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