Belarus Tries To Milk its Technology Tycoons?
On 3 April the Belarusian police detained Viktar Prakapenia, a major IT businessman and owner of the EXP(Capital) investment fund. The authorities accused him of running a business in the shadows in 2005-2008 and allegedly earning $650,000 in profits.
The IT outsourcing sector has been growing fast in Belarus since 2005, when the first government established the High Technology Park and granted it unique tax privileges. However, this highly sensitive and mobile business may choose to move elsewhere thanks to the authorities' awkward dealing with IT leaders. The image damage done by simply putting Prakapenia in jail could have serious consequences for the IT industry as a whole and the investment climate of Belarus.
Belarus as an Outsourcing Phenomenon
Outsourcing IT has become a unique sector in the Belarusian economy following Lukashenka's decree on on High Technology Park in 2005, granting it unique favourable tax privileges. The park has proven to be quite a success, an unusual phenomenon in the largely state-run economy of Belarus.
In 2013 it made $453bn and is targeting $1bn in 2016. The park currently employs over 16,000 people, a group of individuals that earn some of the highest salaries in the country. Belarusian IT companies repeatedly appear on the Global Outsourcing top 100's rankings, with IBA Group sitting at 25th in 2014.
The Belarusian IT sector grew through the 1990s largely untouched by the state officials, who had little understanding of what was at the time an emerging field. Young programmers and academics started to set up their projects, which sometimes developed into successful companies that now compete in the global marketplace. The 2012 list of the top 200 Belarusian businessmen, published by the Ezhednevnik newspaper, included 16 high-tech entrepreneurs.
Famous IT Businessman Detained in Minsk
Viktar Prakapenia is one of the most prominent IT businessmen in Belarus, who at the age of 23 founded Viaden Media, a company that produces software for the entertainment industry. In 2011 he sold the company to Israeli billionaire Teddy Sagi, and soon thereafter opened EXP(Capital), an investment fund. He has also invested in real estate in Minsk. In 2014 a large group of British financial companies, the IG Group, opened an office in Minsk with his assistance.
On 18 March police agents from the cyber crime division and a senior officer from the Investigatory Committee searched Prakapenia's house. The police seized Prakapenia's, his spouse and mother's passports, and froze their bank accounts.
The story begins with Prakapenia going to the police to help them in another case. According to him, the police invited Viktar to help them provide evidence in a criminal case, and as he explained in a letter to his family afterwards, the investigator wanted him to confess to a crime, which he refused to do.
A few days later the investigator informed him that they were considering charging him for illegal business activities. Arguably, in 2005-2008 he and another individual Aliaksej Kamok created web sites and advertisement on the Internet without the proper state registration, a job that brought in $650,000 in illegal profits.
The IT Sector Reacts
After the news of Prakapenia's detention went public, leading figures from the IT sector in Belarus posted an open letter to Aliaksandr Lukashenka. TUT.by founder Jury Zissier, the owner of ST Group Aliaksandr Mukavozčyk, director of EPAM Sytems Belarusian department Siarhej Dzivin and other well-known businessmen were among the signatories. In the letter they asked Lukashenka not to keep Prakapenia in prison during the investigation and unfreeze part of his assets.
The signatories argued that his detention will lead foreign partners of many Belarusian IT companies halt freeze their business with Belarus, which could, in turn, lead to High Technology Park losing around 30% of its income. The amount of money the authorities will get if the case goes through court will be far less than the costs Belarus will pay for damaging its business environment image. In the letter, they state the case, “will set Belarus back for years and cause significant damage to country's investment climate”.
The True Price of Image
Viktar Prakapenia is the first “IT oligarch” ever to be detained in Belarus, though several of Belarus's wealthier businessmen from other sectors have had problems with the Belarusian authorities in the past. At the end of the 2000s and beginning of 2010s a number of major businessmen were detained in Belarus, most of them on charges of tax or duty evasion. The authorities usually released them after they gave the state a portion of what was claimed they owed.
Commenting on the detention of Viktar Šaŭcoŭ in 2011, Aliaksandr Lukashenka explained this approach to economic crimes: "If you've done damage to the state budget - put two or threefold that sum on the table and go away. Otherwise go to prison".
Most experts believe the authorities are trying to intimidate Prakapenia and wring a good chunk of money out of him. Yury Hurski, former co-owner and CEO of Viaden Media, thinks that the financial difficulties of the government force them to consider any possible means to fill the budget.
Yury Zisier, the owner of the largest Belarusian media portal TUT.by, believes that the issue can be described as the arbitrary rule of lower security officers. Looking for a reward, they can destroy whole sectors of the economy without realising the potential repercussions.
Contrary to the opinions of businessmen, the Minister of the Interior Ihar Šunievič in a comment to the dev.by IT portal said that Prakapenia's detention will not harm the investment attractiveness of Belarus. “If the guilt is clearly there, the [state's] reaction will be calm. Swindlers can live in any country”, he said.
A source working for legal department of a major IT company in Minsk told Belarus Digest that even the slightest violation of a legal procedure in Prakapenia’s case will cause major damage to the IT sector. IT outsourcing has become a famous success story for the ineffective state-run economy of Belarus. Thousands of young people study programming every year at university with hopes of joining the highest-paid group of professionals in Belarus.
The IT sector is at once both very vulnerable and mobile, which means that both investors and programmers can easily pack their bags and move to safer places like Poland if the environment gets any worse.
If someone in the government is hoping to milk the wealthy in Belarus to fill gaps in the budget, than they obviously chose the wrong sector, as the fall out from the case will have even more serious ramifications than they may well imagine.
UPDATE: In February 2016, allegations of tax evasion against Viktar Prakapienia were dismissed entirely after authorities failed to uncover any violations. He settled allegations regarding unregistered business activity without admitting any wrongdoing, and there are no other criminal or civil proceedings pending. Prakapienia said in a statement to Belarus Digest that he cooperated fully with the Belarusian authorities throughout the proceedings and has at all times conducted his business according to the highest standards of ethics and compliance.