Industry Sectors | IT

Artem Afian,
managing partner at Juscutum Attorneys Association

Dmitry Gadomsky,
partner at Juscutum Attorneys Association

Just do IT

The high-tech industry in Ukraine is currently developing. It is now on the rise not least due to officials who were simply unaware of what was actually going on. It is only over recent years that the government have decided to pay attention to IT. However, such attention is hardly helpful.

There’s a term in the Anglo-Saxon legal system known as “Black Letter law”. It is used to identify areas of the law that are perfectly clear and unambiguous, with no lack grey areas of any kind. Of course, it is understood that no such areas exist in Ukrainian legislation. From time to time the legislator or the courts spit out random gibberish puzzling business or even each other.

For the legislator the hi-tech industry is particularly terra incognita. Now don’t think that  legislators still don’t have a definition for a “computer”. Somewhere in their pile of laws the “Internet” is even mentioned.

Remember how in your childhood there were these bullies who insistently proposed to play football with them? They couldn’t play football very well, but they were good at spitting between their teeth, cursing loudly and slamming an elbow in your liver when necessary. When everyone was tired of this football they would invite the bravest boys to go for a smoke behind the garages.

Something similar is happening in Ukrainian hi-tech.

Many years ago ICANN entitled a mathematician to administer Ukrainian domain space. The first nerd returned from Silicon Valley and started writing code for his former employee in a different status. Beginning with obscure words, stretched sweaters currently the hi-tech industry yields, depending on the source, between  3 and 10 percent of the country’s GDP.

During all this time not a single Ukrainian government official attempted to establish regulated prices for Internet access or minimum volumes of code production. It is because of the government’s complete unawareness of the hi-tech industry that the latter managed to thrive in its formative years. In the last couple of years the government has been eagerly offering IT a hand. However, one can hardly call it a helping hand. But we’ll get to that in a moment.


The Ministry of Silly Walks

As I said previously, there are a lot of people from IT in Parliament and the Cabinet of Ministers. This is a nice trend. Unfortunately, some of them seem to have been playing politics for too long to be speculating that we need a whole Ministry of Information Technology.

 So what’s so bad about that? Well, in short – everything. The government is a very non-efficient manager. Entrusting the regulation of the entire IT industry to clerks who work on their personal computers running a copy of Windows downloaded from a torrent site is at least scary. Only recently have legislators managed to define and distinguish software “end use” and the transfer of rights, and sensibly amend the definition of “royalty” in the Tax Code. Now one would feel somewhat uncomfortable having to inform legislators that *cough* software is migrating to the cloud and the definition of “royalty” might soon need amending again.

Now there is also a positive side of the proposal to create a Ministry. Take Israel, for example. Their government has the official position of CTO (Chief Technology Officer). This person is responsible for adopting software in government bodies. Imagine (just for the sake of the example) that Kyiv is developing its e-government based on MS SharePoint and Lviv decides to go for an open-source solution from Estonia. The CTO’s job would be to prevent a situation where one part of e-government is incompatible with another part. To sum it up: yes, a CTO in the government is definitely a good idea, but a whole Ministry – no, thank you.

Electronic commerce

Somewhere on the other side of the ocean Amazon is trying out its new drone delivery service. Meanwhile in Ukraine, which is only about a 100 years away from the US, there is a really heated discussion as to whether online stores should have physical cash registers.

But, jokes aside, this year the Ukrainian Parliament finally adopted a law on e-commerce. The text of the law and how it was being adopted is not typical for the Ukrainian legal system and that’s why it makes for a great story.

The good news: the draft was prepared by representatives of the Internet community and MPs were only responsible for lobbying its adoption. The law is written in a very interesting and lively fashion, without terms like “computer operator”. Thanks to this the law doesn’t sound funny, at least to people in the business, and that in itself is an achievement. The adoption of this law immediately moved online retail out of the shadows and into the legal field. That said, good-faith traders will not be required to additionally do anything in particular in order to benefit from the law as their business is already pretty much compliant. In other words, the law solved the legalization of online retail without creating new and more serious problems.

The bad news: the law isn’t ideal, which even its authors admit. The approval of the law involved a number of government authorities and took several years. Along the road the law parted with a lot of provisions that were easier to drop, that are endlessly discussed. For instance, the law does not mention electronic currency. The worst thing about this is that progress, of course, had to step aside and wait for yet another Ukrainian government clerk to justify his paycheck with a remark or two regarding the law.

As a result, we ended up with a good law. It might be somewhat delayed and not ideal, but we finally have it in place. Now we can take time and eliminate any remaining imperfections.


The good news: a few months ago Snapchat paid 140 million USD for a company from Odessa called Looksery. And a few months before that Oracle purchased a company with roots in Dnipropetrovsk called Maxymiser. This year, despite everything, Ukrainian hi-tech projects managed to attract long-term investments. Funds were acquired from local angel investors as well as from foreign venture funds and strategic investors.

The development of IT outsourcing logically leads to the emergence of quality startups. In the past few years we witnessed smart money being invested in startups to support them in their early stages. And there you have a story of how good programmers, persistent investors and underdeveloped legislation turned Ukraine into an attractive country to invest into hi-tech projects.

The bad news: the day before the announcement of the deal the earlier mentioned Maxymiser experienced a dawn raid by the police. Looksery is moving its entire team to the US. Some time later news broke out that the entire team of the company from Dnipropetrovsk is moving to Poland.

The cause of the bad news completely negates the achievements in the good news. Regular dawn raids on IT companies are the norm only in Ukraine. A dawn raid on any of the companies  trading on the NYSE (e.g. Luxoft) would be immediately discussed in a Bloomberg article with all the ensuing results.

In February of this year the Criminal Procedure Code was supplemented with provisions according to which servers and other computer equipment could be seized only if it carried the physical traces of a crime. If information is all that the enforcement agencies are interested in then they must simply copy it to their equipment instead of taking away the entire server rack.

However, it looks like 9 months was just not enough for police employees to scribble down the new provisions on paper and glue it into their old prints of the Criminal Procedure Code. We’re only starting to hear investigators complain about courts refusing to sanction the seizure of computer equipment.

I believe you will not be surprised if I tell you that not a single episode of computer equipment being seized in Ukraine was actually carried out with the aim of collecting evidence. This is nothing less than legalized extortion. Otherwise, we would have witnessed a series of criminal convictions which relied firmly on such evidence.

We are not the US and neither are we Israel. Not even Estonia. In our country the government still treats business as an enemy. For this reason our hi-tech industry is growing just to make it to Silicon Valley or its counterpart in Israel, Germany or neighboring Poland. I don’t have any illusions regarding government policies. That’s why I believe next year even more projects will raise money and leave Ukraine. Those who choose to remain in Ukraine will continue to grow despite everything. And I hope that next time I review the IT market in 2016 I will begin with the words “Sorry folks, my predictions were totally wrong...”