Ukraine

1
Ukraine

• IT Investment Potential

Vince Anderson Jason Artymovich Betsy
Oatley Maurice OSteen
2
Overview

• Background
• Geography
• People
• History
• Government
• Economy
• IT Communications
• Business Climate
• Investment Recommendations

3
Geography
4
Geography
5
People

• Ukraine
• Population 47,425,000 (2004)
• Median age
• 38.2 years (2005 est.)
• male 34.9 years
• female 41.2 years
• Wealth Distribution (1999)
• lowest 10 3.7
• highest 10 23.2
• Below Poverty Line 29
• 5,430 Average Income

• Belarus
• Population 10,300,000 (2005)
• Median age
• 37.0 years (2005 est.)
• male 34.3 years
• female 39.7 years
• Wealth Distribution (1998)
• lowest 10 5.1
• highest 10 20.0
• Below Poverty Line 27.1

World - 27.6 U.S.A - 36.3
6
Language

• Official
• Ukrainian
• Spoken
• Ukrainian 55
• Russian 45
• Surzhyk
• Considered native
• Ukrainian 67.5
• Russian 29.6
• English speaking ability is rare

7
Education

• 99.7 Literacy (over 15 read write)
• 20,900 schools
• compulsory education ages 7-17
• 1246 Vocational schools
• 650,000 students
• 11 Universities
• 1.5 million students
• 15,000 IT graduates per year
• Very educated population

8
History

• Former member of USSR
• Chernobyl accident 1986
• Gained independence August 24, 1991
• Commonwealth of Independent States (CIS)
• Peaceful Orange Revolution in 2004
• forced overturn of rigged presidential election

9
Government

• Democratic republic with three branches
• Executive, legislative and judicial
• 2004 Presidential election had a recount due to
  evidence of election fraud
• Yushchenko dioxin poisoning during campaign
• Viktor Yushchenko won election recount
• Pro-western candidate

10
Government

• Second round recount results

11
Government

• National reform agenda includes
• Join WTO, NATO, EU
• Technical criteria fulfilled to receive EU market
  economy status
• Encourage economic development and domestic
  investment
• Create 5 million jobs
• Increase access to business credit
• Develop internal technology
• Decrease income taxes

12
Economic Overview

• Since independence in 1991
• Loose monetary policies led to hyperinflation in
  1993
• 1999 output 40 of pre-independence levels
• Framework created for privatization and new tax
  code
• Recent economic growth supported by
• strong domestic demand
• low inflation
• solid consumer and investor confidence
• Growth was 9.3 in 2003 and 12 in 2004

13
EconomyEconomic data perspective

• major Ukrainian trading partners
• All data from 2004

14
Foreign Trade - Exports

• 32.9 billion in 2004
• Metals, fuel petroleum products, chemicals,
  machinery transport equipment, food products

15
Foreign Trade - Imports

• 31.5 billion in 2004
• energy, machinery, chemicals equipment

16
Communications Diffusion

• Ukraine's teledensity remains at comparatively
  low levels
• Land wireline telephone system
• Wireline phones 12.7 million (2004)
• Belarus has 3 million
• Wireline teledensity is approximately 18
• United States is roughly 65
• Belarus is about 32
• 1991 telephone system was antiquated,
  inefficient, and in disrepair
• More than 3.5 million applications for telephones
  could not be satisfied
• Fees for new line installation are 1,000 and
  may require long waits
• Only 30 of Ukraine's networks today are digital
• Mobile cellular telephone system
• Mobile phones 11.1 million (2004)
• Belarus 1.1 million
• Mobile teledensity penetration is about 1
• Belarus is similar

17
Internet Diffusion

• Internet usage is held back by bad phone system,
  high fees for access and limited PC ownership
• Internet users
• Most still use dial-up access
• 120,000 (1999)
• 2.9 million (2004)
• Belarus 1.1 million
• Few main ISPs with many layers of resellers
• 2.670 ISPs (2003)
• Belarus 5,308

18
Internet Business Opportunities

• Ukraine ranks near the bottom worldwide in terms
  of Internet-based opportunities
• Economist Intelligence Unit's e-readiness ratings
  for 2003 assess a number of factors
• Quality of the infrastructure for IT
• Ambition of government initiatives
• Degree to which the Internet creates real
  commercial efficiencies
• UKR placed 54th out of the 60 largest economies
• UKR came in eighth out of ten E. Eur. countries
  ahead of only Kazakhstan and Azerbaijan

19
Assets for IT Development

• South-eastern European location
• Near universal literacy rate
• History as technology center for region
• 23,000 certified IT professionals
• Economy improving since low in 1990s
• Recently high GDP growth

20
IT Industry
 

• Outputs software, computers, servers
• Competition India, Israel, Russia, China,
  Belarus
• Client Countries USA, Canada, Israel, Germany,
  France, Sweden, Denmark, Norway, Switzerland,
  Italy, and Spain

21
IT Talent in Ukraine

• Skilled Labor Force
• History of being high-tech center of region
• Ukrainian professionals are known for their
  technical and engineering skills
• Labor cost quality are among the best in Europe
• Less-skilled Management
• Ukrainians lack managerial and business skills
  due to lack of free-market experience
• International-level business schools offer MBAs
  now in Kyiv
• Ukraine has the skilled workers, but would
  benefit from more-skilled managers helping them
  run and grow the businesses profitably

22
Advice for Investing in Ukraine

• US Embassy provides the following advice for
  companies doing business in Ukraine
• Dispute settlement in Ukraine can prove
  difficult, expensive, time-consuming, and unfair
  to investors
• Use competent legal counsel before and while
  doing business in Ukraine
• Take great care when choosing distribution and
  marketing partners, and when establishing joint
  ventures
• Absentee investing does not work well so plan to
  be on-site and directly involved to minimize risk

23
IT Investments to Consider

• Three areas stand out for IT investment
• Overcome poor telecom infrastructure
  ?Satellite-based ISP using WiFi
• Maximize existing computer resources ?Computer
  systems integration services
• Retain native programming talent ?Consolidate
  existing small software developers to create
  larger scale off-shore software production

24
Option 1 Satellite ISP

• Satellite ISP with WiFi
• Why it is attractive
• Huge under-served corporate and private internet
  markets
• Works without wires
• Better service for lower cost than dialup
• Service already works elsewhere in region in
  Europe

25
Evaluation of Satellite ISP

• Satellite ISP with WiFi
• Buyers local SME and consumers
• Risk-Reward rating High - High
• Factors to consider
• Foreign firms are restricted by stringent
  regulations
• Consequently, only Ukrainian private or state
  companies are entitled to apply for operational
  licenses.
• Communication service providers cannot obtain
  wireless license without establishing some type
  of cooperation with Ukrtelecom in the form of a
  9 ownership share
• Regulations would make this difficult to get
  started

26
Option 2 Systems Integration

• Acquire dominant local PC manufacturers to
  develop and market systems integration services
• Why it is attractive
• Computing landscape is mix of old and new
  hardware, software and OS
• Natural extension of existing hardware business
• Can serve current customers now that wont buy
  new HW

27
Computer Systems Integration

• Systems Integration services to provide new
  services to existing customer base
• Buyers local SME with existing computers
• Risk-Reward Medium - High
• Most requested IT services in Ukraine now
• System integration services
• PC repair and upgrades to allow WiFi
• Design and deploy of computer networks
• Upgrading software and OS
• Investors can provide hands-on operations
  management and business planning expertise

28
Option 3 Software Development

• Offshore software development partners
  http//www.wtec.org/loyola/bid/bidukr-eng.html
• Miratech http//www.miratech-pro.com.ua/
• Softline http//www.softline.kiev.ua/control/en
  /index/flash
• Softserve http//www.softservecom.com/
• Infopulse http//www.infopulse.com.ua/
• Tessart http//www.tessart.kiev.ua/
• TelesensKSCL http//www.telesenskscl.com.ua/en/

• Consolidate several leading local software
  companies and develop offshore software service
• Why it is attractive
• UKR is low cost site for high quality software
  development
• Skilled workers in place
• 800 software production companies
• Growing interest among Ukrainian computer
  companies to organize software production centers
  
• Location is attractive due to time zone and links
  to Russian market

29
Software Development

• Consolidate some leading local software companies
  freelance programmers to specialize in software
  development
• Buyers internal and external developers
• Risk Reward Medium Medium
• Factors supporting it
• Offshore software development is growing
• Software in UKR growing at over 18 per year
• Ukraine is well-suited for this within Europe
• Ukrainian software development industry offers
  good opportunities for U.S. firms willing to
  operate in this business environment

30
Attractiveness for Foreign Investment

• Foreign investors look for the following when
  evaluating the attractiveness of a country for
  FDI
• Stability
• a country with an unstable legal system is not
  normally viewed as an attractive destination for
  investment
• Predictability
• Predictability flows from legal stability
• Enforceability
• Investors want laws enforced in a fair and timely
  manner
• Transparency
• Investors want incorruptible courts, regulators
  and government officials
• Ukraine does not rank high in all of these areas

31
Business and Legal Environment

• General business risk in Ukraine is relatively
  high
• Summary of challenges
• Political system is unpredictable and ineffective
  
• Commitment to a liberal market economy is weak
• Privatization is stalled and at risk of failing
• Tax system is unclear and unpredictable
• Effectiveness of the bureaucracy is poor
• Discrimination against foreign businesses is
  common
• Red tape remains pervasive
• Vested interests distort commercial
  administrative systems
• Organized crime is a persistent problem

32
Required Actions in Ukraine

• To improve business climate, Ukraine needs to
• Make landmark judicial reform a top priority and
  set a legal framework for honoring private
  property rights and contractual obligations
• Earn Market Economy Status
• Join the WTO which will provide some additional
  impetus to reforms that target anti-competitive
  behavior
• These steps would significantly improve Ukraine's
  overall image as a stable investment market and
  attract more FDI

33
Ukraine Investment Potential

• Questions?