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Ukraine's Failed Tech Revolution

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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On Tuesday, Snapchat users got a new feature to play with, called Lenses. Now they can modify their photos and short videos to show themselves with altered facial features, cartoonish eyes or rainbows coming out of their mouths. They can thank the biggest deal involving a Ukrainian tech company.

Ukrainians are known for their tech prowess. Ukrainian-born Silicon Valley icons such as WhatsApp founder Jan Koum and Max Levchin, the former chief technology officer of PayPal, are models for kids in Kiev, Kharkiv and Lviv. There's plenty of excitement on the darker side of the business, too. There was a Ukrainian in the group of techies,  whose Russian leader Vladimir Drinkman pleaded guilty to hacking charges on Tuesday,  that was accused of breaching NASDAQ, Carrefour and Jet Blue. Last year, a Ukrainian-run outfit almost cornered the Bitcoin market. 

Ukrainian tech companies, however, rarely make international headlines. The biggest  are outsourcing firms that sell relatively cheap but high-quality coding labor to Western clients. In the first half of 2015, Ukraine exported $738 million worth of tech and telecommunications-related services, about 4 percent of the country's total exports. The biggest deal in the Ukrainian tech industry until now was tiny: the 2012 purchase of a startup called Viewdle by Google for about $40 million. Google quickly closed the business and absorbed its team.

QuickTake Standoff in Ukraine

Now, Snapchat has put Ukraine on the map. It acquired Odessa-based Looksery, the creator of the filters included in Lenses, for $150 million, according to reports on the Ukrainian IT news site Ain.ua and on The Verge. Snapchat acknowledged the deal to TechCrunch.

Looksery's chief executive, Victor Shaburov, is an experienced entrepreneur. He sold his previous two start-ups to the Russian search company Yandex and the Norwegian browser builder Opera Software -- but Looksery, with a staff of just 15, is his biggest win. Before the sale, its face-changing product was popular as a stand-alone app. Mainly, however, it made money -- $1 million a month, according to Ain.ua -- licensing its technology. The company was working on other applications, too: It recently filed patent applications for "emotion recognition for workforce analysis" and "background modification in video conferencing." 

Many of us want to seem, and look, better than they we do, and social networks provide ample opportunities for virtual self-improvement. With Looksery, Snapchat takes this to a new level: no other software can change faces in real time. It's all part of the ephemeral messaging company's monetization strategy that is beginning to emerge. Snapchat is beginning to charge its users who want to send videos that are less ephemeral: if you pay, you can play them again. To stimulate that kind of behavior -- and to make people want to show these videos to friends, for example -- it makes sense to provide as many opportunities as possible to create fun content. The Ukrainian technology also could be applied to videos created outside the Snapchat app, such as movie clips and YouTube hits. SnapChat, valued at $16 billion, may have found a way to make money from its users, without relying on ads, as Facebook and Twitter do.

Ukraine, however, probably won't benefit from that. Viewdle employees moved away to work for Google in the U.S. Ain.ua founder Artur Orujaliev thinks the same will happen with Looksery: It doesn't make sense for Snapchat to keep a tiny office in Odessa. Ukrainians' clear success in facial recognition technology will not lead to the emergence of a cluster of related startups. The money from the deal won't even pass through Ukrainian banks.

Ukrainian programmers are constantly tempted with better pay and working conditions outside their country. Sometimes entire companies pick up and move elsewhere. Andrey Horsev, the head of the Dnepropetrovsk company 908 -- which does web development and works on sharing economy projects -- has just moved the entire staff to Poland. Luxoft, a big outsourcing company, is gradually moving staff from Ukraine to other countries in eastern Europe. A recent raid on Luxofty's offices by the Ukrainian Security Service has accelerated that process.

Developers are the country's most affluent group of professionals, but they're not the most diligent taxpayers. Many of them, even those employed by big companies, are registered as individual entrepreneurs to save on taxes. The government is now proposing to close this loophole, which also will make overseas offers more attractive. Only the most patriotic techies stay.

On Wednesday, one of these, Dmitry Valev, wrote on Facebook that he'd received an offer to move his company with 300 employees to Canada. "We won't go," he wrote, "though, honestly, it's scary here." The scary part is not the war in eastern Ukraine, though many in the tech industry are afraid of being called up, nor is it the severe recession. "What's scary is that even if everybody's making noise, nothing changes," Valev explained. 

Eighteen months after its "Revolution of Dignity," Ukraine still doesn't feel like a welcoming country to its smartest, most Western-oriented citizens. Deals like the Looksery ones show Ukraine could be a tech hub, but the government ignores the industry and does little to stop the brain drain. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net