An IT Solution to Belarusian Economic Malaise

The Belarusian IT industry has had a highly successful year. In 2013, the sector achieved a breakthrough in cooperation with public educational establishments. The IT companies hosted 7 new branches of technical universities, while the decision to found an IT University became a milestone in 2013.

In the first three quarters of 2013 the high tech park has shown a strong 155% growth, with its exports totaling $307m. Seven Belarusian companies entered the global "Software 500" rating, and the country became third in the former Soviet Union by the volume of its IT market.

The Dawn of High Tech in Belarus

For all the grave aspects of a Soviet legacy, Belarus inherited from the USSR a sound system of secondary and higher technical education. Founded in 1964, the Belarusian State University of Informatics and Radioelectronics became an important hub for the Soviet IT industry. It helped to secure a regional head start for Belarus at the dawn of the high tech era.

The high tech revolution has tilted the balance in the three core components of business – capital, infrastructure and workforce – heavily to the advantage of the latter. While lacking capital and a modern infrastructure, in the late 1980s Belarus boasted around 10,000 students of informatics and radioelectronics, ready to drive its new economy.

Doing Things Right: High Technology Park

The Belarusian authorities first turned their attention to the IT sector in 2004. However, President Lukashenka initially saw the value of IT development “mainly in securing the transformation of the traditional branches of the [Belarusian] economy”, citing industry and agriculture as being the most important sectors for the young nation.

After an intense public debate, including some warranted scepticism, the President issued decree № 12 “On the High Technology Park”. Its first four residents joined the park in 2006. Conceived as a virtual entity – a special legal and tax regime for high tech companies, the technology park de facto covered the territory of the whole country.

The park has provided its residents two major advantages: a preferential tax regime and a stable regulatory environment. The companies registered in the technology park pay a fixed income tax of 9% and receive exemptions from corporate and capital gains taxes, VAT and custom duties.

The rules of doing business in the park have remained unchanged since 2005, which is unique in the notoriously fluid Belarusian business environment.

Competing with India, not Israel

Contrary to the narrow vision of the Belarusian leader, the park has established itself as a major export-oriented project. In the first three quarters of 2013, the domestic market revenue of the park residents stood at $40m, making up only 12% of the overall revenue of the park. The park has shown a healthy 155% annual revenue growth.

As of 1 October, its residents employed over 16,000 people, which is 8% more than a year ago. In September 2012, the technology park celebrated achieving $1bn in total revenue since its founding.

High Technology Park Growth

Year
Yearly export, $
No of resident companies
No of employees
2009
110m
80
7,259
2010
161m
94
9,421
2011
215m
106
11,863
2012
331m
118
14,500

However, the biggest successes of Belarusian companies constitutes outsourcing, typically seen as a less lucrative segment of the IT market. This means that the residents of the park largely act as foreign sub-contractors for their Western counterparts, rather than as full-cycle IT product developers.

The outsourcing segment has traditionally been the domain of the developing world, led by India with its cheap and abundant labour force. In the competition for outsourcing contracts, the park touts Belarus’ geographical and cultural proximity to the West and the quality of its services as its main competitive advantages.

When it comes to outsourcing, the flagship companies of the Belarusian IT already have some bragging rights. Four residents of the park made it to the prestigious “The 2013 Global Outsourcing 100” list, with the national leader, EPAM Systems, breaking into top 30. In 2012, the analytical company Gartner Inc. placed Belarus among the top 30 countries in the world in providing offshore software development services.

As for the segment of independent IT product development, the successes of Belarusian companies are rather modest. To compete with global leaders in this segment, such as Israel, the country lacks not only the managerial competencies and organisational capacity of its IT sector, but also infrastructure, capital and closer integration with the West.

Wargaming.net stands as a notable exception. The company has developed the award-winning online game World of Tanks, which has over 60 million registered players.

Flies in the IT Ointment

Despite the generally positive outlook, two types of risks hold the Belarusian IT sector back.

The shrinking pool of IT workers presents the gravest challenge to the industry. Belarus is now simultaneously experiencing the ebb of university students due to the “demographic gap” of the early 1990s and a steady outflow of high-class IT specialists.

In 2012, in the attempt to fill the void, the top three Minsk technical universities increased their student intakes for IT-related programmes of study to 2,307 freshmen, up from just 1,616 the previous year. However, evidence shows that the increased enrolment comes at a cost of declining professional qualifications.

The general investment climate and the image of the country constitute the second barrier. While improving its position in the industry-specific ratings, Belarus consistently trails in the most common international indices used to judge the country’s investment appeal. For instance, in the World Bank’s  “Doing Business 2013” Belarus occupies 151th place on trading across borders and 129th on paying taxes and in the 2013 Index of Economic Freedom it is close to the bottom at the 154th place.

Besides, a number of the so-called “problems of growths” of the Belarusian IT sector comprise insufficient managerial and marketing experience, underdeveloped corporate culture and low international brand name recognition.

Bright Prospects Ahead

As of the late 2013, IT stands as the most attractive branch of the Belarusian service sector. The latest available statistics returned an average salary of $1,400 in the IT branch, more than twice as high as the country average. IT remains the most dynamic branch, dominating the Belarusian startup scene in the years 2012 and 2013.

If the current rate of the IT sector growth continues, the branch will achieve the ambitious goal of $1bn in yearly revenue well before the end of the decade. If that comes true, Belarus will abandon the industrial rubble of the Soviet era for a share of the global high tech pie.

Alexander Martynau

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