IT Sector: Economic hope and political disillusionment

Olga Loiko

Summary

The year 2020 was an extremely difficult year for Belarus due to the COVID-19 pandemic and the severe political crisis. The national economy declined by 0.9%, whereas the information and communication technology (IT) sector showed certain growth. Its gross added value grew by 7.0%, which was a significant accomplishment to compare with other industries. The IT sector contributed 0.4 percentage points to GDP growth, but was unable not recuperate the overall decline.

The High Technology Park (HTP) reported record-breaking exports that reached USD 2.7 billion, a 25% increase from 2019 and almost twice as much as in 2018, when the presidential decree on digital development significantly expanded the range of activities business of HTP residents.

The second half of the year raised doubts, though, as to whether the IT industry would survive. The results of the presidential election held in August were not recognized neither in the country, nor in the West. It was the IT solutions, in particular GOLOS (“Vote”) platform, that helped gather the impressive evidence of election fraud. IT specialists who had enjoyed affectionate support of the national leadership, fell out of favor. Nevertheless, the government did not dare to destroy this uncontrollable, yet still profitmaking and fast-growing industry.

Trends:

Driver of the economy

The contribution of IT services in economic growth continued to increase in 2020 to 7.3% from 6.2% in 2019. For comparison, back in 2009, the share of the IT sector in total GDP stood at a modest 2.3%. The share of computer services in the total volume of the export of services rose from 18% in 2018 to 29% in 2020, while the industries hit by the coronavirus pandemic the most–transport, tourism and construction – were in decline.

The High Tech Park turned to be one of the key drivers of the Belarusian economy. Its output grew by 43% to BYN 7.4 billion; exports – by 25% to USD 2.735 billion. Nearly 90% of IT products and services were exported to the US and EU. The US, Cyprus, UK, Ireland and Russia were the top five importers. In terms of exports per capita, Belarus led with USD 224, the U. S. was second with USD 110, and Russia was third with USD 31.

In 2020, the High Tech Park’s share in GDP was over 4%, although the Park only employs around 1.5% of Belarus’ workforce. HTP residents increased their tax payments to the budget by more than one-third to BYN 418 million to compare with BYN 413.6 million paid by telecom companies. Only energy and alcohol traders paid more in taxes.

The HTP registered 236 new residents in 2020; 65 joined the Park in March 2021. Currently, the HTP numbers 1,021 resident companies. More than 10,000 new jobs were created in 2020, whereas public sector entities fired 43,500 employees. As of late 2020, HTP residents employed nearly 70,000 specialists, and offered new jobs in the regions. Despite the granted tax relief, income tax payments per HTP employee exceeded tax payments on national average by 250%.

The foreign direct investment in the HTP rose in 2020 by 26% to USD 331.7 million. The number of development centers of foreign corporations registered in the Park increased by 23 to a total of 107.

HTP residents’ successes were impressive. HTP residents A1QA, ITransition and SolbegSoft were put on The 2021 Global Outsourcing 100. Several listed companies (Ciklum, IBA Group, Intetics, Artezio) have R&D centers at the HTP. Belarusian women’s health application FLO, which hit the top 10 of largest profit-makers, was the most popular on App Store. Apptopia ranked it fifth in the U.S. and worldwide.

SayGames made it to the December rating of SensorTower. The Belarusian developer and publisher of mobile games ranked seventh in the world in terms of installations and sixth in terms of downloads from the App Store.

Two Belarusian companies were included in the 25th anniversary top 500 of the most dynamically developing high-tech companies in North America. iTechArt Group went up 170 positions from the previous rating. PandaDoc was rated for the first time.

Underminer of the system

Mass protests began in Belarus after the presidential election of August 9, 2020. A large number of IT sector employees were among the activists. They picketed the HTP, and owners of the largest companies signed an open letter, protesting against police brutality.

Mikita Mikado, one of the PandaDoc owners, initiated a fund to assist the law enforcers who did not want to be involved in the crackdown on protesters. In response, top managers of the PandaDoc Minsk office were detained, and the company’s bank accounts were blocked.1 As a result, the company, the head office of which is located in San Francisco, and the central development center is in Minsk, had to stop its operations in Belarus and relocated employees to Ukraine.

Two employees of EPAM, the oldest and most respected Belarusian IT company, were among the leaders of the protest. Senior Vice President Maxim Bogretsov entered the Coordination Council of the opposition. Pavel Liber, Digital Strategy & Experience Design Director, digitalized the results of the election fraud by launching GOLOS platform. Belarusians uploaded their voting ballots for the independent vote count, using GOLOS. Dozens of employees, including top managers of IT companies, were detained during protest actions across the country.

Alexander Lukashenko was outraged by this high degree and profoundness of the protest sentiment in the IT industry. “Tell me what the IT people want?” he said, “We’ll figure it out. Tell me, what do they want? I have created a paradise for them. But no, it is still not enough. They say they want power.”2 The HTP management did not speak out publicly, but clouds were gathering over the industry. BelHard CEO Igor Mamonenko said later, “According to the information I have, the closure of the HTP for political reasons was even considered.”3

Large-scale relocation and targeted sanctions

While the government continued to fight the dissidents in every possible way, Belarusians started heading towards a half-shut border. According to a survey conducted in late 2020, nearly 15% of IT professionals said they had already been working outside Belarus (for comparison, less than 4% left the country in the autumn);4 40% said they were seeking permanent residence abroad or were going on long business trips. Poland was one of the most popular options for relocation after the launch of the Poland: Business Harbour program of assistance to Belarusian IT specialists (800 people took the provided opportunity in the next two months). Ukraine set up the DIIA CITY, which is similar to the Belarusian High Tech Park. Lithuania is also among the top three hosts. EPAM, the largest employer in the industry, opened an office there, planning to hire 600 people. Wargaming took part of its business to Lithuania as well.

Around 10–20% of IT companies’ employees, including the most qualified and well-paid ones, are expected to move abroad. At the same time, owners of large IT businesses prefer not to take risks. “All those having money, about USD 20 million or more, have left the country. There are no people left in Belarus who would run businesses. Almost no one is willing to come to the country for now,” says one of the biggest IT businessmen, who has left Belarus.

In late 2020, the authorities decided to take an unpopular step: to raise taxes for individuals and legal entities. This measure was called temporary and part of the COVID-19 response, as funds were needed to compensate for the loss of budget revenues due to the pandemic. The personal income tax rate for HTP residents rose from 9% to 13%. Eighteen companies questioned in the survey said they did not expect anything in their businesses to change; 17% said their profits would reduce by more than 4%; 14% strengthened their resolve to relocate.5

Lawyer Denis Aleinikov, one of the authors of the “HTP 2.0” decree, which stimulated skyrocketing growth of the industry, stressed that, according to paragraph 1 of presidential decree No.8 of December 21, 2017 “On Digital Economy Development”, the state guaranteed to the international investment and technology community that the special legal regime granted to the High Technology Park (including tax regulations) was to be in force until January 1, 2049. “Stability of the HTP regime over the years is our core value,” he said, “We had been hammering it out for years, and sold it to foreign investors more than once. It is about reputation, which made the HTP the leading IT cluster in Eastern Europe. To raise taxes temporarily means to lose the reputation forever.”6

The European Union’s sanctions imposed in the second half of the year posed another risk to the IT sector. The EU approved on December 17 the third package of sanctions. HTP resident Synesis LLC founded by Russian natives was put on the list for providing the Belarusian authorities with a surveillance system that can search and analyze video footage and use facial recognition software. The company was accused of contributing to the suppression of civil society and the democratic opposition in Belarus. Synesis filed a lawsuit with the European Court of Justice, contesting the decision to apply sanctions.

Cold neutrality

The HTP companies, employees of which were involved in high-profile initiatives or were sentenced to administrative or criminal penalties were neither closed, nor expelled from the Park, but the attitude of the country’s leadership to the IT sector changed dramatically. Market players say the government has a strong feeling that the entire IT community is against it, and they account for almost a half of the protesters. There is no substantial evidence that there are more protesters among IT professionals than in other industries or social groups, but the state-IT relationship got frosty anyway. However, the authorities did not dare to choke off the economic growth driver.

Despite grave dissatisfaction on the part of the government, no scandals happened in the IT industry last year, except for that related to the sanctions against Synesis. Many feared that claims might be laid against cryptocurrency exchanges, which were a matter of intense debates before they were legalized in the country. It turned out that Belarusian legislation and the regulator were able to ensure compliance of the exchanges7 with the recommendations put forward by the Financial Action Task Force on Money Laundering, which checks owners of companies, their finances and the origin of their assets.

In 2020, the turnover of Belarusian crypto exchanges was around USD 4 billion per month. No claims were voiced by the regulator or law enforcers, so the country did not face reputational risks.

It took a few years to make decree No. 8 work to the fullest. Hundreds of companies were started in the HTP, and new ones are being established exclusively in the Belarusian jurisdiction without numerous branches outside the country. One of them, SayGames, is among the world’s top 10 companies in terms of game downloads. Before the decree came into force, such companies only had development offices in Belarus, while the parent companies were located elsewhere, in Cyprus, for example. SayGames is a Belarusian HTP resident, and all the hundreds of millions of dollars that are being spent on advertising, development and for other purposes go through it.

The post-election protests put an end to the plans of the IT industry to reform the national educational system. The IT University, loans for retraining in in-demand IT specialties remained ink on paper.

The state’s ideological pressure on the industry is still unrelenting. “We cannot have a whole enclave inside the country that does not depend on the national economy, with a huge revenue gap to compare with average household incomes and very indistinct from the ideological viewpoint,” House Representative Sergei Klishevich said, “We need to establish the direct link between the IT industry and state orders, which would be financed at the expense of tax credits.”8

Conclusion

Ideological pressure on the IT industry will continue, albeit with an eye to its growing importance to the economy. There are virtually no industry lobbyists in the government now. The only thing that makes the authorities refrain from killing it altogether is that the sector brings to the table over USD 2.4 billion in foreign exchange from exports, pulling up underperforming foreign trade and keeping the ruble from taking a steep dive. Other industries are much more dependent on imports, being unable to substitute the IT industry, should the latter go to wrack. Belarus will develop the knowledge-driven economy regardless of political developments.

Large-scale relocation risks will actualize in waves. The most active and in-demand professionals will continue to leave the country, if the situation does not change for the better. Determined attempts to make the industry ideologically loyal would only accelerate this process.

Belarus’ ambition to become a regional IT hub will likely be futile, although the country will look good for a while with respect to some individual indicators.