The Tech Hubs of the Former Soviet Union

Innovation and breakthrough discoveries are usually associated with the world’s advanced economies, such as the United States, Canada, Japan and Germany. However, the Soviet successor states of Eastern Europe, such as Estonia, Ukraine and Armenia have also found themselves at the forefront of the Fourth (Digital) Industrial Revolution. A lot can be said about the Soviet Union, but one legacy it did leave behind is an appreciation for the hard sciences, such as mathematics, physics and engineering, which prepared these countries for the coming technological boom.

Estonia and Ukraine are considered the rising tech stars of Europe, and Armenia is not far behind them. With the ongoing war in Ukraine, and the sudden influx of refugees, mainly from Russia, into Armenia, many of whom are employed in the tech sector, some of the problems that Armenia faces in the IT sphere became apparent. It is worth exploring the achievements of the former Soviet countries in the IT sphere.

The Tech Sector in Estonia

Estonia is a small, former Soviet country with a population of just over 1.3 million. As of 2021 the country’s nominal GDP is over $31 billion and its GDP per capita stands at $27,282. In 2020, foreign direct investment (FDI) in Estonia totalled $3.5 billion.

Estonia is considered the most entrepreneurial country in Europe for tech start-ups. According to The State of European Tech 2021 Report, 1107 start-ups were founded in Estonia as of November 2021. As of May 2022, that number has grown to 1371, over 20 percent growth in 6 months. Estonia is also a leading country in Europe when it comes to raising venture capital.

The Baltic state adopted a national policy to develop its tech sector at the turn of the century and already hosts 10 unicorns (companies valued at $1 billion or more). Successful Estonian start-ups include Skype, which was acquired by Yahoo in 2005, and later Microsoft in 2011. More recent successes include Wise, a money transfer service, and Starship Technologies, which develops self-driving delivery robots. Estonia has five times more start-ups per capita than any other European country. Today, its top 25 tech companies are worth €21 billion combined. These start-ups alone make up 2-3 percent of the country’s current GDP.

But what lies behind Estonia’s success? According to Estonia’s Prime Minister, Kaja Kallas, they don’t just talk about a digital society, they live it.

One of the drivers of Estonia’s success in tech is the country’s advanced digital capability and entrepreneur-friendly environment. The majority of government services in Estonia are available online, and start-ups can be registered in just 15 minutes.

The country also has a simple tax system with zero percent income tax on retained and reinvested profits and double taxation treaties with over 50 countries. The country also boasts clear stock option regulations and a trustworthy legal system. All these provide the necessary environment for start-ups and technology companies to be established and grow in Estonia, as well as for foreign investors to confidently invest in the country.

There is also a robust community of entrepreneurs and tech sector employees who are committed to giving back to the start-up and tech communities with community organizations, start-up incubators and investment funds. Around 150 support organizations are ready to help and assist start-ups and newly-founded tech companies.

Given the fast growth of the tech sector in Estonia, the country implemented a Start-Up Visa Program in 2017, to be able to hire specialists from abroad. The program incentivizes foreign start-up founders to relocate their businesses to Estonia; in order to make the transfer easy, the country offers an e-residency program. Since the launch of the program, Estonia has received over 2,700 applications from start-ups that wished to relocate, as a result of which 25 percent of start-ups in Estonia are now of foreign origin.

The Tech Sector in Ukraine

Ukraine is another former Soviet country which has made a name for itself in the tech world. It is yet to be seen how Ukraine’s booming tech sector will survive the war that Russia unleashed upon the country on February 24, 2022.

Compared to Estonia, Ukraine has a much larger population of over 41 million. The country’s GDP is over $155 billion, and its GDP per capita is $3,726. In 2019, the country’s FDI was over $5 billion (that number dropped to $304 million in 2020 as a result of the pandemic).

Like Estonia, Ukraine also started to develop its tech sector at the turn of the century. As of 2020, the IT sector accounted for 4 percent of the country’s GDP, growing at a steady rate of 20-30 percent year over year. Currently, Ukraine has four unicorn companies. Grammarly and GitLab are among the successful tech companies in Ukraine.

During the pandemic, when most of the economy of Ukraine was struggling, the IT industry still grew, making up 8.3% of total exports and making the industry one of the most important branches of the Ukrainian economy. Ten years ago, the IT industry accounted only for 1.6 percent of Ukraine’s total exports. Ukraine owes its success in the field to minimal regulations and a stable tax policy, as well as highly qualified professionals.

One issue that Ukraine’s tech sector may face in the future (after recovering from the war) is to find the necessary human capital to sustain its growth rate. Universities have already begun expanding their IT courses recently, and the demand is also growing. Before Russia’s invasion of the country, an “Analysis of IT Education in the Higher Education Institutions of Ukraine” projected that, by 2024, Ukrainian universities would provide around 20,000 IT specialists per year; at the same time, the demand for specialists was estimated at 30,000 to 50,000. Even with the increased efforts, the universities were not able to graduate enough professionals to meet the demands of the country’s market.

It is yet to be seen what lasting impact the war will leave on Ukraine; many companies have had to relocate, and many employees in the sector were mobilized or joined the fight voluntarily.

Moldova and Belarus: Quick Overview

Moldova and Belarus, again two former Soviet countries, have achieved remarkable success in tech as well.

According to the U.S. International Trade Administration, Information and Communication Technology (ICT) is one of Moldova’s most promising sectors, accounting for 10 percent of GDP. The IT sector alone makes up over 3 percent. Moldova does not boast a large number of start-ups; however, the ones that do exist have great potential.

Belarus has over 330 visible start-ups, and the IT sector accounts for around 6 percent of the country’s GDP. The popular messenger app Viber, the game World of Tanks, and EPAM have Belarusian origins. Even though the sector was largely left alone by the country’s authoritarian leader, many start-ups and tech companies have relocated to other countries after achieving initial success.

Overview of the Tech Sector in Armenia

Now let’s see what the tech picture looks like in Armenia. The population of Armenia, according to official data, is around 2.9 million; however, the real number is probably lower. The last census was conducted over ten years ago, in 2011. Armenia’s GDP is over $12 billion and the GDP per capita is $4,267. In 2019, FDI in Armenia was over $100 million (in 2020, it was only around $45 million, due to the pandemic). FDI did peak in 2018, surpassing $266 million, but has been declining since then.

In 2021, the IT industry accounted for 4 percent of Armenia’s GDP; that number had also reached its peak in 2018 at 7.4 percent. As of 2021, there are 1,300 companies actively operating in the ICT sector in Armenia; 500 of them began after 2018. Over 15,000 people are employed in the tech sector and around 25,000 people are engaged in it.

Just before the pandemic devastated the global economy, and before the 2020 Artsakh War created a political crisis in the country, Forbes wrote that start-ups were beginning to multiply in Armenia, calling it “the world’s next tech hub”. The following year, despite the hardships and challenges that Armenia was facing, the photo editing app Picsart became Armenia’s first unicorn company, and Robin the Robot registered international success, being named one of the 100 best inventions of 2021 by Time Magazine.

Like Estonia and Ukraine, Armenia adopted a national policy toward developing its tech sector in the early 2000s, and it grew steadily, as the sector avoided state interference and corruption. After the “Velvet Revolution” of 2018, Nikol Pashinyan’s government announced that the tech sector would be one of the main priorities of the government’s economic policy.

To further boost the sector, the Ministry of High-Tech Industry was created in 2019 by reforming the former Ministry of Transportation, Communications and Information Technology. There are other state-sponsored foundations and institutions aimed at supporting the IT sector as well, like the Information Technologies Development Support Council (ITDSC) and Enterprise Incubator Foundation (EIF).

The Government of Armenia is also trying to boost the IT sector by creating various incentives, like extending tax breaks; since 2015, new start-up IT companies that employ less than 30 people are fully exempt from taxes for their first five years. Also, employees that work in the IT sector pay a ten percent income tax, instead of the country’s universal flat tax (currently 21 percent). The government has also eased the process of registering a business; it can be completed in four days, compared to the regional average of nine days.

Despite the exciting success stories and great potential, the tech sector in Armenia also faces numerous issues, like a shortage of experienced professionals and lack of infrastructure, such as office space, which the inflow of Russian tech workers has highlighted. There is also an imbalance of IT specialists in Armenia, as many choose to become programmers, while there is a shortage of specialists in other fields. Although Armenian universities and tech companies are focusing on STEM education to prepare professionals who will be able to join the IT sector, the education system in general does not supply enough qualified people.

How Are Armenia’s Regional Neighbors Georgia and Azerbaijan Doing?

With a booming tourist industry and serving as a transit country for goods and energy resources in the region, the IT sector does not play as important of a role in the economy of Georgia. However, there are aspirations to grow Georgia’s IT sector and turn the country into a regional digital hub in the South Caucasus and a gateway between East and West. As of 2021, Georgia’s government has directly invested more than $4.7 million “in more than 200 globally scalable start-ups” (fintech, AI, virtual reality, ed tech, agri-tech, and biotech). In recent years, these start-ups have raised over $65 million.

As for Azerbaijan, Armenia’s eastern neighbor’s economy is overwhelmingly based on its natural resources, specifically on exporting oil and gas. However, as an attempt to diversify the economy, the government of Azerbaijan has made the ICT sector one of the four target sectors and second largest target for foreign investment. Azerbaijan’s government also provides incentives such as tax breaks and VAT exemptions.

Conclusion

It is evident that, in the post-Soviet space, Estonia has registered by far the most achievements in the tech sector. Ukraine and Armenia face similar issues, like a mismatch between the demand and supply of talent and specialists. Another challenge that both countries face are security issues. At this stage, it is not known when the war in Ukraine will end and what impact it will leave on the tech sector. In Armenia, while the situation is more stable, there are still unresolved border issues with Azerbaijan as well as domestic political instability, which influence foreign investments and create risks of a brain drain.

by Hranoush Dermoyan EVN Report

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