Not just energy and markets, Russia's war on Ukraine disrupts tech industry

The Russian invasion of Ukraine has already had an impact on the energy and commodities markets. And there’s another major industry that will take a hit: tech.

So far, most of the focus has been on cyber security and semiconductor chips. Russia is a world leader in cyber warfare, sowing misinformation and weaponizing digital platforms. And semiconductor bottlenecks could get worse as the Ukraine crisis deepens, with 90% of U.S. semiconductor-grade neon supplies coming from Ukraine, and 45% of the world’s palladium coming from Russia, while the Biden administration threatens a chip blockade of Russia — and adding to the uncertainties already roiling semiconductor markets.

But the impact on the tech industry will not stop there. That’s because pre-invasion Ukraine was also a valuable, growing hub for tech talent. Tech accounts for over 4% of Ukraine’s GDP; while this is much smaller than, say, India, where the share of tech in GDP is closer to 8%, it was growing fast. The Ukrainian IT development sector exported $6.8 billion in IT services in 2021, and increased by 36% between 2020 and 2021. One in five Fortune 500 companies use Ukrainian IT services, among them Microsoft, Google, Samsung, Oracle, Snap and Ring, drawn in by the country’s minimal bureaucratic hurdles, favorable tax policies, and the professionalization of its tech sector.

While Ukrainian IT got its start as a low-cost offshoring destination, it has moved up to higher-end value-added work such as systems architecture, business analysis and experience design. It has English-speaking developers in time zones that are easier than Asian ones for companies in the U.S. and EU. According to one count, the country is home to over 240,000 tech specialists and more than a hundred R&D centers for international companies. The country’s small but growing blessing of unicorns include ventures such as Gitlab and Grammarly.

Ukraine’s IT industry boasts an impressive collection of rankings on league tables that tech managers follow: first in Eastern Europe in outsourcing developers, first in all of Europe in terms of the number of graduates of technical high schools, fifth in a league table of the best software developers in the world, first globally by the number of Unity3D game developers and C++ engineers and second in JavaScript, Scala and Magento developers.

Now, the country’s dynamic tech clusters — in Kyiv, Lviv, Kharkiv and Dnipro — will all be compromised.

To limit the damage, several companies are trying to move their employees and contractors out of Ukraine, but unfortunately, this will have limited impact. The Israeli software company Wix, for example, has evacuated employees to Poland and Turkey, but most tech workers will not have that luxury. The ability for many to move has already been affected by the current ban on military-aged men leaving the country.

San Francisco-based JustAnswer (with a third of its workforce in Ukraine) has moved its data out of the country and is storing it in the U.S., where Grammarly (which was founded in Ukraine) has always stored its data. thers have invested in backup diesel generators, laptops and internet service. Some are moving employees towards more remote parts of the country, away from the main thrusts of the invasion.

Western tech firms will find that without Ukraine, the worldwide tech talent shortage will get even worse. If high-end tech work needs to be moved to other locations, some alternate European cities could be Istanbul and Tallin — they are the closest to Ukrainian tech cities in terms of socio-economic characteristics. Making a switch would be costly and difficult, but it is something companies will have to consider if the crisis drags on or if Putin is successful.

Ironically, one of the reasons Ukraine was a hotspot for tech talent was due to a legacy of Soviet-era emphasis on engineering and technology education. Now, Vladimir Putin has set back a digital economy that seemed to be on the verge of breaking out, a rising power in digital innovation with a growing consumer base for tech products. The tragic reality for the people of Ukraine is already obvious; the grave consequences for the global economy are only beginning to unfold.