will be able to leave the country only temporarily, for up to a month. Secondly, only 10-15% of the company's employees would be eligible to travel abroad, and only for a good reason. “Besides, when you don't have the opportunity to leave the country, you want it even more. And the longer the restrictions last, the greater the desire will be,” Vasyuk said.

About 7,000 Ukrainian tech specialists have joined the Armed Forces since the start of the war, but local companies want key workers to keep doing their jobs. In Ukraine, there is a procedure that allows companies to delay the mobilization of some key workers for about six months.

So far, only Kharkiv, the second largest city in northeastern Ukraine, has been most successful in retaining its talent, with about 2,000 tech specialists kept in their jobs.

Before the war, this city was a bustling hub of Ukrainian tech with more than 45,000 specialists. Now Kharkiv is one of Russia’s most coveted targets and is constantly suffering from its attacks. City officials have helped local tech firms reserve some of their workers to support the industry.

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But overall, only about 1% of all IT specialists in Ukraine were able to delay being mobilized. According to experts of the IT Ukraine Association, the process to be granted a delay is still very complicated and has many drawbacks.

One of them is that only those officially employed by a company can postpone mobilization. The majority of Ukrainian IT specialists work as private entrepreneurs, similar to contractors, which are common in Ukraine as they are taxed at much lower rates.

Bringing in taxes

There are around 5,000 Ukrainian tech companies that bring a lot of money to the state budget. In the first half of 2022, these companies generated $880 million in taxes.

Ukraine has affordable taxation for tech specialists – they pay a mere 5% income tax. Last year, the country also introduced a special taxation system, Diia City, promising tax, employment, and legal benefits for Ukrainian and foreign IT firms.

Many countries, especially those neighboring Ukraine, have alternatives to the Ukrainian tax system. In Poland, for example, private entrepreneurs pay 8.5-12% income tax, and in Romania – about 10%.

Ukrainians can work abroad without legal employment for 183 days, at which point they have to choose in which country to pay taxes. “Someone will prefer to return to Ukraine because taxes are more favorable here, someone will stay abroad because it is safer and living conditions are better there,” according to Vasyuk.

To save taxes generated by the IT industry, the Ukrainian government is asking European countries to allow Ukrainian techies to be able to keep paying taxes in Ukraine for longer.

Poland has already allowed Ukrainians who work remotely not to pay taxes in Poland. This does not apply to Ukrainians who work for the Polish market.

The Ukrainian government needs to do more so that Ukrainians can keep paying taxes in Ukraine, according to Vasyuk. “Ukraine has a strong intellectual brand that attracts IT specialists, and we need to continue to support it,” he told the Kyiv Independent.


Note from the author:

Hi, this is Daryna Antoniuk, I hope you enjoyed reading my story.

I cover tech for the Kyiv Independent during one of the most difficult times for my country. We need stories like these because the fight on the digital front is just as important as the fight on the ground. I really want to write again about investment in Ukraine’s hi-tech, cool startups and the booming Ukrainian IT market.

But first, Ukraine needs to win the war. Our part in it is keeping the world informed. Consider donating to the Kyiv Independent and becoming our patron so you can read more stories about tech and business in the future.

Support independent journalism in Ukraine. Join us in this fight.
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