Kharkiv, Ukraine's No. 2 city, is be­com­ing busi­ness pow­er­house

Kyiv Post Legal Quarterly - - Contents - BY MATTHEW KUPFER KUPFER@KYIVPOST.COM

KHARKIV, Ukraine — In 2014, the sit­u­a­tion in Ukraine’s east was more than tense. Fol­low­ing the Euro­maidan Rev­o­lu­tion that drove Krem­lin-backed Pres­i­dent Vik­tor Yanukovych from power on Feb. 22, 2014, Rus­sia re­tal­i­ated by in­sti­gat­ing protests in many parts of Ukraine af­ter in­vad­ing the Crimean penin­sula.

In Kharkiv, Ukraine’s sec­ond largest city with 1.4 mil­lion peo­ple about 480 kilo­me­ters east of Kyiv, pro­test­ers — many likely bused in from across the Rus­sian border — oc­cu­pied the re­gional state ad­min­is­tra­tion build­ing and, on April 8, "de­clared in­de­pen­dence" from Ukraine. For Kharkiv’s grow­ing IT in­dus­try, the

tension meant dan­ger. Men in black masks ap­peared at IT com­pa­nies to de­mand ac­cess to data and servers. Some were clearly mem­bers of the Se­cu­rity Ser­vice of Ukraine car­ry­ing out in­ves­ti­ga­tions. But, in many cases, it was un­clear who was be­hind the black masks.

“At that point, it was very im­por­tant for com­pa­nies to form a coali­tion to pro­tect them­selves from (th­ese) data and server is­sues and help IT busi­nesses re­main strong,” says IT pro­fes­sional Sofia Be­lenkova.

Later that year, the Kharkiv IT Clus­ter was born. It started as an or­ga­ni­za­tion to pro­vide le­gal sup­port to com­pa­nies fac­ing data re­quests, says Be­lenkova, who now serves as its ex­ec­u­tive di­rec­tor. Next, it took to lob­by­ing em­bassies to re­store Kharkiv’s good name af­ter the un­rest.

Four years later, Kharkiv is a dif­fer­ent city — peace­ful, bustling, and firmly Ukrainian. And the IT Clus­ter has be­come one of many or­ga­ni­za­tions and com­pa­nies work­ing to drive the city for­ward. In tech­nol­ogy, in­dus­try, agri­cul­ture, and man­u­fac­ture, th­ese com­pa­nies are build­ing a dif­fer­ent rep­u­ta­tion for Kharkiv: that of a busi­ness hotspot.

City of in­dus­try and ed­u­ca­tion

The mod­ern city of Kharkiv grew from a mil­i­tary fortress built in the 1650s. How­ever, it soon re­ori­ented it­self to­ward some­thing that would more pow­er­fully de­fine its fu­ture: ed­u­ca­tion.

In 1804, lo­cal ed­u­ca­tional re­former Va­syl Karazin founded Kharkiv Uni­ver­sity (to­day Karazin Na­tional Uni­ver­sity of Kharkiv). The uni­ver­sity, from its start, was in­ter­na­tion­ally-ori­ented; it taught in the lan­guages of Europe, hired in­struc­tors from abroad, and of­ten in­tro­duced stu­dents to Western ideas. That strong ed­u­ca­tional foun­da­tion came in handy. Dur­ing the 19th cen­tury, Kharkiv grew into an in­dus­trial pow­er­house. Sup­plied with raw ma­te­ri­als from Ukraine’s Don­bas re­gion, the city rapidly de­vel­oped its en­gi­neer­ing, met­al­work, trans­porta­tion, light in­dus­try, and agri­cul­tural sec­tors. Its pop­u­la­tion ex­ploded.

Through­out the Soviet pe­riod, Kharkiv con­tin­ued to be a cen­ter of in­dus­try, pro­duc­ing ev­ery­thing from tanks and planes to trac­tors and mo­tors. It was among the top in­dus­trial and tech­no­log­i­cal cities, and re­garded by many as the Soviet Union's third city af­ter Moscow and Len­ingrad (to­day’s St. Peters­burg).

The col­lapse of the Soviet Union in 1991 de­liv­ered a ma­jor blow to the lo­cal econ­omy, ren­der­ing the pre­vi­ous mod­els of in­dus­trial pro­duc­tion largely ob­so­lete. But in­dus­try chugs on in Kharkiv.

Trac­tor fac­tor

One such his­tor­i­cal en­ter­prise adapt­ing to new eco­nomic re­al­i­ties is the Kharkiv Trac­tor Plant. Founded in 1930, the fac­tory pro­duced 50,000 trac­tors a year at its peak. Its ma­chines could be found work­ing fields across the Soviet Union and in dozens of coun­tries around the globe.

Since its pri­va­ti­za­tion in 1995, how­ever, things have changed.

Now, 2,000 the trac­tors plant an­nu­ally, pro­duces and a max­i­mum its di­rec­tor, of An­driy Ko­val, is work­ing to de­velop the fac­tory in ac­cor­dance with mar­ket con­di­tions, not the Soviet five-year plan.

If the Kharkiv Trac­tor Plant was highly mod­ern in the 1930s, to­day it has fallen be­hind ma­jor in­ter­na­tional brands like John Deere and Claas. Much of its equip­ment still dates back to the mid-soviet pe­riod. And while the Ukrainian mar­ket wants trac­tors boast­ing 300 to 500 horse­power, the plant only pro­duces trac­tors of 180–250 horse­power.

As a re­sult, the Kharkiv plant now fills a spe­cific niche. Its pri­mary clients are agri­cul­tural pro­duc­ers with be­tween 400 and 2,000 hectares of land. And be­yond its tra­di­tional post-soviet mar­ket, it sells to the de­vel­op­ing world: South Amer­ica, Africa, and even China.

It has also es­chewed most of the ex­pen­sive elec­tron­ics com­mon in many trac­tors to­day. Ko­val com­pares his plant’s trac­tor to a Land Rover De­fender.

“It’s a sim­ple, un­der­stand­able ma­chine from the point of view of us­age and re­pair,” he says. “Com­pared to the most ex­pen­sive im­port, our trac­tor will cover 80 per­cent of the func­tional tasks, and we pro­vide it to the client at a price that is three times lower.”

The plant is also work­ing to make im­prove­ments. Among its cur­rent projects are a new trans­mis­sion, cabin, elec­tronic con­trol sys­tem, and hy­drosys­tems for its trac­tors.

Over­all, Ko­val says the plant is try­ing to com­bat the im­age of the old Soviet trac­tor and in­cor­po­rate user feed­back into its prod­uct.

“I beat this into the head of ev­ery em­ployee,” he says. “Any changes should bring ben­e­fit to the client.”

New fron­tiers

If call­ing in­dus­trial card, IT out­put may was eas­ily Kharkiv’s be its new old one. The city cur­rently boasts over 500 IT com­pa­nies, ac­cord­ing to the IT Clus­ter’s Be­lenkova.

And much like the Kharkiv Trac­tor Plant, Ukrainian IT is find­ing its own niche in the global mar­ket.

Take NIX So­lu­tions, Kharkiv’s largest IT firm and a lo­cal suc­cess story. Founded in 1994 by three stu­dent friends, NIX ini­tially helped com­pa­nies and or­ga­ni­za­tions get on­line, in­stall an­tivirus pro­grams, and set up ac­count­ing soft­ware.

With time, how­ever, the re­quests got more com­pli­cated, and the com­pany be­gan de­vel­op­ing cus­tom soft­ware. Its client base also ex­panded “or­gan­i­cally,” with old clients bring­ing new ones, says Alexei Niko­laev, se­nior vice-pres­i­dent for cor­po­rate clients.

“We went from de­vel­op­ing soft­ware to an en­tire spec­trum of ser­vices: qual­ity con­trol, ser­vic­ing servers, sup­port, bug fix­ing, ev­ery­thing we could,” he says. “And, since then, we’ve just added new tech­ni­cal plat­forms.”

To­day, NIX has 1,500 em­ploy­ees in a hip, re­laxed of­fice that would not be out of place in Sil­i­con Val­ley. But its spe­cial­iza­tion is dis­tinctly Ukrainian: out­sourc­ing.

This ap­proach is as ef­fec­tive as it is straight­for­ward. Many of NIX So­lu­tions’ clients are based on the East Coast of the United States. Of­ten they have their own IT spe­cial­ists, but need to find a large quan­tity of highly qual­i­fied spe­cial­ists to de­velop their prod­uct or ser­vice.

That would be ex­tremely ex­pen­sive and dif­fi­cult in the U.S., so the clients turn to NIX. Not only do its spe­cial­ists have the re­quired skills, but the com­pany it­self boasts sig­nif­i­cant ex­pe­ri­ence or­ga­niz­ing large projects and in­te­grat­ing its em­ploy­ees into the client’s team. Of­ten, this can hap­pen with­out even a sin­gle in-per­son meet­ing.

“We’re the clas­sic ‘guys to go to’ for th­ese com­pa­nies,” says Niko­laev. “They come to us with their prod­uct vi­sion and we help them get a team and de­velop the project in ac­cor­dance with their de­mands and needs.”

That Kharkiv should be an IT and out­sourc­ing hotspot is hardly sur­pris­ing. The city hosts five tech­ni­cal uni­ver­si­ties, five IT tech­ni­cal col­leges and an ar­ray of other tech-fo­cused ed­u­ca­tion pro­grams. And lo­cal IT com­pa­nies can of­fer work at a lower price than ones in the West.

The out­sourc­ing ar­range­ment is also

ben­e­fi­cial to the Ukrainian IT com­pa­nies. “Ser­vices that big com­pa­nies in Europe talk about are (ac­tu­ally) out­sourced to Kharkiv,” Be­lenkova says. “From our side, hav­ing a for­eign part­ner in­creases trust and we can at­tract more com­pli­cated and big­ger projects.”

Nestlé’s in­vest­ment

But not all busi­ness in Kharkiv is lo­cal. Even multi­na­tion­als are find­ing in­vest­ment projects in the city. The best ex­am­ple of this mar­riage of Ukrainian and in­ter­na­tional is Nestlé. In April 2018, the Switzer­land-based food and bev­er­age com­pany an­nounced that it would in­vest Hr 700 mil­lion ($26.8 mil­lion) into mod­ern­iz­ing the Kharkiv fac­tory where it pro­duces Miv­ina, a pop­u­lar Ukrainian in­stant noo­dle brand. Launched in 1994 by Viet­namese busi­ness­man Pham Nhat Vuong, Miv­ina be­came a run­away hit that helped make its cre­ator the wealth­i­est man in his home coun­try. The in­ex­pen­sive, tasty in­stant noo­dles have taken on an al­most iconic sta­tus in Ukraine. In 2010, Nestlé pur­chased the Miv­ina la­bel. Its lat­est in­vest­ment in the brand will al­low the com­pany to in­crease the qual­ity of the prod­uct, de­crease the amount of oil used to pro­duce the noo­dles, in­crease the brand’s com­pet­i­tive­ness, and im­prove work­ing con­di­tions at the fac­tory, ac­cord­ing to Ans­gar Borne­mann, mar­ket head for Ukraine and Moldova. In the next two or three years, the com­pany is also plan­ning to launch “in­no­va­tions” — and not “just an­other fla­vor, but us­ing dif­fer­ent raw ma­te­ri­als and com­ing up with dif­fer­ent kinds of prod­ucts,” Borne­mann says. But un­til they launch, those new prod­ucts will re­main a se­cret, he says.

Chal­lenges

For to ploy­ees, say en­trepreneurs, busi­nesses all the there ad­van­tages — are among cor­po­ra­tions, still that many them Kharkiv chal­lenges, ed­u­ca­tion- and of­fers emal broad short­falls, un­aware­ness en­trenched among cor­rup­tion of­fi­cials about and a how best to sup­port the IT in­dus­try. De­spite the city’s strong ed­u­ca­tional in­sti­tu­tions, the IT spe­cial­ists who emerge from Kharkiv uni­ver­si­ties and col­leges of­ten aren’t fully pre­pared for work in the com­pa­nies that are hir­ing. “Cur­rently, the de­mands of the IT com­pa­nies and the qual­i­fi­ca­tions of the grad­u­ates, as a rule, don’t match,” says Ser­hiy Skryn­nyk, di­rec­tor of the A- Level pri­vate IT school. He be­lieves the city needs more mech­a­nisms to help ed­u­ca­tional in­sti­tu­tions co­op­er­ate with the in­dus­try it­self. Mean­while, while both the city and the

Kharkiv re­gional au­thor­i­ties are en­thu­si­as­tic about IT and the po­ten­tial for in­no­va­tion, how the gov­ern­ment will sup­port Kharkiv’s IT sec­tor re­mains un­clear. Be­lenkova sus­pects that “they do not yet un­der­stand how they can sup­port (IT) on the leg­isla­tive side.” Kharkiv Mayor Hen­nady Kernes em­pha­sizes that the city is work­ing to cre­ate trans­par­ent con­di­tions for busi­ness and in­vest­ment projects. But Kernes him­self has a ques­tion­able com­mit­ment to trans­parency; his rep­u­ta­tion in­cludes re­ported ties to the crim­i­nal un­der­world, cor­rup­tion ac­cu­sa­tions, and an on­go­ing crim­i­nal case about the kid­nap­ping of two Euro­maidan ac­tivists in 2014. “It’s a fab­ri­cated case, that has no prospects and no proof,” Kernes told the Kyiv Post, re­fer­ring to the crim­i­nal charges against him. He ac­cused his po­lit­i­cal neme­sis, In­te­rior Min­is­ter Arsen Avakov, and his ad­vi­sor An­ton Herashchenko of the al­leged fab­ri­ca­tion. Ac­cord­ing to the mayor, Kharkiv has opened an ad­min­is­tra­tive cen­ter to han­dle busi­ness reg­is­tra­tion doc­u­ments and ex­clude a large num­ber of bu­reau­crats and, hope­fully, cor­rup­tion from the process. “We are cre­at­ing the max­i­mum con­di­tions for IT tech­nol­ogy, so that busi­ness can al­ways know about this or that com­pany with which it wants to en­ter into re­la­tions,” Kernes said. “If busi­ness thrives, if the en­trepreneur thrives, the city will thrive,” he added. How­ever, Kernes did not ex­press any clear plans for sup­port­ing IT, tac­itly con­firm­ing Be­lenkova’s claim. Re­gional gov­er­nor Yu­lia Svit­ly­chna could not be reached for com­ment by press time. There are also other chal­lenges. The Kharkiv Trac­tor Fac­tory did not op­er­ate for around 10 months in 2016–2017 due to a com­pli­cated le­gal case over sup­posed out­stand­ing debts and, likely, re­lated to its for­mer owner’s con­nec­tions to Rus­sian oli­garch Oleg Deri­paska. Al­though it is again up and run­ning, the scan­dal was a blow to both work­ers and the fac­tory, and demon­strated how pol­i­tics can still in­ter­fere in busi­ness in Ukraine. Fi­nally, Kharkiv faces an­other com­mon Ukrainian eco­nomic strug­gle: brain drain.

Em­ployee turnover

Thomas Ring­ger, Nestlé’s tech­ni­cal di­rec­tor for Ukraine and Moldova, has worked for the com­pany in Switzer­land, Ger­many, the Czech Re­pub­lic, and Rus­sia. But he has never be­fore seen the level of em­ployee turnover com­mon in Ukraine. In any given year, the com­pany can lose 20 to 30 per­cent of its em­ploy­ees. In some cases, the em­ploy­ees are leav­ing to go work abroad. “(Turnover) is re­ally a chal­lenge that is ex­tra­or­di­nary to Ukraine,” Ring­ger says. But Ukraine is not with­out its ad­van­tages, and Ring­ger says his pro­fes­sional ex­pe­ri­ence with Ukraini­ans has been ex­tremely pos­i­tive. “What’s great in Ukraine is you can mo­ti­vate peo­ple, you can rel­a­tively quickly align peo­ple be­hind a joint goal,” he says. “And then nor­mally peo­ple work ex­tremely hard to reach th­ese tar­gets.”

Res­i­dents of Kharkiv, the east­ern city of 1.4 mil­lion peo­ple lo­cated 478 kilo­me­ters east of Kyiv, cross the city's cen­tral Sum­ska Street. Af­ter weath­er­ing Rus­sian-backed un­rest in 2014, the city is now calm, bustling, open for busi­ness — and solidly pro-ukrainian. (Volodymyr Petrov)

Source: State Sta­tis­tics Ser­vice

Ukraine’s gross do­mes­tic prod­uct per capita was $2,150 in 2016. Its most prof­itable re­gion was the city of Kyiv, while Luhansk Oblast ranked last, ac­cord­ing to the lat­est avail­able data.

Alexei Niko­laev, se­nior vice pres­i­dent for cor­po­rate clients at the in­for­ma­tion tech­nol­ogy firm NIX So­lu­tions, shows off ath­letic tro­phies that his em­ploy­ees have won in com­pe­ti­tions with em­ploy­ees of other IT firms. (Volodymyr Petrov)

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