The Silicon Valley Boom in Eastern Europe Amid the Russian War

Technology has been at the center of national security and global economic concerns for years.

US President Joe Biden used his State of the Union address this week to once again focus on competition with China and competitiveness in tech manufacturing. But that discourse has been overwhelmed by the more immediate concern of Russia’s invasion of Ukraine, and there’s another key nexus in the tech sector that Europe’s first ground war since World War II has set. in focus: the burgeoning hub of tech workers in Eastern Europe.

Ukraine, Belarus and Russia – three countries now embroiled in war – have become key growth areas for tech talent in a world more digitally dependent than ever. From start-ups looking for the developers and engineers they need to scale to the next level, to already established companies relying on software partners for digital transformation, hundreds of thousands of tech workers in the region have become essential to the global economy.

Gartner estimates that there are more than one million IT professionals in the three countries, with a quarter (250,000) working for consulting or outsourcing companies. There were 200,000 Ukrainian developers in the country in 2020, according to Amsterdam-based software development outsourcing firm Daxx, which says 20% of Fortune 500 companies have their development teams remotely in Ukraine.

Software companies working for large corporations, from finance to retail, rely on the talent the region has cultivated. Take the example of EPAM Systems. More than 50% of its technical staff is located in the three countries, or more than 30,000 employees. It is an example of how quickly war can disrupt the functioning of organizations in ways impossible to imagine, with internal divisiveness now an issue for EPAM leadership as Ukrainian workers call on its CEO to adopt a much tougher anti-Putin line, according to a Bloomberg report, even though he has so many workers in Russia and Belarus.

For many after the rapidly unfolding events on social media, Aleksandr Volodarsky, the Ukrainian founder and CEO of developer outsourcing company Lemon.io, helped make the human dimensions and the dimensions of tech workers real. of the war, through tweets such as the one in which he showed a photo of his chief marketing officer in military gear.

He announced in mid-February that his company was paying employees two months in advance, and he has since posted that customers are stepping up and “even if developers are mobilized, unavailable, unable to work or volunteered to help the army, they will continue to pay them regular salaries.”

For analysts who have covered companies like EPAM Systems associated with the rise of talent in the region, the immediate concerns are the contacts they have made and the people they have come to know in the executive ranks. of the business and wider technology communities in Eastern Europe. , and the scale of the humanitarian crisis in the region is greater than any company or industry perspective.

“Yes, our teams are sending deliverables from a parking lot in Kharkiv under heavy shelling and gunfire in the area. Incredible humans,” said Logan Bender, chief financial officer of a San Francisco-based software licensing company. , in an Instagram post on Tuesday by venture capital meme account PrayingforExits.

In the longer term, however, there is a significant risk of a ripple effect on technology and other sectors.

“We’ve seen a lot of Eastern European countries become hotbeds of development,” said Scott Berg, software analyst at Needham. “Whether it’s the right people or the right people at the right price, in all the companies I cover, a good third or even half have resources in this area.”

“These public companies, the headliners like EPAM, are only the tip of the iceberg,” said another analyst.

The ubiquity of digital technology intersects with the geopolitical aspirations of countries in what Gartner has come to call “digital geopolitics”. This digital competition between countries “is now one of the most disruptive trends,” wrote David Groombridge, vice president of Gartner Research, and his colleagues in a report this week.

The Gartner team says executives were concerned about their company’s location strategy even before the Russian-Ukrainian war, with 43% of boards telling Gartner that deglobalization was a top concern.

The answer is not to pull out of the region or necessarily remove existing supplier accounts, although this is a risk for any company with large talent pools in the region. Analysts say customers will be reluctant to take work away as long as operations can continue, but may be less willing to give more work to companies with this geographic risk, especially when they have to take into account take into account issues such as cybersecurity, which could limit growth. trajectory for the Eastern European technology hub and the companies that depend on it.

For businesses in the region, they are simply trying to understand basic operational issues, such as how long they will have access to funds to pay workers based in Russia where financial restrictions imposed by the West may limit their ability to payroll, and ensure that workers have the necessary internet access. And the longer the conflict lasts, the more the region’s tech companies and their customers will worry about technology restrictions and the implications for new product development.

“The current impacts on software development centers in Ukraine and neighboring countries have highlighted this, forcing organizations to quickly reconsider which countries their IT services and supply chains should come from,” Groombridge told CNBC via email. “The answer should not be reactive offshoring of capabilities, especially in a world where the current crisis will increase existing shortages of digital skills. Instead, leaders must navigate a complex balance between competitive advantage, concentration risks geographic, availability of skills, legal aspects and regulatory issues and country risk factors for outsourcing their IT services.”

There was already a severe labor shortage in the tech sector, where on average it takes up to 70 days to hire a skilled worker.

“The best talent is in Silicon Valley and the United States, but the second biggest hub is Eastern Europe,” said a Wall Street analyst who has traveled throughout the region.

Developing tech talent isn’t easy, and it’s not as easy a problem to solve as moving a factory from one location to another.

“The people problem takes a long time. These hubs take a long time to grow,” the analyst said.

Unlike economic centers that have developed around the world on the basis of natural resource wealth, precious minerals or raw materials for fuel, intellectual concentration of resources does not often occur. Prior to Eastern Europe, it had been decades since a significant new pool of software and technology talent had been developed.

So far, most-at-risk companies are managing to build a cash reserve in advance, relying on data centers outside the region to begin with, creating redundancies in processes just in case. the systems would not work. But the longer the conflict lasts, the more stability is threatened. The worst fears about cybersecurity and access to the technology needed to perform essential tasks have not spread, although there have been internet blackouts in Ukraine and Russian missiles targeting key infrastructure, and the The Russian invasion is intensifying and is expected to target more people. centers.

If there is a potential silver lining, according to experts who have studied the region, as other global tech hubs like Israel and some South American countries grow, the same way European nations grow commit to much larger defense budgets now than just a month ago, Eastern European countries such as Poland, Romania and Ukraine could see more investment and support in their economies in the future, even if Russia remains shunned by the global economy.

Volodarsky recently presented a business plan with an end date that is not typical for a CEO, not measured in a quarter or a year, but rather “until the end of the war”.

• Make it work with those who can work.
• Support and pay the team even if they are unavailable.
• Donate profits to the military.

Amidst all the other global implications of a war that is still for many in the stun phase, one technological lesson that has the potential to be important for both consumers and businesses becomes clear: the global economy will not may not build up a talent pool the size of what now exists in Eastern Europe quickly, but it’s hyper-real now that events within weeks can suddenly risk damaging it badly.

—CNBC’s Natasha Turak contributed to this report