In a spacious and colorful office in Kyiv’s Lukyanivska district, nearly 200 young Ukrainians are locked in front of their computer screens, crunching computer code for a leading American e-commerce software developer.
The Kyiv-based subsidiary of Magento resembles the relaxed and creative environment at dot.com and IT companies in California’s Silicon Valley. Workers are provided with free biscuits, jams and juices to keep the 24-hour software development process in motion. The kitchen area is designed much like a colorful bar or disco.
But don’t be fooled by the informal atmosphere.
The Ukrainian programmers at Magento’s fast-expanding Kyiv office – as well as budding branches in Donetsk and Dnipropetrovsk – are engaged in a serious and lucrative business. They receive instructions from Magneto’s headquarters in the Los Angeles are about what kind of e-commerce software to develop.
“The software concept was designed in the U.S., but all the programming is done here,” said Yevhen Shevchenko, general director of Magento Ukraine.
Why?
A decent programmer in Ukraine with 2-3 years of experience makes about $2,000 per month, according to Shevchenko. That’s much less than a comparable programmer in Europe or the US would get. Healthcare packages and other benefits, if included, also come cheaper.
(On the photo: Yevhen Shevchenko)
To capitalize on such a cheap option for quality software development services, Magento – which entered Ukraine in 2007 – plans in the coming year to double its Ukrainian workforce.
Magento is one of a growing number of global software developers that see Ukraine as one of the world’s new hubs after India and China for skilled yet relatively inexpensive programmers.
The nation’s billion-dollar IT industry has been growing annually at double-digit levels in the past decade, largely thanks to orders from abroad.
Often, the programmers are employed through subsidiaries of foreign companies, much like Magento does.
Fat software development contracts also go to thousands of highly skilled “lone wolf” programmers who operate in the shadows – unregistered and untaxed.
Dozens of large domestic software development companies employing hundreds of students and polished programmers have also popped up since the 1990s. Examples include Kyiv’s Miratech and Lviv’s Softserve.
Much of the world’s Fortune 500 companies “to some extent rely on Ukrainian programmers for their software development needs,” said Mykola Roenko, Miratech’s CEO.
Roenko, who also heads the IT Ukraine association, said the country owes much of its IT success and potential to high level Soviet education and institutions.
Kyiv, Kharkiv, Donetsk, Dnipropetrovsk and Lviv are currently the hotbeds for quality and quantity of Ukrainian programmers. Their salaries often exceed the national average by six fold.
The darker side
There is a darker side to Ukraine’s IT success, however. Experts say that it’s a good thing, on the one hand, that demand and salaries are increasing for Ukrainian programmers. But unfortunately for Ukraine, most of the profits and tax receipts from the value-added work to globally-prized software products end up abroad, where the clients are located.
Programmers at Magento IT write code for an American e-commerce software developer. Hundreds of thousands of Ukrainian programmers are working for foreign clients and employers. (Anya Korbut)
“There are hundreds of thousands of programmers in Ukraine, working in the industry and earning good money. But how much does it contribute to country’s value added product?” asked Ivan Makushenko, vice president of the investment and banking department at Kyiv-based investment bank Dragon Capital.
Makushenko said that most programmers who operate legally typically get paid for services. They pay a privileged tax for small entrepreneurs under the simplified tax regime. The subsidiaries they work for in Ukraine show little profit.
“The cost of the final product exceeds several times the costs of the outsourcing performed by Ukrainian programmers. As a result of this, Ukraine loses huge sums of money,” Makushenko added.
Yegor Anchishkin, founder of Viewdle, a domestic IT start-up and owner of Zakaz.ua Internet software for online grocery shopping, said that two thirds of Ukraine’s IT industry are operating in the shadows due to the nation’s heavy and complicated tax system.
It’s the same unreasonably high taxation that suffocates much of small- and medium-sized ventures in Ukraine as opposed to the favored tax treatment for well-connected big businesses.
Some relief could be on the horizon in the form of tax breaks.
Government officials are talking about introducing tax privileges as an incentive to attract fresh investment and encourage the industry to pay more of its fair share of taxes on home turf.
Such measures could help to “legalize” the business, said Andriy Kolodiuk, head and owner of AVentures, a leading domestic IT investment company.
But critics say tax breaks will likely be applied selectively giving an advantage to a select group of IT investment projects that are being backed by oligarchs and government officials.
“There is an opinion in IT sector that those draft laws were prepared for a select group of companies where vested interests are at play,” said Magento’s Shevchenko. “Some companies just want to obtain a financial edge.”
Brain drain is another problem. European and US companies are increasingly trying to snatch away Ukraine’s top programming talent, offering business visas and immigration assistance in return for long-term contracts.
“It is very hard to staff a major development or IT project in the US,” said Maxim Motovilov, the U.S. chief architect at Adstream Holdings Plc, which works with Ukrainian IT outsourcing firms.
Volodymyr Flionts, chief programmer at Kharkiv’s Meta internet company, said the full potential of Ukraine’s programmers is often not exploited by foreign companies who directly hire domestic talent through subsidiaries.
Often, they put Ukrainians to work at “factories that produce standard, pipeline product,” he said. Programmers who opt to work for Ukrainian-based firms lose in wage but have the opportunity to develop their own ideas and improve their skills, he added.
Andriy Terekhov, head of the strategic technologies department at Microsoft Ukraine, said the nation needs to start developing more home-based “innovative products.”
Another risk with hiring domestic programmers or developing anything within Ukraine in general, he added, is the very high level of software piracy, some 86 percent, and lack of protection for intellectual property rights.
Kyiv Post staff writer Oksana Grytsenko can be reached at [email protected]
