Before Russia invaded Ukraine, oil, gas, food and metals were the backbone of the country’s economy. But with critical export routes via Ukraine’s Black Sea ports cut off, Ukraine’s gross domestic product contracted by almost 30% last year, with sectors such as agriculture seeing exports fall by 24%.
However, one sector that is thriving, despite the war, is Ukraine’s information technology (IT) and fintech sector. Last year, IT was one of the few areas of the economy that demonstrated positive dynamics. Although the export of services in general for the first eight months of last year declined by 6% compared to the same period a year earlier, IT exports grew by 16% year on year, according to Ukrainian state data.
“The IT sector has proved stable, while other sectors, like agriculture and metal construction, are more vulnerable to Russian attacks,” says Igor Pertsiya, managing partner at Hypra Fund, a Kyiv-based investment firm focused on the fintech sector, which managed to raise $25m in the first month of Russia’s full-scale invasion.
“IT people can work from anywhere and in extreme conditions. Even when there are missile attacks, air raid signals, and no electricity, IT companies are still able to work, because they can easily be transferred to another place, which is not possible with the production of steel, for example,” he continues.
Last year saw seven Ukrainian fintech companies launch, according to the Ukrainian FinTech Catalog 2023 survey, bringing the total number of fintech companies in the country to 246, of which 33% operate in the international market.
IT people can work from anywhere and in extreme conditions. Even when there are missile attacks
The seven new firms include a start-up that uses artificial intelligence to help customers create long-term investment crypto portfolios; an online financial and educational simulator game for improving financial and asset management skills; an online marketplace for insurance, and an agro-finance marketplace that matches buyers of agricultural machinery (farmers, agro-farms) with dealers, banks and leasing companies.
In addition, the National Bank of Ukraine (NBU) is also spearheading several digital initiatives in the financial services space, including a draft concept for a digital currency, the e-hryvnia.
The NBU also plans to unite all systemically important banks to create a common banking network called “POWER BANKING”, which is a joint network of bank branches throughout Ukraine that can operate and provide banking services to customers even in critical situations such as a power blackout.
Ukraine’s thriving miltech sector
As well as home-grown tech talent, international names such as PayPal, Revolut and Klarna have started operating in Ukraine, says Hypra Fund. Big data analytics company Palantir, which works with the US department of defence, and Elon Musk’s SpaceX, have also opened up representative offices.
According to research conducted by Hypra Fund, despite the war, Ukraine is still the primary country, by analysed client reviews, for companies enquiring about tech development or fintech services, with Poland second, and the UK third.
The war has even given rise to a new and thriving “miltech” sector in Ukraine comprising start-ups focused on UAVs – unmanned aerial vehicles – as well as cyber security, robots and munitions. The sector is spearheaded by the Brave1 defence technology cluster, which was launched in April.
A joint initiative of the Ministry of Digital, the Ministry of Defence, the General Staff, the National Security Council, the Ministry of Strategic Industry and the Ministry of Economy, Brave1 is an entry point for co-operation in the field of Ukrainian defence tech: companies, start-ups, government, defence forces, investors, volunteer funds, and media who have joined forces for “victory through technologies”.
[the tech sector] is our competitive advantage today and the potential of quick growth
Three months after launch, the Brave1 cluster received more than 370 applications from Ukrainian defence tech innovators. More than 120 of those applications will gain access to government grants of between $5000 and $25,000.
“Dozens of projects have been launched in the defence tech sphere during the last year, which could boost and fuel the economy of Ukraine, implement collaborations and initiatives, unveil unicorns, create new workplaces during the war, and thus contribute to the victory,” says Iryna Supruniuk, communications lead at Brave1.
“Around 7000 tech workers have joined the Armed Forces or Territorial Defence ranks, gaining unique expertise during wartime. It’s our competitive advantage today and the potential of quick growth,” she says.
Most Ukrainian fintechs use their own funds to get started
Brave1, in conjunction with the Ministry of Economy, are seeking other opportunities for financing projects (investments, fundraising, grants). Currently, most of its financing comes from the Ukrainian Startup Fund, which is managed by the Ministry of Digital Affairs.
Before the Russian invasion, the fund was the largest angel investor in Ukraine, giving $6.4m to more than 250 start-ups, says Hypra Fund. However, the war meant the fund was forced to focus mostly on military tech. Since the summer, only the $35,000 grant programme has been active for “defence, restoration, and dual-purpose projects”, says Hypra Fund.
Ukraine is not short on tech talent, but according to the Ukrainian FinTech Catalog 2023 survey, most fintechs have to rely on their own money to get started.
The survey found that 66% of Ukrainian fintech companies mainly fund their operations using their own resources, with private investors contributing just 15% of funding in 2022, a decrease of three percentage points compared to 2021.
“Even before the war, the main sources of funding were self-funding and friends and family,” says Mr Pertsiya, “but we can't deny that global funding decreased. The prolonged war, high inflation after the pandemic, and anticipation of a global recession have made the business environment less attractive to investors”.
Mr Pertsiya says some overseas investment partners are still waiting to see what happens with the war in Ukraine, and how quickly it will end. “If Ukraine wins fast, in the next 12 months for example, then everything is fine, the multiples will be a lot higher, equal to Poland. That is where funds can make a lot of money. If they can risk a little bit right now, they can play this game and win more than investing in other regions.”
But for sizeable investment funds, Mr Pertsiya says there are not a lot of investment opportunities in Ukraine right now in terms of big tech companies, which are deemed to be less risky than start-ups.
Jean-Erik de Zagon, head of the Kyiv office for the European Investment Bank (EIB), says IT is definitely a growing sector requiring more attention in Ukraine. He points to IT projects like Ukraine’s Diia mobile app, launched in 2020, which brings together identity cards, passports, licences, vaccination records, registrations, insurance, health reimbursements and social benefits.
“All of our documents are digitalised so we don’t need to carry anything with us, just our phone,” explains Mr Pertsiya. “A number of African countries are looking at implementing a similar app, as are some countries in Europe.”
Another Ukrainian digitalisation project that has garnered a lot of attention is DREAM, which stands for Digital Reconstruction Ecosystem for Accountable Management. “The idea is very simple: that the whole process of reconstruction should be digital,” explains Andrii Borovyk, executive director of Transparency International, Ukraine.
More on reconstructing Ukraine
“Any project which is implemented for the reconstruction needs of Ukraine should be within this online system, where you can see the initiation of a project, which is a project concept, till the very end of actual implementation,” he says. “It will help the government to manage the reconstruction, but at the same time, it gives our foreign partners, NGOs, government institutions, and compliance people the opportunity to follow what is going on with a project. This can be a very powerful tool for aiding transparency and accountability for the whole construction process.”
DREAM was launched at the Ukraine Recovery Conference in London in June. As of July, more than 5000 projects and project ideas are already on the system, covering 24 regional restoration services and more than 500 municipalities. The system will be scaled during 2024.
“It’s impressive that, during a war, Ukraine is able to develop a product like [DREAM],” says Mr de Zagon. “Western and central European countries are not even at war and we don't develop many of these kinds of projects. When you can access data online and see what happened to a reconstruction project, that will also ensure much higher transparency, strengthen the state and civil society.
“If NGOs can check what's happened to money in a municipality, that makes a huge difference. And if you can check on your phone whether the money that was supposed to go to a kindergarten has been spent, that makes democracy strong.”
Mr de Zagon says the EIB wants to support the IT sector in Ukraine and is assessing whether to participate in a private equity fund for early-stage investment in Ukraine’s IT sector. “The IT business should be the future of Ukraine. It’s the only one that has been able to increase exports during the war, but it is also a pillar for stronger democracy in the country,” he says.
