Point of view: An IT outsourcing boom could yield broad-based benefits for Belarusan society

Due to educational continuity and a comparatively low level of brain drain, Belarus’ primary asset today lies with its young scientists.

High-tech outsourcing is one of the most dominant trends in today’s economy, but few would associate it with Belarus, better known for its heavy machinery exports than IT experts. This appears to finally be changing. RnR Market Research projects Belarus’ IT outsourcing market to grow at an annual rate of 17.8% by 2018.

Its proximity to the EU, the availability of skilled labour and technical infrastructure, and the limited domestic demand for IT specialists all make Belarus an attractive outsourcing partner. There are already about 800 IT companies and about 30,000 IT professionals in a country of 9.4 million people and a largely state-driven economy.

Pessimists might say that these advantages are just on paper. Belarus’ authoritarian image and small market size make it difficult to compete with EU member states like Poland, which dominate the Eastern European outsourcing market. The West’s growing list of sanctions against Russia, however, may give Belarus’ nascent outsourcing market an extra boost.

Innovation and technology growth driven by the state

The government started to prioritise innovation and technology in the mid-2000s. To improve the country’s business climate, Minsk simplified the process of setting up a business and establishing a preferential taxation regime. Belarus ranked 63rd in the World Bank’s Ease of Doing Business Index last year, ahead of Russia, China, and Italy (Poland ranked 46th).

Valery Tsepkalo, a former ambassador to the United States, spearheaded the state-driven innovation approach. Today, Tsepkalo is an official aide to Lukashenka. He also directs Belarus’ first High-Tech Park, established in 2005 to support the software industry.

The Park, hosting some 140 companies, has an extremely young workforce, with 70 percent of employees aged 28 and under.

Seven Belarusan companies are featured in the recent Software 500 list, a global ranking of software leaders. Attributing this success entirely to the government, however, distorts the facts.

Unlike manufacturing companies, which remained in the hands of the state after 1991, the Belarusan IT sector was built up from scratch by young programmers and academics that were struggling to make ends meet in the post-Soviet economy. These small firms managed to stay off the state's radar. Over time, some of them matured into successful companies that now compete in the global marketplace.

During Soviet times, Belarus was a major technical hub. Minsk's factory for manufacturing computers, created in 1958, produced 70% of all of the general-purpose computers manufactured in the Soviet Union.

Due to educational continuity and a comparatively low level of brain drain, Belarus’ primary asset today lies with its young scientists. In spite of significant problems facing the Belarusan educational system, Belarus produces over 16,000 technical graduates every year.

Belarusans regularly win medals at international science olympiads. This August, 19-year-old Gennady Korotkevich won first place at the Google Code Jam, which annually attracts more than 20,000 participants. Students from the Belarusan State University of Informatics and Radioelectronics (BSUIR) won medals at the IT-Universe-2014 and the International Olympiad in Informatics in Taiwan.

High-tech oligarchs?

The 2012 list of the top 200 Belarusan businessmen, published by Ezhednevnik, included 16 high-tech entrepreneurs. Most of them founded independent software development and distribution companies in the 1990s and early 2000s. All of them have a scientific or technical background, and six graduated from the Belarusan State University of Informatics and Radioelectronics (BSUIR).

The largest, EPAM Systems, was founded by Arkadiy Dobkin, a graduate of the Belarusan National Technical University (BNTU). In 1991, at the age of 30, Dobkin emigrated to the United States. He then organised a network of Minsk-based programmers for doing work that originated in the US. In 1993, together with his classmate Leonid Lozner, he founded EPAM (Effective Programming for America).

Today, EPAM is listed on the New York Stock Exchange, has branches in North America, Europe, and Central Asia, and employs some 9,300 programmers. It was ranked #6 on Forbes’ 2013 list of the 25 Fastest-Growing Tech Companies.

Another Belarusan outsourcing entrepreneur, Sergey Kostevich, began his career building computer hardware.

In 1991, a few months before the Soviet Union's imminent disintegration, Kostevich and his colleagues released the first Soviet-made hard drive. Kostevich soon abandoned academic work and started importing and selling computers and computer parts. In 1992, his newly founded company, Asbis, signed a distribution contract with Seagate, a U.S. hard drive manufacturer. Today, ASBIS has more than 1,700 employees and 33,000 active customers in over 90 countries around the globe.

Of course, not all of Belarus’s IT sector is a story of private sector dynamism and entrepreneurial drive. The 2012 list of the top 200 Belarusan businessmen also includes eight “oligarchs” whose wealth was earned through other means and subsequently invested in various IT assets.

Topping the list is Uladzimir Peftiev, who made his fortune selling Belarusan weapons and only later acquired control of Internet provider “Delovaya set” (Business network).

Roadblocks to outsourcing

Belarus has the potential to become a rather successful high-tech centre in Europe. Currently, though, the top IT companies in the region still prefer to invest in Bulgaria, Poland, Czech Republic, Estonia and Lithuania. These countries are democratic EU member states with attractive market economies. The primus inter pares is Poland – Krakow, for example, ranked 10th in Tholons’ 2013 list of top 100 outsourcing destinations. Minsk did not even make the list.

In Belarus’ small economy, high-tech industries remain marginalised. The country invests a mere 0.7% of its GDP into research and development; a level that is lower than average among post-Soviet nations. Neighbouring Russia spends more than twice as much (relative to its GDP). The share of high-tech products among Belarusan exports is also well below that of its neighbours, and indeed, it has barely budged since the onset of the post-Soviet period.

Perennial sanctions by the West against Belarus – including a travel ban and asset freeze affecting ministers and businessmen with direct ties to Lukashenka – have also stifled high-tech outsourcing.

That trend may be reversing, however, as the West steps up its sanctions against neighbouring Russia. According to data from customer records of Hiperos LLC, a vendor of third-party management software, over 1,600 of Russian firms provide services to U.S. companies.

U.S. companies involved in these transactions now have to check whether sanctioned individuals own their Russian partner companies in order to avoid the legal repercussions.

The most risk-averse firms, of course, may simply decide to leave the post-Soviet space altogether. Still, Belarus’ burgeoning outsourcing industry could yet benefit from the political instability plaguing Eastern Europe. Outsourcing to Belarusan companies may yet prove an alternative that is safer than Russia and more cost-effective than the EU states.

An IT outsourcing boom could yield broad-based benefits for Belarusan society. IT companies could gradually help erode the dominance of the state sector in emerging high-tech industries. Workers in these industries are less likely to fear losing their jobs based on their political opinions. A new class of young and wealthy techies -- with income nearly three times the national average -- would have the opportunity to travel abroad and build important social ties with the West.

Originally published on BelarusDigest