The new digital economy of Ukraine: thinking in war time

It has been 13 weeks since the Russian Federation invaded Ukraine, and the initial confusion and shock has since been driven out by clarity and understanding of the way forward. International support keeps us determined to liberate Ukrainian territory completely, as well as to 'demilitarize and denazify' Russia. It will allow not only Ukraine but also the European countries to enjoy a secure environment in the future. While the Ukrainian Armed Forces perform their duty on the battlefield, representatives of the Ukrainian accountancy and consulting market are contributing to the survival and development of the national economy. Local initiatives include supporting Ukrainian businesses with information on subsidized loans, government guarantees, wartime tax benefits, programs for displaced people, and advisory to national and regional authorities. Our sector is also involved in plans to develop Ukraine’s information technology sector, once the war is over. The information technology sector is set to become a major driver of economic development of Ukraine, as, in Q1 of 2022, it provided export earnings of $2 billion, with an increase of 28% compared to the previous year, while employing more than 250,000 people. Accordingly, many of our counterparts are expanding their IT practices. For example, KPMG Ukraine has been actively hiring staff for ERP systems implementation (SAP, Microsoft Dynamics), software development (.NET, Java), and cybersecurity to support their projects in Western Europe. PwC Ukraine studies the options for Ukrainian businesses to switch from the dominating Russian accounting software 1C:Enterprise, offering alternative solutions. BDO Ukraine has introduced an extensive job list, inviting software developers (such as Cloud Engineers, Data Engineers, and Senior DevOps Engineers) to cooperate with BDO offices in other countries. The digital economy is also playing a special role in the economic revival of Ukraine. In April, the President of Ukraine established the National Council for Reconstruction of Ukraine from the Consequences of War. Under the aegis of the Council, 23 different workgroups were created, comprising officials from ministries, the parliament, and the Office of the President, as well as independent experts. The groups were segregated into digitalization, loss assessment, infrastructure recovery, economic revival and development, and other areas. Kreston Ukraine has joined the digitalization group and is now contributing to designing initiatives for the digital economy, public services and information infrastructure development. We plan to research digital transformation strategies at the state and corporate levels and analyze the implementation experience. Previously, we researched electronics imports in the Russian Federation, including chips and circuits, to identify the main buyers, suppliers, manufacturers, product range and terms of supply, as requested by the Ministry of Digital Transformation. The information was necessary for assessing sanctions potential and preparing a campaign to block shipments of electronic components that could have military applications. Despite the current hostilities, Ukraine's reconstruction and development theme is one of the most relevant ones both domestically and in discussions with foreign partners. Obviously, the war will end eventually, and everyone should be prepared for this. At a government level, the so-called 'new Marshall Plan' for reconstructing Ukraine already involves more than 40 nations in its discussion. The new Marshall Plan's funding may reach an estimated $1 trillion, with technology and modernization as one of its components. The recovery offers a unique opportunity to transform resource-based sectors of the Ukrainian economy into highly productive, smart and competitive ones. Even before the war, Ukraine was on a steady course towards digitalization, meeting significant milestones in access to technology and Internet infrastructure, use of technology by citizens, businesses and the state, and the impact of technology on the economy and quality of life. This will drive the unique investment potential of Ukraine for international private capital interested in tech-innovative businesses. In the modern world, economic development is impossible without the use of information technology. McKinsey predicts that by 2025, information technology will represent 22% of GDP growth in China, and in the US up to 10%. For the countries of Central and Eastern Europe, digitalization will increase GDP by a total of EUR 200 billion. Huawei estimates that every $ 1 investment in IT infrastructure in 2020 will bring in $ 20 in 2025. With this in mind, countries around the world are already seeking to increase the share of the digital economy in their GDP and are declaring their intentions in digital transformation strategies: using information technology to create a sustainable and innovative economic environment. Qualitative strategy is an instrument of systematic and effective state policy that contributes to increasing the competitiveness of the national economy and improving the quality of life. Ukraine also needs to develop and implement the new digital transformation strategy that sets out relevant goals and visions to achieve them, which will help transform public IT policy, improve the quality of public services, and enhance Ukraine's integration into the global digital economy. Kreston Ukraine leads the research and foresight committee of the Ukrainian Venture Capital and Private Equity Association (UVCA). According to a recent review of venture capital transactions in 2021, investors injected a record $779.6M into Ukrainian startups, 46% more than in 2020. In Q1 of 2022, there have already been 11 venture deals totaling $11.5M and 8 exits totaling $135M. Despite the ongoing hostilities, we expect increased investing activity among Ukrainian tech companies, spurred by support programs from international partners. With 538 service companies, Ukraine heads the list of the Eastern European countries in IT outsourcing. If you would like to get involved with international initiatives to support the development of Ukraine's digital economy, please contact the author (atamas@kreston.ua). By Sergey Atamas, managing partner, Kreston Ukraine