News.Kyiv.Me.

Real Money Heads for Virtual Ukraine

Real Money Heads for Virtual Ukraine

With Ukraine on the verge of an economic meltdown, tech startups offer a ray of hope for the future.

by Sergiy Rachinsky 22 October 2014

KYIV | Ukraine appears to be on the brink of economic disaster. Compounding its east-west schism, the country is in recession, may have to restructure its debt, and is failing to attract foreign investment that could help lift the economy.

 

If the pessimistic outlook seems lost on politicians, it’s no wonder – with just days to go before the 26 October parliamentary elections, Prime Minister Arseniy Yatsenyuk and his government are trying to project a calm front as they battle to retain their seats.

 

Yet unlike the government ministers, investors aren’t hiding their pessimism about the handling of the economy and some are already voting with their feet.

 

Petcube, a Ukrainian startup venture, allows pet owners to keep an eye on, or even play with, their pets remotely. Courtesy photo.

 

Government statistics show that in the first six months of 2014, Ukraine attracted $1.3 billion in foreign investment, while capital outflow hit $8 billion. Even much of the inflow is the return of Ukrainian money that had earlier been off-shored.

 

The conflict in eastern Ukraine has rattled would-be investors and it is too early too see if the tenuous cease-fire deal agreed by President Petro Poroshenko and his Russian counterpart, Vladimir Putin, improves the investment climate. There also appears to be disappointment over the slow pace of reform promised by Kyiv in order to align the country’s future with the European Union.

 

Officials at the State Agency for Investment and National Projects say that in addition to the cessation of hostilities in the east, Ukraine needs to complete the process of political stabilization and to improve the general economic situation if it wants to attract investors.

 

“War in the east of Ukraine is a major stop-factor that limits the access of foreign companies to the capital market in Ukraine and increases the risk to an unacceptable level,” Sergey Yevtushenko, who heads the agency, said at the International Economic Forum in Kharkiv on 5 September.

 

The country is in difficult straits. The Institute of International Finance warned earlier this month that Ukraine could be forced to seek debt restructuring despite a $17 billion bailout provided through the International Monetary Fund and $15 billion pledged by the EU earlier this year. The IMF projects a shrinking economy and soaring consumer prices through the end of the year.

 

TECH FIRMS TO THE RESCUE?

 

Yet not all the news is bad. Andrey Kolodyuk, a well-known Ukrainian investor, entrepreneur, and managing partner of AVentures Capital, says one segment of the economy is experiencing an investment boom.

 

That growth is occurring in technology, offshore programming, and Internet startups – a world away from Ukraine’s traditional industrial base.

 

“I’m just back from the USA,” Kolodyuk said on the sidelines of one of many business events sponsored by the EU in Kyiv these days. “We discussed investment plans with leading international funds in Los Angeles. Nobody there is afraid of the war in Ukraine. They have long history of investing in Israel, where armed conflict almost never stops.”

 

Ukraine’s IT market is still small and mainly focused on software development and web-based services, but Kolodyuk is optimistic this is only the beginning. “Foreign investors are actively interested in Ukrainian developments in mobile payment systems, the education sector, as well as e-commerce.”

 

Although Ukraine’s IT industry is among the most poorly capitalized segments of the economy – accounting for only 1.5 percent of all equity capital in December, according to the State Statistics Service – the country’s IT startups are worth more than $1 billion, Yevgen Syosyev, another AVentures managing partner, said in a March presentation.

 

In 2013 alone – “the terrible last year” of President Viktor Yanukovych’s tenure – Ukrainian startups received about $70 million worth of investments, Kolodyuk said. 

 

“This year we look forward to increasing the volume,” he said, noting that one Polish fund has plans to invest $100 million by the end of this year and two other projects valued at $10 million each could complete their investment rounds this year.

 

“It’s just something that is not well-known. Many foreign investors found Ukrainian projects and teams directly and invest in their work,” Kolodyuk said. “Often they just move people to other countries to keep working. During the last year and a half we [identified] about 2,000 projects with ties to Ukraine. We’ve already invested money in four of them and are looking for a few more.”

 

Ukrainian startup Petcube (a device that allows people to play with their animals remotely via a smartphone app) managed to raise $250,000 via the Kickstarter crowd-funding site. Another well-known Ukrainian project is iblazr, a portable LED Flash for Apple iOS and Android cameras. Iblazr’s founders also raised capital through Kickstarter.

 

CLICK TO PAY

 

Signs of tech life can also be found in Kyiv’s Lviv Square, home to the first Bitcoin Embassy in the former Soviet countries, and one of only four in the world. The Kyiv outlet was launched by the Bitcoin sales agency Kuna to create an incubator of ideas and to provide information about the digital currency. It also has a Bitcoin-ATM and souvenir store.

 

On 26 September, some 170 locals and foreigners attended the Bitcoin Conference, Ukraine’s first virtual currency event, at Kyiv’s Olimpiyskiy Stadium. 

 

“We’re happy that this industry is developing in Ukraine at such rapid speed and we’re sure that Bitcoin is going to become stronger in the future,” said a Bitcoin press release on the event. According to information from the conference, some 236,000 Ukrainians use the digital currency.

 

Asked about Ukraine’s potential as an information and technology hub, Kolodyuk said the promising developments had been overlooked by a government “busy with war and elections” and focused on traditional industries, agriculture, and finance. The evolving tech sector “helps us to feel much more free and independent even in the current economic situation. You can see the result of pure entrepreneurial activity and it looks great,” he said.

 

However, he warned that the government could follow up with efforts to regulate the Internet, with potentially damaging consequences for entrepreneurs as well as those using the web for the free exchange of ideas. It means “that we have limited time. As soon as they realize the real potential of this market, they [could] put enormous pressure on us,” Kolodyuk said.

 

PRESSURE TO REFORM

 

Meanwhile, Western entrepreneurs have been open about their concerns over government corruption and the state of reform in the tumultuous nine months since Yanukovych was forced to step down as president, opening the door to outwardly pro-Western leaders. Foreign investors had the opportunity to express their concerns before the current president and the prime minister at a meeting on 2 October in Kyiv’s Fairmont Hotel.

 

The foreign business leaders are well aware that politics is one of the most profitable businesses in Ukraine. Tomas Fiala, the head of the major investment house Dragon Capital, reacted angrily to reports that places on political party lists were being sold for $3 million to $4 million – despite government assurances of honest parliamentary elections. The business community has also objected to the rise in excise taxes, especially on alcohol and tobacco, according to a Kyiv Post report on the meeting. 

 

A 55 percent tax on the profits of private gas producers has been criticized as economically disastrous. The levy – up from 15 percent for extraction from deeper than 5 kilometers, and 28 percent for natural gas tapped closer to the surface – was to expire by the end of 2014 but the revenue source is still included in next year’s budget.

 

“Kyiv’s attempt at fiscal discipline to fund the war effort in the east and stave off an economic crisis is not working, and the end result is going to be economic suicide,” Robert Bensh, a majority shareholder in the independent gas producer CUB Energy, recently told Oilprice.com.

 

Poroshenko has defended his 2020 reform program – aimed at aligning Ukraine with EU standards and convincing investors that the country is a good place to do business.

 

“The purpose of our ambitious reforms is to achieve European standards of life and prepare for the application for EU membership in 2020,” Poroshenko said in presenting the reforms in September. The Strategy 2020 package includes some 60 economic and social reforms.

 

“We have to dismantle the feudal system of our economy, open our market and our democracy,” Poroshenko said in his speech.

Sergiy Rachinsky is a journalist and blogger in Kyiv and the founder of New Media in Ukraine, an online media consultancy.