- Gartner estimates there are over one million IT professionals in Ukraine, Belarus and Russia, with one-quarter (250,000) working for consulting or outsourcing firms.
- Major software companies in the region include EPAM Systems, which employs over 30,000 tech workers across the three countries.
- It can take decades to create a technology hub as strong as Eastern Europe's and it has become an essential digital link in the business needs of start-ups and Fortune 500 companies, but what is being called "digital geopolitics" now threatens its accomplishments.
Technology has been at the center of national security and global economic concerns for years.
U.S. President Joe Biden used his State of the Union address this week to again focus on competition with China and competitiveness in technology manufacturing. But that speech was overwhelmed by the more immediate concern of Russia's invasion of Ukraine, and there is another key link in the technology sector that the first land war in Europe since WWII has highlighted: the booming hub of tech workers in Eastern Europe.
Ukraine, Belarus and Russia – three countries now intertwined in war – have grown into essential growth areas for tech talent in a world more reliant on digital than ever before. From start-ups sourcing the developers and engineers they need to get to the next level, to already established corporations relying on software partners for digital transformation, hundreds of thousands of tech workers in the region have become critical to the global economy.
Gartner estimates there are over one million IT professionals in the three countries, with one-quarter (250,000) working for consulting or outsourcing firms. There were 200,000 Ukrainian developers in the country in 2020, according to Amsterdam-based software development outsourcing company Daxx, which says that 20% of Fortune 500 companies have their remote development teams in Ukraine.
Software vendors working on behalf of big corporations, from financials to retail, rely on the talent that the region has cultivated. Take EPAM Systems, as an example. More than 50% of its tech staff are across the three nations – over 30,000 employees. It is an example of just how quickly war can disrupt the functioning of organizations in ways impossible to imagine, with internal dissension now an issue for EPAM leadership as workers in Ukraine call for its CEO to take a much harder anti-Putin line, according to a Bloomberg report, even though it has so many workers in Russia and Belarus.
For many following the rapidly unfolding events on social media, Aleksandr Volodarsky, the Ukrainian founder and CEO of developer outsourcing company Lemon.io, has helped to make the human dimensions and tech worker dimensions of the war real, through tweets such as one in which he showed a picture of his chief marketing officer in military gear.
He had announced back in mid-February that his company was providing two months of pay in advance to employees, and he has since posted that clients are stepping up and "even though developers are mobilized, unavailable, can't work, or volunteered to help the army, they will keep paying them regular salaries."
For analysts who have covered companies like EPAM Systems associated with the rise of talent in the region, immediate concerns are with the contacts they have made and the individuals they have come to know from the ranks of company leadership and the broader tech communities in Eastern Europe, and the scope of the humanitarian crisis in the region is greater than any company or sector outlook.
"Yes our teams are sending deliverables from a f—ing parking garage in Kharkiv under heavy shelling and gunfire in the area. Amazing humans," Logan Bender, chief financial officer at a San Francisco-based software licensing company, said in a story posted to Instagram on Tuesday by venture capital meme account PrayingforExits.
Longer-term, though, there is significant risk of a ripple effect across technology and other sectors.
"We've seen a lot of Eastern European countries become hotbeds for development," said Scott Berg, software analyst at Needham. "Whether it is the right individuals or the right individuals at the right price, across all of the companies I cover, a solid third if not half have resources in that area."
"These public companies, the headline companies like EPAM, are just the tip of the iceberg," said another analyst.
The ubiquity of digital technology is intersecting with the geopolitical aspirations of countries in what Gartner now refers to as "digital geopolitics." This competition in the digital realm between countries, "is now one of the most disruptive trends," wrote David Groombridge, Gartner Research VP, and his colleagues in a report this week.
The Gartner team says executives were worried about their enterprise location strategy even before the Russia-Ukraine War, with 43% of boards of directors telling Gartner deglobalization was a major concern.
The answer isn't to pull out of the region or necessarily pull existing accounts from vendors, though this is a risk for any companies with significant talent pools in the region. Analysts say clients will be reluctant to pull work as long as operations can continue, but may be less inclined to give expanded work to companies with this geographic risk, especially when they have to take into account issues including cybersecurity, and that could limit the growth trajectory for the Eastern Europe tech hub and companies reliant on it.
For companies in the region, they are just trying to understand basic operational issues, such as how long they will access to funds to pay workers based in Russia where financial restrictions imposed by the West could limit their payroll abilities, and making sure workers have the internet access needed. And the longer the conflict goes on, the more tech firms in the region and their clients will worry about technology restrictions and implications for new product development.
"The current impacts to software development centers in Ukraine and surrounding countries have brought this into sharper focus, forcing organizations to rapidly reconsider which countries their IT services and supply chains should be sourced from," Groombridge told CNBC via email. "The answer should not be a reactive onshoring of capabilities, especially in a world where the current crisis will increase existing shortages of digital skills. Instead, executives need to navigate a complex balance of competitive advantage, geographic concentration risks, skills availability, legal and regulatory issues, and country risk factors to relocate their IT services."
There was already an acute shortage of labor in the technology sector, where on average, it can take up to 70 days to hire a skilled worker.
"The best talent is in Silicon Valley and the U.S., but the second-biggest hub is Eastern Europe," said one Wall Street analyst who has traveled throughout the region.
Developing tech talent isn't easy, and it isn't a problem as simple to fix as moving a factory from one location to another.
"The people problem takes a long time. These hubs take a long time to develop," the analyst said.
Unlike the economic hubs that have developed across the globe based on natural resource riches, precious minerals or commodities for fuel, intellectual concentration of resources doesn't happen often. Before Eastern Europe, it had been decades since a significant new software and technology talent pool had been developed.
So far, the companies most exposed are managing — building up a cash reserve in advance, relying on data centers outside the region to begin with, building redundancies into processes in the event that systems aren't functioning. But the longer the conflict persists, the more stability is at risk. The worst fears about cybersecurity and access to the technology needed to perform core tasks have not played out on a widespread basis, though there have been internet outages in Ukraine and Russian missiles targeting key infrastructure, and Russia's invasion is intensifying and expected to target more population centers.
If there is a potential silver lining, according to experts who have studied the region, while other global tech hubs such as Israel and some South American nations are growing, in the same way that European nations are committing to defense budgets that are much larger now than just a month ago, Eastern European nations such as Poland, Romania and Ukraine may see further investment and support in their economies in the future, even if Russia remains shunned by the global economy.
Volodarsky recently laid out a business plan with an end date that isn't typical for a CEO, not measured in a quarter or year, but rather, "until the end of the war."
• Keep it running with those who can work.
• Support and pay the team even if they are not available.
• Donate profits to army.
Among all the other global implications of a war that is still for many in the stun phase, one tech lesson that has the potential to be significant for both consumers and businesses is becoming clear: the global economy can't build a talent pool the size of the one that now exists in Eastern Europe quickly, but it's hyper-real now that events within a few weeks can suddenly run the risk of seriously damaging it.
—CNBC's Natasha Turak contributed to this report