Ukraine’s IT industry was the only sector of the country’s economy to grow during the first year of Russia’s full-scale invasion in 2022. Despite the unprecedented shocks of the Russian invasion, Ukrainian IT exports reached a record $7 billion by the end of the year, while local startups continued to attract investors. However, preliminary data for 2023 shows that this trend has now run its course. During the first nine months of 2023, Ukrainian IT exports fell by 9%. Annual figures are expected to confirm an 8% decline that would return the IT industry to its prewar status.
Ukrainian industry experts point to problems related to wartime conditions, including restrictions on military-age males leaving the country and challenges in meeting customer deadlines. They also acknowledge that other factors are contributing to the current market downturn, including an international IT recession that is reducing demand in the dominant US tech sector. With 42 percent of Ukrainian IT exports currently going to the United States, this downward trend is bad news for Ukraine.
For the past few decades, the Ukrainian IT sector has expanded in line with growing demand for IT services in the West. Ukrainian IT companies have focused on exporting engineering services to the US, EU, and other Western countries, while also seeking to attract investors from the same locations. This model worked well as long as demand for Ukrainian services continued to rise in the West, but the current recession in the Western tech industry along with stagnation in the US venture capital market are pushing Ukraine to look for new markets. The most obvious growth area is the Gulf region.
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The combined IT market of the Gulf countries is currently estimated at $108 billion. This is less than one-tenth of the US market, but it is rapidly expanding and can accommodate new players. Securing a mere one to two percent of this Gulf region IT market would allow Ukraine’s IT industry to keep growing.
What are Gulf countries looking for? Most of all, they seek trusted suppliers of high-end IT solutions at a reasonable price, which is exactly where Ukraine excels. The Ukrainian IT industry has many offices of American IT engineering companies delivering US quality products and services for competitively low prices. Ukrainian IT companies also operate in a similar time zone to Gulf region customers, making them even more appealing.
Ukraine’s flourishing startup scene is a particularly attractive feature for Gulf region businesses. While more than 500 venture capital funds operating in the Gulf region raised about $2.5 billion in capital in 2023, the local startup pipeline is not yet sufficient to absorb these funds. An attractive Ukrainian startup could be the ideal fit for smart Gulf-based investors.
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In order to increase Ukrainian penetration of Gulf markets, Ukrainian tech companies must open regional branches. Given the prominent role played by government agencies in the development of the IT sector in the Gulf region, the Ukrainian government should be looking to prioritize the digital component in bilateral dialogue, including high-level visits by officials from the Ministry of Digital Transformation.
International financial institutions and development agencies can also play a role in this process. This would help provide much needed support for the Ukrainian economy while also boosting the Western presence at a time when China is actively increasing its footprint in the Gulf region tech sector. According to the Nature Index, China’s share of Saudi Arabia’s total international research collaborations grew to 28.3 percent by 2023, exceeding that of the United States (26 percent), Germany (10.1 percent), and the United Kingdom (10.3 percent).
Assisting the Ukrainian technology industry in penetrating Gulf region markets could form part of a much bigger digital Marshall Plan for Ukraine. The foundations of Ukraine’s postwar economy are currently being laid; it is already clear that the tech sector will be one of the key engines of the country’s future economic growth. This new model will make Ukraine more transparent, accountable, and attractive for investors. It will also make the Ukrainian economy more sustainable and integrated into the global knowledge-driven supply chain.
Despite the many challenges created by Russia’s ongoing invasion, now is the right time support the evolution of the Ukrainian tech sector. This includes backing efforts to enter new foreign markets. Helping Ukrainian IT companies expand their presence in the Gulf region should be one of the priorities of the country’s digital growth strategy. This can provide a boost for Ukraine’s wartime economy and also position the IT industry for sustained growth in the years to come.
Anatoly Motkin is president of StrategEast, a non-profit organization developing the knowledge-driven economy in the Eurasian region with offices in the United States, Ukraine, Georgia, Kazakhstan, and Kyrgyzstan.
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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.
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Image: The Sun Rises Over Dubai's Skyline. December 29, 2023, (Photo by Anushka Eranga/NurPhoto)