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Eastern Europe created its own Silicon Valley. Russia’s invasion of Ukraine risks it all

PUBLISHED SAT, MAR 5 20229:04 AM EST UPDATED 3 HOURS AGO
Eric Rosenbaum

Ukraine, Belarus and Russia – three countries now intertwined in war – have grown into essential growth areas for tech talent in a world more reliant on digital than ever before. From start-ups sourcing the developers and engineers they need to get to the next level, to already established corporations relying on software partners for digital transformation, hundreds of thousands of tech workers in the region have become critical to the global economy.

Gartner estimates there are over one million IT professionals in the three countries, with one-quarter (250,000) working for consulting or outsourcing firms. There were 200,000 Ukrainian developers in the country in 2020, according to Amsterdam-based software development outsourcing company Daxx, which says that 20% of Fortune 500 companies have their remote development teams in Ukraine.

Software vendors working on behalf of big corporations, from financials to retail, rely on the talent that the region has cultivated. Take EPAM Systems, as an example. More than 50% of its tech staff are across the three nations – over 30,000 employees. It is an example of just how quickly war can disrupt the functioning of organizations in ways impossible to imagine, with internal dissension now an issue for EPAM leadership as workers in Ukraine call for its CEO to take a much harder anti-Putin line, according to a Bloomberg report, even though it has so many workers in Russia and Belarus.

“We’ve seen a lot of Eastern European countries become hotbeds for development,” said Scott Berg, software analyst at Needham. “Whether it is the right individuals or the right individuals at the right price, across all of the companies I cover, a solid third if not half have resources in that area.”

“These public companies, the headline companies like EPAM, are just the tip of the iceberg,” said another analyst.

The Gartner team says executives were worried about their enterprise location strategy even before the Russia-Ukraine War, with 43% of boards of directors telling Gartner deglobalization was a major concern.

The answer isn’t to pull out of the region or necessarily pull existing accounts from vendors, though this is a risk for any companies with significant talent pools in the region. Analysts say clients will be reluctant to pull work as long as operations can continue, but may be less inclined to give expanded work to companies with this geographic risk, especially when they have to take into account issues including cybersecurity, and that could limit the growth trajectory for the Eastern Europe tech hub and companies reliant on it.

For companies in the region, they are just trying to understand basic operational issues, such as how long they will access to funds to pay workers based in Russia where financial restrictions imposed by the West could limit their payroll abilities, and making sure workers have the internet access needed. And the longer the conflict goes on, the more tech firms in the region and their clients will worry about technology restrictions and implications for new product development.

“The current impacts to software development centers in Ukraine and surrounding countries have brought this into sharper focus, forcing organizations to rapidly reconsider which countries their IT services and supply chains should be sourced from,” Groombridge told CNBC via email. “The answer should not be a reactive onshoring of capabilities, especially in a world where the current crisis will increase existing shortages of digital skills. Instead, executives need to navigate a complex balance of competitive advantage, geographic concentration risks, skills availability, legal and regulatory issues, and country risk factors to relocate their IT services.”

There was already an acute shortage of labor in the technology sector, where on average, it can take up to 70 days to hire a skilled worker.

“The best talent is in Silicon Valley and the U.S., but the second-biggest hub is Eastern Europe,” said one Wall Street analyst who has traveled throughout the region.

Developing tech talent isn’t easy, and it isn’t a problem as simple to fix as moving a factory from one location to another.

“The people problem takes a long time. These hubs take a long time to develop,” the analyst said.

Unlike the economic hubs that have developed across the globe based on natural resource riches, precious minerals or commodities for fuel, intellectual concentration of resources doesn’t happen often. Before Eastern Europe, it had been decades since a significant new software and technology talent pool had been developed.

So far, the companies most exposed are managing — building up a cash reserve in advance, relying on data centers outside the region to begin with, building redundancies into processes in the event that systems aren’t functioning. But the longer the conflict persists, the more stability is at risk. The worst fears about cybersecurity and access to the technology needed to perform core tasks have not played out on a widespread basis, though there have been internet outages in Ukraine and Russian missiles targeting key infrastructure, and Russia’s invasion is intensifying and expected to target more population centers.

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