IT Sector: Rapid growth and political empowerment

Olga Loiko

Summary

Rapid growth of the information and communication technology sector continued in 2019 against the backdrop of a modest 1.2% growth of the national economy. The IT industry’s gross value added increased 9.3%. It accounted for nearly a half of GDP growth (0.5 percentage points).

A significant expansion of businesses of the High Technology Park (HTP) residents gave access to numerous incentives for national business and foreign investors. Criticism of the HTP as an “IT offshore”, which is believed to be only beneficial to its residents, was basically ungrounded, given its scientific accomplishments. The amount of taxes paid by one HTP employee (income tax, VAT and excise taxes from consumption) was 374% larger than the country’s average outside the IT industry.

Belarus launched two crypto currency exchanges and one platform for tokenized assets. At the meeting with representatives of IT businesses held in April 2019, President Alexander Lukashenko promised to continue comprehensive support for the industry.

Trends:
HTP as a growth point

Over the past decade, the economic input of the Belarusian IT industry increased considerably. In 2009, the share of the IT sector in total GDP made up 2.3% against 6.2% in 2019. For comparison, the share of agriculture, forestry and fishery industries, which are no less important to the Belarusian economy, decreased over this period from 8.1% to 6.8%.1 The share of computer services in total exports of services increased from 4.5% in 2010 to 18.0% in 2018, being only behind transport services.

In 2018, the first year of effect of decree No.8 on digital economy development, which granted tax and legal preferences to IT companies, the High-Tech Park boosted its exports by 38% year on year to USD 1.414 billion. The HTP operations continued to gain momentum in 2019. In just one year, HTP resident companies’ output in monetary terms increased 62% year on year to BYN 5.177 billion. The Park’s output growth outpaced the IT industry growth rate in Central and Eastern Europe (20–25%) and the whole world (4–5%).

HTP residents increased exports in 2019 by 55% to USD 2.195 billion. This is more than Belarus spent on servicing its external debt last year (USD 1.5 billion) or raised in foreign loans (USD 1.6 billion).

HTP’s exports constituted 21% of Belarus’ total exports of services. The Park’s foreign trade surplus, which increased by USD 2 billion, helped rectify the situation with Belarus’ foreign trade in goods and services, which showed a USD 243 million deficit. This deficit would be 9 times larger without the HTP.

In 2019, the HTP contributed a lot to GDP growth by 0.28 percentage points. The entire IT industry accounted for 0.5 percentage points of total 1.2% GDP growth. The contribution of the HTP alone was comparable with the contribution of the entire industrial sector (0.3 pp), construction or agriculture (0.2 pp each).

The value of HTP to the economy increased in early 2020, as Belarus and Russia failed to agree on long-term oil supply contracts. For example, IT companies’ exports increased in January 2020 by another 35%, exceeding the export of Belarusian oil products.

The number of new HTP resident companies continued to increase. There were 319 residents in 2019; 82 new ones were admitted as of April 2020 to a total of 818 residents. HTP companies created 13,700 new jobs. In 2017–2019, the Park employed over 33,000 people, the average salary standing at BYN 4,700 as of the end of the year against BYN 1,238.7 on the national average. The industry was attractive not only for Belarusians. According to the Interior Ministry, around 1,800 foreigners arrived in Belarus in 2018–2019 to work in the High-Tech Park.

The contribution of various sectors of the economy to the Belarusian budget largely depends on taxation regulations and tax benefits provided to individual enterprises and lines of business, as well as on government subsidies. HTP residents paid 11.43% of their revenues in 2018 in aggregate taxes. In 2019, tax payments to the budget by HTP residents totaled BYN 302.3 million (up by nearly 25%), which is more than taxes paid by all enterprises of the Ministry of Construction and Architecture (BYN 297.0 million), the Ministry of Industry (BYN 140.7 million) and the Ministry of Agriculture (BYN 81.6 million).2

An average HTP employee paid 4.6 times more income tax, 4.8 times VAT and 5.5 times excise taxes than the national average. Despite the granted benefits, the effective income tax rate is only 1 percentage point lower than the effective rate set for the average worker employed in the economy. Although the rate of deduction to the Social Protection Fund is significantly lower, the average HTP employee paid more in relation to the average salary, than the average worker employed in the economy, and 1.25 times more in absolute terms.3

The HTP’s economic efficiency was 2.5 times higher in 2019 than the efficiency of the entire economy. As of the end of 2019, the Park employed around 61,000 people or 1.4% of the country’s workforce, thus accounting for 3.5% of GDP.

Image and investment

Insignificant foreign direct investment has long been a problem for Belarus. Foreign investors are not in a hurry to enter the market of Belarus, which is reluctant to foster privatization and takes ineffective efforts to improve the investment climate. The situation is different when it comes to the Belarusian IT industry. HTP resident companies are of profound interest to investors, including large IT corporations.

According to the HTP administration, more than 40% of the residents are enterprises with foreign capital. The Park hosts 90 development centers of foreign corporations. Resident companies report a total of USD 285 million in FDI. Mobile apps designed in Belarus are downloaded more than 200 million times a month, which is comparable with the number of applications installed via Facebook.

In the third quarter of 2019, Belarusian SayGames mobile games developer was ranked world’s third in terms of the number of downloads of its applications (300 million per quarter) after Facebook and Google. Wannaby used its augmented reality technology in the Gucci online store. HTP residents’ FLO and Tesla Suit projects were named the most innovative in the world at CES-2019, the largest technology exhibition in Las Vegas.

Belarus’ second problem–its international image–was also resolved last year with the help of the HTP. The Park was visited by more than 120 foreign delegations, including ministers, deputy ministers and presidents. The U.S. Secretary of State Michael Pompeo went to the HTP in February 2020. “Inspired by what I saw at Hi-Tech Park Belarus. A great example of how Belarus can seize its extraordinary growth potential by embracing forward-looking economic policies and smart regulation. It’s clear how impactful American investment can foster prosperity across the globe,” he wrote on Twitter. The Park numbers 62 companies with American capital. The export of software to the United States exceeded USD 900 million in 2019. It was simply impossible to find another equally significant site for the American guest to see.

The president of Belarus traditionally speaks with IT people at least once a year. When in the HTP in April 2019, he promised comprehensive support to the Park. “We have taken this path, and we will not intentionally deviate from it. We will go straight forward. If you need support in addressing acute issues, which we don’t want to be today, consider it done. I have backed you, and I will, because, essentially, you are my children. I raised you to the best of my ability, and then you grew up, and began suggesting where we should go. We will move in this direction as efficiently as you want,” A. Lukashenko said.4

In October 2019, he seconded the proposal of the IT community to establish an IT university. The expansion of the influence of the IT sector on the most conservative area in Belarus – education – can be considered the second largest achievement of IT lobbyists since the adoption of presidential decree No.8.

Crypto republic of IT country

“You want a crypto currency, a crypto exchange, mining, farms, whatever... We will go this way,” A. Lukashenko said to IT specialists in October 2019. Presidential decree No. 8 legitimized crypto currency exchanges, exchange operators, mining, tokens, etc. Operations with tokens are exempt from income tax and VAT until January 1, 2023.

In November 2018, the HTP Supervisory Board approved regulations on the crypto currency industry operation, stating that all companies that are allowed dealing with crypto currencies shall abide by the zero tolerance policy towards laundering funds obtained through criminal activity in accordance with the FATF recommendations. The HTP is to closely look at the owners of resident companies, their financial standing, and the origin of their assets.

In January 2019, VP Capital of Victor Prokopenya and Larnabel Ventures of Said Gutseriev invested in Currency.com, Belarus and CIS’ first legal crypto exchange. The company reported over USD 1 billion in turnover and 100,000 customers in 2019.

The second crypto exchange, IExchange, launched by Cryptotrade was registered in July.

BelVEB, one of the six systemically important banks of Belarus, opened Finstore.by investment platform in November. It hosts ICOs of Belarusian companies, the Minsk Automobile Plant (MAZ) and Belvest among them. Finstore registered 1,278 investors in just four months, and the amount of funds raised reached USD 4.1 million. The platform seeks the status of a regional financial hub, inviting non-resident investors to contribute to high-tech and real sector projects.

The national financial market remains underdeveloped. Belarus was ranked 59th out of 65 countries in the Global Fintech Index 2020 (for example, Lithuania was ranked 4th).5 The favorable legal environment can help Belarus finally make a breakthrough and offer domestic and foreign investors financial tools they want.

The archaic law on measures to prevent legalization of proceeds from crime, financing of terrorist activities or proliferation of weapons of mass destruction is an obstacle to Fintech development in Belarus. At the same time, amendments to the law make it possible to open bank accounts online.

Conclusion

Hard times began for outsourcers as COVID-19 broke out. Fearing the approaching crisis, customers cut spending, including on contractors. The pandemic will accelerate the reorientation of the country from outsourcing to production. What was expected to happen in the next five years will happen in 2020.

The increase in the share of production companies in the HTP gives reason to believe that the entire industry will continue to grow even in the face of a global economic recession, given that it was the production companies that proved to be the most viable. Many products that originate from Belarus have shown growth: games, crypto exchanges, health apps, online education, etc. Regardless of the duration of the pandemic, accelerated digitalization of all sectors of the economy, including healthcare, education, and trade, will be strongly required.

Against the backdrop of permanent problems in other industries, the state will probably begin to take the IT industry seriously, and will speed up the adoption of the HTP 3.0 decree, which has been discussed for almost a year now, primarily in the field of IT education.